Small Caps - CIMB Research 2017-05-18: Manufacturing Stocks Shine In 1Q17

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Singapore Stocks Picks Small Caps Top Picks AEM HOLDINGS LTD AWX.SI RIVERSTONE HOLDINGS LIMITED AP4.SI SUNNINGDALE TECH LTD BHQ.SI MEMTECH INTERNATIONAL LTD BOL.SI UMS HOLDINGS LIMITED 558.SI

Small-Caps - Manufacturing Stocks Shine In 1Q17

• 1Q17 reporting season saw seven stocks beat our estimates (4Q16: 3) while 6 stocks were in line. Three stocks reported earnings below our estimates (4Q16: 4).
• We remove Cityneon and Talkmed from our top small-cap picks.
• New additions to the list this quarter are AEM Holdings and Riverstone Holdings.
• AEM will enjoy a good FY17 with both qoq and yoy net profit growth. The company has guided for a pre-tax profit of at least S$17.5m for 9M17.
• We believe Riverstone could enjoy EPS CAGR of 17% in FY17F-19F, driven by capacity expansion.

1Q17 earnings performance 

• The 1Q17 results season was a good quarter for small-cap stocks under our coverage. Manufacturing stocks, in particular, reported strong 1Q17 results. 
• In 1Q17, net profit of 7 companies came in above expectations (4Q16: 3), 6 companies performed in line with expectations (4Q16: 10) and 3 companies reported below-expectation earnings (4Q16: 4). 
• The 1Q17 earnings outperformance was driven mainly by stronger revenue growth.

Changes to small-cap top picks 

• We are removing Cityneon and Talkmed from our small-cap top picks. 
  • Cityneon’s near-term share price upside will be capped by the current offer price of S$0.90 per share proposed to its major shareholders. 
  • Talkmed’s share price factors in the current positives and it will need a meaningful acquisition to drive earnings further. 
• Replacing these two stocks are AEM Holdings Ltd and Riverstone Holdings Ltd.
• Memtech, Sunningdale Tech and UMS Holdings remain in the portfolio.

AEM Holdings 

• AEM’s share price has gained 140.4% since our initiation report on 8 Mar 17. It is currently the sole source supplier of test handlers to its single customer. 
• The company announced a strong 1Q17 and the share price re-rated as it guided for a pre-tax profit of at least S$17.5m for 9M17 (9M16: S$4.9m). If this materialises, it would translate into a very robust 257.1% yoy growth in pre-tax profit.

Riverstone Holdings 

• Riverstone’s 1Q17 core net profit was ahead of our expectations and we are projecting a stronger 2H as more capacity comes on-stream. 
• Management has revised upwards its capacity expansion plan, with total capacity slated to reach 10bn pieces p.a. by endFY19, representing a 60% increase over end-FY16. 
• Backed by EPS CAGR of 17% in FY17F-19F, we upgraded Riverstone from Hold to Add post its 1Q17 results.

Highlighted companies 

AEM Holdings Ltd 

• ADD, TP S$3.39, S$2.44 close 
• AEM is currently the sole source supplier for its key customer. 
• We believe EPS CAGR over FY17F-19F can hit 74.8%. For 9M17, AEM forecasts its pre-tax profit to amount to at least S$17.5m.

Memtech International 

• ADD, TP S$1.09, S$0.79 close 
• Memtech is a net-cash company that is trading at 0.69x CY17 P/BV. Dividend yields are projected to be 4.5-5.5% over CY17F-18F.
• We believe Memtech will enjoy margin expansion given volume growth.

Sunningdale Tech Ltd 

• ADD, TP S$2.19, S$1.83 close 
• Sunningdale Tech has finally seen the results of its cost reduction initiatives. The 1Q17 gross margin rose to 15.0%. 
• We believe margins will continue to improve, leading to a hike in our profit forecasts.

William TNG CFA CIMB Research | http://research.itradecimb.com/ 2017-05-18

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