BRC ASIA LIMITED (SGX:BEC)
KOUFU GROUP LIMITED (SGX:VL6)
FU YU CORPORATION LTD (SGX:F13)
Small/Mid Caps 2Q19 Results Round-up - More Misses Than Beats; Stay Selective On Deep Value
- The majority (60%) of the companies under our small/mid-cap coverage met expectations this earnings season while 13% surprised on the upside; misses were higher compared to beats at 27% due to a weaker performance from the manufacturing and consumer sectors.
- We recommend investors selectively accumulate deep-value names (eg low ex-cash P/E, high dividend yield) with a good track record to withstand this uncertain economic environment.
- Our top picks are Koufu Group, Fu Yu and BRC Asia.
WHAT’S NEW
Manufacturing – Largely within expectations; weaker results with more cautious outlook.
- In 2Q19, Valuetronics (SGX:BN2)’s and Fu Yu Corporation (SGX:F13)’s results were in line with our estimates while Sunningdale Tech (SGX:BHQ) missed expectations.
- Sunningdale Tech unexpectedly fell into a loss-making position in 2Q19 due to higher-than-expected decline in its auto sales and slower-than-expected ramp up of new factories. Overall, its outlook has turned more cautious due to the escalating trade war and slower global growth. We subsequently downgraded the stock to a SELL, with a target price of S$1.01. See report: Sunningdale Tech - 2Q19 Hit By Slowdown In 3 Key Segments; Downgrade To SELL.
- While Valuetronics’ 1QFY20 results came in within expectations and we maintain our BUY call, we expect a more neutral second half and similarly for Sunningdale Tech, earnings growth on a y-o-y basis is unlikely after the high base effect from 2H18. That said, we believe Valuetronics’ 1-year stock price correction of 15% and ex-cash PE of 2.6x for FY20 have more than priced in a weaker FY20. See report: Valuetronics 1QFY20 - Results In Line; Vietnam Expansion Progressing Well.
- Fu Yu is the only company within our manufacturing coverage that reported net profit growth in 2Q19 and it is likely to stand a chance of growing on a y-o-y basis for 2H19 due to cost savings, revenue growth in Malaysia and Singapore, and new customers in China. Thus, Fu Yu remains our preferred pick for the sector. See report: Fu Yu Corp 2Q19 - Results In Line With Gross Margin Expansion & Higher Dividend.
Consumer – Mixed Bag.
- Among our consumer staples stocks, Sheng Siong Group (SGX:OV8)’s 2Q19 earnings were slightly above our expectation while Japfa (SGX:UD2)’s was a miss.
- Sheng Siong Group reported strong growth in new store sales (11.3% y-o-y) which more than offset the marginal 0.3% contraction in same-store-sales (SSS) growth. We expect this trend to continue in 2H19, driven by the full effect of 10 new store openings in 2018.
- Japfa’s weaker-than-expected 2Q19 performance was mainly attributable to lower broiler ASPs due to a supply-demand imbalance, as well as low swine ASP as a result of the African Swine Flu (ASF). Post results, we downgraded the stock to HOLD as we turn more cautious on the uncertainties in these two key segments, which could be a near-term overhang for earnings and share price. See report: Japfa Ltd - 2Q19 Uncertainties In Two Key Segments; Downgrade To HOLD.
- For the F&B service companies under our coverage, Koufu Group (SGX:VL6)’s results were in line while Jumbo Group (SGX:42R) missed expectations.
- The key reason for Jumbo Group’s earnings miss was the four-week closure (due to renovations) of the Jumbo Seafood restaurant located at The Riverwalk. While we trim our FY19 earnings forecast by 11%, there is potential for a better 4QFY19 from normalised earnings of the outlet which is now fully operational, as well as contributions from the newly-opened Jumbo Seafood outlets at Jewel Changi and ION Orchard.
- On the other hand, Koufu Group’s earnings are on track to meet our 19% forecast growth for 2019, with full year contribution from Rasapura, new outlets ramping up and steady roll-out of the R&B Tea outlets. See report: Koufu Group Ltd - Foodcourts Driving Growth.
Recently initiated BRC Asia reported solid earnings.
- BRC Asia (SGX:BEC) reported a 3QFY19 net profit of S$9.1m (+70.6% q-o-q) vs a loss of S$6.8m in 3QFY18 and was in line with expectation. Operating margins have improved (+2.4ppt q-o-q) and the group looks set to reap the benefits from its acquisition of Lee Metal.
Our top picks are Koufu, Fu Yu and BRC Asia.
- We believe the market has overlooked Koufu Group’s strong performance and cash generation ability that has helped it build a significant net cash position (equivalent to c. 23% of Koufu Group’s market cap as of 2Q19), and it is trading at a deep discount of 13.8x 2019F PE vs the peer average of 22.7x.
- We also like Fu Yu for its high sustainable dividend yield of 7.9% for 2019F and cheap EV/EBITDA at 3.4x. We note that at this attractive valuation and withits geographically diversified plants, it is a potential takeover target.
- BRC Asia is also our top pick as its recent acquisition of its closest rival, Lee Metal Group, provides it monopolistic power and it is thus a major beneficiary of Singapore’s current infrastructure and construction upcycle. In addition, its 9MFY19 earnings grew from a loss of S$3.8m to a profit of S$20.7m and we expect earnings to exhibit strong growth momentum with continued synergies from the acquisition.
- We note that all our top picks provide decent 2019F dividend yields in the range of 3.6-7.9% (Fu Yu: 7.9%, BRC Asia: 3.8%, Koufu Group: 3.6%)
Other small mid cap company result highlights.
- 2Q has historically been a seasonally weak quarter for Banyan Tree with revenue at S$51.8m (-24.3% y-o-y) and net profit at -S$7.9m (-48.0% y-o-y). Property sales decreased by S$10.6m (-70.5% y-o-y) to S$4.6m due to recognition timing, while hotel investments revenue decreased by S$5.1m to S$33.6m (-13.3% y-o-y) as it stopped consolidating the results of Banyan Tree Seychelles following its sale in Nov 18. In light of recent macro-economic headwinds, we have cut 2019–21 revenue estimates for Banyan Tree’s hotel investments as we expect excess supply, falling tourism numbers and a strong domestic currency to weaken the company’s 2019-21 revenue.
- Maintain BUY and target price of S$0.74 (from S$0.90).
- See report: Banyan Tree Holdings - 2Q18 Mixed Bag Of Results, Awaiting Divestment Of China Assets.
- Tianjinzhongxin Pharmaceutical’s 2Q19 net profit (+10.3% y-o-y) was slightly above expectation. Strong sales from its major products and extensive marketing efforts have lifted the company’s performance in 2Q19. Sales of the two top contributing products, Su Xiao Jiu Xin Wan and Qing Fei Xiao Yan Wan, grew 24.6% and 18.9% y-o-y respectively. Tianjinzhongxin Pharmaceutical is trading at a huge discount of 57.4% to its A shares (600329 CH). Thus, we believe that there is still plenty of upside for Tianjinzhongxin Pharmaceutical as the current share price does not match the company’s good fundamentals.
- Maintain BUY and target price of US$1.40.
- Overseas Education Limited’s (OEL) 2Q19 net profit of S$1.6m (-12% y-o-y) was in line with our expectations. The 3.7% y-o-y decline in revenue was due to a fall in student enrolment; however, the decline in revenue from tuition fees narrowed from 4.6% y-o-y in 2Q18 to 3.5% y-o-y in 2Q19. In addition, while Overseas Education Limited benefitted from lower interest cost on the new bank loan, the financing cost also included initial bank charges. We expect 2H19 to be slightly better as more cost savings from the loan refinancing kick in.
- Maintain BUY and target price of S$0.46.
- See report: Overseas Education Limited 2Q19 - Results In Line; Expect A Better 2H19 On Cost Savings.
- CSE Global’s 2Q19 core net profit of S$4.8m (+13.4% y-o-y) was in line with expectations. Key positives include stronger gross margin (+0.9ppt y-o-y) and a 19.4% y-o-y increase in order intake. CSE Global targets to maintain full-year dividend of 2.75 S cents for 2019, translating to a attractive dividend yield of 6.3%. There is potential for a stronger 2H19 (2H18 formed 55% of core net profit in 2018) as there were some project delays in 1H19.
- While the lull in large greenfield projects for oil & gas persists, CSE Global expects a steady flow of small projects from its existing customer’s installed base. Overall, management anticipates an increase in activities and better financial performance for 2019.
- Maintain BUY and target price of S$0.62.
- See report: CSE Global - 2Q19 Results In Line; Healthy Orderbook & Positive Outlook.
- Sunpower Group’s 2Q19 core net profit posted robust growth (+84.8% y-o-y) at Rmb50.5m. The 84.8% y-o-y growth in core net profit was driven by the strong performance from the GI segment. Underlying core net profit rose 53% y-o-y in 1H19 to Rmb111m, forming 37% of our full-year forecast.
- Management has earmarked the GI segment as a key driver for the group, as Sunpower Group stands to benefit from mandatory closure of small boilers and relocation of factories into industrial parks We think the ramp-up of existing GI projects and a strong M&S orderbook should continue to drive revenue growth in 2H19.
- Maintain BUY and target price of S$0.83.
- See report: Sunpower Group 2Q19 - Results In Line, Robust Growth From The GI Segment.
- PropNex’s 1H19 net profit came in below our forecasts. Private resale volumes are expected to remain subdued as owners postpone their decisions to sell. New sales are expected to be supported by the strong pipeline of 45 projects (17,000 units) launch-ready in 2019-20. Interim dividend of 1.25 S cents (81% payout) was declared.
- In view of weaker transaction volumes, downgrade to HOLD with a lower target price of S$0.50 (previously S$0.60). Entry price: S$0.45.
- See report: PropNex - 2Q19 Lower Sales Projections; Downgrade To HOLD.
John Cheong
UOB Kay Hian Research
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https://research.uobkayhian.com/
2019-08-22
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