Singapore Stock Alpha Picks - UOB Kay Hian 2017-02-06: Top-slicing After Outperformance

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Singapore Stock Top Picks BUMITAMA AGRI LTD. P8Z.SI CHINA AVIATION OIL(S) CORP LTD G92.SI DUTY FREE INTERNATIONALLIMITED 5SO.SI FOOD EMPIRE HOLDINGS LIMITED F03.SI

SINGAPORE Alpha Picks - Top-slicing After Outperformance

• Most of our Alpha picks outperformed in January, prompting us to top-slice selectively. 
• We remove DBS and KPTT but add in Food Empire on hopes that the group may restore FY16 final dividends and continue on its earnings recovery.

WHAT’S NEW

Reviewing January picks. 

• Our alpha picks performed well in January, with picks such as DBS rising 9.4% mom and mid-cap gems like Duty Free International (DFI) and China Aviation Oil (CAO) appreciating 8.2% and 10.8% respectively. 
• The slight disappointment came from Keppel T&T (-1.5% mom) as its 4Q16 results were lacklustre, marred by several one-offs, assets disposals and higher sales expenses to shorten the data centre (DC) development cycle.

Refreshing our alpha picks. 

• Given the outperformance of some of our key picks, we would tactically top-slice DBS, particular with re-emerging concerns over its exposure to weaker companies in the oil & gas (O&G) sector. 
• KPTT has also been removed from our list on limited near-term catalysts, despite our positive long-term view on DCs.

ACTION 

Tactically taking profit on DBS after a stellar January. 

• We remove DBS from our alpha picks after its solid 9.4% mom rise in January. While fundamental valuations remain compelling and DBS will be a beneficiary of rising rates, we see possible headwinds from negative newsflow on its exposure to the (O&G) sector. All eyes will be on DBS’s 4Q16 earnings that are scheduled to be reported on 16 February.

Selected quality mid-caps to provide alpha. 

• CAO and DFI both outperformed the FSSTI in Jan 17 and remain on our BUY list – given CAO’s strong structural outlook in the aviation sector in China and given that DFI’s earnings have not yet fully reflected the benefits from its Heinemann partnership. In addition, its strong financials also opens up the possibility for accretive M&As. 
• DFI recently rewarded patient shareholders with a 3QFY17 interim dividend of 1.25 S cents and a 2-for-5 bonus warrant issue, which surpassed our expectations. 
• We added in Food Empire as it is the dominant coffee mix market leader in Eastern Europe. With the revival of the rouble and the explosive growth in Vietnam, profits should recover nicely in 2016-17.

Bumitama - BUY (Ooi Mong Huey) 

• Earnings growth underpinned by: 
  1. production recovery (4Q to be stronger than 3Q), 
  2. higher CPO ASP, and 
  3. lower production cost as bulk of manuring costs were incurred in 1H16.
• 2017 should see stronger earnings growth on the back of a strong production recovery (projected at 15.6% yoy) from a young age profile and new mature areas.

Share Price Catalyst Event: 

• Earnings growth momentum in 4Q16 and 2017 would be the key catalyst.

Timeline: 

• Potential upside in upcoming 4Q16 results (on 24 February) from better-than-expected CPO prices.

China Aviation Oil - BUY (Edison Chen) 

• Benefits from an oil price contango environment as they are able to buy oil immediately at lower prices while arranging for deliveries at a later date and higher prices.
• 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.

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: 

• Record-breaking 2016 full-year results expected on 23 Feb 17.

Duty Free International - BUY (Nicholas Leow/Andrew Chow) 

• DFI is a solid consumer play with an attractive dividend yield (>6%) and a 3-year net profit CAGR of 14.3% for FY16-19.
• The Heinemann Asia Pacific partnership could result in strong gross margin expansion of 3-5ppt, in our view, This is on lower procurement cost and better inventory management leading to a shorter cash conversion cycle Our target price of S$0.55 is based on DCF (WACC: 7.5%, terminal growth: 1%).
• Potential earnings surprises are expected in FY18 as margin expansion could positively surprise.

Share Price Catalyst Event: 

• Accretive overseas M&As in developing markets such as Cambodia, Myanmar and China will result in share price movement; stronger-than-expected earnings growth in FY17-18.

Timeline: 

• Potential M&A acquisition announcement in the next 6-12 months.

Food Empire - BUY (Nicholas Leow/Edison Chen) 

• Food Empire is a dominant coffee mix market leader in Eastern Europe with a market share of more than 50% in Russia and more than 40% in Ukraine. The company has raised prices in excess over local inflation in the last few years which demonstrates its immense pricing power in its core Eastern European markets.
• With a stable ruble and potential for Russian sanctions relief from the new US President Donald Trump, we expect a strong sustainable rebound in net profit for FY16 with the potential to return to paying dividends once again.
• Any upside to the US$/RUB will see further upward adjustments to our target price.

Share Price Catalyst Event: 

• Sustained earnings growth momentum in 4Q16 and a return to paying dividends.

Timeline: 

• Potential upside in upcoming 4Q16 results (mid- to late-February) from a stable US$/RUB.

Andrew Chow CFA UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2017-02-06

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.250 Same 1.250

BUY Maintain BUY 2.010 Same 2.010

ADD Maintain BUY 0.550 Same 0.550

BUY Maintain BUY 0.780 Same 0.780