Singapore Stock Alpha Picks (March 2019) - UOB Kay Hian 2019-03-06: Adding Memtech & Capitaland Commercial Trust

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MEMTECH INTERNATIONAL LTD (SGX:BOL) CAPITALAND COMMERCIAL TRUST (SGX:C61U) FU YU CORPORATION LTD (SGX:F13) OVERSEA-CHINESE BANKING CORP (SGX:O39) CSE GLOBAL LTD (SGX:544) SATS LTD. (SGX:S58)

Singapore Stock Alpha Picks (March 2019) - Adding Memtech & Capitaland Commercial Trust

• Our portfolio’s monthly average return of 2.1% outperformed the FSSTI’s 0.7% in February.
• We re-positioned our portfolio by removing the telco picks and adding CapitaLand Commercial Trust.
• Among the small caps, we added small-cap gem Memtech International for its prospective strong 2019 earnings growth of 31%, potential to benefit from a better macro environment in China and attractive valuation of 8.9x 2019F PE. But, we removed Valuetronics.

WHAT’S NEW

Reviewing picks in February.

• Our alpha picks had a mixed performance in February. On a portfolio basis, our picks recorded a simple average return of 2.1% m-o-m vs the FSSTI’s advance of 0.7%. (see Straits Times Index & Constituents Performance in February 2019)
• The standout performer was CSE Global (SGX:544) which delivered a gain of 11.6% m-o-m, followed by SATS (SGX:S58) which increased 6.0% m-o-m, whereas the underperformer was OCBC Bank (SGX:O39) (-3.9% m-o-m).
• The small-cap manufacturing companies within our portfolio include Fu Yu Corporation (SGX:F13) which was flat m-o-m while Valuetronics (SGX:BN2) declined 0.7% m-o-m as both stocks fell 4-5% on the last trading day of February.

ACTION

Refreshing our alpha picks.

• We removed SingTel (SGX:Z74) and NetLink Trust (SGX:CJLU) from our picks given the lack of near-term catalysts. As for the small-cap manufacturing picks in our portfolio, we removed Valuetronics and added Memtech International (SGX:BOL) – a small-cap gem. We favour the stock for its attractive valuation of 8.9x 2019F PE, a discount of 26% to peers’ and strong net profit growth of 31% in 2019.
• We also added CapitaLand Commercial Trust (SGX:C61U) as we expect it to benefit from the recovery in office rents and its expansion into Germany.

Memtech International (SGX:BOL) – BUY (John Cheong)

Expect 2019 to be a good year on new projects and better macro conditions in China.

• We expect net profit for 2019 to grow 31% y-o-y, after the 13% y-o-y decline in 2018. The main growth drivers are expected to be several new projects in the consumer electronics and medical segments.
• Production in 1H19 is expected to pick up significantly as several new and existing multinational customers are targeting new product launches. Also, the improvement in China’s macro environment from tax cuts and the Sino-US trade deal could benefit Memtech International as all of its manufacturing plants are located in China.

Compelling BUY for strong earnings growth and attractive valuation

• Memtech International is a compelling BUY for its strong net profit growth of 31% in 2019. In addition, it has an attractive valuation of 8.9x 2019F PE, a discount of 26% to peers’.
• Also, Memtech International has a strong balance sheet with net cash of US$21.3m (S$28.8m), equivalent to 19% of its market cap. Its 2019 ex-cash PE is only 7x.

Share Price Catalyst

• Events:
  1. lower raw material prices,
  2. faster-than-expected ramp-up of new projects and layed in 2018, and
  3. potential privatisation.
• Timeline: 3-6 months.

CapitaLand Commercial Trust (SGX:C61U) – BUY (Jonathan Koh and Peihao Loke)

Benefit from recovery in office rents.

• Grade A core CBD office rents increased 14.9% to S$10.80psf pm in 2018. With limited upcoming supply of office space within the core CBD, we expect further upside for office rentals in 2019. We expect CapitaLand Commercial Trust to achieve positive rental reversion for AST2 in 1H19 and CapitaGreen in 2H19.

Further expansion into Germany.

• CapitaLand Commercial Trust plans to add scale and depth to its presence in Germany. It completed the acquisition of 38-storey grade A freehold commercial building Gallileo in Frankfurt’s banking district for €356m (S$540.7m) in Jun 18. There are opportunities to expand to other gateway cities in Germany, such as Berlin, Munich, Hamburg and Dusseldorf. CapitaLand Commercial Trust intends to cap exposures to overseas markets at 20% of deposited properties.

Share Price Catalysts

• Event: Recovery in office rents. More acquisitions in Germany.
• Timeline: 12 months.

SATS (SGX:S68) – BUY (K Ajith)

• We continue to favour SATS for its regional exposure to Asia’s passenger traffic growth and cargo volume growth. As at 9MFY19, revenue at operating regions grew 7.8%, with the bulk of growth coming from emerging markets, including China and India. While cargo growth is likely to weaken in 1H19, we believe the impact to earnings will be buffered by growth in the non-aviation food solutions business.
• As at 9MFY19, SATS generated a 20% y-o-y rise in operating cash flow. Recurring FCF (which includes dividends from associates) rose 61% y-o-y. Thus, we believe SATS could raise final dividend by 1 S cent to 13 S cents (total 19 S cents).

Share Price Catalyst

• Potential M&A involving Lufthansa Sky Chefs, Gategroup or Swissport
• Timeline: n.a.

Fu Yu Corp (SGX:F13) – BUY (John Cheong)

High and sustainable dividend yield, cheap EV/EBITDA.

• Fu Yu Corporation offers a high and sustainable dividend yield of 8.3% for 2019 and we expect it to increase to 8.8% in 2020 on the back of improving net profit, FCF and strong net cash position of S$80m or S$0.11/share.
• In 2018, Fu Yu Corporation raised its interim dividend for the first time in three years, and we expect further increases.

Takeover target for valuation, diversification, capacity and salary savings.

• Fu Yu Corporation could be a takeover target given:
  1. its attractive valuation of 3.1x 2019F EV/EBITDA; note that its peers have been privatised at an EV/EBITDA range of 5.0-25.7x in the past;
  2. Fu Yu Corporation’s geographically-diversified plants and customers are highly sought after;
  3. Fu Yu Corporation’s low utilisation rate of only around 50% could appeal to potential acquirers who are in a hurry to increase production capacity; and
  4. low-hanging fruit from the savings of its three cofounders’ remuneration, estimated at S$2.3m-3.0m p.a., or 20-27% of 2018 net profit.

Share Price Catalyst

• Events:
  1. Higher-than-expected dividends,
  2. potential takeover offer, and
  3. potential corporate actions to unlock values such as disposal of properties.
• Timeline: 3-6 months.

OCBC (SGX:O39) – BUY (Jonathan Koh)

Catching up with peers in hikes for dividend payout.

• OCBC aims to provide steady and sustainable dividends. Management plans to maintain dividend payout ratio at 40-50% of core earnings (2017: 37.7%, 2018: 40.6%), which can support growth of 6-7% for risk weighted assets (RWA) and 10-12% for total assets.
• Given that CET-1 CAR at 14.0% is above the target range of 12.5-13.5%, we expect OCBC to improve dividend payout ratio towards mid-40%, bringing DPS to 50 S cents and dividend yield to 4.5% for 2019.

Implementing IRBA for OCBC Wing Hang.

• OCBC plans to implement an internal ratings-based approach (IRBA) to compute RWA for OCBC Wing Hang. OCBC Wing Hang’s RWA intensity was higher at 64% for 2017 vs 50.7% for OCBC on a group-wide basis.
• We estimate OCBC would be able to reduce its RWA by 4% if OCBC Wing Hang lowers its RWA intensity to 50% under IRBA, and this would further improve OCBC’s CET-1 CAR by another 0.6ppt. The exercise would further increase OCBC’s CET-1 CAR, thus enhancing its capacity to pay more dividends.

Share Price Catalysts

• Event: Further increase in dividend payout in 2019. Implementation of IRBA at OCBC Wing Hang.
• Timeline: 12 months.

CSE Global (SGX:544) – BUY (John Cheong/Yeo Hai Wei)

Healthier competitive environment in key markets.

• Gross margin continued to improve in 4Q18, rising 5.4ppt y-o-y. Sequentially, gross margin rose 2.7ppt from 27.5% in 3Q18. This was due to an improving margin mix from the Americas region. Management cited a more accommodative environment in CSE Global’s key markets of Australia and the US where they see increased activities and also scope for healthier pricing.
• Going forward, we expect gross margins of ~27.0% to be sustained.

Potential beneficiary of smart nation initiatives and digital defence.

• With the government’s emphasis on the smart nation initiatives and the inclusion of digital defence as part of the overall Total Defence framework, CSE Global will be a potential beneficiary of future government tenders in this space.
• CSE Global’s association as a Singapore company with a history of being part of Chartered Electronics Industries, the electronics arm of Singapore Technologies, makes it a suitable candidate for projects in this space.

Potential synergies from new shareholder.

• Serba Dinamik, a Malaysia-listed company, recently bought a 25% stake in CSE Global at S$0.45/share. We see potential synergies as it could open up new markets for CSE Global, such as Malaysia and the Middle East.
• We understand that CSE Global is still undergoing due diligence by Petronas in order to achieve the qualified vendor status and is working with Serba Dinamik to explore potential collaboration beyond Petronas contracts.

Share Price Catalysts

• Event:
  1. large greenfield infrastructure project wins,
  2. large greenfield oil & gas project wins, and
  3. accretive acquisitions.
• Timeline: 3-6 months.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-03-06

SGX Stock Analyst Report BUY MAINTAIN BUY 1.330 SAME 1.330

BUY MAINTAIN BUY 2.160 SAME 2.160

BUY MAINTAIN BUY 0.285 SAME 0.285

BUY MAINTAIN BUY 13.850 SAME 13.850

BUY MAINTAIN BUY 0.620 SAME 0.620

BUY MAINTAIN BUY 5.600 SAME 5.600

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