Singapore Strategy - CIMB Research 2016-12-05: Alpha Picks For 2017

Singapore Strategy - CIMB Research 2016-12-05: Alpha Picks For 2017 2017 Alpha Picks Singapore Market Strategy

Singapore Strategy - Alpha Picks For 2017

  • Our Big-Cap Alpha Picks are: Dairy Farm, First Resources, ST Engineering, UOL and Venture Corp. 
  • Our Small-Cap Alpha Picks are: Auric Pacific, Best World, CEI, Cityneon, Dutech, Mermaid Maritime, Sunningdale and Valuetronics.

CIMB Analysts’ Alpha Picks for 2017 (Large Cap) 

Dairy Farm (Add, TP US$8.70) launch

  • DFI is currently trading at its -1 s.d. levels (c.21x forward P/E). After two consecutive years of earnings declines, margins finally look like they have bottomed and we think it is now time to revisit the stock.
  • Earnings rebound is the key positive, with its previous problem markets (Indonesia and Singapore) already showing signs of recovery. Its investments in Greater China (Yonghui and San Miu) are also doing well. We see the stock well supported by a stable 3% yield.
  • Key risk is a big slowdown in consumer spending in Asia.

First Resources (TP S$2.32) launch

  • First Resources trades at P/Es of 13x for FY17 and 10.6x for FY18, below the regional plantation sector average P/E of 18x for FY17. Our target price of S$2.32 is based on FY18 P/E of 13x, the stock’s average historical P/E.
  • First Resources is our top pick among the Singapore planters due to its superior operating efficiency compared to peers, strong FFB output growth prospects and attractive P/E valuations vs. peers.
  • A potential re-rating catalyst is stronger-than-expected earnings. Key risks are lower CPO prices and production.

ST Engineering (Add, TP S$3.75) launch

  • We like STE as a proxy to the stronger US economy and US$. Its net cash is a plus in a higher interest rate environment.
  • The worst could be over for land systems and marine after the disposal of its loss-making Chinese operations and recovering oil price for the latter.
  • Smart nations and technology awareness will continue to support order wins in electronics.
  • US MRO hangars could see a higher number of shop visits riding on better profits for the airlines.
  • STE is trading at -0.5 s.d. below its mean (19.8x).
  • Stronger-than-expected earnings recovery could be a catalyst.

UOL SP (Add, TP S$7.96) launch

  • UOL is our preferred pick among developers, trading at a 42% discount to RNAV. We think that the stock’s high recurrent income profile, accounting for c.58% of EBIT, will provide investors with a stable income base.
  • Residential earnings stream is visible with a good take-up rate from ongoing projects and planned new launch of The Clement Canopy in 1Q17.
  • Potential for corporate exercise for its associate UIC as the group raises its total deemed stake in the latter to 49.63%.

Venture Corp (Add, TP S$10.94) launch

  • Venture is trading at FY17F and FY18F P/E multiples of 13.6x and 12.7x, respectively, vs. core EPS growth of 16.3%/7.7%. The company is well managed with a net cash balance sheet and strong free cash flow generation.
  • Venture’s past efforts in engaging less price sensitive customers have borne fruit in recent years, driving our projected 16.3% earnings growth in FY17F. The well sustained S$0.50 DPS (5.2% yield) with room for possible dividend upside is well liked by the market.
  • Dividend announcement in 1Q17 and continued quality earnings performance in CY17 will be share price catalysts.

CIMB Analysts’ Alpha Picks for 2017 (Small Cap) 

Auric Pacific (Add, TP S$1.96) launch

  • We like the leading positions of Auric’s house brands, including Sunshine bread, SCS butter, and Buttercup margarita, in the Singapore and Malaysia markets.
  • We expect Auric’s profitability to return into positive territory in FY16, and to expand further in FY17, driven by 1) closure/disposal of its loss-making food retail outlets, and 2) continued growth of its bread and butter business.
  • Auric currently trades at FY16F/17F core P/E of 7.7x/7.3x (3.5x/3.2x if ex-net-cash), vs its bakery peers’ average of 17.1x/13.8x, or general F&B players’ 26.9x/23.3x. FY16F/17F ex-cash P/E.

Best World (Add, TP S$2.21) launch

  • The stock’s valuations are undemanding at just 10x forward P/E. This is below peers’ 16x and its historical peak band of 15-18x during its last earnings upcycle.
  • FY17 is poised to be another record year as Best World converts its distribution in China to its core direct selling model. This is set to propel the group to a new level of profitability. Also, sales growth momentum in Taiwan remains strong on the back of increased product acceptance. The stock offers a 3% yield.
  • Risks include regulatory changes or poor execution in China.

CEI Limited (Add, TP S$1.04) launch

  • CEI trades at 7.4x/6.8x FY17F/FY18F P/E. Earnings growth is expected to pick up in FY17F and FY18F due to rising contributions from medtech and life science customers.
  • Its balance sheet is net cash and the company has also been a good dividend paymaster. Dividend yields are projected to be 10.9-11.8% over FY17F-FY18F.
  • The stronger US$ versus ASEAN currencies will also be a boon.
  • Short-term catalyst will be dividend announcement in 1Q17 when full-year results are announced.

Cityneon (Add, TP S$1.41) launch

  • FY16 was only the start of a multi-year earnings growth for Cityneon, having secured and developed the licensing rights for Avengers S.T.A.T.I.O.N and Transformers, in the form of permanent installations at Las Vegas and travelling sets around the world.
  • Our current Add call and TP of S$1.41 is premised on 15x FY18 P/E (10% discount to peers’ average) and 33-115% EPS growth in FY17-18F.
  • We believe the catalysts of more travelling sets and the potential acquisition of more IPs could materialise in 1H17.

Dutech Holdings (Add, TP S$0.65) launch

  • We like Dutech for its leadership position in the niche safe manufacturing sector. Dutech assumes c.20-25% share of the global ATM safe market.
  • Three positive business developments driving Dutech’s growth in FY17-18F are: 1) potential new contract wins from existing customers, 2) the manufacturing contract for a new transmission product from a leading automotive player, and 3) the recentlycompleted acquisition of METRIC.
  • Dutech currently trades at an FY16F/17F core P/E of 7.9x/6.8x vs. peers/downstream players’ average of 17.3x/14.4x.

Mermaid Maritime (Add, TP S$0.17) launch

  • The TP is based on 0.5x on FY17 P/BV. Our c.17% discount to 1.s.d levels below mean of 0.58x is largely due to the key downside risk of the non-renewal of AOD III’s contract
  • We are positive on company as it boasts a stable balance sheet with minimal gearing (0.02x in 9MFY16) and is churning positive operating cash flows even at low levels of vessel utilisation.
  • The stock is trading at trough valuations of 0.36x FY16F P/BV (5-year mean: 0.8x), despite having minimal default risks.
  • Best time to enter the stock: Post Dec 16, once MMT has greater clarity on the AOD III.
  • Our TP would be S$0.20/share if we re-rated the stock to -1 s.d. levels.

Sunningdale Tech (Add, TP S$1.51) launch

  • Sunningdale Tech trades at 8.9x/8.5x FY17F/FY18F P/E. Earnings growth is muted at 4.6%/5.2% with low ROEs of 6.8%.
  • Over the years, despite the challenging industry conditions, Sunningdale has managed to stay profitable and has been rewarding shareholders with dividends.
  • We believe the company will continue to improve its cost efficiency and capitalise on its global manufacturing footprint. Trading at just 2.4x/1.9x FY17F/FY18F EV/EBITDA, it could also be of interest to private equity funds.

Valuetronics (Add, TP S$0.60) launch

  • We think Valuetronics deserves to trade above its current valuation of 7.4x CY18 P/E (ex-cash P/E of 2.9x only), given its sustainable earnings growth of 6- 13% for FY3/17-19F, and cash-generative business.
  • Its penetration into the automotive sector and increasing exposure to Internet of Things (IoT) have not been fully priced in, in our view. The stock also offers 6.9% dividend yield.
  • Continued order wins and higher-than-expected dividends payout could catalyse the stock; key risk is unexpected order delays or cancellations.

LIM Siew Khee CIMB Research | Singapore Research Team CIMB Research | http://research.itradecimb.com/ 2016-12-05

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