SMC Monthly - DBS Research 2016-06-15: Jun-16 Top Conviction Picks


Jun-16: Top Conviction Picks

  • With May behind us, we move away from defensive picks and turn our focus back to names with firm growth prospects driven by company-specific factors and catalysts. 
  • We continue to like Japfa and mm2 Asia for their earnings momentum, and believe that freshly initiated names, Cityneon and Jumbo offer good growth prospects at currently inexpensive valuations. 
  • We also include ARA Asset Management, which after receiving proceeds from its recent rights issue, is well positioned to capture AUM from capital partners which the group is targeting. 
  • Countries of interests are Australia, China, Korea, and potentially Japan.

ARA Asset Management [ARA SP, TP S$1.76]

  • We believe that ARA is now poised to take the next quantum leap in the fund management business. Following its growth into one of the largest real estate managers in Asia with close to S$30bn in AUM, the manager is seeing opportunities to deploy capital into key cities of Australia, China and Korea.
  • The group’s focus will be to leverage on the expertise and on- the-ground knowledge of the heads at their various countries of focus. This will enable ARA to tap on any opportunities to acquire assets and also to develop relationships with Capital Partners which they can work together to co-invest out of their home country.
  • ARA-managed REITs have also the debt capacity to acquire given current low gearing levels. Assuming a target gearing level of close to 40%, we estimate that in aggregate, the REITs have a firepower of close to S$5bn.
  • Our TP of S$1.76 is based on 
    1. 18x PE multiple on its fee- income business, and 
    2. market value of its stakes in listed REITs, and 
    3. investments in its private funds.

Cityneon Holdings [CITN SP, TP S$1.05]

  • Cityneon 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 earnings are forecasted to ramp up rapidly from ~S$1m in FY15 to S$7.4m and S$16.9m in FY16F and FY17F respectively. Earnings for FY18F have been tweaked lower after adjusting for shorter depreciation period. Further upside could stem from securing a third IP (Star Wars or Jurassic World, for example), which we have not factored into our earnings.
  • Our target price of S$1.05 is pegged to peer average of 15x FY17F earnings, and represents an upside of about 24% over the current share price of S$0.825.

Jumbo Group [JUMBO SP, TP S$0.68]

  • Growth for Jumbo will mainly be driven by new store openings in both China and Singapore. New outlets in Singapore include the Riverside Jumbo Seafood outlet and new restaurants outlets in the central area. For the Chinese market, there are plans to grow on the import of other portfolio brands into China, as well as the opening of new outlets in Shanghai. Further, we also see opportunities for acceleration of growth should Jumbo be successful in its negotiation of master franchise contracts in other parts of China. There could also be upside potential from M&A with other regional F&B foodservice chains.
  • Jumbo Group has posted a stellar 1H16 performance with 14% y-o-y revenue and 42% earnings growth respectively. It is on track to record higher core earnings growth for FY16F. This main driver was due to China rapid growth. Jumbo’s business fundamental is strong and cash generative. Its margin has been higher than its regional peers, with strong net cash balance and close to 30% ROE. We project earnings growth of 27% for FY15-18F through rapid outlet growth and better profitability.
  • Jumbo currently trades at 20.7x FY17 PE which is below its regional peer’s average of 23.0x. We peg our valuation of Jumbo at 23x FY17F PE which is in line with peer average to derive our TP of S$0.68. Jumbo has a decent dividend yield of 3% and a payout ratio of 55%.
  • We believe better-than-expected earnings traction in time to come could cause the stock to re-rate and trade at higher valuations.

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%.
  • Its 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.

mm2 Asia [MM2 SP, TP S$0.75]

  • 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. mm2 Asia has also previously acquired a 51% stake in entertainment company, UnUsUal Group, at PE of 10.2x, which will further enhance mm2’s position in Asia.
  • On 10th Jun, the Group announced the potential listing of UnUsUal, which would enable mm2 to crystallise gains and to unlock value.
  • Using peers’ average of 22x, we derive our target price of S$0.75 on FYMar17F EPS. The stock trades at an attractive PEG of 0.43x.

Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-06-15
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.05 Same 1.05
BUY Maintain BUY 1.10 Same 1.10
BUY Maintain BUY 0.75 Same 0.75
BUY Maintain BUY 0.68 Same 0.68
BUY Maintain BUY 1.76 Same 1.76