RHB Research 2015-06-22 (Strategy on Rising Interest Rates): BUY Croesus Retail Trust, Ezra Holdings. Neutral on Maxi-Cash Financial Services, Midas Holdings

Rising Stress From Firming Interest Rates

Expectations are for the US Federal Reserve to raise the Fed Fund rate in 2H2015. This should correspondingly lead to higher Singapore interest rates as well. We identified listed corporates which have relatively high gearing and low interest cover and highlight here how some of them will be affected.

We expect Singapore interest rates to trend up.

The 3-month SIBOR is highly correlated with the US Fed Fund rate. With the US Federal Reserve’s Wed 17 Jun statement on track for a rise of the Fed Fund rate in 2H15, the 3-month SIBOR could also see some upside going forward.

The premium of Singapore 10-yr government bond yield over the US equivalent since late 2014 is likely to persist.

This would keep the Singapore 10-yr government bond yield high.
Corporates in need of funding may need to pay higher interest costs before they can raise the required funds.

Higher Singapore interest rates are negative for corporates with high gearing.

We consider a) corporates with gearing > 80% and b) interest cover of < 5x as relatively higher risk.
Whilst we note that there could be other considerations, we see this as a first filter to pick out relevant companies.
Some of these companies could experience higher funding costs with a rise in the Singapore interest rate.

Some high geared corporates are cushioned.

Whilst some corporates have relatively high gearing, their financials could be cushioned by their uniqueness
a) Croesus Retail Trust (CRT SP, BUY, TP: SGD1.15) has 100% of its debt already hedged and secured at 1.96% for the next three years;
b) CWT (Under Review) trades commodities which are funded by short-term trade facilities – excluding such trade facilities, adjusted net gearing is a much lower 0.39x;
c) Ezra (EZRA SP, TRADING BUY, TP: SGD0.34) is doing a rights and convertible bonds issue and will deleverage;
d) Midas (MIDAS SP, NEUTRAL, TP: SGD0.35), has its debt denominated in CNY and the key interest rate for Midas is the PBOC’s benchmark interest rate, which we expect to trend down over the next few months.

Stocks Analysis

Croesus Retail Trust (CRT SP, BUY, TP: SGD1.15) has 100% of its debt already hedged and secured at an all-in cost of 1.96% for the next 3 years. As a result, an interest rate hike will have no impact on them for the next 3 years in terms of any increase in finance costs. (Analyst: Jarick Seet)

CWT Limited (CWT SP, UNDER REVIEW), Singapore’s leading logistics operator, ventured into commodity trading business in mid-2011 with the acquisition of MRI Trading which is involved in the trading of base metal concentrates. CWT’s commodity trading volumes have grown significantly over past four years and at end- 2014, the trading business accounted for 92% of revenue and 36% of gross profit. As commodity trading business requires high working capital to grow, CWT’s leverage has increased in line with the growth in its commodity trading volumes. The company reported a net debt of SGD1,089m and net debt-to-equity of 1.42x in 2014 vs. net debt of SGD180m and net debt-to-equity of 0.38x in 2011. However, commodities traded by CWT are funded by short-term trade facilities, which are self-liquidating in nature (i.e. the debt related to a specific commodity trade ceases to exist once the trade is completed). Excluding such trade facility, which was worth SGD787m, CWT’s 2014 net debt-to-equity stood at 0.39x. Based on 2014 annual report, excluding the revolving short-term trade facility, only 30% of CWT’s total debt is exposed to floating interest rates. We estimate that every 1ppt change in the company’s borrowing rate will result in 10% change in its FY16F EPS. (Analyst: Shekhar Jaiswal)

Ezra (EZRA SP, TRADING BUY, TP: SGD0.34) is performing a rights and a convertible-bonds issue to raise a total of USD300m, retiring a USD180m bond and refinancing c.USD120m of perpetuals. The company is thus deleveraging, turning free-cash flow-positive, with no new vessels in the pipeline. The current orderbook of USD2.4bn provides operational visibility. Stock trades at 0.3x P/B, whereas the company has delivered gains on asset sales, indicating the book value may not be so severely impaired. (Analyst: Lee Yue Jer)

Maxi-Cash Financial Services (MCFS SP, NEUTRAL, TP: SGD0.22) is involved in the pawnbroking business and its main revenue comes from its pawnbroking loans. An increase in interest rate would be negative for MFCS as it decreases the margins the company earns as the cost of funds/borrowings will increase. (Analyst: Jarick Seet) Mencast (MCAST SP, NEUTRAL, TP: SGD0.37) had a slow 1Q15 as offshore work declined, with the growing Energy Division partially mitigating the fall. The company is actively deleveraging and cost-cutting. We see healthy growth in its Energy division as it commercializes new products, and a recovery in the offshore fabrication business as the oil market stabilizes. We currently have a NEUTRAL recommendation with a SGD0.37 TP based on 1x P/B, which is a 21% discount from RNAV including fair value appraisal gain on properties. (Analyst: Lee Yue Jer)

Midas Holdings (MIDAS SP, NEUTRAL, TP: SGD0.35), which derives 80% of its revenue from the railway sector, has incurred large capex over past 2-3 years to expand its aluminium extrusion capacity and build a new aluminium plates plant. The company experienced weak order inflows and deteriorating accounts receivables aided by slowing government investment in China’s railway sector during the same period. This increased the company’s net debt to CNY2,526m at end-2014 from just CNY432m at end-2011. The interest coverage ratio fell to 1.1x from 6.2x during the same period. At present, we expect the company’s interest coverage to improve and estimate an interest coverage ratio of 1.5x at end-2017 aided by completion of large expansion projects in 2015 and improving accounts receivable as China increases investments in railways. However, Midas’ earnings and balance sheet strength remain exposed to the potential rise in interest rates. 80% of the its CNY3,735m gross debt is exposed to variable-rates and carry interest rate that is 0%-30% above China central bank’s benchmark interest rate. We estimate that every 1ppt change in the company’s borrowing rate will result in 40% change in its FY16F EPS. (Analyst: Shekhar Jaiswal)

Overseas Education (OEL SP, Unrated) has an outstanding bond of SGD150m that is due in 2019. OEL has no other borrowings. The outstanding bond has a fixed coupon rate of 5.2%. Hence there is no impact on OEL with rising rates. (Analyst: Juliana Cai)