Stock Picks 2017 - OCBC Investment 2016-11-28: A diversified portfolio with core earnings and decent sustainable dividends (Part 2)

Stock Picks 2017 - OCBC Investment 2016-11-28: A diversified portfolio with core earnings and decent sustainable dividends KEPPEL DC REIT AJBU.SI OUE LIMITED LJ3.SI RAFFLES MEDICAL GROUP LTD BSL.SI SHENG SIONG GROUP LTD OV8.SI SINGTEL Z74.SI

Stock Picks 2017 - A diversified portfolio with core earnings and decent sustainable dividends (Part 2)

  • SINGTEL (Z74.SI).

Keppel DC REIT 

Key beneficiary of data centre secular growth trends 

  • We believe Keppel DC REIT (KDCREIT) offers investors a unique pure- play exposure to the data centre industry, given that it is the first and only data centre REIT to be listed in Asia. This industry is expected to experience robust growth given the huge potential of cloud computing and proliferation of ‘Big Data’, coupled with outsourcing trends by organisations. 
  • As there are also high barriers to entry due to significant upfront costs and requirement of technical knowledge and expertise, we believe KDCREIT’s strong track record and high quality assets would provide it with a competitive advantage.

Inorganic growth momentum to continue 

  • Management has actively been on the lookout to source for accretive acquisitions to drive KDCREIT’s inorganic growth. Since its IPO in Dec 2014, it has subsequently acquired or proposed to acquire five assets across various geographical locations such as Singapore, Italy, Germany, Wales and Australia. This also allows KDCREIT to diversify its income streams. 
  • Following its preferential offering exercise in which gross proceeds of S$279.5m were raised, we estimate that its FY16F gearing ratio would come in at 27.8%. This would provide KDCREIT with ample debt headroom to acquire more properties for growth. 
  • It enjoys a right-of-first-refusal (ROFR) from both its sponsor Keppel T&T and iseek Communications. We also like KDCREIT for its defensive attributes, given its long portfolio WALE of 8.6%. Based on our projections and a closing price of S$1.215, KDCREIT offers FY16F and FY17F distribution yields of 5.2% and 6.1%, respectively. The former is partly impacted by dilution from its preferential offering exercise, while contribution from a proposed acquisition which is funded by the proceeds is expected to come only in Dec 2016. 
  • Maintain BUY and S$1.35 fair value on KDCREIT.

OUE Limited 

Undervalued high-end developer 

  • As one of the high-end developers that are dependent on foreign demand, OUE stands to benefit from the potential relaxation of additional buyer stamp duties. In such an event, high-end home prices would outperform those in mid-tier and mass-market; the premium of high-end psf prices over the mass-market is now 64% - near a 10-year low and more than one standard deviation below the average level of 87%. 
  • While one cannot be certain about the trajectory of housing measures ahead, we believe the worst of the regulatory headwinds is behind us, now that existing curbs have successfully stabilized the market. 
  • OUE currently trades at a discount of 42% to our RNAV of S$3.09.

Differentiated and active sales strategies help to ride out property downturn 

  • In order to combat the excess stock of apartment units on the market, OUE implemented a deferred payment scheme (DPS) for its Twin Peaks Tower 2 re-launch in April. The differentiated sales strategy helped to boost both the volume and selling prices of the units; prices jumped from S$2,100 psf to a high of S$3,056 psf for a one-bedroom unit. We expect that the employment of similar sales strategies will help OUE to unlock value from developed assets. 
  • Looking forward, we anticipate improved contributions following from OUE’s asset enhancement initiatives at OUE Downtown , which is slated to open by mid-2017, as well as the active lease management at US Bank Tower. 
  • We have a BUY on OUE with a fair value of S$2.17.

Raffles Medical Group 

Growth remains intact 

  • We believe Raffles Medical Group’s (RMG) growth remains intact in the long run. Due to on-going expansion plans, expenses may inevitably run ahead of topline contribution, thus a slower earnings growth trajectory vs. earlier years. 
  • Nonetheless, newly opened medical centres at Shaw Centre and Holland Village are expected to breakeven by end of this year and next year, respectively. Since its participation in a JV in International SOS (MC Holdings) from Oct 2015, the group has incurred certain integration and transition costs while management has been working on improving the efficiency of this business. The group has been expanding its corporate clients base as well.

Supported by various expansion plans 

  • As the local healthcare system continues to evolve with rising competition from both restructured hospitals and private hospitals, RMG is still a strong contender in the region, in our view. Locally, the Raffles Hospital Extension, which is slated to complete by 1H17, will add about 220k sq ft of GFA to house new services like Radiotherapy and expand specialist services. 
  • Besides growth coming from its local operations, they have been gradually expanding its presence overseas to ensure sustainable growth in the longer term. The group is currently in four other countries – China, Vietnam, Cambodia and Japan. The Shanghai hospital project is also slated to be ready by end 2018. Execution remains a key factor to success in China, and we believe RMG’s management strength gives some assurance to this project. 
  • In addition to a steady long term growth story, RMG also has a healthy balance sheet with net cash position of S$78.0m as of 30 Sep-16. 
  • We have a BUY on the stock with fair value estimate of S$1.61.

Sheng Siong Group 

Still growing despite keen competition 

  • Amid challenging operating conditions, Sheng Siong Group has been a consistent performer with revenue having been driven by its nine new stores that were opened since 2015, while same store sales growth would have been better if not for a temporary store closure. 
  • Looking ahead, we are cognizant of the looming store closures next year for a Woodlands store and very likely, the one in The Verge mall. 
  • Nonetheless, revenue can continue to be underpinned by new stores and renovation of older stores can typically boost growth as well. We would not be concerned with new stores that are of smaller sizes, as these are in untapped areas and are able to enjoy healthy traffic. 
  • In addition, although the local supermarket industry has been facing rising competition from existing and new entrants in both traditional and e- commerce fields, we believe the group’s value positioning in the market cushions against such adversity.

Sustainable margins 

  • The group has also been able to improve its margins steadily over the past few years and margins are likely to sustain on the back of on-going initiatives which include increasing direct sourcing and bulk handling, improving its sales mix (higher proportion of fresh produce), as well as increasing selection and types of house-brand products. 
  • Due to a variable staff cost structure, the group can control costs through improving efficiency as well as reducing overheads. 
  • Separately, on the group’s plans to open its first store in Kunming, China, this is expected to be delayed to 2Q17, while we do not expect gestation losses to be significant. 
  • All considered, with a defensive and cash generative business, a healthy balance sheet and net cash of S$46m as of 30 Sep- 16, we have a BUY on the stock with fair value estimate of S$1.15.


Three key long-term growth drivers 

  • Firstly, we expect Singtel’s investments in regional dominant telecom players to be one of the key growth drivers ahead. Given the limited growth outlook of telecom industry in Singapore and Australia, we believe Singtel’s exposure in developing economies (i.e. India, Indonesia, Thailand and Philippines) will help drive longer-term growth as mobile penetration rates in these countries continue to increase alongside data usage. 
  • Secondly, we like Singtel’s growing presence in the cyber security segment through its recently acquired company, Trustwave. With growing digitalization of data globally, and increasing number of important transactions performed through the internet, we believe the demand to protect such growth in data will certainly increase, and we expect Singtel to benefit through Trustwave. 
  • Thirdly, while its digital marketing arm, Amobee, is still loss-making as at 2QFY17, we remain positive on its longer-term prospects as demand for digital marketing continues to grow.

Least affected by threat of 4th Telco 

  • Following the submission of Expression of Interest (EOI) documents by three applicants (on 1 Sep) for the New Entrant Spectrum Auction (NESA) to Infocomm Media Development Authority of Singapore (IMDA), two of them, MyRepublic Ltd (MyRepublic) and TPG Telecom Pte Ltd (TPG), have (on 16 Nov) received pre-qualifications to participate in the NESA. That said, we believe the impact of a 4th Telco entry in Singapore will be immaterial on Singtel’s earnings as a group. 
  • Based on 1HFY17 results, only ~26% of its EBITDA was derived from Singapore, and out of this 26%, only ~32% of it was derived from the consumer segment within Singapore, which includes its pay TV and broadband businesses. Hence, we do not expect losing 2-3% revenue share over the next five years will materially affect its dividend payout. 
  • Hence, we reiterate BUY on Singtel with 12-month fair value estimate of S$4.27.

Carmen Lee OCBC Investment | http://www.ocbcresearch.com/ 2016-11-28