Singapore Strategy - DBS Research 2016-06-14: Theme 2 of 4 ~ Growth at reasonable pricing

COMFORTDELGRO CORPORATION LTD C52.SI JAPFA LTD UD2.SI CITYNEON HOLDINGS LIMITED 5HJ.SI MM2 ASIA LTD 43D.SI JUMBO GROUP LIMITED 42R.SI

Strategy - Four themes to ride this cycle

Faced with both structural and cyclical challenges, Singapore posted a dismal 1.8% y-o-y growth in 1QGDP, with Services sector, previously a pillar of strength, contracting at 5.9% q-o-q.
The weak link was financial services which shrank by 15% q-o-q, while loan growth was down1.8% in March.

With GDP growth expected to be 1.5% this year and 1.9% next year, corporate earnings growth is anaemic at only 2% this year for STI Components, leading to a de-rating of the STI.
Brighter spots are in small mid cap names, which our team attempted to uncover in the last six months. Among our coverage, small caps (< S$1bn) are estimated to generate earnings growth of 22% in 2016, and 18% in 2017, a stark contrast to big cap's growth of 4% for this year.
Our screen shows up interesting names in niche segments; mm2 Asia, Cityneon Holdings and Jumbo Group were stocks we recently initiated coverage on while Japfa Ltd has turned around and we believe it has more room to go, despite its strong performance. ComfortDelgro offers steady growth and upside from its transition to the government bus contracting model, although earnings from its Metroline bus operations in the UK maybe affected if the British Pound (GBP) weakens due to a potential BREXIT. Every 10% decline in GBP will lead to a 1.7% drop from translational changes in our forecasts.

We like Jumbo Group for its rapid growth in China, close to 30% ROE, relatively higher margin than peers, cash generative business, and strong net cash balance.
We project 27% earnings CAGR from FY15-18F driven by new outlets and China ramping up to better profitability.
The group had already posted a stellar 1H16 (FYE Sep) performance with 14% and 42% y-o-y revenue and earnings growth respectively, driven by China, and is on track to record higher core earnings growth for FY16F.
The stock currently trades at 20.3x FY17F PE, below regional peer average of 23x and at an attractive PEG of 0.7x. Dividend yield of 3% is decent at 55% payout ratio.

mm2 Asia generates revenue by extracting fees from producing and distributing movies. It has a high-margin business model (gross margin: 40-50%, net margin: c.20%) with an impressive growth outlook.
We expect mm2 to grow at an EPS CAGR of 62% from FY15-FY18, underpinned by growth in local productions, expansion into the China market, and contribution from cinema operations and newly acquired entertainment company, UnUsUal Group.

Cityneon Holdings has evolved to become a creator of innovative and interactive exhibits revolving around Marvel’s The Avengers and Hasbro’s Transformers franchises, with the acquisition of Victory Hill Exhibitions (VHE) in September 2015. While it will operate its Las Vegas exhibits, VHE primarily develops travelling exhibits which will be operated by local partners, and upfront licensing fees should account for a large portion of VHE’s takings; execution risk is thus minimal, while the business model is scalable.
We expect VHE to have a total of six sets by end-2017 and eight by end-2018; Cityneon Holdings earnings are forecasted to ramp up rapidly from ~S$1m in FY15 to S$6.7m and S$16.3m in FY16 and FY17 respectively. Further upside could stem from securing of a third IP (Star Wars or Jurassic World for example), which we have not factored in to our earnings.
Our target price of S$1.03 is pegged to peer average of 15.2x FY17F earnings, and represents an upside of about 25% over the current share price of S$0.825.

We expect margin expansion on the back of lower fuel prices, coupled with the transition to the Government Bus Contract model from 1 September 2016.
With lower capex needs, we believe there is upside for management to progressively increase its dividend payout.
We expect profit growth to be above the average trend in FY16F/17F of c.10-11% (vs average of 6%).

1Q results were ahead of expectations, driven by growth outside Indonesia as the Animal Protein and Dairy segments expanded 8% and 10% y-o-y respectively.
Looking forward, we believe 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.