Singapore Stocks Alpha Picks - UOB Kay Hian 2017-06-05: Adjustment Amid Toppish Valuations

Alpha Picks - UOB Kay Hian 2017-06-05: Adjustment Amid Toppish Valuations Singapore Stocks Picks Analysts' Recommendations UOB Kay Hian Alpha Picks MEMTECH INTERNATIONAL LTD BOL.SI SINGAPORE AIRLINES LTD C6L.SI CAPITALAND COMMERCIAL TRUST C61U.SI CITIC ENVIROTECH LTD. CEE.SI CHINA AVIATION OIL(S) CORP LTD G92.SI

Alpha Picks - Adjustment Amid Toppish Valuations

  • We take profit on Food Empire after its stellar 31% return in May and replace it with Memtech. 
  • We add SIA as a short candidate on its recent price bounce despite challenging prospects.


Food Empire a clear winner and primed for profit taking. 

  • Food Empire's share price surged 31% mom in May, after reporting solid 1Q17 results that exceeded our expectations. The solid performance was on the back of strong growth in sales for most key markets. 
  • While we remain sanguine on its long-term prospects and have a BUY and target price of S$0.90, the strong 31% price rise in May leads us to take profit and remove the stock from our alpha picks. 
  • Since the inclusion of this stock in our list in Feb 17, Food Empire has yielded a total return of 28.4% (including dividends).

Keeping faith in Citic Envirotech and China Aviation Oil. 

  • These two stocks had mixed performances in May. 
  • China Aviation Oil performed well, rising 5% mom as it was included into MSCI Singapore Small Cap Index (effective after the close of market on 31 May 17). 
  • As for Citic Envirotech, the company did not disappoint in terms of newsflow, with a recent Rmb3b contract win in Ningbo, China. However, the stock has not reacted positively and we think this could provide an entry opportunity. We continue to favour the stock, with a BUY and DCF-based target of S$1.10.


Add Memtech International and SIA. 

  • We add Memtech as a BUY as the stock remains inexpensive and there are possibly more earnings and dividends upside. The stock is also trading at an unwarranted discount to its precision engineering peers. 
  • SIA has been added in as a short candidate on potentially weak data points.

Memtech International - BUY (Nicholas Leow/Edison Chen)

  • Memtech’s R&D team specialising in material sciences has given the company a competitive edge in this industry. The company holds more than 120 patents.
  • Its crown jewel is its manufacturing process for liquid silicone rubber (LSR) which allows it to break into the Beats by Dre supply chain. Our channel checks indicate that Memtech is one of the world’s leading precision engineering manufacturers of LSR products.
  • Maintain BUY and PE-based target price of S$1.15, pegged at sector FY17 PE of 12.5x.

Share Price Catalyst

  • Event: Better-than-expected earnings and dividends.
  • Timeline: 2Q17 results in August.

Singapore Airlines SIA - HOLD (K Ajith/Sophie Leong)

  • SIA's stock price has rebounded somewhat following the recent sell-down. We believe the rebound is not sustainable as SIA has yet to announce any credible actions to lower costs or eliminate unprofitable routes.
  • SIA will release May operating statistics by June, which are unlikely to inspire confidence. Any increase in load factors could very well be due to aggressive discounting.
  • Barring a steep cut in capacity/fleet, we believe SIA's stock price is likely to trend down towards the recent low of S$9.60.

Share Price Catalyst

  • Event: May operating statistics.
  • Timeline: Mid-June.

Capitaland Commercial Trust CCT - BUY (Vikrant Pandey/Derek Chang)

  • CCT's pressure on rental reversions mitigated by CapitaGreen and spread-out lease expiries, Golden Shoe carpark redevelopment to drive value in the medium term.
  • While management expects negative rental reversions to continue, underscored by supply-side rental pressure, they nevertheless expect DPU to remain stable, bolstered by the recent acquisition of the remaining 60% stake in CapitaGreen,
  • Nascent signs of Grade A office rental stabilisation as peak of supply is behind us.
  • Grade A rental decline could fast be approaching a bottom, especially as qoq declines have been slowing.

Share Price Catalyst

  • Event: Data points on the leasing activity for the upcoming office supply in the next six months (especially Marina One), signalling a turnaround.
  • Timeline: Ad hoc release of data points by property consultants.

Citic Envirotech – BUY (Edison Chen/Nicholas Leow)

  • We have a street-high DCF-based target price of S$1.10, implying a 43% 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 Chinese government. This would benefit CEL, which has the track record and technology.

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.
  • The stock has been recently added into the MSCI Singapore Small Cap Index.

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: 2QFY17 results.

SATS – HOLD (K Ajith/Sophie Leong)

  • The stock has done well and currently trades at a premium to our target price of S$5.05.
  • SATS is at multi-years high and trading at +2SD above mean PE.
  • We suggest investors to take profit.

Share Price Catalyst

  • Event: Higher-than-expected costs and weaker pricing power as airlines’ yields come under pressure.
  • Timeline: 1QFY18 results.

*Alpha Picks - Denotes a timeframe of 1-3 months and not UOBKH’s usual 12-month investment horizon for stock recommendation.

Singapore Research UOB Kay Hian | http://research.uobkayhian.com/ 2017-06-05
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.150 Same 1.150
HOLD Maintain HOLD 10.000 Same 10.000
BUY Maintain BUY 1.940 Same 1.940
BUY Maintain BUY 1.100 Same 1.100
BUY Maintain BUY 2.260 Same 2.260