Small Caps - CIMB Research 2016-03-03: Cautious outlook


Smallcaps - Cautious outlook 

  • 4Q15 reporting season saw a better performance, with 5 beats versus 2 in 3Q15. 
  • The 2016 outlook is generally cautious. 
  • Del Monte and Sarine Tech have room to re-rate given enough time. 
  • Best World and Sunningdale Tech reported strong earnings. 
  • UMS Holdings’ 5-6 Scts DPS should continue into FY16. 

■ 4Q15 performance 

  • The earnings performance of smallcaps under our coverage improved in 4Q15. 
  • For the 4Q results season, the net earnings of five companies came in above expectations (3Q15: 2), 10 companies performed in line with expectations (3Q15: 10), while two companies were below expectations (3Q15: 6). 
  • The beats came mainly from non-recurring operational one-offs and lowered expectations pre-results. 
  • Only one stock (Sarine Tech) was upgraded during this results season. 

■ 2016 outlook 

  • The water-treatment sector continues to see demand buffeted by the dire pollution situation in China, which necessitates continued supportive government policies and capex to address the situation. 
  • Other than this sector, the rest of the smallcaps were cautious, citing the soft economic sentiment and volatile exchange rates. 

■ Stocks that could re-rate given time: 

  • Del Monte could be in for a re-rating if its turnaround demonstrated in 2QFY4/16 results continue. Full year results will provide a better sense of how well Del Monte has managed its acquisition of the US business. Refinancing via preference securities remain a goal, though again being delayed by weak equity market conditions. Eventual listing of the US business is a likely option to recapitalise the group. 
  • Sarine Tech’s Board opines that the worst of its industry downturn is behind. This should lead to an earnings recovery post the dismal FY15. The key re-rating drivers are better than expected results in the short-term and faster progress in its polished diamond customer segment which has the potential to be a significant earnings contributor. 

■ Stocks that caught our eye this reporting season: 

  • Best World registered strong earnings growth in FY15 with 149.2% yoy rise in net profit. With a full year DPS of 2 Scts, dividend yield is 5.3%. Historical P/E and P/BV are 8.4x and 1.33x (hist. ROE: 15.9%). The key re-rating driver is the huge China market potential once the company obtains its direct selling licence in China. Subject to Chinese authorities’ approval, management is targeting to achieve this within the next 12 months. Even without this, management is optimistic that FY16 performance will be positive. 
  • Sunningdale Tech reported its first full year performance with the acquisition of First Engineering. Revenue grew 42% yoy and reported net profit was up 52.1% yoy. With a DPS of 5 Scts, dividend yield is 5.4%. Historical P/NTA and EV/Core EBITDA are 0.55x and 2.6x respectively. The company reckons that it is now one of the largest plastic injection moulding companies with a global footprint. Shareholding is fragmented. 

■ Top picks 

  • Our top picks are GLL, IP, SARINE, VMS
  • In the dividend yield department, UMS Holdings continues its excellent track record as a dividend paymaster, ending FY15 with a 6 Scts DPS in total (11% yield). 
  • Although 1H is expected to be weak and earnings could fall 33% yoy in FY16, strong FCF generation is likely to see the continuation of its 5-6 Scts DPS payout. 
  • A risk to highlight is the expiry of its AMAT contract in 2017. Terms and ability to renew the contract does pose a risk.

Highlighted companies

GL Limited - ADD, TP S$1.26, S$0.85 close

  • GL Limited is a play into the London tourism industry. The rebranding of its hotels has yielded initial results and the discount to its RNAV should narrow as earnings continue to improve. 

Sarine Technologies Ltd - ADD, TP S$1.67, S$1.65 close

  • Sarine Technologies offers solutions to diamond manufacturers. FY15 was a washout year but industry conditions appear to have turned more favourable, setting the stage for an earnings rebound. 

Venture Corporation - ADD, TP S$9.52, S$8.24 close

  • Venture is a leading EMS company with a strong net cash balance sheet. The group focuses on lower volume, higher value-added products. It has a strong track record as a dividend yield stock.

William TNG CFA CIMB Securities | Roy CHEN CIMB Securities | NGOH Yi Sin CIMB Securities | 2016-03-03
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 9.52 Same 9.52
ADD Maintain ADD 1.26 Same 1.26
ADD Maintain ADD 1.67 Same 1.67