YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)
VENTURE CORPORATION LIMITED (SGX:V03)
KEPPEL CORPORATION LIMITED (SGX:BN4)
CDL HOSPITALITY TRUSTS (SGX:J85)
WILMAR INTERNATIONAL LIMITED (SGX:F34)
DBS GROUP HOLDINGS LTD (SGX:D05)
SINGAPORE TECH ENGINEERING LTD (SGX:S63)
KOUFU GROUP LIMITED (SGX:VL6)
FU YU CORPORATION LTD (SGX:F13)
Singapore Stock Alpha Picks - Outperformed In 3Q19; ADD Yangzijiang
- While the FSSTI retreated 6.1% in 3Q19, our alpha picks gained 2.0% in the quarter, led by our small/mid-cap picks (FU YU CORPORATION (SGX:F13): +11.5%, KOUFU GROUP (SGX:VL6): +5.8%) and our short call on SATS (SGX:S58) (-11.2%).
- For September, our portfolio rose 0.9% m-o-m, surpassing the FSSTI’s gain of 0.4% m-o-m; notable outperformers for the month were FU YU CORPORATION LTD (SGX:F13) and CDL HOSPITALITY TRUSTS (SGX:J85).
- For October, we add YANGZIJIANG SHIPBUILDING (SGX:BS6) as we believe the recent share price weakness is unwarranted and it is currently trading at an inexpensive valuation of 0.56x 2019F P/B.
WHAT’S NEW
Alpha picks outperformed FSSTI in 3Q19.
- On an equal weighted basis, our alpha picks recorded a decent gain of 2% in 3Q19, outperforming the FSSTI which suffered a decline of 6.1% in the same period. The outperformance of our alpha picks was led by our small-mid cap picks (FU YU CORPORATION (SGX:F13): +11.5%, KOUFU GROUP LIMITED (SGX:VL6): +5.8%) and our short call on SATS (SGX:S58) which delivered a return of 11.2%.
- Meanwhile, the underperformers among our picks in 3Q19 were ST ENGINEERING (SGX:S63) (-6.0%) and KEPPEL CORPORATION (SGX:BN4) (-5.9%).
Reviewing picks in September.
- Most of our picks notched up gains within the range of 0.7-4.7% m-o-m in September, with the exception of WILMAR INTERNATIONAL (SGX:F34) and ST ENGINEERING (SGX:S63). Notable outperformers for the month were FU YU CORPORATION (SGX:F13) and CDL HOSPITALITY TRUSTS (SGX:J85) which rose 4.7% m-o-m and 2.5% m-o-m respectively.
- Overall, our portfolio recorded an increase of 0.9% m-o-m, surpassing the FSSTI’s gain of 0.4% m-o-m.
ACTION
Adding Yangzijiang to our October portfolio.
- We add YANGZIJIANG SHIPBUILDING (SGX:BS6) as we see the slump in share price in August post news reports of the chairman assisting investigations in China to be unwarranted, given that it does not involve the company or its funds. Meanwhile, mid-term shipbuilding outlook appears positive.
- On a valuation basis, it is currently trading at 0.56x 2019F P/B which we view as inexpensive as it is -2SD below the company’s 5-year historical P/B.
YANGZIJIANG SHIPBUILDING (SGX:BS6) – BUY (Adrian Loh)
- We believe Yangzijiang Shipbuilding's share price weakness in August regarding its chairman assisting investigations in China is unwarranted, as it does not involve Yangzijiang Shipbuilding or its funds. Importantly, the medium-term shipbuilding outlook appears positive and the company is trading at an inexpensive valuation of 0.56x P/B (-2SD below 5-year average). We have a BUY recommendation on the stock and a P/B-based price target of S$1.46.
- Management has the experience and expertise to run the company while the chairman is away. In particular, Mr Ren Letian, the CEO of Yangzijiang Shipbuilding for the past five years and the son of Chairman Ren Yuanlin, has been with the company since 2006 in various roles. With his detailed knowledge of shipyard and shipbuilding operations, the core business will not be affected in the absence of the company’s chairman, in our view.
- Positive shipbuilding outlook in the medium term. In late-Aug 19, Yangzijiang Shipbuilding announced a new order win for three 82,000DWT bulk carriers and two 325,000DWT bulk carriers which we estimate at approximately US$250m. Ytd order wins now total US$604m and is comfortably approaching our 2019 order-win estimate of US$1b. We forecast that order wins will improve to US$1.5b in 2020 driven by:
- market-share gains at the expense of Korean yards, helped to some extent by the cheaper renminbi, and
- shipowners complying with stricter International Maritime Organisation (IMO) environmental regulations that come into force in 2020. Yangzijiang Shipbuilding noted that newbuild enquiries in 2H19 have been stronger compared to 1H.
Share Price Catalyst
- Event:
- New ship-building order announcements, specifically from Japanese shipowners due to the positive synergistic effects of the Mitsui JV; and
- news that the chairman is no longer assisting in the Chinese authorities’ investigations.
- Timeline: 2-3 months.
VENTURE CORPORATION LIMITED (SGX:V03) – BUY (John Cheong & Joohijit Kaur)
- New product launches in late-3Q19 could help maintain profitability. 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 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 (SGX:BN4) – BUY (Adrian Loh)
- Current valuations appear undemanding. Keppel Corp is currently 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.
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 (SGX:F34) – BUY (Leow Huey Chuen)
- Share price dragged down by haze issue. The annual haze event was more severe this year in early-September with the extended drier weather bringing more attention to plantation companies. Wilmar’s share price had dropped by 3% after the Greenpeace publication on Indonesia’s burnt land area despite the company not being in the list of companies highlighted in the publication. We opine that the weaker share price performance was mainly due to the environmental, social and governance (ESG) issue that more funds are paying attention to in recent years. We note that post the Greenpeace press release, Singapore plantation companies’ share prices have declined by 3%.
- Upcoming results could be a price catalyst. The earnings outlook for 2H19 should be better on the back of improving soybean crush utilisation, increasing sales volumes and sustainable and healthy palm refining margins. Soybean crushing margins improved on the more upbeat demand for soymeal with feed demand from the poultry and aqua sectors partially offsetting lower demand from the swine sector. China consumers are also substituting pork meat with other sources of proteins. Being the largest palm oil processing company, Wilmar is benefitting from the low palm prices while seeing strong demand, especially from the two its major markets – India and China. Low prices with good demand volumes have translated into better PBT margins for 1H19 at 4.8% vs 2.2% and 3.2% for 2017 and 2018 respectively. We believe these margins would be sustainable in 2H19.
Share Price Catalysts
- Event: Announcement of the final approval for the listing of Yihai Kerry Arawana Holdings.
- Timeline: 1-3 months.
DBS GROUP (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.
- Competitive advantage due to 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% y-o-y in 2019 despite an uncertain macro outlook.
- Timeline: 2-4 months.
ST ENGINEERING (SGX:S63) – BUY (K Ajith)
- Beneficiary of renewed key defence pact between Singapore and the US. The pact, which allows American forces to use Singapore’s air and naval bases, was renewed for another 15 years to 2035. While ST Engineering would not disclose the nature of its defence-related work, we reckon that the firm would be providing maintenance support for the US Naval and Air Force and as such, we deem the extension of the defence pact as positive for ST Engineering. In 2018, defence-related works accounted for 31% ($2.1b) of ST Engineering’s revenue.
- Orderbook at S$15.6b stood at record high, while orderbook recognition for the next two quarters is set to rise by 41% yoy. As at end-Jun 19, orderbook grew 10.6% q-o-q to S$15.6b, including the backlog of MRAS post-acquisition and net of loss of Jet Airways. In 2Q19, the marine, aerospace and electronics sectors contributed S$2.5b in orderbook recognition. ST Engineering had guided that S$3.8b (+41% y-o-y) in orderbook recognition is expected to be delivered in 2H19.
- Trading at 5-year mean PE valuation, downside risk is low. The street does not appear to be too enthused by ST Engineering’s recent US$24.3m (S$33.5m) purchase of satellite communications (SATCOM) firm, Glowlink Communications Technology. We however believe that it complements ST Engineering’s existing SATCOM business as well as a prior acquisition, Newtec. Meanwhile, ST Engineering’s share price has declined by 9% post the 2Q19 results and is trading at 20x 2019F earnings, in line with the 5-year average. Given recent acquisitions and diversification, we reckon ST Engineering deserves to trade at a higher PE valuation.
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 Group 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 Group 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 3.6% for 2019.
- We forecast double-digit net profit growth from 2019 with completed enhancement initiatives for Rasapura Masters, a pipeline of five new food courts and a faster roll-out of R&B and Super Tea outlets 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 Group 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 (SGX:F13) – BUY (John Cheong)
- High and sustainable dividend yield, inexpensive EV/EBITDA. Fu Yu offers a high and sustainable dividend yield of 7.6% 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. See Fu Yu's dividend history.
- Takeover target for valuation, diversification, capacity and salary savings. Fu Yu could be a takeover target, given:
- its attractive valuation at 3.7x 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
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https://research.uobkayhian.com/
2019-10-04
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