Alpha Picks - UOB Kay Hian 2017-04-03: Allocating For A New Quarter

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Singapore Stock Top Picks CITIC ENVIROTECH LTD. CEE.SI SATS LTD. S58.SI CHINA AVIATION OIL(S) CORP LTD G92.SI SEMBCORP MARINE LTD S51.SI FOOD EMPIRE HOLDINGS LIMITED F03.SI

Alpha Picks - Allocating For A New Quarter

• We remove Sunningdale after its share price surge and replace it with newly initiated Citic Envirotech. 
• Sembcorp Marine remains a candidate for short on possible negative newsflow and we highlight SATS for profit taking after its outperformance.

WHAT’S NEW

Stunning performance from Sunningdale. 

• Our alpha picks portfolio had a fruitful March, with Sunningdale rising 21% since our initiation and introduction into our alpha picks. 
• Otherwise, our picks such as SMM (short), China Aviation and Food Empire are unchanged, with SMM being notable as it declined 6% since we added it as a short candidate.

ACTION 

Adding in a new initiation to BUY and a large cap to topslice. 

• We remove Sunningdale after its stellar share price performance (+21% since our initiation) with an upside of only 11%.
• We add Citic Envirotech as we initiate coverage with a BUY and a projected 33% price upside. It is a solid proxy to China’s push for a greener environment. 
• We remain believers in China Aviation Oil (CAO) and Food Empire as CAO continues to benefit from the robust growth in China’s civil aviation industry and the global aviation industry. Food Empire is an inexpensive consumer proxy for Russia and Ukraine. 
• Sembcorp Marine (HOLD) is a short idea after its 39% ytd rise, which we think is not fundamentally justified as we prefer its parent SembCorp Industries. 
• SATS has also been added as a profit-take idea on its premium valuations as its PE is now at +2SD above mean.

Citic Envirotech – BUY (Edison Chen / Nicholas Leow) 

• We recently initiated coverage with a BUY and street-high DCF-based target price of S$1.10, implying a 33% upside. 
• Citic Envirotech (CEL) is the best in class with superior technology know-how protected through a suite of intellectual property rights.
• Riding on favourable industry dynamics and the entrance of a new strategic shareholder, investors can look forward to new areas of growth in river rehabilitation, sludge treatment and the circular economy.
• Share Price Catalyst Event: Potential contract wins that could underpin FY17-18 earnings.
• Timeline: 3-6 months as clean water is a high priority for the China government. This would benefit CEL, which has the track record and technology.
• See report: CITIC Envirotech (CEL SP) - UOB Kay Hian 2017-03-29: Targeting A Torrent Of S$1b In New Project Wins

SATS – HOLD (K Ajith / Sophie Leong) 

• The stock has outperformed and currently trading at a premium to our DDM-based target price of S$4.60. In addition, SATS is at multi-years high and trading at +2SD above mean PE.
• Jan-Feb 17’s flight movements rose only 1.6% yoy, less than half that of 3QFY17’s 3.7%. This suggests that gateway services revenue growth could slow in the coming quarters, given that SATS has about 80% share of Changi Airport’s flights.
• Interestingly, Changi Airport’s flight movements declined for the first time in 23 months in Feb 17, while pax throughput rose. This suggests that airlines could be cutting flight frequencies and flying with fuller loads. While positive for airlines, this is negative for ground handlers such as SATS.
• We suggest investors top-slice their holdings.
• Share Price Catalyst Event: 4QFY17 earnings may disappoint.
• Timeline: Reporting of 4QFY17 results in May (4QFY16 results were released on 23 May 16).
• See report: SATS (SATS SP) - UOB Kay Hian 2017-02-10: 3QFY17 Boosted By Higher Cargo Volumes, But Earnings Likely To Moderate

China Aviation - BUY (Edison Chen) 

• China Aviation Oil (CAO) is Asia Pacific’s largest physical jet fuel trader, and holds a monopoly in supplying imported jet fuel to 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 futures 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: 1QFY17 results to be released on 19 Apr 17.
• See report: China Aviation Oil Singapore Corp (CAO SP) - Sleep Soundly At Night

Sembcorp Marine - HOLD (Foo Zhi Wei/Andrew Chow) 

• Though our official recommendation is HOLD, we think the 39% ytd rise in share price is an opportunity to topslice.
• The lack of contract wins is worrisome. If no order wins are secured soon, 2017 earnings will start feeling the impact of the low 2016 contract wins as orderbook depletes.
• Target price is S$1.61, based on 1.2x 2017F P/B, derived on a P/B vs ROE relationship for large-cap shipyards.
• Share Price Catalyst Event: Lack of orderbook wins or weaker-than-expected 1Q17 results. Possible negative newsflow on clients that undergo financial restructuring could also be a catalyst.
• Timeline: Ad hoc announcement/news of clients with financial woes.
• See report Sembcorp Marine (SMM SP) - UOB Kay Hian 2017-02-23: 4Q16 Earnings Outlook Hazy On Disconcerting Order Drought

Food Empire - BUY (Nicholas Leow/Edison Chen) 

• Food Empire is the dominant coffee mix market leader in Eastern Europe with a market share of more than 50% in Russia and more than 40% in Ukraine.
• With a stable Russian ruble and potential for Russian sanctions relief from the new US President Donald Trump, we expect a strong sustainable rebound in net profit in FY17.
• Food Empire enjoys scarcity premium after the privatisation of Super Group and postponement of Viz Branz’s IPO.
• Share Price Catalyst Event: Sustained earnings growth momentum in FY17 and further share purchases by its CEO.
• Timeline: 1QFY17 results and ad hoc share purchases by its CEO. 
• See report: Food Empire Holdings (FEH SP) - 2016 Full Turnaround Achieved, Back To Paying Dividends

Singapore Research UOB Kay Hian | http://research.uobkayhian.com/ 2017-04-03

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.10 Same 1.10

HOLD Maintain HOLD 4.600 Same 4.600

BUY Maintain BUY 2.210 Same 2.210

HOLD Maintain HOLD 1.610 Same 1.610

BUY Maintain BUY 0.780 Same 0.780