Singapore Strategy - RHB Invest 2016-03-08: Top 16 recovery plays stock picks (Part 2 of 3)

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COMFORTDELGRO CORPORATION LTD C52.SI  SMRT CORPORATION LTD S53.SI  FRASERS CENTREPOINT TRUST J69U.SI  SILVERLAKE AXIS LTD (5CP.SI) 5CP.SI  SIIC ENVIRONMENT HOLDINGS LTD. BHK.SI 

Top 16 recovery plays stock picks (Part 2 of 3)

• COMFORTDELGRO CORPORATION LTD (C52.SI) 
• SMRT CORPORATION LTD (S53.SI) 
• FRASERS CENTREPOINT TRUST (J69U.SI) 
• SILVERLAKE AXIS LTD (5CP.SI) 
• SIIC ENVIRONMENT HOLDINGS LTD. (BHK.SI)

ComfortDelGro Corporation (CD SP, BUY, TP: SGD3.60) 

• We expect lower energy costs, the transition of local bus business to the Government Contracting Model (GCM), a ramp up in rail business and decline in competitive intensity in the domestic taxi market to translate into c.30% earnings growth in FY16. The stock is trading at 16.5x FY16F P/E. 
• We continue to like ComfortDelGro’s visible earnings growth amidst an uncertain economic environment, diversified earnings base, strong net cash balance sheet and management’s execution track record of delivering steady earnings growth. 
• Key catalysts are the commencement of bus GCM in Sep 2016, sale of bus assets to the Government and early replacement of an older taxi fleet in Singapore translating into higher taxi rental rates. 
• Risks to TP include unfavourable forex leading to higher translation losses for its overseas business, slow growth in rail ridership and lower-than-estimated margins for its local bus business. 

SMRT Corporation (MRT SP, BUY, TP: SGD1.61) 

• While near-term growth for SMRT may remain muted amidst high maintenance costs, fares reduction and train revenue downside risks from DTL2’s start, we believe transition of bus operations to the Government Contracting Model (GCM) would boost margins, bus sales assets to Land Transport Authority (LTA) would release cash and rail reforms clarity would help re-rate the stock. 
• Although management has always restrained from providing details relating to the talks with the LTA on rail reforms, we believe such reforms could be implemented in 2018/early 2019. As a part of rail reforms, we estimate the sale of rail assets in FY19 could add SGD0.50 to our DCF-based SGD1.61 TP. 
• Key catalysts are commencement of bus GCM in Sep 2016, sale of bus assets to the government and announcement of rail reforms. 
• Risks to TP include slow growth in rail ridership and lower-than-estimated margins for its local bus business. 

Frasers Centrepoint Trust (FCT SP, BUY, TP: SGD2.22) 

• We continue to like Frasers Centrepoint Trust (FCT) for its pure play within the suburban retail space. The REIT faced minimal risk of vacating its expiring spaces since a third of the total lease renewals for the year have already been renewed in its first quarter. 
• Additionally, we observed that tenants' sales and traffic flow were on an upward trend, suggesting to us that FCT is able to command higher rental fees upon its tenants' expiry. 
• Key catalyst: stronger-than-expected rental reversion. 
• Risk to TP: longer-than-expected delays in the AEI of Northpoint. We maintain BUY with a TP of SGD2.22, as we expect FCT to finish the year with a high single digit (7-9%) positive rental reversion. 

Silverlake Axis (SILV SP, BUY, TP: SGD0.75) 

• With a healthy orderbook and a strong licensing contribution in 2H16, after stripping off its one-off costs, Silverlake may be set for a stronger period ahead. As it has shown that it does not hesitate to use excess cash to reward shareholders, more dividends could be paid then – to make up for the shortfall in the first half. This, with the potential red packet, leads us to maintain BUY. 
• Our unchanged TP of SGD0.75 is based on 17x FY16/F P/E and backed by a DCF valuation. 
• Catalyst: More recurring income. Risk to TP: Economic recession. 

SIIC Environment (SIIC SP, BUY, SGD1.26) 

• SIIC remains as our TOP pick in the utilities sector. We continue to like SIIC for its ability to achieve higher project IRRs of ~10% compared to the peer average of 8%. 
• Moreover, more than 50% of SIIC’s waste water treatment plants have yet to comply with China’s national Grade 1A water discharge standard. Hence, there is still a large room for SIIC to grow organically through upgrading projects. The stock is trading at 14.8x FY16F P/E (historical mean: 16.6x). 
• Key catalysts include faster than expected acquisitions and dual-listing in Hong Kong. 
• Risk to TP includes IRR erosion from intensified competition.. 

Ong Kian Lin RHB Invest | Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-03-08

RHB Invest SGX Stock Analyst Report BUY Maintain BUY 3.60 Same 3.60

BUY Maintain BUY 1.61 Same 1.61

BUY Maintain BUY 2.22 Same 2.22

BUY Maintain BUY 0.75 Same 0.75

BUY Maintain BUY 1.26 Same 1.26