Singapore Strategy - CIMB Research 2017-01-19: Marketing feedback

Singapore Strategy - CIMB Research 2017-01-19: Marketing feedback Singapore Market Strategy DAIRY FARM INT'L HOLDINGS LTD D01.SI UOL GROUP LIMITED U14.SI VENTURE CORPORATION LIMITED V03.SI

Singapore Strategy - Marketing feedback

  • Our recent marketing themes: 
    1. under-owned cyclicals could turn around, 
    2. US$ strength and better US economy, and 
    3. consumer stocks turnaround stories.
  • Alpha picks: Venture, ST Engineering, UOL, Dairy Farm, First Resources, Best World, Cityneon, Mermaid Maritime, Valuetronics. 
  • We also added Sembcorp Marine to the list.

Better market gains warmer interest - 

  • Singapore stocks are still relatively under-owned among the investors in Hong Kong and Malaysia. However, the slightly warmer interest from investors coincided with the rally in the index as STI is the strongest performer in the region (+4% YTD).

Watching Cyclicals 

  • Most of the investors we met during our marketing in Hong Kong and Malaysia were receptive of our view that the under-owned offshore & marine names could be the way to play the Singapore market, as oil prices sustain at the current level. 
  • Our Neutral call on the sector remains but we see Sembcorp Marine SMM (trading at -1 s.d. of 20-year P/BV) as a potential out-performer as it is a direct proxies to ride the upturn as negatives (Brazil and Cosco) have been priced in. Ezion is a small-cap proxy (-0.4x CY17F P/BV) that is unlikely to belly up with cashflows from existing contracts.
  • The most common question to our property sector Overweight call was if demand has returned. Our argument is supported by: 
    1. valuation (40% discount to RNAV), and 
    2. tapering-off of supply in residential and office segments from 2018. 
  • Land banking, bottoming office vacancy in 2H17, and M&A activities could re-rate the sector.

Banks fully priced at 1x P/BV and c.9% ROE 

  • Our Underweight call on banks was questioned the most on rate hike. At current valuations, we believe banks are fully priced. 
  • Apart from unexciting loan growth, asset quality is still a concern, especially among the SMEs, as NPLs have started to trend upwards. Although an oil price recovery may ease concerns on collaterals and NPLs in the oil & gas sector, we believe fundamental operations may only start to see a pick-up from 2H17 as the industry awaits orders and utilisation improvement.

US dollar strength and beneficiary of US economy 

  • Venture and ST Engineering could benefit from a stronger US$ and increased spending in the US. Investors were concerned about the impact of protectionism on Venture. 
  • We believe Venture’s refocus, from traditional electronics manufacturing services (EMS) to the niche test & measurement (med-tech, life science and 3D printing), could differentiate itself. We believe its customers are unlikely to disruptively exit Asia in the short-term.

Consumers – is it time to get into Thai Bev? 

  • Investors were looking for an angle to buy Thai Bev. Its share price has retreated since the Thai king’s departure and could have priced in the expected weaker 4Q16 due to the mourning period. Improvement of its beer market share is still a re-rating catalyst, in our view. Rival Boon Rawd's strategy thus far (price cutting, revamping packaging and introducing new brand) has not impacted Thai Bev’s c.40% market share. M&A and corporate restructuring will still be a mid-term catalyst.
  • Investors were also curious about Best World’s business model and distributors/ inventory risk. We see little risks here as it has no incentives to reward distributors to stock-up inventory. We like Best World for the growth potential of its full direct sales model in China and undemanding valuation of 8x CY18F P/E vs. its historical peak band of 15-18x during the last earnings upcycle.
  • Dairy Farm is our large-cap top pick, for its margin recovery from the shutting down of unprofitable stores in Singapore and Indonesia. Valuation is also attractive at -1.s.d. of its historical mean.

Highlighted companies 

Dairy Farm Int'l ADD, TP US$8.70, US$7.34 close 

  • After two years of earnings declines, margins finally seem to have bottomed and we think it is now time to revisit the stock. 
  • Earnings rebound is the key positive, with Indonesia and Singapore showing signs of recovery.

UOL Group ADD, TP S$7.96, S$6.26 close 

  • UOL has a high recurring income base, underpinned by rentals, hotel operations and investment holdings. 
  • The stock is now trading at 36% discount to RNAV.

Venture Corporation ADD, TP S$10.94, S$9.84 close 

  • A yield and growth story. DPS of S$0.50 is sustainable, with potential upside. Earnings growth (+16% yoy in CY17F) is the fruit of its effort to refocus, from traditional EMS to niche life science and med-tech segment. 
  • Trading at c.14x CY18F P/E, below its average of 15x.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2017-01-19
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