SMC Monthly - DBS Research 2016-02-04: Feb-16 Top 5 Conviction Picks

SMC Monthly - DBS Research 2016-02-04: Feb-16 Top 5 Conviction Picks JAPFA LTD UD2.SI  RIVERSTONE HOLDINGS LIMITED AP4.SI  MM2 ASIA LTD 41C .SI  OSIM INTERNATIONAL LTD O23.SI  CHINA MERCHANTS HLDGS (PACIFIC) C22.SI 

Feb-16: Top 5 Conviction Picks 

  • Despite the challenging start to 2016, we keep four of our five conviction picks as we focus on names that should report or have reported strong earnings (Japfa, Riverstone, mm2 and OSIM), or declare an attractive dividend – CMH Pacific. 


mm2 Asia* [MM2 SP, TP S$1.05] 

  • As a leading producer of films and TV/online content in Asia, mm2 provides a full suite of services spanning the entire filmmaking process. 
  • Riding on growing demand and support for local production, mm2 will continue to grow its presence in Singapore, Taiwan, and Hong Kong, by offering localised content. In addition, its venture into the lucrative Chinese movie market provides further support for growth as Chinese films are generally characterised by their bigger budgets and higher margins. 
  • To strengthen its competitive edge, mm2 recently acquired five cineplexes in Malaysia, which serve as a source of recurring income to the Group, while generating cost savings for its future productions over the longer term, as half of film proceeds are retained by cinema operators. 
  • At 21x FYMar16F PE and 12x FY17F PE based on its enlarged share capital, mm2 trades at a c.50% discount to peers’ 27x FY16F PE. 
  • Given its smaller size, we apply a 30% discount, or PE of 19x to projected FYMar17F earnings, which implies a 12- month target price of S$1.05. 

OSIM International [OSIM SP, TP S$1.28] 

  • The retailer and brand owner of healthy lifestyle products for OSIM massage products, GNC chain of supplements in Singapore, Malaysia and Taiwan, and TWG brand of high-end luxury tea cafes and saloons, observed declining sales growth between 3Q12 and 1Q15. 
  • However, from 2Q15, the rate of sales decline has been consistently decelerating, likely due to recovering chair sales - which make up the bulk of OSIM’s revenue. 
  • We turned positive on OSIM on 29th Jan, after a > 40% share price decline since we downgraded the stock in October 2015, and as its recent 4Q15 earnings showed sequential improvement with signs of bottoming out. 
  • OSIM has continued to pay 6.0Scts DPS from its strong balance sheet even though core earnings fell by close to 40% in FY15. 
  • With earnings decline projected to stabilise and given net cash position of S$200m, we see limited risks of dividend cuts at this stage, and believe that downside risk should therefore be minimal. 
  • At below 11x forward PE and dividend yield of c.6%, current valuations appear attractive. 
  • Our target price of S$1.28 for OSIM, premised on modest earnings growth in FY16F, is pegged to the stock’s average 7-year historical mean valuation of 14x. 

Riverstone Holdings [RSTON SP, TP S$1.41] 

  • The Malaysian-based manufacturer of niche cleanroom nitrile gloves and healthcare gloves had an exceptional run-up this year from S$0.975 to a peak of S$2.58, before closing the year up 146% at S$2.40 (before bonus issue). 
  • The Group completed Phase 2 (of 5) of its expansion plans on schedule in 3Q15, which will add 1bn gloves in annual production capacity to 5.2bn by end-2015. 
  • To further capture opportunities from both new and existing customers, Riverstone will be accelerating its expansion plans ahead of schedule. When the five expansion phases are complete (expected by 2018), total production capacity will be raised to a minimum of 8.2bn gloves p.a. 
  • Furthermore, Riverstone could grow capacity faster than expected as it recently acquired 9.364 acres of land for the construction of a factory and worker hostels. 
  • Going forward, we expect capacity expansion to underpin growth, supported mostly by robust long-term global demand for healthcare gloves amid rising healthcare standards and expenditures, and greater awareness on workplace safety. 
  • A strengthening US$ vs Ringgit will also benefit the company as Riverstone receives c.90% of its revenues in US$, while only c.35% of its costs are incurred in US$. 
  • We arrive at our 12- month target price of S$1.41 after applying a target valuation multiple of 20x blended FY16/17F PE, which is fair given its smaller capacity. 

China Merchants Holdings (Pacific) [CMH SP, TP S$1.45] 

  • The Chinese toll road operator completed its Jiurui Expressway acquisition and the acquisition of three toll roads in Guangxi Zhuang Autonomous Region over the year, which should propel the Group’s top and bottom lines in the medium to long term. 
  • CMHP operates eight toll roads, with a total length of 576km, in four different provinces (Zhejiang, Guangxi Zhuang Autonomous Region, Jiangxi and Guizhou) in China. 
  • Driven by contributions from these recent acquisitions, we project CMHP’s core earnings to grow by nearly 50% from HK$675m in 2014 to HK$1,004m by 2017. 
  • Apart from its strong cash flow generation and long-term growth prospects, we also like the company for its attractive dividend yield of almost 9%. 
  • Our 12-month target price of S$1.45 is based on DCF valuation with WACC of 9.8%, and offers > 80% upside. We see the stock re-rating as it delivers earnings growth. 

Japfa Ltd [JAP SP, TP S$0.90] 

  • Shares bounced back from a record low of S$0.28 on 15 Sep 2015 after the government ordered day-old-chick (DOC) breeders to cull parent stock to address the oversupply situation in the poultry industry. 
  • Breeders have agreed to the culling of 6m poultry parent stock (of which Japfa’s share is 16% or c.960k) and when completed, would reduce the feed cost for Japfa’s breeding division. 
  • Combined with the stabilisation of DOC prices above breakeven cost, we anticipate the Group’s breeding segment GPM to recover substantially. 
  • At 25% EBITDA CAGR over the next three years, we believe that Japfa, given its last price of S$0.475, remains undervalued at 7.5x forward PE. 
  • Looking forward, we expect recovery in the breeding segment, strong growth in China’s raw milk output, Rupiah stabilisation and recovery in purchasing power to boost Japfa’s FY16 earnings.




Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-02-04
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.41 Same 1.41
BUY Maintain BUY 0.90 Same 0.90
BUY Initiate BUY 1.05 Same 1.05
BUY Initiate BUY 1.45 Same 1.45
BUY Initiate BUY 1.28 Same 1.28


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