Small Mid Caps Monthly - DBS Research 2017-01-18: Non-REIT yield plays could outperform in a rising interest rate environment

Small Mid Caps Monthly - DBS Vickers 2017-01-18: Non-REIT yield plays could outperform in a rising interest rate environment Singapore Stocks Small & Mid Caps VENTURE CORPORATION LIMITED V03.SI KATRINA GROUP LTD. 1A0.SI CSE GLOBAL LTD 544.SI SHENG SIONG GROUP LTD OV8.SI UMS HOLDINGS LIMITED 558.SI

Small Mid Caps - Non-REIT yield plays could outperform in a rising interest rate environment

  • In a rising interest rate environment, non-REIT yield plays such as Venture, Sheng Siong and Katrina could outperform. 

Positive start to 2017 but economic growth remains uncertain. 

  • The year 2016 proved to be erratic, with the UK voting to leave the European Union and Trump’s surprise win (among others) sending shock waves into global markets.
  • While the Singapore equity market has had a generally positive start to 2017 (indices +2.8% YTD on average), we remain watchful over several potential external headwinds. These include uncertainty over Trump’s policies, the threat of anti-globalisation, rise in populism and possible liquidity outflows, which could lead to increased volatility ahead.

With the reality of interest rate hikes pushing nearer, we prefer non-REIT yield plays. 

  • With the global market environment still looking fairly uncertain, we see yield stocks as attractive relative to their non-dividend paying peers, given that the former has 
    1. historically been better able to fend off volatility during periods of weakness, and 
    2. often offers the potential for higher risk-adjusted returns.
  • DBS economists are forecasting the Fed to increase rates by 25 basis points every quarter (consensus expectations are for three rate hikes) in 2017. Should our house view come to fruition, we believe the performance of S-REITs (which tend to offer the highest yields among dividend-paying counters) will likely be capped.
  • With the hikes in mind, we screen for small-mid cap (US$50m – US$2bn market cap) companies within our coverage that fulfil the following criteria: 
    1. Record of stable dividends, with prospective yield of > 4% for CY17F 
    2. Little or no borrowings (net gearing of under 0.3x for CY17F) 

We prefer Venture, Sheng Siong and Katrina for their strong earnings outlook. 

  • Apart from fulfilling the above criteria, these companies also stood out for their strong earnings outlook and are set to deliver bottom-line growth of c.8% to 13% in FY17F: 

Venture Corp (BUY, TP S$10.90) 

  • A fixed dividend commitment of 50 Scts (or prospective yield of 5.2%), coupled with high single-digit earnings growth prospects of 7.5% in FY17F, is attractive. With 55% of exports to the US, Venture will also benefit from both a recovery in the US and the strengthening US dollar. Costs are in ringgit while almost all of sales are in US dollars.
  • A well-managed company with fragmented ownership, it is also an attractive takeover target.

Sheng Siong Group (BUY, TP S$1.19) 

  • We like Sheng Siong for its earnings growth traction, efficient operations, strong ROE, defensive earnings qualities, dividend yield and net cash balance sheet.
  • Even as store closures are expected for FY17F, we believe a combination of company-driven initiatives (such as direct sourcing from suppliers in Malaysia, higher sales of house brands, and more bulk handling with the expansion of warehouse space at its Mandai distribution centre) and higher fresh mix from the displacement of wet markets in Singapore, should help drive continued margin expansion and ultimately, earnings growth.
  • At current prices, the stock also offers a prospective yield of 4.8%.

Katrina Group (BUY, TP S$0.43) 

  • Driven by margin expansion from a growing online business, more store openings (to 60 stores by 2019, from 34 as at 1H16), improving annual sales per store and regional expansion plans, we project Katrina to deliver double-digit earnings growth through to FY18F.
  • Currently trading at undemanding valuations of < 11x FY17F PE, Katrina appears attractive both for its strong upside potential of nearly 70% and prospective 6.1% yield. 

Hold on for yield until clearer signal of a sustainable uptick in demand. 

UMS Holdings (HOLD, TP S$0.61) 

  • Favourable industry trends, coupled with Applied Materials’ strong order book, augurs well for UMS Holdings’ core business from end-2017 but the extent to which UMS benefits from the former’s strong growth prospects ahead is mostly hinged upon the renewal of the Endura contract, which is due to expire at end-January 2017. 
  • Given their longstanding partnership, we believe that the risk of non-renewal is relatively low but expect to see adjustments to existing contractual terms. Until we receive further clarity on the contract renewal and see a more sustainable uptick in demand, we recommend holding on to UMS for its attractive 5-Sct dividend (or prospective yield of 8.1%).

Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-01-18
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 10.900 Same 10.900
BUY Maintain BUY 0.430 Same 0.430
HOLD Maintain HOLD 0.410 Same 0.410
BUY Maintain BUY 1.190 Same 1.190
HOLD Maintain HOLD 0.610 Same 0.610