Singapore Market Strategy - DBS Research 2017-07-03: (5) Investment Theme ~ Alpha Picks


Singapore Market Strategy - Investment Theme ~ Alpha Picks

Continue From... Singapore Market Strategy - DBS Research 2017-07-03: (4) Investment Theme ~ Defensive & Yield

B) Alpha picks 

  • We look for stocks with above market earnings growth, >15% upside, and specific catalysts to drive performance over the next 3-6 months. These are Thai Beverage, Breadtalk, Dairy Farm, Genting Singapore, and City Developments.

Breadtalk (BUY; TP: S$1.92) 

CHIJMES/AXA could be sold 

  • We believe Breadtalk’s earnings will continue to turn around and deliver growth. 1Q17 earnings have validated that its Foodcourt business is on track for a turnaround. 
  • Apart from earnings growth, we see potential catalysts from the possible sale of AXA Tower/CHIJMES, and revaluation of Beijing Tongzhou Development. 
  • BreadTalk’s valuation, based on its core business (ex-property investments), is compelling at 16.2x FY17/18F PE. BreadTalk’s core business is undervalued at 16.2x FY17/18F PE after stripping out the value of investment properties from the current share price. Applying 22x PE valuation to the retail business and adding back the value of its investment properties, we derived a target price of S$1.92. 
  • We see potential for more special dividends if Perennial needs to raise funds, and this could lead to the sale of AXA Tower or CHIJMES. BreadTalk has tag along rights and along with Perennial, had monetised 111 Somerset and 112 Katong before. The revaluation of Beijing Tongzhou Development will also be another share price catalyst.

City Developments (BUY; TP: S$12.63) 

Tapping on launches and government land sale 

  • City Developments (CDL)’s property launches in 2H17 will position it to ride on the positive sentiment in the property market. 
  • CDL’s existing unsold inventory at its various launched projects in Singapore amounted to close to 1,033 units, representing close to 16% of total units. CDL’s effective stake in this unsold inventory is close to 598.3 units (vs 737.3 units in 4Q16). With positive sales momentum at Gramercy Park in 1Q17, subject to market conditions ahead, we see the group launching the 124-unit New Futura at Leonie Hill Road, and South Beach Residences (est 190 units) in 2H17. In a best case scenario, assuming 100% sell-through rate, we estimate that sales from these 3 projects could potentially reap close to S$2bn in sales (CDL’s effective stake is close to S$1.8bn) which will be recognised in 2017-2018. 
  • A more aggressive land sale program, + 9% h-o-h by Singapore government, provides opportunities for Singapore companies to land bank, while lofty bid prices in recent months will keep prices up for residential units over the next 2-3 years.

Capitaland (BUY; TP: S$4.33) 

2017 to be a banner year for the group with a strong 1Q17 showing. 

  • The group’s various business units are expected to deliver strongly in 2017. CAPL's 1Q17 results were strong despite one-off gains. We are seeing an improvement across business divisions. Noteworthy is the stable tenant sales across its portfolio, implying a majority of its new retail mall completions (mainly in the Raffles City projects in Shenzhen, Hangzhou and Changning) are substantially pre-leased prior to completion. 
  • In addition, residential sales should do well given improving property sentiment in Singapore and China. We believe that it is time for the group to turn more aggressive in replenishing its land bank in these countries. 
  • Acknowledging strong competition for land, management is looking at opportunities to acquire land through JVs or mergers & acquisitions (M&A) which will offer the group an alternative and cheaper entry price. The group remains keen to build on its recurring income base and we could see acquisitions in that space.

Dairy Farm (BUY; TP: US$9.96) 

Efficiency gains drive margin enhancement 

  • Current share price ex-Yonghui values Dairy Farm (DFI)’s core business at just 18.6x forward PE, below the regional peer average, and its 9-year historical average forward PE of 25x. We see growth supported by more margin improvements ahead. 
  • Results in 2H16 were stronger driven by better operating efficiencies as anticipated. We continue to be positive on further cost efficiencies from enhanced operational processes through distribution centres, procurement and IT systems.  In line with growth traction, we also expect DPS to increase in FY17F based on c.60-56% payout ratio, leading to slightly higher dividend yield. 
  • DFI currently offers forward dividend yield of 2.9%.

Genting Singapore (BUY; TP: 1.35) 

Strong earnings momentum 

  • We expect the strong earnings momentum in 1Q17 to continue. Genting has been able to grow its earnings despite still soft VIP rolling chip and mass business volumes, through the successful execution of its cost reduction initiatives as well as lowering bad debts given the implementation of a more selective and conservative credit policy last year. This structurally lower cost base provides a strong platform when volumes eventually bounce on the back of the growth in tourist arrivals.

Thai Beverage (BUY TP $1.07) 

Post mourning pent up demand 

  • We believe that uncertainties surrounding slower consumption in Thailand from the mourning period is temporary. The pullback in share price is a chance to accumulate the counter.
  • While 1H17 saw earnings dipping by 2% y-o-y, we believe 2H17 would turn in a better y-o-y performance on the back of tighter cost control. In addition, expectations of excise tax increase could lead to distributors and agents stocking up, thus spurring sales in 4Q17F. 
  • Dividend yield of slightly over 3% is an added attraction. 
  • On a longer-term horizon, we believe its ongoing transformation into a regional beverage player will aid in further re-rating the counter. Its associate, Fraser & Neave Ltd (FNN) now owns 18.74% in Vinamilk, and has stated an intention to increase this further. 

Janice Chua DBS Vickers | Yeo Kee Yan CMT DBS Vickers | Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-07-03
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