SMC Monthly - DBS Research 2016-03-08: Mar-16 Top 5 Conviction Picks


SMC Monthly - Mar-16 Top 5 Conviction Picks 

  • We continue to mainly favour companies that are projected to report firm earnings growth (or recovery), and thus keep three of our five conviction picks. 
  • As both OSIM and mm2 Asia have substantially re-rated, we replace them with Ezion Holdings, which is our preferred proxy for a recovery in oil prices and Innovalues Ltd, which is poised to ride the growing demand for safety and eco-efficient automotive components. 

Ezion Holdings [EZI SP, TP S$0.85] 

  • Ezion provides service rigs and offshore logistics support services to the offshore oil & gas industry. Following the period of low oil prices and challenging conditions for the O&G sector, Ezion was also hit by asset impairments and losses, and recently reported a net loss of US$63.5m in 4Q15. 
  • Looking ahead, we remain optimistic about Ezion’s ability to survive through this downturn with its solid management team, network and assets. Its venture into the offshore windfarm segment – which provides diversification away from the O&G sector, should also help to fuel growth as Ezion continues to win offshore windfarm contracts. 
  • We value Ezion based on 0.7x FY16F P/V, and arrive at a 12- month target price of S$0.85. At current prices, this implies a 34% upside potential. 
  • Further, we think that its share price could re-rate as its earnings recover with the resumption of service rigs which are currently under repair/upgrades, vessel deliveries, and as new contracts or renewals are secured. 

Innovalues Ltd [IP SP, TP S$1.01] 

  • We recently iniatiated coverage on Innovalues, a components manufacturer who is the beneficiary of rising awareness and stricter regulatory standards toward safety and eco-efficiency in automotives. 
  • As a key supplier to Sensata, a leading producer of autmotive sensors, we expect earnings to grow by 30% from S$23m in FY15 to S$30m in FY17F as Innovalues continues to deepen their partnership to tap into the underpenetrated Chinese automotive sensor market. 
  • Beyond 2017, we expect prospects for Innovalues to remain favourable as more of the sample orders it secured in 2014 and 2015 are slated for commercial production. Its potential venture into the industrial segment for sensors could also serve as the next leg of growth. 
  • Our target price of S$1.01 for Innovalues is based on 12x blended FY16/17F PE, which implies a 20% discount to larger peers’ blended 15x FY16/17F PE. 
  • We expect the counter to rerate as the Group ramps up on production and as earnings are delivered. 

Riverstone Holdings [RSTON SP, TP S$1.30] 

  • The Malaysian-based manufacturer of niche cleanroom nitrile gloves and healthcare gloves is a leader in the manufacture of Class 10 and Class 100 cleanroom gloves. 
  • It is currently in Phase 3 (of 5) of its expansion plans, and expects to add 1bn gloves in annual production capacity to 6.2bn by end-2016. 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 accelerate its capacity expansion plans faster than expected, as it has 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 of workplace safety. 
  • A strengthening US$ vs ringgit will also benefit the company as Riverstone receives c.90% of its revenues in US$, while only c.35% of its costs are incurred in US$. 
  • As the sector has recently de-rated, we lowered our 12-month target price to S$1.30 (from S$1.41) after adjusting our target valuation multiple from 20x to 18x blended FY16/17F PE, which is fair given its smaller capacity. 

China Merchants Holdings (Pacific) [CMH SP, TP S$1.25] 

  • The Chinese toll road operator recently completed its Jiurui Expressway acquisition and the acquisition of three toll roads in Guangxi Zhuang Autonomous Region, which should bolster the group’s top and bottom lines in the medium to long term. 
  • Looking into 2016, we believe the full-year contributions of the three newly acquired roads in Guangxi, along with modest growth from the existing toll road portfolio, should drive the group’s organic earnings growth at a double-digit pace, which should allow the group to maintain a 7-Sct dividend. 
  • Factoring in lower traffic growth for the toll roads in the Guangxi province (Jiurui, Yangping, Guixing and Guiyang), our FY16 and FY17 forecasts are lowered by 19% and 13% to HK$718m and HK$822m, respectively. 
  • Based on DCF valuation with a WACC of 9.8%, we have thus revised our 12-month target price to S$1.25 (from S$1.45 previously)
  • Apart from its strong cash flow generation and long-term growth prospects, we also like the company for its attractive dividend yield of c. 8.4%. We see the stock re-rating as it delivers earnings growth. 

Japfa Ltd [JAP SP, TP S$0.90] 

  • Shares rallied after Japfa posted a 4Q15 net profit of US$34m that was substantially ahead of the US$14.5m that was expected. 
  • Looking forward, we believe the growth drivers are still intact and forecast 23% EBITDA CAGR over the next three years – mainly driven by higher dairy volumes as Japfa intends to double dairy farm production capacity in China by constructing another five farm hubs in Inner Mongolia. 
  • While we expect Japfa’s combined regional DOC output to expand less aggressively by 6% CAGR over the same period, given the curbs on DOC capacity, we think that demand should continue to be driven by population growth and rising per capita income. 
  • We think that the market is currently ignoring value contributions from Dairy and its regional Animal Protein subsidiaries, which continue to deliver consistent growth. Thus, we reiterate our BUY call with a SOP-based target price of S$0.90. 

Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-03-08
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.30 Down 1.41
BUY Maintain BUY 0.90 Same 0.90
BUY Maintain BUY 0.85 Same 0.85
BUY Maintain BUY 1.25 Down 1.45
BUY Maintain BUY 1.01 Same 1.01