Alpha Picks - UOB Kay Hian 2016-11-07: Staying The Course

Alpha Picks - UOB Kay Hian 2016-11-07: Staying The Course

Alpha Picks - Staying The Course

  • We stick to our alpha picks, which offer broad exposure to structural trends and improving CPO prices. 
  • Laggards in our list that we favour include Keppel T&T (KPTT), China Aviation Oil (CAO) and Duty Free International (DFI).


Staying the course. 

  • Within our alpha picks list, KPTT and DFI have been laggards but we remain fans, particularly of KPTT, as it is a key beneficiary of rising secular trends such digital economy, including cloud computing and big data.


No changes in our alpha picks selection; look at laggards. 

  • Our selection of stocks reported mixed results in October, with Bumitama (BUY), CAO (BUY) and StarHub (SELL) outperforming the FSSTI whereas Keppel T&T and DFI were laggards. 
  • KPTT released a solid set of 3Q16 results from the data centre division but its share price was punished by weakness in M1, which accounts for 22% of KPTT’s SOTP valuation. 
  • We have conservatively assumed a target price of S$1.76/share for M1 in our KPTT SOTP valuation and have a target price of S$2.36/share for KPTT.

BUMITAMA - BUY (Leow Huey Chuen)

  • Earnings growth is underpinned by: 
    1. production recovery, +48% qoq in 3Q16, 
    2. higher CPO ASP (expected to be 5-8% higher yoy), and 
    3. lower production cost as 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 4Q16 and 2017 would be the key catalyst.
  • Timeline: 4Q16 strong production to underpin earnings recovery.


  • China Aviation Oil (CAO) is APAC’s largest physical jet fuel trader, and holds a monopoly in supplying imported jet fuel to the whole of 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

  • Event: A steeper jet fuel future contango market will likely enhance trading profits. Any M&A announcements on earnings-accretive fuel assets will also likely result in share price reviews.
  • Timeline: Better-than-expected 4Q16 results.

STARHUB - SELL (Jonathan Koh)

  • A weak set of 3Q16 results, which was below our and market expectations, underscores our cautious stance on StarHub.
  • StarHub’s dividend policy of paying out 5 S cents per quarter and 20 S cents per year is at risk of downgrade next year as grants from NGNBN taper off and competition intensifies with the potential entry of a fourth mobile operator.
  • Target price of S$2.40 is based on DCF (COE: 7.5% and terminal growth: 1.5%).

Share Price Catalyst

  • Event: IMDA may announce the pre-qualified candidate(s) by end-November, and the new entrant spectrum auction could be conducted in December, at the earliest.
  • Timeline: End-November for pre-qualified candidates.

DUTY FREE INTERNATIONAL - BUY (Nicholas Leow/Andrew Chow)

  • BUY Duty Free International (DFI) as it is a solid consumer play with an attractive dividend yield and a 3-year EPS CAGR of 15.3% from FY16-19F. We believe our estimates to be conservative as we have not fully built in the upside from margins expansion from its Heinemann tie-up.
  • The tie-up with Heinemann Asia Pacific should result in strong gross margin expansion of 3-5ppt on the back of lower procurement cost and better inventory management leading to a shorter cash conversion cycle
  • Target price of S$0.57 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

  • Event: Accretive overseas M&As in developing markets such as Cambodia, Myanmar and China will result in share price review, stronger-than-expected earnings growth in FY17 and FY18.
  • Timeline: Potential M&A acquisition announcement in the next 6-12 months.

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

  • Looking ahead, we note a supply shortage for cloud DCs and we believe Keppel T&T (KPTT) is the answer, with it being a preferred vendor in the sector.
  • The value of KPTT’s investment arm alone makes up 70% of its market cap while its DCs 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: Faster-than-expected Alpha Fund deployment can drive data centre development from one a year to more than two.
  • The kick start of development of new data centre either in Singapore or Europe upon the recycle the capital of DC3
  • Timeline: Within the next 12 months.

Singapore Research Team UOB Kay Hian | 2016-11-07
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.250 Same 1.250