SMC Monthly - DBS Research 2016-09-09: Safety first as dark clouds gather

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SINGAPORE O&G LTD. 41X.SI  CITYNEON HOLDINGS LIMITED 5HJ.SI  KATRINA GROUP LTD 1A0.SI  CHINA AVIATION OIL(S) CORP LTD G92.SI  ARA ASSET MANAGEMENT LIMITED D1R.SI 

SMC Monthly - Safety first as dark clouds gather

• With one eye on the September FOMC meeting and another on the lead-up to the US elections, we advocate safety first over the next month.
• Our picks this month are: ARA Asset Management, China Aviation Oil, Cityneon, Singapore O&G, and Katrina Group – names which have company- specific catalysts.
• We cast our spotlight on defensive plays and additionally highlight Sheng Siong, Jumbo Group, CDL Hospitality Trust and Frasers Logistics & Industrial Trust as resilient names in this uncertain environment.

Conviction Picks – August & September 2016 

Review of our performance for August.

• Our conviction picks underperformed, declining by 1.4% on average, mainly as investors took profit on some of the stocks that have done well YTD. Meanwhile, the indices (FTSE STI, FTSE Small Cap and FTSE Mid Cap indices) gained 1.1% on average since our last issue.
• mm2 Asia was the standout name among our picks for August, gaining > 12%, while ARA Asset Management remained relatively flat.
• China Aviation Oil was the worst performing, losing 10.7% during the month. We think this was likely due to profit- taking as the counter has gained > 90% YTD.

For September, we replace mm2 Asia with new initiation Katrina Group.

• As we enter the seasonally volatile months of September and October, we centre our picks for September on names with clear company-specific catalysts which we think could help them weather the anticipated volatility a bit better than peers, and keep most of our picks – ARA Asset Management, China Aviation Oil, Cityneon and Singapore O&G, while we replace mm2 Asia (which has re-rated close to our target price of S$0.83) with newly initiated Katrina Group.

Katrina Group [KTG SP, TP S$0.43] 

• Katrina is an F&B restaurant brand owner and operator in Singapore and China. Currently operating nine different F&B brands across its 34 stores (including two in China), Katrina endeavours to grow regionally in Malaysia, Indonesia and Vietnam, and targets to reach 60 stores by 2019.
• The group has also established a fast-growing online business which generates a sizeable S$100,000 in monthly receipts, and has recently positioned itself to grow further through a deal with Foodpanda. 
• Driven by slight margin expansion as the online business grows, more store openings and the realisation of regional expansion plans, we project double-digit earnings growth of 13-17% for FY17-18F. The stock currently trades at an undemanding 13x FY17F PE, below peer average of 20x. We peg our valuation for Katrina at 18x FY17F PE (or 10% discount to peer average).

Safety first, look for defensive plays 

• With one eye on the September FOMC meeting and another on the lead-up to the US elections, we advocate safety first over the next month and screen for defensive plays for Small Mid Caps (SMCs) within our coverage that exhibit some of the following qualities: 
  1. Stable record of dividends, 
  2. Clear growth drivers, 
  3. Defensive/resilient earnings outlook, and/or 
  4. Good cost and cash discipline.

Yield stocks tend to be less volatile. 

• However, we have to be selective as a key risk is the Fed potentially starting a series of rate hikes. With the global growth environment looking fairly uncertain, yield plays (which are historically less volatile than non-dividend paying peers) could offer better defensiveness. Our yield picks include ARA Asset Management, Sheng Siong, and S-REITs - CDL Hospitality Trust and Frasers Logistics & Industrial Trust.
• Assuming ARA group of REITs gears up to c.40%, we estimate that in aggregate, ARA Asset Management could have a firepower of close to S$5bn, and expect ARA to grow AUM by S$2bn per annum. At current prices, the stock offers a decent prospective yield of 3.6%.
• Even as CDL Hospitality Trust faces negative headlines such as excess new room supply in Singapore and weakness in its Maldives operations due to soft demand, we believe that the stock’s Singapore exposure is undervalued (on an implied price per key basis) and offers compelling long-term value – thus rewarding investors who wait (6.7% yield at current prices based on 90% payout ratio) for the eventual upturn. We believe that any weakness stemming from uncertainty surrounding the Zika virus to be a buying opportunity.
• We see Frasers Logistics & Industrial Trust (FLT) as an attractive stock with a multi-pronged growth engine, offering superior income visibility with flexibility to acquire assets supported by an under-geared balance sheet. At current prices, the counter also offers an attractive prospective yield of 6.3%.

Stocks with relatively defensive end-exposures. 

• Apart from yield stocks, we also like stocks with relative defensive end-exposures as their earnings outlook tends to be a bit more resilient. Our picks include Jumbo Group, Sheng Siong and Singapore O&G.
• Helped by relatively stable operations in Singapore, coupled with rapid growth following its diversification into China, highly cash-generative business, its relatively higher margins (vs peers) and strong net cash balance, we think that Jumbo is well able to defend margins and navigate short-term weakness, if any.
• Consumer staple, Sheng Siong, has been growing on the opening of new stores and same-store-sales growth, and enjoys improving operating efficiencies. With no change to Sheng Siong’s dividend payout ratio of 90%, the stock currently offers a yield of 3.6% for FY16F.
• Specialising in women’s health (mainly in obstetrics and gynaecology), Singapore O&G (SOG) is well positioned to benefit from incentives introduced by the Singapore government to boost fertility rate. Expansion into other higher- margin complementary specialised services in the medium term could also help to further strengthen the group’s earning profile.

Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-09-09

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