VENTURE CORPORATION LIMITED (SGX:V03)
KEPPEL CORPORATION LIMITED (SGX:BN4)
BRC ASIA LIMITED (SGX:BEC)
CDL HOSPITALITY TRUSTS (SGX:J85)
WILMAR INTERNATIONAL LIMITED (SGX:F34)
SINGAPORE TECH ENGINEERING LTD (SGX:S63)
DBS GROUP HOLDINGS LTD (SGX:D05)
KOUFU GROUP LIMITED (SGX:VL6)
FU YU CORPORATION LTD (SGX:F13)
Singapore Stock Alpha Picks - Outperforms In A Challenging August 2019
- Our portfolio outperformed the FSSTI amid a challenging August, declining 4.2% m-o-m vs the FSSTI’s -5.9% m-o-m.
- For September, we change our SELL call for Venture Corp (SGX:V03) to a BUY.
WHAT’S NEW
A challenging August.
- The FSSTI retraced 5.9% m-o-m in August, dragged by concerns over the US-China trade tensions, Singapore government’s downward revision of GDP growth to 0-1% for 2019, as well as the unrest in Hong Kong which hit counters with operations in Hong Kong. See Performance of Straits Times Index Constituents in August 2019.
- While our picks suffered declines of 2.2-8.8% m-o-m, our portfolio’s simple average return of 4.2% m-o-m (ex-dividend adjusted: 3.2% m-o-m) outperformed the steeper decline in the FSSTI. See UOBKH's Singapore Alpha Picks (August 2019).
- Our best performer was our SELL call on Venture Corp, which declined 2.3% m-o-m.
- Among the worst hit were Keppel Corp (-8.8% m-o-m), DBS (-7.1% m-o-m) and ST Engineering (-7.1% m-o-m).
ACTION
Change Venture Corp to BUY.
- Since placing Venture Corp as our short-term SELL call in July, Venture Corp's share price has retreated 5.3%. Post 2Q19 results which came in within our expectations, we upgraded Venture Corp to a BUY on share price weakness.
- In the face of a volatile geopolitical environment, Venture Corp managed to maintain similar level of earnings in 1H19 vs a high base 1H18. Several product launches in late-3Q19 should help lift its performance in 2H19. In addition, we note Venture Corp is a good proxy to a potential US-China trade deal.
ANALYSTS’ TOP ALPHA* PICKS
| Analyst | Company | Recommendation | Performance# | Catalyst |
|---|---|---|---|---|
| John Cheong/Joohijit Kaur | VENTURE CORPORATION (SGX:V03) | BUY | - | New product launches, US-China trade deal. |
| Adrian Loh | KEPPEL CORPORATION (SGX:BN4) | BUY | -5.4 | Continued recovery in new-order flow in 2H19. |
| Lucas Teng/ LLelleythan Tan | BRC ASIA LIMITED (SGX:BEC) | BUY | -2.2 | Strong FY19 results on the back of improved contribution from acquisitions. |
| Loke Peihao/ Jonathan Koh | CDL HOSPITALITY TRUSTS (SGX:J85) | BUY | -1.2 | Recovery in contribution from Orchard Hotel; growing Singapore tourist arrivals. |
| Leow Huey Chuen | WILMAR INTERNATIONAL (SGX:F34) | BUY | 16.3 | Announcement of YKA listing details, ie IPO price and listing timeline. |
| K Ajith | ST ENGINEERING (SGX:S63) | BUY | 4.2 | Already in place. |
| Jonathan Koh | DBS GROUP (SGX:D05) | BUY | -10.3 | US-China trade deal and strong deposit franchise which ensures firmer NIM. |
| John Cheong/ Joohijit Kaur | KOUFU GROUP (SGX:VL6) | BUY | -8.7 | Sale of its two central kitchens and better-than-expected contribution from R&B Tea. |
| John Cheong | FU YU CORPORATION LTD (SGX:F13) | BUY | 10.8 | Higher-than-expected dividend or potential takeover offer. |
- * Denotes a timeframe of 1-3 months and not UOBKH’s usual 12-month investment horizon for stock recommendation
- # Share price change since stock was selected as Alpha Pick Source: UOB Kay Hian
VENTURE CORPORATION LIMITED (SGX:V03) – BUY (John Cheong & Joohijit Kaur)
- New product launches in late-3Q19 could help maintain profitability. Several new product launches are expected in late-3Q19, such as in the test and measurement as well as the life sciences industries. As a result, we expect Venture Corp to perform better q-o-q in 4Q19.
- Ability to navigate a challenging environment. Although the volatile environment due to the US-China trade war and geopolitical issues is expected to persist, Venture Corp has several initiatives to navigate this environment and will continue to diversify its value creation in the multiple ecosystems it participates in. Backed by its strong financial well resources, Venture Corp is well placed to capture growth opportunities.
Share Price Catalyst
- Event: New product launches in 2H19, US-China trade deal.
- Timeline: 3-6 months.
KEPPEL CORPORATION LIMITED (SGX:BN4) – BUY (Adrian Loh)
- Current valuations appear undemanding. Keppel Corp is trading at 13.3x 2020F PE and well below its 5-year average of 14.4x. Importantly, we highlight that the company’s 1- year forward P/B of 0.9x is 1SD below its 10-year historical average of 1.5x.
- Non-offshore and marine businesses stepping up. In its recent 1H19 earnings release, the company reported that its property, infrastructure and investments business segments faced robust revenue and business outlook. In particular, its investments segment saw significantly improved y-o-y earnings due to higher contributions from Keppel Capital and M1 as well as one-off gains from previously-held interest in M1.
Share Price Catalyst
- Event: Continued recovery in new-order flow in 2H19.
- Timeline: 3-6 months.
BRC ASIA LIMITED (SGX:BEC) – BUY (Lucas Teng & Llelleythan Tan)
- Merger provides monopolistic power and improved earnings. BRC Asia 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 almost tripled y-o-y to S$11.5m and we expect earnings to exhibit strong growth momentum with continued synergies from the acquisition.
- Upcycle in Singapore’s infrastructure and construction sectors. Construction demand has picked up in 2018 and is on an uptrend, with the BCA forecasting demand of S$27b-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, 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 3.6%. Despite the sector slowdown in 2017-18, BRC Asia has seen resilient operating cash flow and 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 (SGX:J85) – BUY (Loke Peihao & Jonathan Koh)
- Singapore exposure (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 in 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 the previous operator).
Share Price Catalyst
- Events:
- Recovery in contribution from Orchard Hotel,
- ramp-up in Raffles Maldives Meradhoo, and
- newsflow on hotel room rates, occupancy and tourist arrivals.
- Timeline: 3-12 months.
WILMAR INTERNATIONAL LIMITED (SGX:F34) – BUY (Leow Huey Chuen)
- Listing of YKA still on track for late-4Q19. A lot of concerns were raised on the possible delay of the listing to 2020, given that we are only 4.5 months away from 2020. Based on the progress and communication with authorities in China, management remains confident that the listing will take place by this year and regardless of market conditions, the listing will proceed.
- Potentially, YKA’s IPO pricing is likely to be pegged to 23x 2018 PE. With its strong market positioning and branding in China, we do expect share price to perform well upon listing. This could lift trading sentiment on Wilmar International as well. Post listing of YKA, we expect Wilmar International to declare a special dividend, which could lift dividend yield by 2-2.5ppt on top of the expected 1.5% yield from the annual dividend.
- 2H19 core profit to improve h-o-h. The main earnings growth drivers for 2H19 would come from:
- the oilseeds & grains division which has seen soybean crushing margins turn positive and higher consumer packs sales on festive demand in China; and
- sugar contribution from Australia should be positive and would be able to offset the off-season losses from India.
- The tropical oil division will continue to do well with better volumes and steady margins despite higher feedstock prices.
Share Price Catalysts
- Event: Listing of YKA.
- Timeline: 2-4 months.
DBS GROUP HOLDINGS LTD (SGX:D05) – 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 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 from the 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 (SGX:S63) – BUY (K Ajith)
- Orderbook recognition for the next three quarters 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 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.
- 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 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 LIMITED (SGX:VL6) – BUY (Joohijit Kaur & 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 2019, which is sustainable given strong cash-flow generation. This could translate into a potential dividend yield of 3.7% for 2019.
- We forecast double-digit net profit growth 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 into higher dividends.
Share Price Catalyst
- Sale of its two central kitchens, better-than-expected contribution from R&B Tea, and better-than-expected performance from Rasapura.
- Timeline: 3-6 months.
FU YU CORPORATION LTD (SGX:F13) – BUY (John Cheong)
- High and sustainable dividend yield, inexpensive EV/EBITDA. Fu Yu offers a high and sustainable dividend yield of 7.9% for 2019, and we expect this to increase to 8.8% 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 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:
- its attractive valuation at 3.4x 2019F EV/EBITDA (note that peers were privatised at EV/EBITDA of 5.0-25.7x in the past);
- Fu Yu’s geographically diversified plants and customers are highly sought after;
- its low utilisation rate of only around 50% could appeal to potential acquirers who are in a hurry to increase production capacity; and
- low-hanging fruit from the savings of three co-founders' 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’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 re-rate 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:
- Higher-than-expected dividends;
- potential takeover offer; and
- potential corporate actions to unlock value, such as disposal of properties.
- Timeline: 3-6 months.
Singapore Research
UOB Kay Hian Research
|
https://research.uobkayhian.com/
2019-09-09
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