Singapore Stock Alpha Picks (December 2018) - UOB Kay Hian 2018-12-04: A Mixed November


Singapore Stock Alpha Picks (December 2018) - A Mixed November

  • After a mixed November, we re-position our picks by removing ST Engineering and replacing it with SATS.
  • We also introduce FUYU as an addition to our portfolio.


A mixed November.

  • November turned out to be a mixed month with some outperformers and underperformers within our alpha picks. On a portfolio basis, our picks gained an average of 1.0% m-o-m, which compares with the FSSTI’s advance of 2.5% during the month (see Straits Times Index Constituents Performance in November 2018).
  • Within our portfolio, notable outperformers include OCBC and Valuetronics, with the latter rising 6.3% due to a rebound in sentiment due to the temporary ceasefire between the US and China. We like OCBC as we believe there is ample room for dividend payout growth.
  • The underperformer within our portfolio is CSE Global, which retreated 3.3% as sentiment was hit by the reversal in oil prices.


Adjusting portfolio to reflect recent developments.

  • We remove ST Engineering from our picks. While we still like the company and retain our BUY rating on the stock, there is a possibility that the stock could underperform over the short haul, as the street might not have fully factored in the potential of impairment charges in 4Q18. In its place, we add SATS as we believe it was unjustifiably sold down after a minor earnings miss for 2QFY18, which was due to the weakness in associate earnings.
  • We also introduce one of our mid-cap picks – FUYU - as an addition to our portfolio. We favour the stock for its sustainable dividend yield of 8.3% for FY18 and its compelling 2019F ex cash PE of 5.9x.

SATS - BUY (K Ajith)

SATS LTD. (SGX:S58)  SATS (SGX:S58) Share Price  SATS (SGX:S58) Target Price  SATS (SGX:S58) Analyst Reports  SATS (SGX:S58) Corporate Actions  SATS (SGX:S58) Announcements  SATS (SGX:S58) Latest News  SATS (SGX:S58) Blog Articles

  • SATS has been unjustifiably sold down after a minor earnings miss for 2QFY18, which was due to weakness in associate earnings. Part of that was due to a weaker Indonesian rupiah, which has since strengthened. Thus, associate earnings are unlikely to weaken significantly in coming quarters.
  • SATS will also be key beneficiary of the truce in the trade war between the US and China, as re-export shipments from ASEAN will no longer be impacted in 1Q19. We believe that part of the earlier decline in SATS’ stock price was due to concerns over potentially lower cargo volumes processed out of SATS’ regional gateways. For at least the next three months, these concerns would be alleviated by the truce in tariffs by both the US and China.

Share Price Catalyst

  • Already in place.
  • Timeline: 1-3 months.

Fu Yu Corp – BUY (John Cheong)

FU YU CORPORATION LTD (SGX:F13)  Fu Yu (SGX:F13) Share Price  Fu Yu (SGX:F13) Target Price  Fu Yu (SGX:F13) Analyst Reports  Fu Yu (SGX:F13) Corporate Actions  Fu Yu (SGX:F13) Announcements  Fu Yu (SGX:F13) Latest News  Fu Yu (SGX:F13) Blog Articles

High and sustainable dividend yield.

  • FUYU offers a high and sustainable dividend yield of 8.3% for FY18 and we expect it to increase to 8.8% in FY19, on the back of improving net profit, free cash flow, and strong net cash position of S$75m/S$0.10 per share, which is equivalent to 52% of market cap as of 3Q18.

Diversifying to a more stable business model.

  • In the past decade, FUYU relied heavily on customers in traditional industries such as printing and communications. However, it has reduced its revenue concentration on the printing segment from 50% in FY11 to 31% in FY17 and we expect this to continue as it wins more new customers.

Optimising and turning around loss-making operations.

  • FUYU has taken four key steps to optimise its business:
    1. completed the privatisation of its 71%-owned Malaysia-listed subsidiary,
    2. terminating a JV which is losing S$0.7m a year,
    3. turning around two out of five loss-making plants in China, and
    4. amalgamating two subsidiaries.

Share Price Catalyst

  • Event:
    • Higher-than-expected dividends,
    • potential takeover, and
    • more new customers in the consumer, medical and automotive segments.
  • Timeline: 3-6 months

DBS - BUY (Jonathan Koh)

DBS GROUP HOLDINGS LTD (SGX:D05)  DBS (SGX:D05) Share Price  DBS (SGX:D05) Target Price  DBS (SGX:D05) Analyst Reports  DBS (SGX:D05) Corporate Actions  DBS (SGX:D05) Announcements  DBS (SGX:D05) Latest News  DBS (SGX:D05) Blog Articles

DBS is a prime beneficiary of rising interest rates in Singapore and Hong Kong.

  • Its CASA ratio for Singapore dollar is stable at 92%. It has also strengthened deposit franchise in Hong Kong with CASA ratio for Hong Kong dollar improving 13.9ppt to 56.2% over the past three years.

We expect DBS to reward shareholders with DPS of S$1.20 for 2018.

  • The stock offers an attractive dividend yield of 5.0%.

Share Price Catalyst

  • Event: NIM expansion along with rate hikes.
  • Timeline: 3-6 months

Valuetronics – BUY (John Cheong/Yeo Hai Wei)

VALUETRONICS HOLDINGS LIMITED (SGX:BN2)  Valuetronics (SGX:BN2) Share Price  Valuetronics (SGX:BN2) Target Price  Valuetronics (SGX:BN2) Analyst Reports  Valuetronics (SGX:BN2) Corporate Actions  Valuetronics (SGX:BN2) Announcements  Valuetronics (SGX:BN2) Latest News  Valuetronics (SGX:BN2) Blog Articles

Expect earnings to play catch-up in the upcoming quarters.

  • Given the continued robust growth from the ICE segment, we expect earnings to be better in the upcoming quarter.

Limited impact from US trade tariff.

  • Management estimates that less than 10% of its revenue will be impacted by the new round of tariffs by the US. In the longer term, the group is looking to expand into ASEAN to reduce the impact from the US trade tariff.

Healthy demand expected to continue

  • for the industrial and commercial electronics (ICE) segment as it continues to enjoy better demand for connectivity modules used in the automobile industry.

Share Price Catalyst

  • Event: Higher-than-expected dividends or M&As, backed by net cash of S$132m or around 40% of Valuetronics’ market cap. More customers in the automobile or Internet of Things segments.
  • Timeline: 3-6 months

OCBC – BUY (Jonathan Koh)

OVERSEA-CHINESE BANKING CORP (SGX:O39)  OCBC Bank (SGX:O39) Share Price  OCBC Bank (SGX:O39) Target Price  OCBC Bank (SGX:O39) Analyst Reports  OCBC Bank (SGX:O39) Corporate Actions  OCBC Bank (SGX:O39) Announcements  OCBC Bank (SGX:O39) Latest News  OCBC Bank (SGX:O39) Blog Articles

Higher NIMs from re-pricing of mortgages.

  • Management expects a significant portion of its mortgages to be re-priced in 3Q18, especially those pegged to long-term deposit rates and prime rates. It ensures that upward movements in SIBOR and SOR are sustainable before it adjusts the interest rates for mortgages. Mortgages accounted for 26.1% of OCBC's total loans. 3Q18 has already seen a decent 5bp uptick in NIMs to 1.72%.

Room to raise dividends.

  • We see room for OCBC to gradually raise dividends. The group’s dividend payout ratios are 40-50%.

Share Price Catalyst

  • Event:
    • Rising interest rates could help underpin NIMs.
    • The divestment of a 33.3% stake in Hong Kong Life Insurance for HK$2,366.7m (S$425.9m) is waiting for regulatory clearance and should be completed by end-18.
  • Timeline: 6-9 months.

Singtel – BUY (Jonathan Koh)

SINGTEL (SGX:Z74)  SingTel (SGX:Z74) Share Price  SingTel (SGX:Z74) Target Price  SingTel (SGX:Z74) Analyst Reports  SingTel (SGX:Z74) Corporate Actions  SingTel (SGX:Z74) Announcements  SingTel (SGX:Z74) Latest News  SingTel (SGX:Z74) Blog Articles

  • The merger between TPG Telecom and Vodafone Hutchinson Australia is positive as it will consolidate the market in Australia from four to three players, which could lead to pricing stability. As at 1QFY19, Optus accounted for 21% of SingTel’s pre-tax profit.
  • The group is least affected by a fourth mobile operator in Singapore as overseas businesses account for about 70% of its bottom-line. BUY with a target price of S$3.94.

Share Price Catalyst

  • Event:
    • Fund flow into laggards and defensive stocks, including Singtel which offers a good dividend yield (DPS commitment of 17.5 S cents/share for two years).
    • Continued improvement in Telkomsel’s performance.
  • Timeline: 3-6 months.

CSE Global – BUY (John Cheong/Yeo Hai Wei)

CSE GLOBAL LTD (SGX:544)  CSE Global (SGX:544) Share Price  CSE Global (SGX:544) Target Price  CSE Global (SGX:544) Analyst Reports  CSE Global (SGX:544) Corporate Actions  CSE Global (SGX:544) Announcements  CSE Global (SGX:544) Latest News  CSE Global (SGX:544) Blog Articles

Solid proxy to recovering oil prices.

  • CSE is a good proxy to recovering oil prices as two-thirds of its existing orderbook of S$175m come from the O&G sector. In addition, the stock offers a sustainable dividend yield of more than 6%.

High entry barriers.

  • The group has a 32-year track record in a business with high entry barriers. CSE is one of the few qualified system integrators in the region for O&G and communication infrastructure industries.

Potential synergies from new shareholder.

  • Serba Dinamik, a Malaysia-listed company, recently bought a 25% stake in CSE at S$0.45/share. We see potential synergies as it could open up new markets for CSE, such as Malaysia and the Middle East.

Share Price Catalyst

  • Event:
    • New contract wins and continued recovery in earnings. Newsflow of positive synergy with new shareholder Serba Dinamik.
    • Accretive M&A given the group’s strong financial position.

Singapore Research Team UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-12-04
SGX Stock Analyst Report BUY MAINTAIN BUY 0.590 SAME 0.590

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