Singapore Strategy
Stock Top Picks
DBS GROUP HOLDINGS LTD
D05.SI
CHINA AVIATION OIL(S) CORP LTD
G92.SI
BUMITAMA AGRI LTD.
P8Z.SI
DUTY FREE INTERNATIONALLIMITED
5SO.SI
KEPPEL TELE & TRAN
K11.SI
Singapore Strategy - Alpha Picks ~ Switching Large-cap Picks
- Our alpha picks did well in December, generally outperforming the FSSTI (except DFI).
- After the solid performance of StarHub since its inclusion in our list, we remove StarHub and add in DBS.
- No change in our conviction mid-cap picks – China Aviation Oil (CAO), Duty Free International (DFI) and Keppel T&T (KPTT).
WHAT’S NEW
A good December.
- With the exception of Duty Free International (DFI), our alpha picks outperformed the FSSTI by a margin of 2-8%.
- The stellar performers in December were Bumitama (+7.1% mom) and KPTT (+6.5% mom). DFI underperformed on fears towards its exposure to the ringgit, which we think this was overdone.
ACTION
Removing StarHub after stellar performance.
- Since the inclusion of StarHub in our list as a conviction SELL in Sep 16, the stock had declined 17.6% vs the 5.7% rise in the FSSTI. This came on the back of worries over the emergence of a fourth mobile operator, which has materialised. Hence, we remove StarHub and replace it with DBS as we see its strong momentum continuing on the firm outlook of interest rates.
Stick with quality mid-caps.
- China Aviation Oil and Keppel T&T (KPTT) outperformed the FSSTI in December and remain on our BUY list given the strong structural outlook in the aviation sector in China as well as demand for data centres. Their valuations remain cheap as these two stocks are trading at discounts to peers.
- DFI’s underperformance against the FSSTI (-2.6% mom in Dec vs FSSTI -0.8% mom) is a buying opportunity as its benefits from its Heinemann tie-up have yet to be fully reflected in its earnings. In addition, its strong financials also opens up the possibility for accretive M&As.
DBS – BUY (Jonathan Koh)
- We expect new NPLs from the O&G sector should normalise and taper off in the subsequent quarters.
- FOMC members have projected that federal funds rate would increase to 1.4% by end- 17, indicating expectations of three hikes in 2017 instead of two. We estimate DBS’ NIM would expand by 4bp from 1.76% in 4Q16 to 1.80% in 4Q17.
- DBS is our top pick for the banking sector due to its high-beta to rising interest rates.
Share Price Catalyst
- Event: Results announcement (with no negative surprises in NPLs) and rising interest rates.
- Timeline: 4Q16 results to be released in February
China Aviation - BUY (Edison Chen)
- China Aviation Oil (CAO) is APAC’s largest physical jet fuel trader, and holds a monopoly in supplying imported jet fuel to the whole of China, making it a proxy to China’s global aviation boom.
- Along with its stake-holding in the exclusive refueller for SPIA, CAO has two solid growing sources of recurring income.
- Management also has a five-year plan to double profits to US$120m through organic and M&A growth.
- As CAO reports and receives revenue in US$ but remains listed in S$, it benefits significantly from the rising strength of the US$ (up 8.2% since Jun 16).
- Benefits from an oil price contango environment as they are able to buy oil immediately at a lower price while arranging for deliveries at a later date and higher prices.
Share Price Catalyst
- Event: A steeper jet fuel future contango market will likely enhance trading profits. Any M&A announcements on earnings-accretive fuel assets will also likely result in share price reviews.
- Timeline: Record-breaking 2016 full-year results in early-Feb 17.
Bumitama - BUY (Ooi Mong Huey)
- Earnings growth underpinned by:
- production recovery (4Q showing to be stronger than 3Q’s),
- higher CPO ASP, and
- lower production cost as bulk of manuring costs were incurred in 1H16.
- 2017 should see stronger earnings growth on the back of a strong production recovery from a young age profile and new mature areas.
Share Price Catalyst
- Event: Earnings growth momentum in 4Q16 and 2017 would be key catalysts.
- Timeline: Potential upside in upcoming 4Q16 results (on 23 February) from better-thanexpected CPO prices.
Duty Free International - BUY (Nicholas Leow/Andrew Chow)
- DFI is a solid consumer play with an attractive dividend yield and a 3-year EPS CAGR of 15.3% for FY16-19. We believe our earnings estimates could be conservative as we have not fully built in the upside from margin expansion from its Heinemann tie-up.
- The tie-up with Heinemann Asia Pacific should result in strong gross margin expansion of 3-5ppt on the back of lower procurement cost and better inventory management leading to a shorter cash conversion cycle
- Our target price of S$0.57 based on DCF (WACC: 7.5%, terminal growth: 1%) incorporating potential earnings surprises from FY18 as margin expansion could come in stronger than expected.
Share Price Catalyst
- Event: Accretive overseas M&As in developing markets such as Cambodia, Myanmar and China will result in share price review; stronger-than-expected earnings growth in FY17-18.
- Timeline: Potential M&A acquisition announcement in the next 6-12 months.
Keppel T&T - BUY (Edison Chen/Foo Zhi Wei)
- Looking ahead, we note a supply shortage for cloud DCs. We believe KPTT is the answer, with it being a preferred vendor in the sector.
- The value of KPTT’s investment arm alone makes up 70% of its market cap while its DCs are some of the best in the business, offering superior performances with ROIC in the high teens. There is huge growth potential in being a proxy to the growing digital economy and with the Alpha Fund, the rate of current DC development could double.
Share Price Catalyst
- Event: Faster-than-expected Alpha Fund deployment could drive data centre development from one p.a. to more than two p.a..
- The kick-start of development of new data centres either in Singapore or Europe upon the recycling of capital of DC3.
- Timeline: Within the next 12 months.
Jonathan Koh CFA
UOB Kay Hian
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http://research.uobkayhian.com/
2017-01-10
UOB Kay Hian
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