SMC Monthly - DBS Research 2016-10-10: Eye$ on the money

Small Mid Cap Monthly - DBS Vickers 2016-10-10: Eye$ on the money EZION HOLDINGS LIMITED 5ME.SI

Small Mid Cap Monthly - Eye$ on the money

  • Sticking with our safety first theme as we approach the US elections and with Brexit back in focus, we look at firms that are all cashed up. 
  • Prompted by a recent call for Metro to return excess cash to shareholders, we screen for cash-rich SMCs that offer value. 
  • Top picks for Oct: China Aviation Oil, Cityneon, Ezion Holdings, Katrina Group and Singapore O&G. 
  • SMC Radar: SunMoon

Conviction Picks – September & October 2016 

Review of our performance for September 

  • Singapore’s equity markets fared slightly better than expected during the seasonally volatile month of September, as the indices (FTSE STI, FTSE Small Cap and FTSE Mid Cap indices) erased losses from mid-September – edging into positive territory (albeit barely) with marginal gains of 0.2% on average since our last issue.
  • Meanwhile, our conviction picks underperformed as they declined by a modest 0.6%, which we think was mainly due to profit-taking on Cityneon (which is still up almost 190% YTD), and Katrina Group, which closed slightly lower. Singapore O&G did well, gaining 5.2% m-o-m.

Add Ezion for October, our preferred SMC proxy to the recent uplift in oil sentiment.

  • While details on OPEC’s agreement to cut production are lacking and scepticism remains until the cuts materialise, the surprise move sends a positive signal that OPEC is on the cusp of changing its production strategy, which we think could put a floor on oil prices and set the stage for a steadier oil recovery.
  • Following the post-OPEC uplift in oil sentiment, we believe that service providers could see a strong rebound from the low base, and add Ezion as our preferred pick (among SMCs under our coverage) to ride the rebound.

Ezion Holdings [EZI SP, TP S$0.58] 

  • Ezion provides liftboats/service rigs and offshore logistics support services to the offshore oil & gas industry. It was one of the first companies to introduce liftboats in Asia and the Middle East. As of June 2016, it has a total of 26 service rigs delivered and 17 service rigs in operation.
  • Despite the weak oil & gas market, we believe Ezion remains an attractive investment as its liftboat/service rig assets support the more resilient production stage of the offshore E&P value chain, and these assets offer an attractive substitute to the traditional workboat/barge combination used to support production platform maintenance. In terms of the business outlook, vessel deliveries of 2/7/2 units in 2016/2017/2018 respectively – all which have secured back-to-back contracts – are expected to contribute to the bottomline. Additionally, an MOU inked with one of China’s top IPPs – Huadian – to support Chinese offshore windfarm installations holds potential. Rate reductions and contract terminations remain a key risk for Ezion; we have prudently assumed a 15% p.a. reduction in our model.
  • Ezion’s share price, currently trading at 0.4x P/BV, has been dragged down by its recent rights issue, as well as weak sentiment in the wake of the Swiber incident in Singapore, but we believe this is unjustified. We have a BUY call on Ezion with a TP of S$0.58, based on 0.6x FY16 P/BV.

All cashed up 

  • Prompted by a recent call for Metro Holdings to return excess cash to shareholders by an activist shareholder, some investors have turned their interest towards companies with a large amount of net cash sitting on their balance sheet, and which offers value.
  • This month, we screen for SMC names of market capitalisation between US$20m to US$1bn, with c.60% or more of their market capitalisation in net cash (adjusted for minority interest) that are trading at 1x or less P/B. Additionally, these names were also profitable in the last year of operations:  

Trading below net cash per share. 

  • Based on our screen, there are three names that are trading below their net cash per share level i.e. Nobel Design Holdings, Sinostar PEC Holdings and CDW Holding. Net cash per share for these companies represent 140%, 138% and 114% of their share price respectively.
  • Additionally, Nobel Design and Sinostar are trading at just 3.5x and 5.5x historical PE, suggesting that they could potentially be deeply undervalued.
  • Three other names are trading very close to their net cash per share. Baker Technology, Hanwell Holdings and PEC Ltd are trading at 93%, 84% and 81% of their net cash per share respectively.

Undemanding PE valuations. 

  • Besides Nobel Design and Sinostar, there are several other companies in our screen that also trade at undemanding (historical) PE valuations of 10x or less. These include PEC Ltd (8.2x PE), AP Oil Intl (9.6x), Hengxin Technology (4.8x), Hock Lian Seng (6.6x), Mun Siong Engineering (9.9x), Hai Leck Holdings (6.1x), Metro Holdings (9.9x), Parkson Retail (3.4x) and SHS Holdings (8.4x).

Potentially attractive dividend yield also on offer. 

  • Another interesting aspect of this set of screened stocks is that most of them have historically paid dividends, some of which are at fairly attractive levels.
  • Companies that offer a historical yield of 5% or more include CDW Holding (9.7%), OKP Holdings (5.4%), Hock Lian Seng (6.9%), China Minzhong (5.5%), Hai Leck Holdings (10.5%), Powermatic Data (5%) and Fu Yu Corp (7.6%).
  • Amongst these names, Hock Lian Seng and Hai Leck Holdings are the most intriguing as they are also trading at just 6.6x and 6.1x PE respectively, while trading at 71% and 66% of net cash per share.

Paul Yong CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-10-10
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