Small caps - 4Q16 Earnings mostly in line
- 4Q16 reporting season saw three stocks beating our estimates (3Q16: 3), while 10 stocks were in line. Four stocks reported earnings below our estimates (3Q16: 3).
- Our top pick for growth is Cityneon. Execution is the key risk.
- Talkmed could continue to garner investor interest after its proposed one-for-one bonus issue. M&A is the fastest way to grow the business.
- UMS Holdings will benefit from the strong outlook for key customer Applied Materials in 2017. Renewal of the manufacturing contract has removed uncertainty.
- Sunningdale is trading at 0.79x historical P/BV, while peers Fu Yu and Fischer Tech trade at P/BV of 0.96x and 1.02x.
4Q16 earnings performance
- The earnings performance of the small-cap stocks under our coverage was lukewarm in 4Q16. The 4Q16 results season saw net profit of three companies coming in above expectations (3Q16: three companies), 10 companies performed in line with expectations (3Q16: 13) and four companies below expectations (3Q16: 3).
- The 4Q16 earnings outperformance came mainly from slightly better sales performance and improved cost control.
- Cityneon posted FY16 net profit of S$6.7m (+667% yoy), accounting for 87%/88% of our/Bloomberg consensus full-year numbers. This might appear a miss, but stripping out one-off expenses of S$1.4m attributed to i) Victory Hill Exhibitions (VHE) acquisition, and ii) pre-opening marketing expenses at Vegas’ Avengers Station, FY16 core net profit (S$8m) was in line with our full-year forecast.
- Potential re-rating catalysts are the acquisition of a third IP and successful launch of the Transformers’ travelling set.
- Talkmed is backed by a strong net cash balance sheet. Potential re-rating catalysts include faster-than-expected turnaround of its associate, which saw a qoq reduction in 4Q16 losses. Any accretive M&As would also be positive.
- Key risks are the company’s high dependence on its CEO and founder Dr Ang and a negative outcome of Dr Ang’s appeal against the Singapore Medical Council (in the Singapore High Court).
- Uncertainty overhanging UMS share price has been removed with its successful renewal of a manufacturing contract with key customer, Applied Materials for another three years with an option for another three years of renewal. With a strong balance sheet, we expect DPS of S$0.06 (9% dividend yield) over FY17F-19F to be sustained.
- The outlook is also positive as SEMI (industry forecaster) expects 9.3% yoy growth for the global semiconductor manufacturing equipment industry in 2017.
Eyes on the Ground recap
- We launched a new product “Eyes on the Ground” in 4Q16 to highlight more stocks to clients.
- Of the eight stocks that we highlighted, five have seen double-digit percentage gains in their share price after we highlighted them. Two stocks saw single-digit percentage gains versus the time we highlighted them. One stock’s (Singapore Myanmar Investco) share price has fallen 17% since the date when we first highlighted the stock.