Small Mid Cap Monthly - DBS Research 2017-03-15: Conviction picks for February and March

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Small Cap Mid Cap Singapore Stock To Buy EZION HOLDINGS LIMITED 5ME.SI CITYNEON HOLDINGS LIMITED 5HJ.SI JAPFA LTD. UD2.SI MIDAS HLDGS LIMITED 5EN.SI SINGAPORE O&G LTD. 41X.SI

Small Mid Cap Monthly - 

• Small caps (-0.8%) underperformed the market (+0.4%) and our top picks (-0.2%) had a broad range of performances (-19% to +35%).
• Our top picks this month are Ezion Holdings, Cityneon Holdings, Japfa Ltd, Midas Holdings and Singapore O&G.

Conviction picks for February and March

Indices gained 0.8% on average since last issue (17 Feb – 13 Mar): 

• FTSE STI: 3096.69 to 3147.15 // + 1.6% 
• FSTS Index: 397.79 to 394.63 // - 0.8% 
• FSTM Index: 712.30 to 722.58 // + 1.4% 

Our picks had a broad range of performances in February 

• Performances among our conviction picks for the month were varied, with Best World posting a strong 34% gain since our last report, offset by Japfa’s 19% and Cityneon’s 13% declines. Meanwhile mm2 Asia fell by 6% and Courts Asia gained 1.1%. 
• Our picks outperformed FTSE ST Small Cap (-0.8%) but underperformed the STI (+0.7%) and FTSE Mid Cap (+1.2%).

New conviction ideas for March include Ezion Holdings (BUY, TP S$0.62), Midas Holdings (BUY, TP S$0.36) and Singapore O&G (BUY, TP S$1.60). 

• With good assets, positive operating cash flow and decent cash balance, Ezion is among the stronger players in the offshore logsitics support services space. We believe that core earnings are near bottom and comforted by Ezion’s positive operating cash flows and lower gearing – which are much needed in this environment. We have included Ezion among our conviction picks as we see the stock as one of the best proxies to ride the oil price rebound.
• With a strong 4Q16 rounding up 2016 to drive a 76% yoy improvement in earnings, and strong recovery momentum, we see current valuations for Midas at 0.5x P/BV as bombed out. Continually improving earnings should help re-rate the stock towards our TP of S$0.36, based on 0.8x FY17F P/BV.
• We also like Singapore O&G (“SOG”) for both its positive organic and inorganic growth prospects. Core earnings growth will likely be supported by growth in its key cancer and dermatology divisions, expansion into new specialisations (such as paediatrics) , and margin improvements, while plans to acquire small complementary practices could further accelerate growth.

Company Profiles for March 2017 Conviction Picks 

1) 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.61%.

2) Ezion Holdings [EZI SP, TP S$0.62] 

• We believe that Ezion’s core earnings are near bottom and we are comforted by the group’s positive operating cash flows and lower gearing which are much needed in this environment. Ezion is among the stronger players with good assets, positive operating cash flow and decent cash balance and thus see Ezion as one of the best proxies to ride the recovery in oil prices.
• Apart from an oil price rebound, other re-rating catalysts stem from earnings recovery with the resumption of service rigs currently under repair/upgrades in 2017/2018, and successful diversification of its customer base to win new charter contracts.
• Our TP of S$0.62 for Ezion is based on 0.7x FY17 P/BV, which represents a prospective 77% upside. 

3) Japfa Ltd [JAP SP, TP S$1.25] 

• Japfa Limited (JAP) is involved in all major animal proteins across different geographies in Asia. It currently trades at a significant discount to its sum-of-parts valuation despite delivering consistent earnings growth from Indonesia, China, Vietnam, Myanmar and India, where per capita demand for dairy, animal protein and branded consumer food is rising.
• Following a 42% EBITDA growth in FY16, JAP’s FY17F EBITDA should expand 6%. This will be driven by rising contribution in Animal Protein outside Indonesia and Dairy segments. We think that JAP’s FY16-18F EBITDA CAGR of 12% justifies implied 6.4x forward EV/EBITDA multiple.
• Our SOP-based TP (pegged to forward EV/EBITDA) of S$1.26 implies upside of nearly 26%.

4) Midas Holdings [MIDAS SP, TP S$0.36] 

• Midas Holdings Ltd. (Midas) manufactures aluminium alloy extrusion products for the passenger rail transport, power and other industries.
• With order books of c.Rmb800m for its core extrusion business and over Rmb13bn for its associate NPRT, we expect Midas’s existing railway-related businesses to show steady growth into 2017F and 2018F. In particular, we expect the core aluminium extruded products division to show improvement in 2017F following a temporary slowdown in project deliveries in 2H16, as demand for metro and highspeed railway cars in China remains robust.
• With a strong 4Q16 rounding up 2016 to drive a 76% yo-y improvement in earnings, and strong recovery momentum, we see current valuations for Midas at 0.5x P/BV as bombed out. Continually improving earnings should help re-rate the stock towards our TP of S$0.36, based on 0.8x FY17F P/BV.

5) Singapore O&G [SOG SP, TP S$1.60] 

• Singapore O&G (SOG) is a chain of medical practices, specialising in women’s health mainly in obstetrics and gynaecology (O&G), women’s cancer-related and dermatology and aesthetics.
• Apart from plans to grow its market share in the O&G segment via the recruitment of new doctors, SOG has also been diversifying into higher-margin complementary services, such as its cancer-related and newly acquired dermatology and aesthetics business, which should continue to leverage on referrals from its existing bread-and-butter O&G business to deliver growth. In line with its goal to be an integrated women’s health medical practice, we believe other complementary services to explore include paediatrics, IVF and child-care services.
• We have recently revised earnings for FY17F-FY18F by -2% to 5% to factor in the implicit discount in relation to the deferred payment for the acquisition in FY17F offset by marginal contributions from the potential commencement of the paediatrics division. 
• Our target price of S$1.60 is based on the average of two valuation methodologies i) PE multiple at 30x PE, and ii) DCF valuation.

Paul YONG CFA DBS Vickers | http://www.dbsvickers.com/ 2017-03-15

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