Small Mid Caps - DBS Research 2017-05-23: May 2017 Top Picks

SGinvestors.io

Small Mid Caps Top Picks CDL HOSPITALITY TRUSTS J85.SI HI-P INTERNATIONAL LIMITED H17.SI MM2 ASIA LTD. 1B0.SI SINGAPORE O&G LTD. 1D8.SI UMS HOLDINGS LIMITED 558.SI

Small Mid Caps - May 2017 Top Picks

• SMC picks – CDL Hospitality Trust, mm2 Asia, Singapore O&G, Hi-P, UMS.

Review of March 2017 Picks 

• Indices gained 1.5% on average since last issue (13 Mar – 18 May): 
  • FTSE STI: 3147.15 to 3221.66 // + 2.4% 
  • FSTS Index: 394.63 to 402.27 // + 1.9% 
  • FSTM Index: 722.58 to 724.26 // + 0.2% 

Our picks had a broad range of performances 

• Overall, our picks in March underperformed the market, - 5.8% vs average of +1.5% for the market over the same period, dragged down by Japfa and Ezion. Cityneon did well.
• Potential entry of strategic investors and the exploration of a third Intellectual Property right drove Cityneon’s share price higher. News on the formation of Singapore O&G’s Paediatrics division and the recent stock split are positive for the stock.
• Japfa was partly affected by concerns on oversupply of swine in Vietnam. Operational weakness on the back of the weak oil prices has capped Ezion’s share price performance.
• Share price of Midas was relatively flat, despite depressed valuations and positive newsflow on contract wins.

May 2017 Small Mid Cap Picks 

• We have removed four out of our five picks in March - Cityneon, Ezion, Japfa and Midas. 
  • We continue to like Cityneon on fundamentals, and expect explosive earnings growth ahead but near term, share price is likely to be capped by the potential mandatory general offer at S$0.90 per share. 
  • Operational weakness on the back of weak oil prices capped Ezion’s share price performance. 
  • Midas was relatively flat, despite depressed valuations and positive newsflow on contract wins.
  • For Japfa, near term, Animal Protein outside Indonesia could continue to be weak, due to the oversupply of swine in Vietnam. 
• We retain our pick for Singapore O&G.

Ex-technology picks – CDL Hospitality Trust, mm2 Asia, Singapore O&G, Sheng Siong.

• For Technology stocks, our picks are Hi-P and UMS. Other picks are CDL Hospitality Trust, mm2 Asia and Singapore O&G. 
• CDL Hospitality Trusts (CDREIT) is the cheapest REIT providing exposure to the upturn in the Singapore hospitality market which we project will occur in 2018 as supply pressure eases. CDREIT offers compelling long-term value given its Singapore portfolio trades at a heavily discounted implied price per key of S$500,000 which is below its replacement cost of c.S$700,000, recent market transactions of above S$650,000, and that of other listed Singapore hospitality REITs of between S$650,000 and S$1m. In addition, CDREIT offers an attractive 6.4% yield.
• mm2 Asia is on a growth trajectory. We project mm2 to grow at an EPS CAGR of 52% from FY16-FY19, underpinned by growth in productions, expansion into the China market, and contribution from UnUsUal.
• 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 May 2017 Picks 

1) CDL Hospitality Trust [CDREIT SP, TP S$1.75] 

• Although we expect the Singapore hospitality market to only recover in 2018, we believe the current low share price has largely priced in the current downturn and CDREIT offers compelling long-term value given that its Singapore portfolio trades on a heavily discounted implied price per key. 
• In addition, CDREIT offers patient investors an attractive 6.4% yield (based on 90% payout ratio) ahead of the eventual upturn. CDREIT is the cheapest REIT on a price per key basis, providing exposure to the upturn in the Singapore hospitality market which we project will occur in 2018 as supply pressure eases.
• We recently raised our DCF-based TP to S$1.75 from S$1.70. We believe with CDREIT tempering downside risk to earnings this year with the acquisition of The Lowry Hotel, at current levels, CDREIT offers an attractive entry point to an expected recovery in the Singapore hospitality market next year.

2) Hi-P [HIP SP, TP S$1.07]

• Hi-P is riding on the growth trajectory for Smartphone and IoT market. The group is expanding production, in particular at its Suzhou plant, in preparation for orders from new customers, and also new products from existing customers. 
• Overall utilisation rate for 1Q 2017 was below 40%. With the expected ramp-up in production, we expect utilisation rate to reach 60-70% in the next 1-2 years.
• Hi-P reversed from a steep loss in 1H2016, mainly driven by improved manufacturing efficiency. We expect earnings momentum to continue, on the back of operational efficiency, new customers and new product launches. 
• Our TP of S$1.07 is based on 12x FY18F earnings.

3) mm2 Asia [mm2 SP, TP S$0.70] 

• mm2 Asia is on a growth trajectory. We project mm2 to grow at an EPS CAGR of 52% from FY16-FY19, underpinned by growth in productions, expansion into the China market, and contribution from UnUsUal. The cinema arm, on the other hand, helps to build a recurring income base. Upon completion of the latest acquisition of 13 cinemas in Malaysia, mm2 Asia will be a top four player in Malaysia.
• Our target price of S$0.70 is based on sum-of-parts (SOTP) valuation; we recently switched the valuation methodology for mm2 to SOTP valuation from the PE method, as contribution from the different business units will be more meaningful going forward.

4) Singapore O&G [SOG SP, TP S$0.80] 

• 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, and it should continue to leverage on referrals from its existing bread-and-butter O&G business to deliver growth. 
• Expansion into new specialisations such as paediatrics augurs well for the group. In line with its goal to be an integrated women’s health medical practice, we believe other complementary services to explore include IVF, childcare services and imaging.
• Our target price of S$1.60 (S$0.80 post share split) is based on the average valuation using 30x PE and DCF valuation. Our estimates have incorporated marginal contributions from paediatrics division.

5) UMS Holdings [UMSH SP, TP S$1.33] 

• Industry expert SEMI predicts that global fab equipment spending could reach an industry all-time high of over US$46bn in 2017, before climbing closer to US$50bn in 2018.
• Through its entrenched relationship with Applied Materials – a leading producer of semiconductor equipment, UMS should naturally benefit from the former’s efforts in expanding its addressable market and market share gains. 
• Plans to grow production capacity by approximately 30% by end-2018 should also allow UMS to better capitalise on this strong end demand.
• To capture growth potential in the strong semiconductor uptrend, we impute a higher valuation multiple from 9x to 11x FY18F PE (or 9x ex-cash) – which still represents a discount to larger peers’ 14x, and arrive at a higher TP of S$1.33.
• Additionally, as a dividend play (with prospective yield of 6.2%), the stock’s attractiveness is further enhanced by the prospect of higher dividends.

Lee Keng LING DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-05-23

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.750 Same 1.750

BUY Maintain BUY 1.070 Same 1.070

BUY Maintain BUY 0.700 Same 0.700

BUY Maintain BUY 0.800 Same 0.800

BUY Maintain BUY 1.330 Same 1.330