Small Mid Cap Monthly - DBS Research 2017-02-21: Jump on the privatisation bandwagon

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singapore stocks small mid caps CITYNEON HOLDINGS LIMITED 5HJ.SI COURTS ASIA LIMITED RE2.SI JAPFA LTD. UD2.SI MM2 ASIA LTD. 1B0.SI BEST WORLD INTERNATIONAL LTD 5ER.SI

Small Mid Cap Monthly - Jump on the privatisation bandwagon

• Markets remained buoyant over the last four weeks, with small caps leading growth.
• Riding on the positive momentum, we continue to favour growth stocks for February - Cityneon, Courts Asia, Japfa, mm2 and recent initiation, Best World.

Conviction picks for January & February 

Indices gained 2.8% on average since last issue (17 Jan – 17 Feb): 

• FTSE STI: 3012.77 to 3096.69 // +2.8% 
• FSTS Index: 384.00 to 397.79 // + 3.6% 
• FSTM Index: 696.20 to 712.30 // + 2.3% 

Our January picks declined 0.5% on average. 

• Performances among our conviction picks for January were fairly mixed, with mm2 Asia and Japfa further extending their gains by 8.6% and 7.4% over the last four weeks, respectively and outperforming the three indices (FTSE STI +2.8%, FTSE ST Small Cap +3.6% and FTSE Mid Cap +2.3%).
• Meanwhile, a pullback in Ezion following its four-month rally resulted in a 7.3% m-o-m decline. In anticipation of a weak set of results (mainly due to unrealised forex losses) for 4Q16, CNMC Goldmine also fell 7.0% m-o-m. Beyond the temporary blip, higher gold production and gold prices could catalyse earnings for the group, with further upside potential from M&A.

Include new initiation, Best World International (BUY, TP S$2.36) and Courts Asia (BUY, TP S$0.51) among conviction picks for February. 

• With earnings momentum in Taiwan likely to be sustained by targeted efforts to cultivate existing networks and leapfrog into Northern Taiwan and MOFCOM’s indirect endorsement through the recent award of its direct selling license in the PRC providing the company with the credibility and platform needed to gain scale in China, we like Best World as a unique play on the Asian (especially China) consumption story.
• Riding on the steady growth outlook of its key markets of Taiwan and China, we project PATMI to rise quickly at 68% CAGR from S$10.1m in FY15 to S$48m by FY18F, and opine that it should trade at a smaller discount to global peers’ 19x forward PE.
• On track to to post core earnings growth of 30% y-o-y on the back of better cost controls, stronger gross margins and lower interest costs, earnings recovery for Courts Asia will be led by store network expansion plans in Indonesia and Malaysia, which in turn should benefit from the expected acceleration in GDP growth and consumer sentiment recovery regionally in 2017.
• Apart from compelling valuations of 8x FY18F PE (near -0.5SD of its historical forward PE valuation) and 0.7x P/B, we also like Courts , which is more than 70% owned by Singapore Retail Group, as a potential privatisation play.

Company Profiles for February 2017 Conviction Picks

1) Best World [BEST SP, TP S$2.36] 

• With strong earnings momentum in Taiwan likely to be sustained by targeted efforts to further culivate existing networks and leapfrog into Northern Taiwan, and armed with the credibility and platform needed to gain scale in China (following MOFCOM’s indirect endorsement through the recent award of its direct selling licence), Best World is set to ride on the firm growth outlook in its key markets to grow PATMI quickly at 68% CAGR from S$10.1m in FY15 to S$48m by FY18F.
• Our TP of S$2.36 is based on 16x FY16F PE, similar to Best World’s historical average PE over the last 12 months, offering potential 24% upside to current prices.

2) Cityneon Holdings [CITN SP, TP S$1.26] 

• Cityneon is riding on its recent VHE acquisition that transforms it into a creator of innovative and interactive exhibitions. The group’s earnings are directly correlated with the number of exhibits it has, and is set to register an explosive FY16-FY19F EPS CAGR growth of c.150%.
• An expanding project pipeline, plans to add a third Intellectual property rights (IP), and potential tie-ups with strategic investors like CMC Holdings are catalysts.
• Our TP of S$1.26 is based on peer average PE valuation of 17x FY17F earnings, which implies upside of c.40%.

3) Courts Asia [COURTS SP, TP S$0.51] 

• Courts' store network expansion plans in Indonesia and Malaysia are progressing well, and will benefit from the expected acceleration in GDP growth and consumer sentiment recovery regionally in 2017. Coupled with effective cost controls and sustainable improvement in margins, Courts is on track to post earnings growth of 30% y-o-y.
• Valuation is compelling at 8x FY18F PE (near -0.5SD of its historical forward PE valuation) and 0.7x FY18F P/B. The stock also offers dividend yield of c.3.9% for FY17F.
• Given current valuations and that major shareholder, Singapore Retail Group, currently owns about 74.3% of Courts, we also see the company as a potential privatisation play. The outlay required to acquire the remaining shares does not seem excessive in our view (c.S$58m, and approximately 2.3x FY18F net profit level based on current share price).

4) Japfa Ltd [JAP SP, TP S$1.26] 

• Japfa’s EBITDA is projected to expanded by 16% to c.US$465m, driven by lower borrowing costs and continued growth in all segments: 
  1. Expect resilient demand in Indonesian live broiler and DOCs over the next 12 months, 
  2. new product launches for the consumer food products segment, and 
  3. better productivity/raw milk in the dairy segment.
• At current prices, we believe that the stock is undervalued relative to its presence in Asia’s largest population, relative to peers, and for its secular growth prospects. Our SOP-based TP (pegged to forward EV/EBITDA) of S$1.26 implies upside of nearly 26%.

5) mm2 Asia [mm2 SP, TP S$0.56] 

• Underpinned by growth in productions, expansion into the China market and contributions from cinema operations and entertainment company, UnUsUal Group, mm2 Asia is projected to deliver an EPS CAGR of 50% from FY16-FY19F.
• Upside to earnings could come from earnings-accretive acquisitions and from more projects (especially in China where budgets are much higher). Separately, the successful listing of UnUsUal, which mm2 acquired at 10.2x PE back in February 2016, would enable mm2 to crystallise gains and unlock value.
• Our TP of S$0.56 is pegged to FYEMar18F earnings and peers’ average of 24x, which offers 11% upside to current prices.

Paul YONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-02-21

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