Singapore Small Mid Cap Stocks - DBS Research 2018-03-08: Opportunities to bottom fish

Small Mid Cap Stocks Strategy - DBS Vickers 2018-03-08: Upside Participation, Downside Protection Singapore Small Mid Cap Stocks Small Mid Cap Stocks To Buy Now RIVERSTONE HOLDINGS LIMITED AP4.SI ROXY-PACIFIC HOLDINGS LIMITED E8Z.SI CHINA AVIATION OIL(S) CORP LTD G92.SI DELFI LIMITED P34.SI

Small Mid Cap Stocks Strategy - Upside Participation, Downside Protection: 

Part 3 - Opportunities to bottom fish

  • Trading cheap and ready to shine in 2018: We also see opportunities to bottom fish, as there are a few other companies that are on the cusp of an earnings turnaround (Delfi, Roxy Pacific), or trading at deep discounts despite strong growth prospects (Riverstone, China Aviation Oil). 

Opportunities to bottom fish 

Attractive valuations with a chance to shine in 2018. 

  • With positive vibes gathered during the Q4 reporting season and a handful of companies guiding for stronger operational prospects in 2018, we would see the February correction as an opportunity for investors to accumulate selective stocks at attractive valuations.
  • In our screen, we favour companies that are: - 
    1. On the cusp of an earnings turnaround i.e. Delfi Ltd, Roxy Pacific, and/or
    2. Trading at attractive valuations despite strong earnings growth potential i.e. Riverstone Holdings, China Aviation Oil (CAO). 

Turnaround plays - 

  • Delfi and Roxy Pacific may have missed the mark in their recent Q4 earnings report card compared to a year ago, but are set for an earnings turnaround in 2018.
  • Ongoing share buybacks for Roxy signal confidence in future earnings, providing further support to its share price.

Firm growth but cheap valuations. 

  • Trading at relatively cheap valuations vs peers, the recent pullbacks in Riverstone and CAO also offer investors a better entry point, ahead of their strong, anticipated growth in subsequent quarters.

Delfi (Rating: BUY; Target Price: S$1.80) - Turning the corner

  • With its share price currently trading near six-year lows, Delfi’s weak operating environment appears to be priced in and is worth a relook. 4Q17 performance suggests that weakness might have bottomed out, and is set to improve from FY18F.
  • Riding on the low-base effect, improving sentiment, lower raw materials, and positive production rationalisation effects, earnings could grow at c.20% CAGR over FY17-19F and drive a meaningful recovery in share price.
  • Our Target Price of S$1.80 is based on regional peer average of 26x, pegged to blended FY18F/19F earnings.

Roxy Pacific (Rating: BUY; Target Price: S$0.69) - Ready for launch

  • One of the earliest to land bank in the current market cycle, Roxy’s investments in small but freehold residential sites gives the company the flexibility to launch quickly and hit the market.
  • Strong take-up rates for The Navian – its first launch in 2018 have been encouraging. With a total of six residential developments in Singapore ready for launch in 2018 (two to three of which will be within 1Q18), the group is well poised to capture the rise in buyer demand ahead of its peers, and grow earnings quickly at c.53% CAGR over FY17-19F.
  • Still largely “undiscovered” among institutional funds, we believe the ability to surprise on the upside is high over the near term. Roxy currently trades at 1.3x FY18F P/BV, below historical average. At its peak, Roxy traded at 2.3x P/BV.

Riverstone (Rating: BUY; Target Price: $1.27) - Cleanroom edge not priced in yet

  • Given the competitive nature of the healthcare glove industry (which represents the bulk of peer revenues), we see value in Riverstone’s growing cleanroom glove business, which allows the group to command consistently higher margins vs peers.
  • We believe the market has yet to fully appreciate Riverstone’s unique strengths and leadership in the cleanroom glove arena, as its shares continue to trade cheaply (below its historical average forward PE) vs larger peers, which have re-rated strongly in recent months despite unchanged fundamentals.
  • Based on consensus estimates, Hartalega is currently trading at +1SD of its historical average, while Top Glove and Kossan are at above +2SD.
  • We see the valuation gap of c.55% (vs larger peers’ c.29x) narrowing and Riverstone at least trading at its historical average forward PE of 16x FY19F PE (from c.13x currently) as the group ramps up on its incoming cleanroom glove capacities to deliver higher-quality earnings growth at 16% CAGR over FY17-19F. Better-than-expected execution could spark a further re-rating to 18x PE (+1 SD), in line with peers.

China Aviation Oil (Rating: BUY; Target Price: $1.98) - Firm growth ahead

  • CAO’s jet fuel import business segment as well as its key associate SPIA, which roughly accounts for over 80% of CAO’s earnings, are set to benefit from the double-digit pace of international travel growth in China over the next few years.
  • In particular, with a fifth runway in Shanghai Pudong soon to start commercial operations, contribution from SPIA is well poised to enjoy firm growth ahead. The continued expansion in its jet fuel supply business will also help its trading business to reap benefits from a greater scale and network.
  • With over US$300m in cash (net cash of US$180m) and a strengthened management team, the group will step up its efforts on the M&A front to make value-accretive acquisitions, which could act as a further re-rating catalyst for the stock.

Lee Keng LING DBS Vickers | Carmen TAY DBS Vickers | http://www.dbsvickers.com/ 2018-03-08
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 1.270 Same 1.270
BUY Maintain BUY 0.690 Same 0.690
BUY Maintain BUY 1.980 Same 1.980
BUY Maintain BUY 1.800 Same 1.800