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Singapore Stock Alpha Picks (June 2019) - UOB Kay Hian 2019-06-04: A Challenging May; Adding Wilmar

Singapore Stock Alpha Picks - UOB Kay Hian Research| SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05) OVERSEA-CHINESE BANKING CORP (SGX:O39) KOUFU GROUP LIMITED (SGX:VL6) WILMAR INTERNATIONAL LIMITED (SGX:F34) FU YU CORPORATION LTD (SGX:F13) CAPITALAND COMMERCIAL TRUST (SGX:C61U) SINGAPORE PRESS HLDGS LTD (SGX:T39) SINGAPORE TECH ENGINEERING LTD (SGX:S63)

Singapore Stock Alpha Picks (June 2019) - A Challenging May; Adding Wilmar




WHAT’S NEW


Reviewing picks in May.



ACTION


Add Wilmar.

  • WILMAR INTERNATIONAL (SGX:F34) has been added to our picks as we are of the view the recent retracement of Wilmar's share price over concerns of the US-China trade war escalation as overdone.
  • The disruption from the recent round of tariff hike is less impactful on soybean market compared with 2018, and we expect improvement in soybean crushing margins in coming quarters.

Remove SATS.



ANALYSTS’ TOP ALPHA PICKS

Analyst Company Rec Performance # Catalyst
Leow Huey Chuen Wilmar BUY - Expect the draft prospectus for China IPO to be posted in Jul/Aug 2019
K Ajith ST Engineering BUY 4.2 Already in place.
Jonathan Koh DBS BUY -12.8 US-China trade deal and strong deposit franchise which ensures firmer NIM.
Lucas Teng/
John Cheong		 SPH BUY -9.1 Ramp-up in student accommodation acquisitions.
Yeo Hai Wei/
John Cheong		 Koufu BUY -15.5 Sale of its two central kitchens and better-than-expected contribution from R&B Tea.
Jonathan Koh/
Peihao Loke		 CapitaLand Commercial Trust BUY 2.6 Recovery in office rents. More acquisitions in Germany.
John Cheong Fu Yu BUY 1.5 Higher-than-expected dividend or potential takeover offer.
Jonathan Koh OCBC BUY -19.8 Further increase in dividend payout in 2019.
# Share price change since stock was selected as alpha pick



Wilmar International – BUY (Leow Huey Chuen)


Concerns on recent trade war development overdone.

  • Wilmar's Share Price fell about 11% from its recent high when US-China trade war escalated in May with fresh tariffs. The disruption from the recent round of tariff hike is less impactful on the soybean market as compared with 2018. Soybean prices in South America did not react much due to the oversupply of soybean globally. Thus, soybean crushing margins for the next three quarters should be better than that of 1Q19.
  • Based on industry data, China’s soybean crushing utilisation improved to 54-55% in 2Q19 from 44-47% in 1Q19, and is reporting positive margin.

Expecting China IPO draft prospectus to be available in next three months.

  • This will reveal more detailed information on Wilmar’s business exposure in China and could change investors’ perspective on Wilmar, which has always been seen as a large soybean crusher. nother good set of results for 2Q19, which is scheduled to be announced in the second week of Aug 19.
  • The key earnings supports will come from the oilseeds & grains division with positive contribution from soybean crushing vs losses in 1Q19, as well as tropical oil continuing to deliver good profit with steady margins and better volume.

Share Price Catalysts



DBS – BUY (Jonathan Koh)


Maintain guidance for NIM expansion.

  • Management expects NIM to expand 5bp to 1.95% in 2019 (average for full year), compared with 1.85% last year, even if there are no interest rate hikes. DBS raised its fixed home rate (FHR) by 15bp in Jan 19 and by 40bp in Apr 19, which provide upside for NIM in 1H19.
  • About 60% of Singapore dollar-denominated loans get re-priced in the first year after an interest rate increase. The balance 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 of 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.

  • It had a high Singapore dollar- 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



ST Engineering (K Ajith)


Orderbook recognition for next three quarters set to rise 31%.

  • As at end-Mar 19, orderbook grew 6.8% y-o-y to S$14.1b, with the aerospace and electronics sectors contributing S$2.1b for the quarter. ST Engineering had guided that S$4.2b (+ 31% y-o-y) in orderbook is expected to be delivered in 2019.
  • ST Engineering’s recent award wins, particularly the S$1b Polar Security Cutter (PSC) contract along with the S$1.3b aerospace contract, would provide earnings buffer, while recent M&As are expected to be earnings accretive.

ST Engineering’s (STE) latest acquisition of satellite communications (Satcom) company Newtec should springboard its 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 and Newtec generated S$26m in EBITDA in 2018.
  • We expect ST Engineering's ROE to rise by 5.5ppt to 27.7% by end -21.

Share Price Catalyst



Singapore Press Holdings – BUY (Lucas Teng)


Building defensive assets in student accommodation.

  • SPH’s acquisition of student accommodation is gaining momentum with three new assets acquired in Apr 19. SPH’s UK student accommodation AUM is now sizeable at S$600m. The defensive assets demonstrate a strong counter cyclical nature as student numbers also typically increase in the event of an economic slowdown from a weaker labour market.

Active capital recycling by new management team.

  • The new management team has taken active steps to improve its capital efficiency in the property space. They have recently updated a S$1b debt issuance programme in addition to appointing former CapitaLand group CEO Lim Ming Yan as an independent director to the board, bringing a veteran’s experience to their real estate business.

Share Price Catalyst



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


Defensive cash cow backed by strong brands and leading market position.

  • Koufu runs highly defensive food court and coffee shop businesses, and is focused 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 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-digit level starting from 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 the group revenue.

Disposal of central kitchens should unlock S$10m in value.

  • Koufu 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



CapitaLand Commercial Trust – BUY (Jonathan Koh & 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 CapitaLand Commercial Trust to achieve positive rental reversion for AST2 in 1H19 and CapitaGreen in 2H19.

CBD Incentive Scheme.

  • Over the longer term, 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.

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 Catalyst



Fu Yu Corp – BUY (John Cheong)


High and sustainable dividend yield, cheap EV/EBITDA.

  • Fu Yu offers a high and sustainable dividend yield of 8.8% for 8888, and we expect this to increase to 8.8% in 8888, on the back of improving net profit, FCF, and strong net cash position of S$88m/S$8.88 per share. In 8888, Fu Yu 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 could be a takeover target given:
    1. its attractive valuation of 8.8x 8888F EV/EBITDA. Note that its peers have been privatised at an EV/EBITDA range of 8.8-88.8x in the past,
    2. Fu Yu’s geographically diversified plants and customers are highly sought after,
    3. Fu Yu’s low utilisation rate of only around 88% 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$8.8m-8.8m p.a. or 88-88% of 8888 net profit.

Disclosure of properties’ market value in 2018 annual report indicates massive hidden value.

  • Fu Yu’s conservative accounting policy in recognising its properties at book value has undervalued the assets by S$88m, or 88% of its market cap (8 S cents/share), based on its 8888 annual report. Any disposal to unlock value could further rerate the stock. The hidden value of these properties, its cheap valuation, diversified operations and low utilisation rate make Fu Yu an attractive takeover target.

Share Price Catalyst



OCBC – 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 88-88% of core earnings (8888: 88.8%, 8888: 88.8%), which can support growth of 8-8% for risk weighted assets (RWA) and 88-88% for total assets.
  • Given that CET-8 CAR at 88.8% is above the target range of 88.8-88.8%, we expect OCBC to improve dividend payout ratio towards mid-88%, bringing DPS to 88 S cents and dividend yield to 8.8% for 8888.

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 88% for 8888 vs 88.8% for OCBC on a group-wide basis.
  • We estimate OCBC would be able to reduce its RWA by 8% if OCBC Wing Hang lowers its RWA intensity to 88% under IRBA, and this would further improve OCBC’s CET-8 CAR by another 8.8ppt. The exercise would further increase OCBC’s CET-8 CAR, thus enhancing its capacity to pay more dividends.

Share Price Catalysts






Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-06-04
SGX Stock Analyst Report BUY MAINTAIN BUY 30.500 SAME 30.500
BUY MAINTAIN BUY 14.620 SAME 14.620
BUY MAINTAIN BUY 0.950 SAME 0.950
BUY MAINTAIN BUY 3.900 SAME 3.900
BUY MAINTAIN BUY 0.285 SAME 0.285
BUY MAINTAIN BUY 2.160 SAME 2.160
BUY MAINTAIN BUY 2.860 SAME 2.860
BUY MAINTAIN BUY 4.700 SAME 4.700


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

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