Small caps - CIMB Research 2016-11-17: 3Q16 Still a muted quarter

Small caps 3Q16 - CIMB Research 2016-11-17: Still a muted quarter AURIC PACIFIC GROUP LIMITED A23.SI CEI CONTRACT MANUFACTURING LTD AVV.SI CITYNEON HOLDINGS LIMITED 5HJ.SI SUNNINGDALE TECH LTD BHQ.SI

Small caps 3Q16 - Still a muted quarter

  • 3Q16 reporting season saw three stocks beating our expectations, while 13 stocks were in line. Three stocks reported lower-than-expected quarterly earnings.
  • Our top growth picks are Cityneon and Memtech.
  • Our top small-cap dividend pick is CEI Limited.
  • We believe that the market will continue to re-rate Auric Pacific as it continues to deliver on earnings, given the completion of its restructuring.
  • We believe Sunningdale’s cash flow generation capability and global footprint are still of interest to industry peers or private equity entities.


3Q16 earnings performance 

  • The earnings performance of the small-cap stocks under our coverage was again lukewarm in 3Q16. 
  • The 3Q16 results season saw net profit of three companies coming in above expectations (2Q16: two companies), 13 companies performing in line with expectations (2Q16: 11) and three companies below expectations (2Q16: 4). 
  • The 3Q16 earnings outperformance came mainly from slightly better sales performance and benefits of restructuring.


Top growth pick 1: Cityneon 


  • Cityneon’s 1H16 core net profit outperformed, at 82% of our FY16 forecast, thanks to its Victory Hill Exhibition (VHE) acquisition. 
  • We forecast core EPS growth of 109% for FY17 and 28% for FY18, driven by the launch of the Transformers’ exhibition in Las Vegas. Wining a third set of licensing rights would be a re-rating catalyst. 
  • Execution missteps and exogenous threats, such as negative impact from terrorist attacks, are key risks. 
  • Cityneon’s next results release would be in 1QCY17.


Top growth pick 2: Memtech 

  • Memtech’s 3Q16 results were boosted by the resumption of its Beats project. At its current run-rate, we believe Memtech is on track to achieve our FY16F net profit. 4Q16F net profit is likely to be stronger, driven by demand from Amazon and a second Beats project that was launched in the quarter. 
  • With net cash of US$24m at end-3Q16 and strong operating cash flow, we believe dividend yields of 3.6-6.7% are achievable in FY16-18F. 
  • We expect EPS growth of 63% and 14.6% in FY17F and FY18F.


Turnaround F&B play: Auric Pacific 

  • We view Auric as a deeply undervalued consumer staples play. Auric currently trades at FY16F/17F core P/E of 7.7x/7.3x, at a heavy discount to its bakery peers’ average of 17.1x/13.8x, or general F&B players’ 26.9x/23.3x. 
  • Excluding net cash of S$0.65/share at end-3Q16, Auric trades at 3.5x/3.2x FY16F/17F ex-cash P/E. 
  • Given Auric's significant net cash (55% of its market cap) and minority shareholder interest of only 23.83%, we think that major shareholders may consider privatising the company.


Dividend yield and US$ strength beneficiary 

  • We expect CEI Limited’s medtech and life science business to drive revenue growth of 5% p.a. over FY17-18F and propel average core EPS growth of 10.2% p.a. over FY17- 18F. 
  • Despite muted earnings growth, minimal capex and strong dividend track record could see investors rewarded with 10-11% dividend yields over FY16-17F. 
  • Based on its 10-year historical average P/E of 9.2x, we have an Add rating on the stock with target price of S$1.04. CEI Limited will report its FY16F results in 1QCY17.


Possible M&A target: Sunningdale Tech 

  • Sunningdale’s 9M16 core net profit was in line with expectations at 75% of our full-year forecast. The automotive segment continued to be the only segment with strong revenue growth. 
  • Although the company is cautious on its earnings outlook, we believe the new manufacturing plant in Chuzhou, China, which will be completed by end-2016, will mitigate cost pressure. 
  • We also believe that the group’s global manufacturing footprint could attract M&A interest from either industry players or private equity firms.


Highlighted companies 


Auric Pacific Group Limited 

  • ADD, TP S$1.96, S$1.35 close 
  • Auric is a deeply undervalued consumer staples turnaround play, in our view. With the completion of its restructuring, we believe the company will continue to deliver positive earnings momentum moving forward.

CEI Limited 

  • ADD, TP S$1.04, S$0.84 close 
  • CEI Limited’s minimal capex and strong dividend track record could see investors being rewarded with 10-11% dividend yields over the next three years. Based on its 10- year historical average P/E of 9.2x, our TP is S$1.04.

Cityneon Holdings 

  • ADD, TP S$1.19, S$1.09 close 
  • We forecast core EPS growth of 109% for FY17 and 28% for FY18, driven by the launch of the Transformers’ exhibition in Las Vegas.
  • Wining a third set of licensing rights would be a re-rating catalyst for Cityneon.




William TNG CFA CIMB Research | Roy CHEN CFA CIMB Research | NGOH Yi Sin CIMB Research | http://research.itradecimb.com/ 2016-11-17
CIMB Research SGX Stock Analyst Report ADD Maintain ADD 1.960 Same 1.960
ADD Maintain ADD 1.04 Same 1.04
ADD Maintain ADD 1.19 Same 1.19




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