Spotlight on M&A - DBS Research 2019-07-02: SGX Technology Sector & REITs

Singapore Market Strategy - DBS Group Research | SGinvestors.io AIMS APAC REIT (SGX:O5RU) CACHE LOGISTICS TRUST (SGX:K2LU) HI-P INTERNATIONAL LIMITED (SGX:H17) SOILBUILD BUSINESS SPACE REIT (SGX:SV3U) FU YU CORPORATION LTD (SGX:F13) SUNNINGDALE TECH LTD (SGX:BHQ) SPINDEX INDUSTRIES LIMITED (SGX:564)

Spotlight on M&A - SGX Technology Sector & REITs




Technology sector - Survival tactics; stronger together


Weaker growth outlook

  • The global economic growth has weakened. Global growth is now projected to slow from 3.6% in 2018 to 3.3% in 2019, before returning to 3.6% in 2020, according to IMF. The latest estimate is 0.2 and 0.1 percentage point below last October’s projections. Closer home, with renewed hostilities between the US and China, the downside risk has heightened. As such, our economist has lowered full year 2019 GDP growth forecast for Singapore to 2.1%, from 3.1% previously.
  • The global economy is facing a confluence of risks, which could severely disrupt economic activity and inflict significant damage on longer-term development prospects. Risks in the external environment have also picked up with renewed hostilities between the US and China. Coupling with the Huawei incident, this has aggravated the trade war that has led to the technology war. Though Huawei is now allowed to do business with US companies again in the latest development, uncertainty still prevails.

Technology sector – at the crux of the trade war

  • In the technology space, the supply chain that spans across Asia has been affected by the trade war. Margins are hit and visibility remains low as customers are less willing to commit to orders in view of the cloudy outlook. Suppliers within the whole supply chain would need to relook their strategies to survive in this trade-challenged environment. Relocation out of China or changing suppliers are some of the options. However, this process would take time and not all of the manufacturing processes can be easily transferred out of China. Improving operational efficiencies is another way to reduce cost but the impact on bottomline is usually not significant.
  • The M&A or privatization route could be another option to consider. It does make economical sense for technology companies to adopt the M&A route as some of these companies may have common customers, provide similar services or manufacture similar products. Synergistic acquisitions can also offer other significant benefits such as economies of scale and increased market share.
  • In view of the uncertain outlook for most technology companies since the start of the trade war in March last year, share prices for most technology companies have retreated by more than half from their high in 2017. See Share Price Performance of SGX Technology Sector Stocks. At current level, valuations are beginning to look attractive, with the STI trading at -1SD of its mean, albeit outlook remains uncertain. This makes technology companies a more likely target for M&A/privatisation.
  • There are numerous factors driving companies towards the M&A/ privatisation path. YTD, some of the technology companies that have chosen this path include PCI Limited (SGX:P19), Kingboard Copper Foil (SGX:K14) and Memtech International (SGX:BOL). We believe this trend is likely to continue.
  • Other potential candidates include

HI-P INTERNATIONAL LIMITED (SGX:H17) (HOLD; Target Price S$1.41)

  • Hi-P International could be a takeover/privatisation target as its free float in the market is small. Executive Chairman and Chief Executive Officer, Mr Yao Hsiao Tung, now owns about 84% of the company. Furthermore, the group has yet to announce a succession plan, after Deputy CEO, Mark Su’s resignation in March this year.
  • We continue to believe that with its entrenched relationship with key customers, which include some of the world’s biggest names in mobile phones, tablets, household and personal care appliances, Hi-P International could be an attractive target for global companies looking to build a base in Asia. Though in the near term, the group is channeling its resources towards building its business amid the challenging market on the back of the trade war, we believe the M&A theme could surface again at an opportune time.

FU YU CORPORATION LTD (SGX:F13)

  • While current valuations for Fu Yu at 0.9x P/BV and 12x PE seem fair, the stock looks attractive for its 7.2% yield and ex-cash PE of only 6.2x for FY18.
  • Net cash accounts for 54% of its market cap, which could lead to potential for a privatisation or takeover offer.

SPINDEX INDUSTRIES LIMITED (SGX:564)

  • Back in February 2017, the founder of Spindex attempted to privatise the company at S$0.85 per share, at a 21% premium to the last traded price. However, the deal was blocked by Star Engineering, a subsidiary of Northstar Equity Partners, indicating a potential offer at higher than S$0.85 per share. However, Star Engineering did not put forward a firm offer or a specific offer price.
  • Spindex could potentially be back in the market, given the relatively attractive PE of c.6x, low free float of c.25% and net cash accounting for 29% of its market capitalisation.

SUNNINGDALE TECH LTD (SGX:BHQ)

  • Sunningdale Tech has gone through several rounds of M&A in the past to become one of the biggest one-stop turnkey plastic solutions provider.
  • Sunningdale Tech‘s competitive advantages lie in its tooling capabilities, expertise in high cosmetic parts, credibility in the healthcare and automotive business and scalable robust system and processes that have been built over the years. At 0.7x P/BV and 11x FY19F PE, attractive valuations could lead to takeover potential – especially from PE funds or larger top-tier players in the precision plastic field seeking Asian exposure.

Cash is king



Mergers in the REIT space

  • This is the year for M&A activity and “indexation” among listed S-REITs, with most REIT managers taking strategic steps towards increasing their own assets under management (AUM) and market cap to gain investor visibility. Post the take-over of Viva Industrial Trust (SGX:T8B) in 2018, the year 2019 started with more activity on the M&A front with proposed combination of the two OUE-sponsored REITs (OUE Commercial REIT (SGX:TS0U) and OUE Hospitality Trust (SGX:SK7)). Smaller scale REITs like IREIT Global (SGX:UD1U) found a new sponsor in City Developments (SGX:C09) while Sabana REIT (SGX:M1GU) gained a new sponsor with Vibrant Group (SGX:BIP) selling its stakes in the REIT and REIT manager to a new investor in the logistics space.
  • Looking ahead, we continue to see further consolidation within the REIT space, especially in mid-cap industrial REITs such as
  • These REITS are trading at attractive yields in excess of 7%-8.5%, which prohibits them from pursuing acquisitions as it will unlikely be accretive given its high cost of capital. We believe that over time, REIT managers will be looking to either combine, or consider mergers.
  • Looking at the implied yields of the mid-cap industrial REITs ranging 6.5%-7.2%, which is much higher than actual physical transactions, it might just be attractive for Sponsors to consider executing on M&A in the longer term.


See also






Lee Keng LING DBS Group Research | https://www.dbsvickers.com/ 2019-07-02
SGX Stock Analyst Report BUY MAINTAIN BUY 1.500 SAME 1.500
HOLD MAINTAIN HOLD 0.750 SAME 0.750
HOLD MAINTAIN HOLD 1.410 SAME 1.410
HOLD MAINTAIN HOLD 0.630 SAME 0.630
NOT RATED MAINTAIN NOT RATED 0.250 SAME 0.250
NOT RATED MAINTAIN NOT RATED 99998 SAME 99998
NOT RATED MAINTAIN NOT RATED 99998 SAME 99998



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