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).
WHAT’S NEW
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.
ACTION
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:
- production recovery, +48% qoq in 3Q16,
- higher CPO ASP (expected to be 5-8% higher yoy), and
- 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 - BUY (Edison Chen)
- 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
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http://research.uobkayhian.com/
2016-11-07
UOB Kay Hian
SGX Stock
Analyst Report
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