SMC Monthly - DBS Research 2016-05-05: May-16 Top Conviction Picks


May-16: Top Conviction Picks

  • With volatility likely to increase, we prefer to go with defensive and resilient picks. 
  • Defensive yield picks: UMS Holdings and China Merchants Pacific offer prospective yields of > 8%. Meanwhile, Japfa has demonstrated resilience following its recent strong 1Q results, and mm2 Asia is poised to post good earnings growth ahead on growing local productions and recurring income from recently acquired businesses (including cinemas). 
  • We also reiterate our FULLY VALUED call on Nam Cheong, which could see significant downside risk.

Top BUY ideas:

Japfa Ltd [JAP SP, TP S$1.10]

  • Japfa’s 1Q results were ahead of expectations, contributing to 23% of our full-year target vs its two-year average of 12%.
  • Strong performance was largely driven by growth outside Indonesia as the Animal Protein (outside Indonesia) and Dairy segments expanded 8% and 10% y-o-y respectively.
  • Looking forward, we believe the growth drivers are still intact and forecast a 23% EBITDA CAGR over the next three years – mainly driven by higher dairy volumes as Japfa intends to double its 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 ahead should continue to be driven by population growth and rising per capita income.
  • While our post-1Q forecasts remain unchanged, we roll forward our earnings base to FY17F, thus raising our SOP- based TP to S$1.10 from S$0.90 previously, and continue to believe that the counter lags its subsidiary’s market value and our assigned value.

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

  • Despite the weaker RMB, the Group’s 1Q net profit grew 15% to HK$164m, led by growth at Yongtaiwen E’way, Beilun-Port E’way and contributions from recently acquired roads in Guangxi.
  • Bolstered by the acquisition of six toll roads over the last five years, and with continued firm support from its parent China Merchants Group, a top ten SOE in China, we believe the Group’s earnings is on a steady long-term growth path.
  • Apart from its strong cash flow generation and long-term growth prospects, we also like the company for its attractive dividend yield of c. 8.5%. Management remains on the lookout for further acquisition opportunities, which could serve as a catalyst for faster-than-expected growth and drive further re-rating of the stock.
  • Our DCF-derived TP of S$1.25 with WACC of 9.8% implies > 50% upside. Offering both potential upside and attractive yield of c. 8.5%, we thus have a BUY call on CMH Pacific and see the stock re-rating as it delivers earnings growth.

UMS Holdings [UMSH SP, TP S$0.73]

  • UMS is one of the main component manufacturers and sub- assemblers of precision components to leading semiconductor manufacturing equipment company, Applied Materials.
  • Currently in the industry down-cycle, we think near-term earnings will likely be weak, but despite the near-term pressure on demand for its end-products, UMS's ability to generate strong cash flow to support a yield of almost 10% is attractive. Current capex trends of chipmakers and foundries also point to expected recovery of equipment spending at end-2017, which could lead to further upside to the expected 6-Sct dividend.
  • Providing attractive yields of almost 10%, ahead of the anticipated recovery in 2017, we think that UMS could be attractive as a dividend play. Our DCF-based TP of S$0.73 (cost of equity of 10%) presents potential upside of 18% to its current price.

mm2 Asia [MM2 SP, TP S$0.63]

  • 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 has acquired five cineplexes in Malaysia, which serve as a source of recurring income to the Group. Newly acquired entertainment company, UnUsUal will further enhance mm2’s position in Asia while the entry of StarHub could raise its profile and pave the way for bigger opportunities ahead.
  • Using peers’ average of 20x, we derive our target price of S$0.63 on FYMar17F EPS. The stock offers potential upside of 25%, and trades at an attractive PEG of 0.35x.

Top SELL idea:

Nam Cheong [NCL SP, TP S$0.07]

  • Nam Cheong faces headwinds on two fronts: its speculative built-to-stock model has floundered due to a dearth of buyers in the current market, while its order book – reflecting firm contracts on both built-to-stock vessels and built-to-order vessels, has halved over the last financial year, from RM1.3bn in December 2014 to RM630m as of December 2015.
  • If order wins remain weak (the Group saw only two wins in FY15 vs over twenty each year from FY12-14), we see significant downside risk to revenues and earnings in FY16F. Current valuation of 0.4x P/BV looks a bit steep compared to peers, which are trading at 0.25-0.35x. 
  • We have a FULLY VALUED call with TP of S$0.07.

Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-05-05
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.73 Same 0.73
BUY Maintain BUY 1.10 Same 1.10
BUY Maintain BUY 0.63 Same 0.63
BUY Maintain BUY 1.25 Same 1.25
FULLY VALUED Maintain FULLY VALUED 0.07 Same 0.07