Alpha Picks - UOB Kay Hian 2016-10-03: Two New Initiations, Two New Conviction Picks

STRATEGY – SINGAPORE - UOB Kay Hian 2016-09-05: Alpha Picks UOB Kay Hian Conviction Picks

Alpha Picks - Two New Initiations, Two New Conviction Picks

  • We highlight two additions to our alpha picks as a result of two new initiations in September – Keppel T&T and Duty Free International.


  • Two new conviction calls to consider for October. We initiated coverage on two new stocks in September – Keppel T&T and Duty Free International. Consequently, we add these two stocks to our conviction call list.


  • Amendments to our alpha picks. 
  • We add Keppel T&T and Duty Free International to our alpha picks following our BUY initiations of both stocks in September. 
  • Bumitama (BUY), China Aviation (BUY) and StarHub (SELL) remain on the list while Frasers L&I Trust (BUY) and Singapore O&G (BUY) have been removed
  • We remove Frasers as there is less than a 10% upside to our target price while SOG appreciated 7% in September and may consolidate at current levels following its strong 1H16 results.

BUMITAMA - BUY (Leow Huey Chuen)

  • Earnings growth underpinned by: a) production recovery - expect at least 58-60% of 2016 production to come in 2H16, b) CPO average selling price to rise 5-8% yoy, and c) lower production cost as the bulk of manuring cost was incurred in 1H16.
  • 2017 should see stronger earnings growth on the back of strong production recovery from its young age profile and new mature areas.

Share Price Catalyst

  • Event: Stronger earnings growth in 2H16 and 2017 would be the key catalyst.
  • Timeline: Solid 3Q16 results to be announced November. 4Q16 strong production to underpin earnings recovery in 2016.


  • Asia Pacific’s largest physical jet fuel trader, China Aviation holds a monopoly in the supply of imported jet fuel to China, making it a proxy to China’s global aviation boom.
  • Together with its stake in the exclusive refueller for SPIA, CAO has two solid growing sources of recurring income.
  • Management also has a five-year plan to double profits to US$120m through organic and M&A growth.

Share Price Catalyst

  • Events: 
    1. A steeper jet fuel futures contango market will likely enhance trading profits, 
    2. any M&A announcements on earnings-accretive fuel assets will also likely result in share price reviews, and 
    3. potential earnings surprise.
  • Timeline: Potentially strong 3Q16 results to be announced in November.

STARHUB (Jonathan Koh)

  • With three companies - MyRepublic, airYotta and TPG Telecom - submitting expression of interest to the IDA, the entry of a fourth mobile operator is likely. This would disrupt the status quo of the existing cozy oligopoly.
  • StarHub would be affected by the increased competition. We estimate its DPS could drop from 20 cents in 2016 to 16 cents in 2019, reducing its dividend yield from 5.8% to 4.6%.
  • Our target price of S$2.62 is based on DCF (discount rate: 7.5%, terminal growth: 1.5%) and assumes the fourth mobile operator garners a market share of 9.1% two years after commercial launch.

Share Price Catalyst

  • Event: New entrant spectrum auction. Confirmation of the list of pre-qualified bidders would provide further negative catalyst for the stock.
  • Timeline: October.

DUTY FREE INTERNATIONAL (Nicholas Leow/Andrew Chow)

  • A solid consumer play with an attractive dividend yield and a 3-year EPS CAGR of 15.3% in FY16-19. We believe our earnings estimates are conservative as we have not fully built in the upside from margin expansion from its Heinemann tie-up.
  • Recent tie-up with Heinemann Asia Pacific should result in strong gross margin expansion of 3-5ppt through lower procurement cost and better inventory management leading to a shorter cash conversion cycle
  • Our target price of S$0.56 is based on DCF (WACC: 7.5%, terminal growth: 1%) with potential earnings surprises from FY18 as margin expansion could come in stronger than expected.

Share Price Catalyst

  • Events: 
    1. Accretive M&As in developing markets such as Cambodia, Myanmar and China will result in share price review, 
    2. stronger-than-expected earnings growth in FY17 and FY18, and 
    3. potential earnings surprise.
  • Timeline: 2QFY17 results announcement in mid-October, and any acquisition announcement in the next 12 months.

KEPPEL T&T (Edison Chen/Foo Zhi Wei)

  • The value of Keppel T&T’s Investment arm alone makes up 70% of its market cap while its data centres (DC) are some of the best in the business, offering superior performance with ROIC in the high teens. 
  • There is huge growth potential in being a proxy to the growing digital economy, and with the Alpha Fund, the rate of current DC development could double.

Share Price Catalyst

  • Event: Disposal of Singapore DC3 could result in further special gains and dividends. Kick start of the Alpha Fund deployment can drive DC development from one a year to more than two a year.
  • Timeline: Next 12 months.

Singapore Research UOB Kay Hian | 2016-10-03
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.560 Same 0.560