SMC Monthly - DBS Research 2016-08-12: Aug-16 Top Conviction Picks


SMC Monthly - Aug-16 Top Conviction Picks

  • For August, we focus on names with good growth potential following previously announced or prospective acquisitions ahead – either as a potential acquirer or acquisition target, and keep most of our picks – ARA Asset Management, China Aviation Oil, Cityneon and mm2 Asia
  • We add Singapore O&G, which delivered a strong set of results from both organic and inorganic growth in 1H16, and could potentially acquire a new complementary specialisation (Pediatrics) in 2017. We recently raised FY16F/17F earnings by 13%/11% and lifted TP from S$1.05 to S$1.50.

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 whom it can work together with to co-invest out of its 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, 
    2. market value of its stakes in listed REITs, and 
    3. investments in its private funds.

China Aviation Oil [CAO SP, TP S$1.70]

  • We like CAO given its unique proposition on two fronts. 
  • Firstly, its monopoly in the supply of jet fuel in China should allow the group to benefit from the long-term growth in the Chinese international air travel market, which in our opinion, carries fairly low risk (owing to the cost-plus pricing model CAO enjoys for its domestic business). Its domestic scale and strong backing from its parent have also been instrumental in the group’s ability to secure jet fuel supply contracts outside of China thus far. The group has successfully increased its total non-PRC supply locations to 42 other international airports, and is expected to increase ahead. 
  • Secondly, we also like CAO for its unique exposure to Shanghai Pudong International Airport through its 33% stake in SPIA, the sole suppier of jet fuel at the airport. In addition, with net cash of almost US$169m as at 1Q16, we believe that CAO could be on the lookout for acquisitions to further grow the scale and reach of its business and profits. 
  • Our target price of S$1.70 based on 12x FY17F PE, which we believe is reasonable against the projected 18% EPS CAGR over FY15-17F.

Cityneon Holdings [CITN SP, TP S$1.20]

  • 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 now expect VHE to have a total of seven sets by end-2017 (from six sets previously) and eight by end-2018; Cityneon earnings are forecasted to ramp up rapidly from ~S$1m in FY15 to S$7.4m and S$19.3m in FY16F and FY17F respectively. 
  • Earnings for FY18F have been adjusted by +11%. 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$1.20 is pegged to peer average of 15x FY17F earnings, and represents an upside of about 16% over the current share price of S$1.035.

mm2 Asia [MM2 SP, TP S$0.83]

  • 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$0.83 on FYMar17F EPS. The stock trades at an attractive PEG of 0.43x.

Singapore O&G [SOG SP, TP S$1.50]

  • Singapore O&G (SOG) is a chain of medical practices, specialising in women’s health. It derives 60% of its revenue from its obstetrics and gynaecology (O&G) services, leveraging on the healthcare segment which is predominantly served by the private sector (57% of babies are delivered through the private sector). 
  • Apart from plans to grow its market share in the O&G segment via the recruitment of new doctors, SOG has also been diversifying into higher-margin complementary services, such as its cancer-related and newly acquired dermatology and aesthetics business, which should continue to leverage on referrals from its existing bread-and-butter O&G business to deliver growth. 
  • Further, we could also see an acceleration of growth through the acquisition of new specialisations as management hopes to start a new pediatrics division in 2017 (subject to the successful recruitment of competent pediatricians) , and is also exploring other expansion opportunities into new specialisations or markets. 
  • Following the strong set of 1H16 results, we have raised earnings for FY16F/17F by 13%/11%, and lifted TP (based on the average of PE multiple of 30x and DCF valuation) to S$1.50, from S$1.05 previously.

Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-08-12
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