Singapore Stock Recommendations
Small Mid Cap Stocks To Buy Now
BREADTALK GROUP LIMITED
5DA.SI
CITYNEON HOLDINGS LIMITED
5HJ.SI
MM2 ASIA LTD.
1B0.SI
RIVERSTONE HOLDINGS LIMITED
AP4.SI
Small Mid Cap Stocks Strategy - Upside Participation, Downside Protection
- Earnings still key; go for names with clear growth catalysts – BreadTalk, Cityneon, mm2 Asia, and Riverstone.
- Keep a firm eye on growth and another on downside protection as small-mid caps have yet to recover from recent selldown.
- Steady dividends make good safety nets – Chip Eng Seng, Hong Leong Finance, Riverstone, Sheng Siong, Sunningdale, and UMS.
- Trading cheap and ready to shine in 2018 – China Aviation Oil, Delfi, Riverstone, and Roxy Pacific.
Firm eye on earnings growth.
Season of Positive Revisions. Results are in.
- The recent 4Q reporting season concluded with a positive earnings revision trend of +2% to +3% for FY18F and FY19F earnings of stocks under our coverage. Within our small mid cap (SMC) universe, c.65% reported results which were within expectations, while c.16% were above.
- The upward revisions were led by APAC, Hi-P, Best World, Riverstone, UMS and Hong Leong Finance. Notably, APAC delivered impressive first full-year results post IPO, while Best World, Riverstone and UMS saw record profits in FY17.
- Among the sectors, Technology shone the brightest with earnings upgrades of +15.6% and +19.0% for FY18F and FY19F respectively, but results for the Oil & Gas sector remained weak.
Growth stocks with steady yields are more attractive.
- Encouraged by the positive earnings growth momentum displayed in 4Q, we seek to identify stocks with clear catalysts to sustain firm growth momentum ahead. There are at least 16 SMCs under our coverage offering > 10% earnings growth in FY18F.
- Apart from potential capital gains, small-mid cap stocks can also pay good dividends – providing investors with both upside participation and downside protection. With results season now over and dividend payments back in focus, we believe that growth stocks with a dividend sweetener could outperform over the next one to two months. Historically, SMCs that are consistent dividend payouts also tend to be more resilient.
- Additionally, we also see opportunities to bottom fish, as there are a few other companies that are trading cheap but offer steady growth and/or on the cusp of an earnings turnaround.
Part 1: Look for Earnings Boosters
Firm eye on earnings growth, which remains key for SMCs.
- While the earnings growth trend has been positive, we would favour companies with strong, specific catalysts to help sustain double-digit earnings growth over the next two years.
- Our preferred picks include BreadTalk, Cityneon, mm2 Asia, and Riverstone.
Riding on growing scale and improving operating leverage to deliver sustainable growth.
- Cityneon and mm2 Asia stand out as young and fast-growing companies, and are still in their transformative stages of growth. Cityneon has successfully transformed into a creator of innovative and interactive exhibitions, while mm2 Asia has established a meaningful presence across the production value chain - from movie/drama creation to exhibitions.
- Meanwhile, Riverstone – which also features in several other screens as a dividend growth play and bottom-fishing candidate, is poised to deliver successive earnings records in the coming years as the group ramps up on new capacity to meet growing demand.
- Driven by new stores and cost management, the outlook for BreadTalk also remains attractive.
Our preferred picks to ride the earnings momentum:
BreadTalk (BUY; Target Price: S$2.05)
- We remain positive on BreadTalk over continued consolidation of underperforming outlets that will yield better margins going forward and sale of stakes in properties such as CHIJMES and AXA Tower that will unlock shareholder value if they materialise.
- Growth drivers remain intact and turnaround in Bakery division led by store growth and better profitability in FY18F will drive earnings growth.
- BreadTalk’s valuation, based on its core business (ex-property investments), seems compelling at 18x FY18F PE.
Cityneon (BUY; Target Price: S$1.45)
- Though Cityneon has been listed for over ten years, it was given a new lease of life when VHE Entertainment (VHE) was injected into the group in September 2015. Cityneon has since evolved to become a creator of innovative and interactive exhibitions, focusing on creating captivating cutting-edge content, and delivering engaging and interactive exhibitions to audiences, from its traditional exhibition business.
- Since its injection into Cityneon, VHE has secured two more Intellectual Property (IP) rights – Transformers and Jurassic World. Together with the first IP – Avengers, Cityneon is now on a stronger and firmer growth path with a total of three IPs, to help propel the group to even greater heights.
- We continue to expect Cityneon to deliver explosive FY16-19F EPS CAGR growth of 165%. Trading at a low PE-to-growth ratio of 0.2x FY18F earnings, Cityneon is attractive to investors seeking unique ideas in the entertainment industry.
mm2 Asia (BUY; Target Price: S$0.75)
- mm2 Asia was listed on the SGX in December 2014 as a leading producer of films and TV/online content in Asia. In a short span of about three years, the group has evolved to become a full-service provider in the entire value chain of content creation to distribution, with the acquisition of cinemas (18 in Malaysia and eight in Singapore), event production and concert promotion company UnUsUaL, and post-production company, Vividthree.
- Having a strong presence in the entire value chain of content creation and distribution further cements mm2's status as the leader in the media/entertainment industry. With a much larger and stronger scale, mm2 can now enjoy the synergistic benefits from the entire value chain.
- We expect strong earnings CAGR of 28% for FY17-20F, underpinned by growth in productions, expansion into the China market, and contribution from UnUsUaL. The cinema arm, on the other hand, helps the group build a recurring income base.
Riverstone (BUY; Target Price: S$1.27)
- A global market leader in niche cleanroom gloves, Riverstone’s edge in the high-tech cleanroom segment sets it apart from the bigger boys. Given intense competition in the healthcare space, we see value in Riverstone’s growing cleanroom business – which allows the group to command consistently higher margins vs peers (16% vs peers’ c.10-15% in FY17).
- With new cleanroom facilities set to kick in from 2Q18, cleanroom capacity is expected to grow by c.33% to at least 2bn gloves p.a. The ramp-up on these new capacities should help drive higher growth in cleanroom gloves vis-à-vis the lower-margin healthcare business, allowing Riverstone’s earnings growth of c.16% to catch up with larger peers’ c.17%.
Lee Keng LING
DBS Vickers
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Carmen TAY
DBS Vickers
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http://www.dbsvickers.com/
2018-03-08
DBS Vickers
SGX Stock
Analyst Report
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