Small Mid Caps Monthly - DBS Research 2017-01-18: Focus on growth in the new year

Small & Mid Caps - DBS Vickers 2017-01-18: Focus on growth in the new year Singapore Stocks Small & Mid Caps Conviction Picks CITYNEON HOLDINGS LIMITED 5HJ.SI CNMC GOLDMINE HOLDINGS LIMITED 5TP.SI EZION HOLDINGS LIMITED 5ME.SI JAPFA LTD. UD2.SI MM2 ASIA LTD. 1B0.SI

Small & Mid Caps - Focus on growth in the new year

  • December picks outperform, gaining 3.2% on average against the market’s +0.5%.
  • Conviction ideas for January – Cityneon, CNMC Goldmine, Ezion, Japfa and mm2, based on three key themes: 
    1. Strong growth/earnings turnaround 
    2. Beneficiaries of a US recovery and strong US dollar 
    3. Strong cashflow and yields 



Review of December 2016 Picks


Indices gained 0.5% on average since last issue (8 Dec – 17 Jan): 

  • FTSE STI: 2958.86 to 3012.77 // +1.8% 
  • FSTS Index: 386.73 to 384.00 // - 0.7% 
  • FSTM Index: 692.80 to 696.20 // +0.5% 

Our picks outperformed, gaining 3.2% on average, which was mainly led by Cityneon and China Aviation Oil’s strong performance.

  • For December, our outperformance was mainly led by the run-up in mm2 Asia and China Aviation Oil as they delivered double- digit growth of were up 13.4% and 10.4% respectively, but partly negated by Cityneon’s 11.0% decline and CNMC’s flat performance.
  • Since our last issue, we have also trimmed Cityneon’s earnings for FY17F by 8% to factor in the delay in the launch for Transformers in Las Vegas, which resulted in a lower TP of S$1.26, from S$1.37 previously. Despite this, we continue to expect Cityneon to register an explosive FY16-FY19F EPS CAGR of c.150%.
  • Since our last update, CNMC also issued a profit warning as it expected to report a net loss for 4Q16 on 
    1. net unrealised foreign exchange losses resulting from a depreciation of the Ringgit against the USD, and 
    2. decline in revenue from lower ore grades.
    Beyond this blip, we remain optimistic in the earnings outlook for the group and note that while gold price retreated below US$1150/oz in Dec, it has since rebounded to above US$1200/oz currently.


Focus on these three key themes to help weather uncertainty in the new year. 

  • Despite a volatile 2016, there were many strong stock performances. In an equally uncertain 2017, we believe that selective stock picking can still provide significant share price outperformance.
  • We see a few key themes for 2017:- 
    1. Strong earnings growth or turnaround in 2017; 
    2. Beneficiaries of an US recovery and strong US dollar; and 
    3. Companies with strong cash flow and yields that are more insulated from higher interest rates (such as companies with little or no debt); and 
  • Furthermore, with valuations still below the historical mean, we are likely to see more privatisation or take-over offers in 2017 (as seen in 2016).


Begin 2017 with five conviction picks – Cityneon, mm2 Asia, Japfa, Ezion and CNMC Goldmine. 

  • For January, we centre our picks on names that fall under either of the above themes: 
  • Riding on its recent VHE acquisition that transforms it into a creator of innovative and interative exhibitions, Cityneon is poised to deliver strong earnings growth of 133% in FY17F, while mm2 Asia – underpinned by growth in productions, expansion into the China market and contributions from cinema operations and entertainment company, UnUsUal Group, is projected to deliver an EPS CAGR of 50% from FY16-FY19F.
  • At current prices, we believe that Japfa – whose EBITDA is expected to expand by 16% in FY17F driven by growth in all segments, is undervalued relative to its presence in Asia’s largest population, relative to peers and for its secular growth prospects.
  • Backed by good assets, positive operating cash flow and decent cash balances, we see Ezion as one of the best proxies to ride the oil recovery given its earnings resiliency and growth potential.
  • With gold predominantly priced in US dollars, and operational costs mainly incurred in ringgit, CNMC Goldmine is a strong beneficiary of a higher, stabilised US dollar. However, as its net cash balance of c.US$33m (as at 3Q16) is kept in the ringgit, volatile forex movements could give rise to unrealised translation losses.


DBS Group Research Small Mid Cap Conviction Picks 2017-01-18


Theme 1: Strong earnings growth or turnaround in 2017 


1) Cityneon Holdings [CITN SP, TP S$1.26] 

  • Cityneon is riding on its recent VHE acquisition that transforms it into a creator of innovative and interactive exhibitions. The group’s earnings are directly correlated with the number of exhibits it has, and is set to register an explosive FY16-FY19F EPS CAGR growth of c.150%.
  • An expanding project pipeline, plans to add a third Intellectual property rights (IP), and potential tie-ups with strategic investors like CMC Holdings are catalysts.
  • Our TP of S$1.26 is based on peer average PE valuation of 17x FY17F earnings, which implies upside of c.37%.

2) Ezion Holdings [EZI SP, TP S$0.56] 

  • We believe Ezion is one of the best proxies to ride the recovery, given its earnings resiliency and growth potential.
  • Besides the delivery rescheduling, ten of Ezion’s service rigs have been withdrawn from its fleet for repairs/upgrades/conversions. The resumption of these rigs in 2016 should drive earnings recovery. Its balance sheet has also been strengthened by rights issues of US$100m, which were completed in July 2016.
  • With a positive operating cash flow and lower gearing, Ezion is among the stronger players with good assets, decent cash balances and successful diversification of its customer base (windfarm contracts) to win new charter contracts. 
  • Our TP of S$0.56 for Ezion is based on 0.6x FY16 P/BV, which represents a prospective 37% upside.

3) Japfa Ltd [JAP SP, TP S$1.18] 

  • Japfa’s EBITDA is projected to expanded by 16% to c.US$465m, driven by lower borrowing costs and continued growth in all segments: 
    1. Expect resilient demand in Indonesian live broiler and DOCs over the next 12 months, 
    2. new product launches for the consumer food products segment, and 
    3. better productivity/raw milk in the dairy segment.
  • At current prices, we believe that the stock is undervalued relative to its presence in Asia’s largest population, relative to peers, and for its secular growth prospects. 
  • Our SOP-based TP (pegged to forward EV/EBITDA) of S$1.18 implies upside of nearly 28%.

4) mm2 Asia [mm2 SP, TP S$0.56] 

  • Underpinned by growth in productions, expansion into the China market and contributions from cinema operations and entertainment company, UnUsUal Group, mm2 Asia is projected to deliver an EPS CAGR of 50% from FY16-FY19F.
  • Upside to earnings could come from earnings-accretive acquisitions and from more projects (especially in China where budgets are much higher). Separately, the successful listing of UnUsUal, which mm2 acquired at 10.2x PE back in February 2016, would enable mm2 to crystallise gains and unlock value.
  • Our TP of S$0.56 is pegged to FYEMar18F earnings and peers’ average of 24x, which offers 20% upside to current prices.


Theme 2: Beneficiaries of a US recovery and strong US dollar 


1) CNMC Goldmine [CNMC SP, TP S$0.65] 

  • Supported by well-run operations, steady cash flow generation and competitive cash costs, Kelantan-based gold miner CNMC Goldmine is attractive as a less-risky gold proxy with yield.
  • With gold dores being priced and sold in US dollars, and CNMC's gold mining operations fully based in Kelantan (Malaysia), it is a potential beneficiary if the US dollar stabilises at a higher level against the ringgit. However, as CNMC reports in US dollars but keeps cash in ringgit for operating needs, it is exposed to fluctuations in the US dollar against the ringgit over the short term, which could result in unrealised forex losses.
  • Higher gold production and/or gold price could catalyse earnings while the proposed acquisition of a 51% stake in Pulai Mining (also Kelantan-based) could provide further upside. Our 12-month TP of S$0.65, which is based on a blend of DCF (WACC of 10.7% terminal growth of 1%) and 14x FY17F PE, offers potential upside of c.51%.







Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-01-18
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