Singapore Market Monitor - Maybank Kim Eng 2016-11-18: Four that we like (and four we don’t)

Singapore Market Monitor - 2016-11-18: Four that we like (and four we don’t) Singapore Market Monitor

Singapore Market Monitor - Four that we like (and four we don’t)


Capital preservation trumps earnings expansion 

  • Given the multitude of moving parts in the external environment, our investment approach for the next six months would be skewed towards capital preservation rather than earnings expansion that may be less defensible.
  • Notwithstanding the valuation overlay for our stock selection, we would generally have a bias for companies with the following attributes:
    • Operating in non-cyclical industries;
    • Strong franchise value (market leaders in their sector);
    • Exposure to staples and necessities – F&B, healthcare etc.;
    • Cashflow predictability;
    • Balance-sheet health (low leverage, managed interest rate exposure, limited currency mismatch to cashflow).
  • Screening through our coverage, we highlight four key BUY and SELL recommendations in the Singapore market. Our key picks are CapitaLand Commercial Trust, Jumbo Group, Keppel REIT and Venture Corporation, while our negative calls would be Keppel Corp, OCBC Bank, SATS Limited and Sembcorp Marine.
  • Outside of our four top picks, we are also kindly predisposed to telcos StarHub (STH SP; SGD3.01; HOLD; TP SGD3.52) and SingTel (ST SP; SGD3.66; HOLD; TP SGD3.68). Although both stocks are rated a HOLD due to modest or limited capital appreciation potential to respective valuation estimates, they have a relatively lower impact from the entry of a potential fourth mobile operator in Singapore. This is due to their business and geographical (for Singtel) diversity, and a growing enterprise business offsetting the mobile market competitive pressure. Additionally, both offer attractive dividend yield for FY17, estimated at 6.6% for StarHub and 4.7% for Singtel.



CapitaLand Commercial Trust - Buy 


Investment arguments 

  • Forward yields of 6.2% attractive considering a strong WALE of 6.8 years and DPU growth from recently completed CapitaGreen acquisition.
  • Distribution reflects the underlying fundamentals of its properties unlike for some peers that are supported by noncore capital distribution.
  • Stock trading at just 0.8x P/BV and should see strong NAV support from elevated prices for office assets. Successful redevelopment of Golden Shoe will bring NAV upside.

Key risks to our thesis

  • Slower-than-expected recovery in office rents.
  • Risk of value-destroying redevelopment projects or overseas expansion.


Jumbo - Buy 


Investment arguments 

  • Premium pricing and fast turn, high volume business sustainable through (1) focus on seafood with wide clientele appeal, local and foreign, (2) strong branding making it the default choice for seafood, and (3) choice outlet locations.
  • Core market Singapore provides stable incremental growth while overseas markets (China for now, but could include Thailand in future via franchise strategy) are expected to provide higher growth quantum in coming years.
  • Valuation based on a blend of DCF (WACC 7.7%, LTG 1%) and P/E (20x FY17E). Leading names in this sector trade at 25x and above.

Key risks to our thesis

  • Company specific risks are failure to manage store expansion properly to deliver expected growth and shortage of critical ingredients of its bestselling seafood dishes, eg mud crab.
  • Key external risks are changes to China's food safety laws or import restrictions that affect ingredient sourcing ability and / or economic slowdown severely crimping consumer spending power 


Keppel Reit - Buy 


Investment arguments 

  • Most favourable lease expiry profile with only 10% of office leases up for renewal in 2017/18. Income stability from strong WALE of 6.1 years.
  • Best proxy to elevated prices for office assets in Singapore and aggressive land bids for Central Boulevard imply it is trading below the replacement cost of assets.
  • Stock trading at just 0.7x P/BV and should see strong NAV support. Any sale of assets at prevailing market could lift stock closer to book value.

Key risks to our thesis

  • Slower-than-expected recovery in office rents. 
  • Bigger exposure to interest rate spikes than peers due to higher leverage (mitigated by 74% debt locked to fixed rates).


Venture VMS SP Buy 


Investment arguments

  • Zeroing on industries, products with structural growth and good margins plus a strategy to engage with customers that are market leaders is the backbone of Venture’s strategy.
  • A focus on low volume but high-margin business has been proven to be more resilient in a slow-growth environment than most peers that are high-volume driven (at the expense of margins)
  • We value Venture at 15x PE vs. its customers rather than other EMS firms due to an atypical business model which is more IP-intensive and includes sharing in the revenue/profit pool of its customers (through product design etc.).

Key risks to our thesis

  • Failure of target industries to ramp up volumes according to expectations.
  • Some of Venture’s high-growth customers are in new industries such as 3D printing.
  • Political protectionism that could reverse or slow the outsourcing / offshoring by its customers.


Keppel Corp - Sell 


Investment arguments

  • Oversupplied rig market, weak utilisation and dayrates suggest rig orders may be entering a long period of drought.
  • Loss of role of O&M as a key cash generator to fund property and infrastructure growth, neither of which can scale up fast enough to fill the gap in the next 1-2 years.
  • SOTP-based value of SGD4.57 at implied P/BV of 0.7x. Below GFC trough of 0.9x but cannot rule out more impairments.

Key risks to our thesis

  • O&M customers proactively start taking rig delivery and / or sustainable oil price rise to levels the drive new investments in offshore field development.
  • Significant rebound in Singapore and China property demand.


OCBC - Sell 


Investment arguments 

  • Lacklustre loan growth and fall in customer spreads and more reliant on volatile non-interest income than peers.
  • Further asset quality deterioration, especially from O&G sector, likely to persist amid the turning credit cycle.
  • Valuation based on ~0.8x FY17E P/BV, close to 2SD below historical mean to reflect ROE outlook at below 2008-2015 mean. The 0.8x book value is maintained (sustainable ROE of 9.3%, COE of 10.5% and growth rate of 3.5%).

Key risks to our thesis

  • NIM improvement from repricing of loans at higher interest rates;
  • higher non-interest income from wealth management and higher contributions from Great Eastern
  • Benign credit costs.


SATS Limited - Sell 


Investment arguments 

  • SATS is a beneficiary of growing air traffic in the region but stretched valuations have more than priced in this positive.
  • Consensus forecast for another c180bps margin expansion is too bullish as margin improvements in the past year have been driven by deconsolidation of a low-margin business unit and additional improvements will likely be smaller.
  • Recent share price rally has been driven by index inclusion, not fundamental developments and the share demand will likely be transient (furthermore, principal shareholder Temasek recently sold 23m shares at SGD4.75).

Key risks to our thesis

  • Better-than-expected margin expansion from productivity improvement.
  • EPS upside from accretive acquisitions or faster-than-expected growth in recent new ventures like Brahims (Malaysia), JV with Wilmar (China) etc.


Sembcorp Maine - Sell 


Investment arguments 

  • Oversupplied rig market, weak utilisation and dayrates suggest rig orders may be entering a long period of drought.
  • High exposure to Brazil could yield more negative surprises.
  • Brazil yard may be under-utilised and need to be written off.
  • Valuation of SGD1.00, based on NTA adjusted for our assessment of asset write-downs. Implied P/BV of 0.8x, below GFC trough of 1.3x.

Key risks to our thesis

  • O&M customers start to proactively take rig delivery or potential privatisation at premium valuation.
  • Oil price rises to levels the drive new investments in offshore field development.




Neel Sinha Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-11-18
Maybank Kim Eng SGX Stock Analyst Report




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