UOBKH Alpha Picks - UOB Kay Hian 2017-07-03: Adding In A New Conviction Pick

Alpha Picks - UOB Kay Hian 2017-07-03: Adding In A New Conviction Pick Analysts' Alpha Picks ISDN HOLDINGS LIMITED I07.SI SINGAPORE AIRLINES LTD C6L.SI CITIC ENVIROTECH LTD. CEE.SI MEMTECH INTERNATIONAL LTD BOL.SI CHINA AVIATION OIL(S) CORP LTD G92.SI

Alpha Picks - Adding In A New Conviction Pick

  • We keep faith in most of our picks and add in a newly initiated conviction idea ISDN. 
  • The FSSTI looks fairly valued and we would selectively top-slice and rotate into laggards or inexpensive stocks with catalysts.



WHAT’S NEW


Staying put with most of our existing picks. 

  • Our portfolio stocks had largely underperformed the STI index as there was a correction for the smaller cap stocks that did well in the prior months. We opine that the correction is a healthy one with little change in fundamentals, presenting opportunities for investors to pick some of our top picks at lower prices. 
  • We are confident that once they deliver strong 2Q results in endJuly or early-August, our alpha picks share price will outperform the STI index again.


ACTION


New month, new conviction pick. 

  • ISDN is a new addition to our alpha picks portfolio after our recent BUY initiation given its attractive valuations and exposure to the precision engineering segment. 
  • While Capitaland Commercial Trust CCT remains a BUY, we remove it from our alpha pick list as near-term earnings (2Q17) will be impacted by lower contribution from One George Street after its partial disposal.


ISDN – BUY (Edison Chen/Yeo Hai Wei)

  • We recently initiated coverage at BUY with a PE-based target price of S$0.35/share. (Report: ISDN HOLDINGS (ISDN SP) - 'Made In China 2025' And 'Belt And Road' To Power Growth)
  • The group is a market leader in motion control with high barriers of entry. ISDN has close to 30 years of experience as an integrated engineering solutions provider. 
  • ISDN is a beneficiary of China’s automated manufacturing drive and the “One Belt, One Road” initiative, given its long standing relationship supplying customised locks and hinges to state-owned CRCC.

Share Price Catalyst

  • Event: Potential earnings upside surprise in 2Q17 results or positive newsflow from contract wins/accretive M&A. 
  • Timeline: 2Q17 results in late-July.


Memtech – BUY (Nicholas Leow/Edison Chen)

  • Memtech’s R&D team specialising in material sciences has given the company a competitive edge in this industry. The company holds more than 120 patents.
  • Its crown jewel is its manufacturing process for liquid silicone rubber (LSR) which allows it to break into the Beats by Dre supply chain. Our channel checks indicate Memtech is one of the world’s leading precision engineering manufacturers of LSR products.
  • Maintain BUY and PE-based target price of S$1.15, pegged at sector FY17 PE of 12.5x.

Share Price Catalyst

  • Event: Better-than-expected earnings and dividends.
  • Timeline: 2Q17 results in August.


SIA – HOLD (K Ajith/Sophie Leong)

  • Yields are likely to remain challenging in FY18 on excess capacity. In addition, costs pressures will remain as the delivery of another ten A350 planes this year could lead to further increases in costs.
  • Operating outlook is expected to remain challenging in the next three years on capacity shifts, geopolitical uncertainties and record aircraft deliveries. Barring a steep cut in capacity/fleet, we believe SIA’s stock price is likely to trend down towards the recent low of S$9.60.


Share Price Catalyst

  • Event: Weak 1QFY18 results due to lower yield
  • Timeline: Release of 1QFY18F in August.


Citic Envirotech – BUY (Edison Chen/Nicholas Leow)

  • We have a street-high DCF-based target price of S$1.10, implying a 43% upside.
  • Citic Envirotech (CEL) is the best in class with superior technology know-how protected through a suite of intellectual property rights.
  • Riding on favourable industry dynamics and the entrance of a new strategic shareholder, investors can look forward to new areas of growth in river rehabilitation, sludge treatment and the circular economy.

Share Price Catalyst

  • Event: Potential contract wins that could underpin FY17-18 earnings.
  • Timeline: 3-6 months as clean water is a high priority for the Chinese government. This would benefit CEL, which has the track record and technology.


China Aviation – BUY (Edison Chen)

  • China Aviation Oil (CAO) is Asia Pacific’s largest physical jet fuel trader, and holds a monopoly in supplying imported jet fuel to China, making it a proxy to China’s global aviation boom.
  • Together with its stake in the exclusive refueller for SPIA, CAO has two solid growing sources of recurring income.
  • The stock is also a component of the MSCI Singapore Small Cap Index.

Share Price Catalyst

  • Event: A steeper jet fuel futures 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: 2QFY17 results. 







*Alpha Picks - Denotes a timeframe of 1-3 months and not UOBKH's usual 12-month investment horizon for stock recommendation.


Singapore Research UOB Kay Hian | http://research.uobkayhian.com/ 2017-07-03
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.350 Same 0.350
HOLD Maintain HOLD 10.000 Same 10.000
BUY Maintain BUY 1.100 Same 1.100
BUY Maintain BUY 1.150 Same 1.150
BUY Maintain BUY 2.260 Same 2.260



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