Singapore Market Strategy - DBS Research 2017-07-03: (6) Investment Theme ~ Rebound In Oil Price, Mergers, Acquisitions and Takeovers.


Singapore Market Strategy - Investment Theme ~ Rebound In Oil Price, M&A

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

C) Rebound in oil prices.

Position for oil price rebound in 2H. 

  • Brent crude oil price averaged US$52.8/bbl YTD – 17% higher than 2016 average of US$45.1/bbl, following optimism on supply moderation after the OPEC production cut in late 2016. However, prices have been falling, from the US$50-55/bbl mark since May 2017 on renewed concerns in the market regarding the oversupply situation as global inventory levels have remained stubbornly high and US shale production has rebounded. 
  • The fact that US shale production costs are starting to rise again and productivity improvements are near saturation levels means that oil prices below US$45/bbl are not sustainable from a return point of view. 
  • Currently hovering at around US$45/bbl, we project a move towards the US$55/bbl mark by the end of 2017, thus implying an average of between US$50- 55/bbl for the full-year 2017.

Singapore rigbuilders are proxies to oil recovery; order wins driven by non-drilling solutions, diversifying into LNG. 

  • In addition to their production related facilities such as FPSOs, Singapore rigbuilders have made forays into the LNG market with Keppel Corp (Keppel) delivering its first FLNG vessel while Sembcorp Marine (SMM) on the verge of securing orders for its first-of-its-kind modularised LNG terminal. These are high value add products. 
  • For comparison, contract value for a jackup rig was approx. S$280m while drillships was c.S$700m prior to the recent oil crisis. Keppel’s FLNG vessel orders from Golar were priced at over S$900m each. FLNG orders currently accounted for over 50% of Keppel’s orderbook (S$3.5bn as of end Mar-17). 
  • For SMM, a modularised LNG importing terminal is expected to be worth S$200-300m while an exporting unit could be almost S$1bn. This is a strategic move to reduce reliance on drilling solutions and tap on the robust demand growth for natural gas as cleaner energy. We believe LNG solutions will be a major order driver for Singapore rigbuilders going forward.

D) Mergers, Acquisitions and Takeovers.

M&A / privatisation activities continue to gain momentum.

  • YTD, we have already seen several buyout offers, offering premiums of between 2% to 23% over their last transacted prices. Others that have already indicated their intention to take this path include Global Logistics Properties (GLP) and United Engineers
  • GLP, which has been the centre of the takeover spotlight since last year, with several interested parties ranging from KKR, Blackstone to TPG and RJ. The race is now down to between a Chinese consortium backed by the company's management, and a rival group led by Warburg Pincus. 
  • United Engineers is also said to be on a beauty parade and has pulled in a strong lineup of suitors looking to acquire it. Market talk is that Perennial Real Estate Holdings is likely to acquire United Engineers.
  • We attempt to sift potential candidates by sector, as each sector offers different criteria and value that vulture funds or PE funds seek in order to unlock value in these companies.

Technology - Flushed with cash; low free float or fragmented shareholding structure 

Hi-P (BUY; TP: S$1.07) 

  • Hi-P could be an attractive target for global companies looking to build a base in Asia, or as a privatisation candidate. To date, there is still no concrete succession plan announced by its Executive Chairman & Chief Executive Officer, Mr Yao Hsiao Tung, with a 83.2% stake in the company, after acquiring Molex International’s 22.1% stake in mid-June this year.
  • Furthermore, with its entrenched relationship with key customers, which include some of the world’s biggest names in mobile phones, tablets, household & personal care appliances, Hi-P could be an attractive target for global companies looking to build a base in Asia.

Sunningdale (BUY: TP: S$2.62) 

  • Sunningdale Tech has gone through several rounds of M&A in the past to become one of the biggest one-stop turnkey plastic solutions provider. Sunningdale‘s competitive advantages lie in its tooling capabilities, expertise in high cosmetic parts, credibility in the healthcare and automotive business and the scalable robust system and processes that have been built over the years. 
  • At below 1x P/BV and 10x FY17F PE, attractive valuations could lead to takeover potential – especially from PE funds or larger top-tier players in the precision plastic field seeking Asian exposure.

Venture (BUY; TP: S$14.30) 

  • Venture Corp is a global provider of technology products and solutions. It is best known for its superior capabilities in Original Design Manufacturing (ODM) and in providing high mix, high-value and complex manufacturing. 
  • It is in net cash position and has a fragmented shareholding structure. Founder Mr Wong has a stake of about 7% in Venture.

Fu Yu (NOT RATED; Potential Target: S$0.25) 

  • Currently c.53% majority owned, and trading below historical book value with substantial net cash of nearly S$106m as at end-2016, Fu Yu looks attractive for its 7.5% yield and ex-cash PE of only about 3.3x for FY17F (which is the lowest among its peer group), leading to potential for a privatisation or takeover offer. 
  • A privatisation offer representing 20% premium would require only 82% of its net cash, while a takeout offer at premium of 20% would present an ex-cash acquisition PE of just about 5.8x.

Property - undervalued, under owned and strong asset backing 

Bukit Sembawang (NOT RATED: Potential Target: S$7.55) 

  • Bukit Sembawang (BS) is one of the few developers in Singapore that still have substantially un-developed landbank in Singapore and could be an interesting target for investors looking to land-bank. 
  • The group is 44% owned by the Lee Family, who is rumoured to be keen to sell their stake in another listed company – United Engineers
  • Key properties in Bukit Sembawang’s portfolio are mainly high-end residential projects (Paterson Suites, St Thomas Walk and Skyline Residences) which could be subject to block sales to investors given the improved sentiment amongst buyers (both individual and institutional) in the luxury end of the residential market.
  • The group have also substantial land resources to build landed homes in Ang Mo Kio and Sembawang areas which could last at least 10 years in terms of sales. 
  • Stock is trading at 13% discount to its RNAV of S$7.55.

Banyan Tree (NOT RATED) 

  • Banyan Tree (BTH) has recently announced the strategic collaboration with Accor and Vanke which in our view will be transformational for the group. The collaboration with these partners is an extension of the group’s asset light model and entails providing the group with “wings” to grow its presence and brand globally at a much faster pace than before. 
  • Accor and Vanke offer much needed capital to acquire new assets which Banyan Tree will find it difficult to execute on its own. Accor will co-manage with Banyan Tree its suite of brands globally (with the exception of China, Vietnam and Thailand) while Vanke will co-invest to grow Banyan Tree’s presence in China through the setting up of a new JV where the group will divest most of its China assets. 
  • We estimate the book value of BTH’s China properties to be worth up to RMB 800m (S$177m), of which close S$90m (50% of value) can be unlocked for shareholders through this transaction. A potential special dividend could be in the works when that happens. 
  • In addition, both new partners will take up to a 10% stake in the company over time with new shares issued at S$0.60/share (translating to a premium of 20% to the last traded price of S$0.50/share), implies the confidence that both partners have in the longer term growth potential of the group. 
  • Stock trades at a 0.7x P/NAV of S$0.79/share, which is conservative in our view.

Metro (NOT RATED) 

  • Metro Holdings owns a portfolio of investment properties in China (Shanghai and Guangzhou). Its development properties which is largely still under development are located in China (Nanchang Fashion Mark), and UK (Manchester and Sheffield). 
  • The company has a strong net cash position at 22% of market cap. 
  • Dividend payout rate has been slightly above 50% in the past 2 years with dividend yield of 4.3% and 6% in FY17 and FY16 respectively. 
  • In addition, succession questions arose when the late ex-managing director, Mr Jopie Ong Hie Koan who was the son of the founder, the late Ong Tjoe Kim, passed away in 2016 in his 70s. The Ong family owns a 36% stake in Metro. Currently the company is helmed by Mr Lawrence Chiang who previously held the Group COO position before he was promoted to Group CEO. One of its Directors, Mr Gerald Ong is also the current CEO of PrimePartners Corporate Finance Group. 
  • Metro currently trades at 0.7x P/NAV with potential upside from the realisation of its development properties in the UK and China.

Temasek Restructuring – eye on higher returns 

  • Following the change in leadership at several Temasek-linked companies, this could pave the way for more M&A, restructuring potential in a bid to raise shareholders’ returns.

Aerospace sector: Restructuring/ M&A in Singapore’s aerospace MRO market continues to be a possibility.

  • Both SIA Engineering and to a lesser extent, ST Engineering’s Aerospace division have been grappling with structural issues in the MRO industry for the past few quarters – longer maintenance schedules for new aircraft and engine types, phasing out of old models and increasing OEM dominance of the aftermarket space – and a potential consolidation in the Singapore MRO space makes sense, in our opinion. 
  • The key rationale of a merger scenario can be worked out as under:
    1. Keeping pace with consolidation trend and positioning firmly as the world’s largest airframe MRO providers,
    2. Benefiting from increased scale and service breadth, and
    3. Cost synergies.

SIA Engineering would benefit more as the target company. 

  • In the case that SIA and/ or its principal shareholder Temasek (who is also the main shareholder of ST Engineering) decides to pursue value-accretive strategies for SIA Engineering amid the structural changes in the MRO landscape, there are various potential deal structures:
    1. outright purchase of SIA Engineering by ST Engineering or any other third party,
    2. partial divestment where SIA decides to retain majority control over SIA Engineering, and
    3. merger of two companies in an all share deal.
  • Given that SIA is currently undertaking a strategic review of its operations, it remains to be seen whether it would look at monetizing its stake in SIA Engineering or otherwise consider taking it private in a bid to boost ROE and margins.
  • Meanwhile, ST Engineering’s new CEO has taken strategic steps to divest loss making specialty vehicle business in China.
  • Armed with a net cash chest, we think the new management team could be more aggressive in utilising the group’s balance sheet to accelerate growth. With gross cash of $1.7b and assuming it gears up to 1x, the group has access to as much as S$3bn cash to fund growth and/or M&A – a hefty amount.

Potential rationalisation of Keppel and Sembcorp? 

  • The possibility of M&A between the two Singapore blue-chip O&M plays - Keppel Corporation (Keppel) and Sembcorp Industries (SCI), has been a talking point amid the structural downturn.
  • The recent announcement of strategic review of SCI following the appointment of new CEO, Mr. Neil McGregor, has raised the possibility of such an outcome. In our opinion, merging Keppel Offshore Marine (Keppel O&M) and Sembcorp Marine (SMM) will create a global power house by combining the core competency, world class facilities, and branding of both rigbuilders. 
  • In addition, it provides room for further cost rationalisation in this structural downturn. 
    • SCI could enhance value to its shareholders by focusing on its core competency along the utilities value chain, and divesting the non-synergistic SMM. 
    • Keppel could continue to build on its success as a conglomerate with its multi-pronged businesses - Property, Offshore & Marine (O&M), and Investment. 
  • We believe SCI could emerge as a clear winner in this exercise with potential rerating of its utilities business; SMM benefits as a pure play to ride on sector recovery.

Janice Chua DBS Vickers | Yeo Kee Yan CMT DBS Vickers | Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-07-03
DBS Vickers SGX Stock Analyst Report NOT RATED Maintain NOT RATED 0.250 Same 0.250
BUY Maintain BUY 14.300 Same 14.300
BUY Maintain BUY 2.620 Same 2.620
BUY Maintain BUY 1.070 Same 1.070
NOT RATED Maintain NOT RATED 7.550 Same 7.550