Singapore Stock Alpha Picks (May 2019) - UOB Kay Hian 2019-05-03: Adding DBS


Singapore Stock Alpha Picks (May 2019) - Adding DBS


Reviewing picks in April.


Adding DBS.

  • We add DBS to our portfolio and stick to our existing picks. We think DBS would benefit from NIM expansion in 2H19 and 2020 due to:
    1. the lagged positive impact from rise in SIBOR and SOR in 2018; and
    2. loans on fixed interest rates get re-priced post re-financing.
  • Furthermore, DBS would be the least affected by competition for fixed deposits, given its strong deposit franchise.

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

  • Maintain guidance for NIM expansion. Management expects NIM to expand 5bp to an average of 1.95% in 2019 (2018: 1.85%), even if there are no interest rate hikes. DBS raised its fixed home rate (FHR) by 15bp in Jan 19 and 40bp in Apr 19, which provide upside for NIM in 1H19. About 60% of S$ loans get re-priced in the first year after an interest rate increase. The balance of 40% gets re-priced in the second and third year. Thus, DBS would benefit from NIM expansion in 2H19 and 2020 due to:
    1. the lagged positive impact from rise in SIBOR and SOR in 2018; and
    2. loans on fixed interest rates get re-priced post re-financing.
  • Competitive advantage due to strong deposit franchise. DBS had a high S$-CASA ratio of 90.4% (savings accounts: 73.3%, current accounts: 17.1%) as of Mar 19. DBS would be the least affected by competition for fixed deposits.

Share Price Catalysts

  • Event: US-China trade deal, which benefits DBS more due to its larger footprint in Hong Kong and Mainland China. Strong deposit franchise ensures firmer NIM.
  • Timeline: 12 months.

ST Engineering – BUY (K Ajith)

SINGAPORE TECH ENGINEERING LTD (SGX:S63)  ST Engineering (SGX:S63) Share Price  ST Engineering (SGX:S63) Target Price  ST Engineering (SGX:S63) Analyst Reports  ST Engineering (SGX:S63) Corporate Actions  ST Engineering (SGX:S63) Announcements  ST Engineering (SGX:S63) Latest News  ST Engineering (SGX:S63) Blog Articles

  • As at end-April, ST Engineering has secured S$4.8b of contracts, including a S$1b naval contract. This is about 65% of 2018’s S$4.8b contract wins. The win should boost marine earnings beyond 2021. Similarly, the aerospace sector’s S$0.8b 10-year maintenance contract from a new customer is expected to boost recurrent earnings. With these contracts and recent M&As, ST Engineering’s vision of growing revenue and earnings by 2-3x global GDP growth should come to fruition.
  • Latest acquisition of Newtec should springboard its satellite communications (Satcom) capability in the broadcast & consumer space where the latter's technology has been critical in providing real-time content. Industry sources have estimated that Satcom demand is expected to grow by 10-15% CAGR over the next 10 years. The acquisition is expected to be immediately accretive as Newtec generated S$26m in EBITDA in 2018. We expect STE's ROE to rise by 5.5ppt to 27.7% by end-21.

Share Price Catalyst

  • Already in place.
  • Timeline: 3-6 months.

Singapore Press Holdings – BUY (Lucas Teng)

SINGAPORE PRESS HLDGS LTD (SGX:T39)  SPH (SGX:T39) Share Price  SPH (SGX:T39) Target Price  SPH (SGX:T39) Analyst Reports  SPH (SGX:T39) Corporate Actions  SPH (SGX:T39) Announcements  SPH (SGX:T39) Latest News  SPH (SGX:T39) Blog Articles

  • Selectively scaling up student accommodation assets. Singapore Press Holdings (SPH)’s acquisition of student accommodation is gaining momentum with three new assets acquired in April for £134m (S$237m). Recent acquisitions appear more selective, with SPH electing for investments in cities with upper-mid-tier universities, which have more dependable demand. SPH’s student accommodation AUM is now sizeable, at S$600m.
  • Active capital recycling by new management team. The new management team has taken active steps to improve its capital efficiency, with the most recent activity coming in the form of disposal of shares in Chinatown Point which is held by its associate. SPH is opting for higher-yielding (up to 6%) assets in the student accommodation space vs Chinatown Point (estimated 4%).

Share Price Catalyst

  • Events: Ramp-up in student accommodation acquisitions.
  • Timeline: 3-6 months.

Koufu Group – BUY (Yeo Hai Wei & John Cheong)

KOUFU GROUP LIMITED (SGX:VL6)  Koufu (SGX:VL6) Share Price  Koufu (SGX:VL6) Target Price  Koufu (SGX:VL6) Analyst Reports  Koufu (SGX:VL6) Corporate Actions  Koufu (SGX:VL6) Announcements  Koufu (SGX:VL6) Latest News  Koufu (SGX:VL6) Blog Articles

  • Defensive cash cow backed by strong brands and leading market position. Koufu Group runs highly defensive food court and coffee shop businesses, and focuses on providing competitively priced meals transacted in cash terms. Its outlet and mall management business has seen consistently high occupancy of at least 93% in the last three years. Koufu Group intends to distribute at least 50% of its profits for 2018 and 2019, which is sustainable, given strong cash flow generation. This could translate into a potential dividend yield of 3.9% for 2019.
  • We think net profit could grow at double digits starting 2019 with completed enhancement initiatives of Rasapura Masters, a pipeline of five new food courts, and a faster rollout of R&B and Super Tea which are popular among the younger crowds. Beyond Singapore, Macau will be its overseas expansion springboard which is already contributing 9% of group revenue.
  • Disposal of central kitchens should unlock S$10m. Koufu Group owns two central kitchens at 18 and 20 Woodlands Terrace. We estimate the eventual sale of these properties could bring in S$10m and unlock gains of up to S$8m, which should bump up dividends.

Share Price Catalyst

  • Events:
    1. Sale of its two central kitchens,
    2. better-than-expected contribution from R&B Tea, and
    3. better-than-expected performance from Rasapura.
  • Timeline: 3-6 months.

CapitaLand Commercial Trust – BUY (Jonathan Koh & Peihao Loke)

CAPITALAND COMMERCIAL TRUST (SGX:C61U)  Capitaland Commercial Trust (SGX:C61U) Share Price  Capitaland Commercial Trust (SGX:C61U) Target Price  Capitaland Commercial Trust (SGX:C61U) Analyst Reports  Capitaland Commercial Trust (SGX:C61U) Corporate Actions  Capitaland Commercial Trust (SGX:C61U) Announcements  Capitaland Commercial Trust (SGX:C61U)Latest News  Capitaland Commercial Trust (SGX:C61U) Blog Articles

  • Benefits 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 CapitaLand Commercial Trust to achieve positive rental reversion for AST2 in 1H19 and CapitaGreen in 2H19.
  • CBD Incentive Scheme. Over the longer term, the CBD Incentive Scheme under Master Plan 2019 will moderate the supply of office space within the CBD due to conversion to residential and hotel usage.
  • CCT plans to add scale and depth to its presence in Germany. It completed the acquisition of a 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 Catalyst

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

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

  • We continue to favour SATS for its regional exposure to Asia’s passenger traffic growth and cargo volume growth. Revenue at operating regions grew 7.8% in 9MFY19, 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.
  • SATS generated a 20% y-o-y rise in operating cash flow in 9MFY18. 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) for FY19.

Share Price Catalyst

  • Announcement of new central kitchens in China.
  • Timeline: n.a.

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, cheap EV/EBITDA. Fu Yu Corporation offers a high and sustainable dividend yield of 8.5% for 2019, and we expect this to increase to 9.0% in 2020 on the back of improving net profit, FCF, and strong net cash of S$80m (or S$0.11 per share). In 2018, Fu Yu Corporation raised its interim dividend for the first time in three years, and we expect further increases ahead.
  • Takeover target for valuation, diversification, capacity and salary savings. Fu Yu Corporation could be a takeover target, given its attractive valuation at 3.0x 2019F EV/EBITDA. Note that:
    1. its peers have been privatised at EV/EBITDA of 5.0-25.7x;
    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 three cofounders’ remuneration, estimated at S$2.3m-3.0m p.a., or 20-27% of 2018 net profit.
  • Disclosure of properties’ market value in 2018 annual report indicates massive hidden value. Fu Yu Corporation’s conservative accounting policy in recognising its properties at book value has undervalued the assets by S$50m, or 33% of its market cap (7 S cts/share), based on its 2018 annual report. Any disposal could further re-rate the stock. The hidden value of these properties, its cheap valuation, diversified operations and low utilisation rate make Fu Yu Corporation an attractive takeover target.

Share Price Catalyst

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

  • 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, and implementation of IRBA at OCBC Wing Hang.
  • Timeline: 12 months.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-05-03
SGX Stock Analyst Report BUY MAINTAIN BUY 30.500 SAME 30.500