Singapore Strategy - DBS Research 2016-06-14: Theme 3 of 4 ~ Sustainable yields

M1 LIMITED B2F.SI SINGAPORE TECH ENGINEERING LTD S63.SI ARA ASSET MANAGEMENT LIMITED D1R.SI SHENG SIONG GROUP LTD OV8.SI

Strategy - Four themes to ride this cycle

With an average dividend payout ratio of 55% and dividend yield of 4%, Singapore remains an attractive haven for yield plays.
With the reality of further interest rates pushing nearer in 2H, we would prefer yield plays with net cash and sustainable free cash flows, to REITS. Below is a list of high dividend yield stocks which we believe are sustainable, based on their earnings model, free cash flow and payout ratio.

Our top dividend yield picks are M1, ARA Asset Management, ST Engineering and Sheng Siong.

M1’s share price has declined in anticipation of the entry of a fourth mobile player. It is now the cheapest in the region at 13x FY16F PE.
Our TP of S$2.60 factors the impact of potential new entrant on M1.
While a spectrum auction is scheduled in 3Q16, the big question is if the interested players can raise adequate funds for the network rollout before the auction.
Conversely, if there is no fourth telco entry, M1 could benefit the most as reflected in our bull-case TP of S$3.30 implying potential returns of c.40%. Under our bear-case scenario of an overly aggressive new entrant, we see potential return of -5% based on our bear-case TP of S$2.15.

ST Engineering remains a defensive stock with a healthy balance sheet and secure dividend payouts amid a volatile equity market.
Its Aerospace segment has positioned itself well by investing in growth markets such as narrow-body aircraft Passenger-to-Freighter (PTF) conversions, the Chinese MRO market, and cabin interior solutions, to name a few.
The Electronics segment should also benefit from the ‘Smart City’ trend, which could open up a US$400-500bn market by 2020.

We see 2016 as another banner year for ARA Asset Management, supported by the widely anticipated launch of Asia Dragon Fund 3 (estimated AUM of S$1.0bn and above) and a growing AUM base as positive catalysts to share price.
Our S$1.76 TP is based on sum-of-the parts valuation.
Armed with S$100m in capital from its recent rights issue, ARA is well positioned to capture opportunities that may arise in 2016.

We like Sheng Siong Group (SSG) as the company continues to meet growth expectations.
SSG is on track towards attaining its 50-store target, while long term margin is expected to track our expectations. The Group is one of the most well-run grocery retailers in ASEAN, leading regional peers in profitability, cash flow generation and working capital management.
Dividend continues to be attractive at 4.2% based on FY16F DPS of 3.74 Scts.
We expect margins to be sustained this year, and improve further in FY17F from more bulk purchasing and a higher mix from fresh products. These, along with government grants, should support growth.