Singapore Stock Alpha Picks - UOB Kay Hian 2019-08-02: Strong Outperformance


Singapore Stock Alpha Picks - Strong Outperformance


Our portfolio significantly outperformed in July.

  • In the face of the FSSTI’s decline of 0.6% m-o-m in July, our portfolio delivered a gain of 5.2% m-o-m, significantly outperforming the FSSTI.
  • Our portfolio’s strong performance was led by the small-mid cap picks (Fu Yu (SGX:F13): +9.8% m-o-m, Koufu (SGX:VL6): +7.2% m-o-m), followed by our short call on SATS (-7.7% m-o-m) and Venture Corp (SGX:V03) (-4.6% m-o-m).
  • For our large-cap BUY picks, Wilmar International (SGX:F34) recorded a gain of 7.8% m-o-m – we recently upgraded our target price by 15% to S$4.50 (from S$3.90) as we factor in a higher valuation for its China operations.


Add Keppel Corp and newly-initiated BRC Asia.

Remove SATS to lock in gains.

  • Since placing SATS (SGX:S58) into our short-term SELL call last its share prices have retreated 10.1% m-o-m. We remove the stock at this juncture to take profit.


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

Analyst Company Recommendation Performance# Catalyst
Adrian Loh KEPPEL CORPORATION (SGX:BN4) BUY - Continued recovery in new order flow in 2H19
Lucas Teng/ Llelleythan Tan BRC ASIA (SGX:BEC) BUY - Strong FY19 results on the back of improved contribution from acquisitions.
Loke Peihao/ Jonathan Koh CDL HOSPITALITY TRUSTS (SGX:J85) BUY (0.6) Recovery in contribution from Orchard Hotel; growing Singapore tourist arrivals
John Cheong/ Joohijit Kaur VENTURE CORPORATION (SGX:V03) SELL (6.1) Weak 2Q19 results and US-China trade dispute
Leow Huey Chuen WILMAR INTERNATIONAL (SGX:F34) BUY 20.8 Announcement of YKA listing details, ie IPO price and listing timeline
K Ajith ST ENGINEERING (SGX:S63) BUY 10.5 Already in place.
Jonathan Koh DBS GROUP (SGX:D05) BUY (3.9) US-China trade deal and strong deposit franchise which ensures firmer NIM.
Joohijit Kaur/ John Cheong KOUFU GROUP (SGX:VL6) BUY (8.1) Sale of its two central kitchens and better-than-expected contribution from R&B Tea.
John Cheong FU YU CORPORATION (SGX:F13) BUY 13.4 Higher-than-expected dividend or potential takeover offer.
  • # share price change since stock was selected as Alpha Pick.

Keppel Corp – BUY (Adrian Loh)

  • Current valuations appear undemanding as Keppel Corp (SGX:BN4) is currently trading at a one-year forward PE of 13.3x based on our 2020F forecasts and below its 5-year average of 14.4x. Importantly, we highlight that the company’s 1-year forward P/B multiple of 1.0x is 1SD below its 10-year historical average of 1.5x.
  • Non-offshore & marine businesses stepping up. In its recent 1H19 earnings release, the company reported that its property, infrastructure and investments business segments were both facing robust revenue and business outlooks. In particular, its investments segment saw significantly improved earnings y-o-y due to higher contribution from Keppel Capital and M1 as well a one-off gain of previously-held interest in M1.
  • Share Price Catalyst
    • Event: Continued recovery in new order flow in 2H19.
    • Timeline: 3-6 months.

BRC Asia – BUY (Lucas Teng & Llelleythan Tan)

  • Merger provides monopolistic power and improved earnings. BRC Asia (SGX:BEC) acquired its closest rival, Lee Metal Group, in Jul 18, giving it a 60-70% market share in the supply of steel products utilised in construction projects. 1HFY19 net profit has almost tripled to S$11.5m on a y-o-y basis and we expect earnings to exhibit strong growth momentum with continued synergies from the acquisition.
  • Upcycle in Singapore’s infrastructure and construction sector. Construction demand has picked up in 2018 and is on an uptrend, with BCA forecasting demand of S$27-32b in 2019. Major public-sector projects are expected to be developed in the near term, including the Tuas Megaport and North South corridor, while several leading indicators such as employment, are already pointing to an upturn for the sector.
  • New dividend policy backed by robust cash flow and falling gearing. With a new dividend policy in place, FY19 will have no less than 5 S cents as final dividend, translating to a yield of approximately 3.6%. Despite the sector slowdown in 2017-18, BRC Asia has seen resilient operating cash flow and has been active in reducing its gearing, from a high of 1.6x in 1QFY19 to 1.2x in 2QFY19.
  • Share Price Catalyst
    • Event: Strong FY19 results on the back of improved contribution from acquisitions.
    • Timeline: 3-6 months

CDL Hospitality Trusts – BUY (Loke Peihao & Jonathan Koh)

  • Singapore exposure (c.59% of 1H19 NPI) to benefit from limited future supply. Supply growth is expected to be benign, decelerating to 1.3% from end-18 to 2022 (vs 5.5% CAGR from 2014-17). The tightened new supply is partly due to a lack of hotel sites introduced under the Government Land Sale (GLS) programme since 2014. The subsequent re-introduction of hotel sites at Club Street (390 rooms) and Marina View (540 rooms) in the 2H18 GLS also signals government consensus with our view that supply shortage will be acute in the coming years.
  • Enhanced contributions from rejuvenated Orchard Hotel and Raffles Maldives Meradhoo. Orchard hotel’s rejuvenation (covering lobby, F&B outlets, meeting spaces and Orchard Wing) are mostly completed. Some 260 bedrooms in the Orchard Wing have also been refurbished, and 65 Club Floor Rooms are set to complete in 3Q19. Modernisation of the room products will enhance pricing power (by S$10-15/room-night), which will flow through in the coming quarters, especially via retail rates. Raffles Maldives Meradhoo is set to fully open later this year, and will need an estimated one-year ramp-up phase to stable occupancy ( > 70%) and US$1,200 ADR (vs US$900 under previous operator).
  • Share Price Catalyst
    • Events:
      1. Recovery in contribution from Orchard Hotel,
      2. ramp-up in Raffles Maldives Meradhoo, and
      3. newsflow on hotel room rates, occupancy and tourist arrivals.
    • Timeline: 3-12 months.

Venture Corp – HOLD (John Cheong & Joohijit Kaur)

  • Limited upside from current level from fundamental and technical perspectives. We see limited upside as Venture Corp (SGX:V03) is trading near its long-term PE mean, which indicates limited upside from multiple re-rating. In addition, share price has tested its resistance level of S$17.00 twice but failed to break through. It is currently supported by the 50-day moving average of S$16.50, and price could test its support at S$15.80 or even S$15.15.
  • Expect near-term volatility. We expect stock price to experience some near-term volatility, as we expect 2Q19 performance to be weaker y-o-y before seeing improvement in 2H19 on new product launches. However, given the uncertain macro outlook, we think that there is a higher risk that the new launches might be delayed.
  • Most key customers except Philip Morris reported slower revenue growth in 1Q19. We note that revenue growth of most of Venture’s key customers, such as Broadcom (+10.0% y-o-y), Thermo Fisher (+4.6% y-o-y) and Illumina (-5.9% y-o-y), saw a slower pace of growth compared with 2018 when most reported double-digit revenue growth. On the other hand, Philip Morris (+3.2% y-o-y ex-currency) continued to report healthy revenue growth and expects full-year ex-currency growth of more than 5%.
  • Share Price Catalyst
    • Event:
      1. weak 2Q19 results,
      2. escalation of US-China trade war, and
      3. lower earnings guidance from key customers.
    • Timeline: 1-3 months.

Wilmar International – BUY (Leow Huey Chuen)

  • Upgrade target price to factor in higher valuation for its China operations. We upgraded Wilmar International (SGX:F34)’s target price to S$4.50 (from S$3.90) after taking into consideration the larger contribution from Yihai Kerry Arawana Holdings Co. Ltd (YKA) and applying a higher PE valuation of 26x to its Kitchen Food division (70% of YKA’s gross profit). See report: Wilmar International 2Q19 Results Preview - No Suprises; Market Focusing More On YKA Listing. The disclosure of Wilmar International’s China operations through the listing of YKA has provided the market clarity to its true value and allowed it to more fully understand the business. We believe that investors were surprised about the lower-than-expected contribution from soybean crushing, and that profit contribution from YKA was much higher than that of the oilseeds & grain division in the past. The variances mainly relate to the contribution from its tropical-oil operations in China. Wilmar International is also a large palm-based downstream processor in China focusing on oleochemical and specialty fats.
  • Weaker 2Q19 results will not surprise. Wilmar International is scheduled to report its 2Q19 results on 13 Aug 19. Note that 2Q is seasonally the weakest quarter as consumer-pack sales are low and it is also a non-milling season for sugar. Thus, results are likely to be a non-event as investors are focusing more on the YKA listing, in our view. We forecast core net profit of US$235m-255m (1Q19: US$250m; 2Q18: US$352m). Recall that 2Q18 was a strong quarter for Wilmar International with exceptionally high soybean-crushing margins as a result of a strong surge in soymeal prices in China that resulted from the commencement of US-China trade tensions.
  • Share Price Catalysts
    • Event: Announcement of YKA listing details, ie IPO price and listing timeline.
    • Timeline: 2-4 months.

DBS Group – BUY (Jonathan Koh)

  • Maintains guidance for mid-single-digit loan growth in 2019. Management expects loan growth to pick up in 2H19, driven by non-trade corporate loans (deals that were deferred in 1H19 get pushed into 2H19) and residential mortgages. DBS (SGX:D05) will benefit from the drawdown of new residential mortgages in 2H19.
  • Stability in NIM despite slight dip in interest rates. Management expects two 25bp interest rate cuts in July and September, after which the Fed will respond based on incoming data. Based on this scenario, management expects NIM compression of 1bp q-o-q in 3Q19 and 1-2bp q-o-q in 4Q19. Management expects average NIM for 2019 to be at about 1.90%, which is an expansion of 5bp compared with 1.85% in 2018.
  • DBS has competitive advantage due to its strong deposit franchise. It had a high Singapore dollar-CASA ratio of 88.8% (savings accounts: 72%, current accounts: 16.8%) as of Jun 19. DBS would be the least affected by competition for fixed deposits.
  • Share Price Catalysts
    • Event: DBS achieving resilient earnings growth of 13% in 2019 despite an uncertain macro outlook.
    • Timeline: 2-4 months.

ST Engineering (K Ajith)

  • Orderbook recognition for the next three quarters set to rise by 31%. As at end-Mar 19, ST Engineering (SGX:S63)'s 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 an earnings buffer, while recent M&A initiatives 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 as 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
    • Event: New contract wins for the marine division.
    • Timeline: 3-6 months.

Koufu Group – BUY (Joohijit Kaur & John Cheong)

  • Defensive cash cow backed by strong brands and leading market position. Koufu (SGX:VL6) 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 2019, which is sustainable given strong cash-flow generation. This could translate into a potential dividend yield of 3.9% for 2019.
  • We forecast net profit to grow at double-digit levels starting from 2019 with completed enhancement initiatives of Rasapura Masters, a pipeline of five new food courts, and a faster roll-out 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 in value. Koufu owns two central kitchens at 18 and 20 Woodlands Terrace, Singapore. We estimate the eventual sale of these properties could bring in S$10m and unlock gains of up to S$8m, which could translate to higher 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.

Fu Yu Corp – BUY (John Cheong)

  • High and sustainable dividend yield, inexpensive EV/EBITDA. Fu Yu (SGX:F13) 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 position of S$80m/S$0.11 per share. In 2018, 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 3.0x 2019F EV/EBITDA (note that its peers were privatised at an EV/EBITDA range of 5.0-25.7x in the past);
    2. Fu Yu’s geographically diversified plants and customers are highly sought after;
    3. its 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 co-founders’ remuneration, estimated to be around 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’s conservative accounting policy in recognising its properties at book value has undervalued the assets by S$50m, or 33% of its market cap (S$0.07 per share), based on its 2018 annual report. Any disposal to unlock value could further rerate the stock in our view. The hidden value of these properties, the company’s inexpensive valuation, diversified operations and low utilisation rate make Fu Yu an attractive takeover target.
  • Share Price Catalyst
    • Events:
      1. Higher-than-expected dividends;
      2. potential takeover offer; and,
      3. potential corporate actions to unlock value such as disposal of properties.
    • Timeline: 3-6 months.

Singapore Research Team UOB Kay Hian Research | 2019-08-02
SGX Stock Analyst Report BUY MAINTAIN BUY 7.610 SAME 7.610