SEMBCORP MARINE LTD (SGX:S51)
YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)
KEPPEL CORPORATION LIMITED (SGX:BN4)
CDL HOSPITALITY TRUSTS (SGX:J85)
WILMAR INTERNATIONAL LIMITED (SGX:F34)
SINGAPORE TECH ENGINEERING LTD (SGX:S63)
DBS GROUP HOLDINGS LTD (SGX:D05)
FU YU CORPORATION LTD (SGX:F13)
KOUFU GROUP LIMITED (SGX:VL6)
Singapore Stock Alpha Picks - Decent Return For October, Adding In A Short Idea
- Our portfolio had a decent month, increasing 3.3% m-o-m vs the FSSTI’s slightly higher gain of 3.5% m-o-m in October.
- We take profit on Venture Corp, and add Sembcorp Marine as a short idea as we believe there is currently an excessive premium in the share price due to market speculations of a merger between Sembcorp Marine and Keppel Offshore Marine. Venture Corp has been removed after returning 1.9%, decent since it was only switched to a BUY call in September.
WHAT’S NEW
Reviewing picks in October.
- Roughly half of the stocks within our portfolio notched up decent gains within the range of 3-4% m-o-m, while the other half came in flat in October. The notable outperformer for the month was Keppel Corp, which rose 15.7% m-o-m as share price was up 14% the day after the announcement of Temasek’s partial offer to acquire an additional 554.9m shares (or 30.55%) at S$7.35/share. See Keppel Corp Share Price; Keppel Corp Target Price.
- Overall, our portfolio recorded an increase of 3.3% m-o-m in October, marginally lower than the FSSTI’s gain of 3.5% m-o-m. (see Performance of the Straits Times Index (STI) Constituents in October 2019)
ACTION
Remove Venture and add a short call on Sembcorp Marine.
- Venture Corp (SGX:V03) has been removed after returning a decent 1.9%, since it was only switched to a BUY call in September. See Venture Corp Share Price; Venture Corp Target Price.
- We add Sembcorp Marine as a short idea as we believe there is currently an excessive premium in the share price due to market speculations of a merger between Sembcorp Marine and Keppel Offshore Marine post the announcement of Temasek's partial offer for Keppel Corp. We highlight that a timeline for such a merger is likely 12 or more months away; in the meantime, Sembcorp Marine will report very poor results for 3Q19 and 4Q19. Losses may even extend into 1Q20, in our view.
ANALYSTS’ TOP ALPHA* PICKS
| Analyst | Company | Recommendation | Performance# | Catalyst |
|---|---|---|---|---|
| Adrian Loh | SEMBCORP MARINE LTD (SGX:S51) | SELL | - | Earnings announcements showing that profitability and margins have further deteriorated. |
| Adrian Loh | YANGZIJIANG SHIPBUILDING (SGX:BS6) | BUY | -1.0 | New ship-building order announcements. |
| Adrian Loh | KEPPEL CORPORATION (SGX:BN4) | BUY | 8.9 | Continued recovery in new-order flow in 2H19. |
| Loke Peihao/ Jonathan Koh | CDL HOSPITALITY TRUSTS (SGX:J85) | BUY | -0.6 | Recovery in contribution from Orchard Hotel; growing Singapore tourist arrivals. |
| Leow Huey Chuen | WILMAR INTERNATIONAL (SGX:F34) | BUY | 13.3 | The announcement of the final approval for the listing of Yihai Kerry Arawana Holdings. |
| K Ajith | ST ENGINEERING (SGX:S63) | BUY | 5.0 | Already in place. |
| Jonathan Koh | DBS GROUP (SGX:D05) | BUY | -6.3 | US-China trade deal and strong deposit franchise which ensures firmer NIM. |
| John Cheong/ Joohijit Kaur | KOUFU GROUP (SGX:VL6) | BUY | -7.5 | Sale of its two central kitchens and better-than-expected contribution from R&B Tea. |
| John Cheong | FU YU (SGX:F13) | BUY | 18.6 | 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.
SEMBCORP MARINE LTD (SGX:S51) – HOLD (Adrian Loh)
- Excessive premium currently in the share price. Sembcorp Marine's Share Price reacted positively to Temasek's announcement of a partial offer for Keppel Corp. We believe that this was due to market speculation that this is a precursor to a merger between Sembcorp Marine and Keppel Offshore Marine, which would then create a larger, more competitive and profitable entity. While this is our base case, we highlight that a timeline for such a merger is likely 12 or more months away; in the meantime, Sembcorp Marine will report very poor results for 3Q19 and 4Q19. Losses may even extend into 1Q20, in our view.
- Recent order wins boosted margin slightly. On 1 Nov 19, Sembcorp Marine announced that Shell had added an order for a Floating Production Unit (FPU) for its Whale field in the Gulf of Mexico. While no price was disclosed, we estimate the FPU would cost c.S$250m, bringing ytd order wins to c.S$820m. While this may help 1Q20 and 2Q20 profits, the company needs to win more orders in order to bolster 2020 earnings. See Sembcorp Marine Announcements.
- Current valuations do not appear compelling as Sembcorp Marine is currently trading at a one-year forward PB of 1.3x based on our 2020 forecasts and off its recent trough of 1.01x. More importantly, we highlight that earnings revision momentum will likely be negative in the next few months, in our view. See Sembcorp Marine Share Price; Sembcorp Marine Target Price.
Share Price Catalyst
- Event: Earnings announcements showing that profitability and margins have further deteriorated.
- Timeline: 3-6 months.
YANGZIJIANG SHIPBUILDING (SGX:BS6) – BUY (Adrian Loh)
- We believe that Yangzijiang's share price weakness in August regarding its chairman assisting investigations in China is unwarranted given that it does not involve the company or its funds. More 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. See Yangzijiang Share Price; Yangzijiang Target Price.
- Yangzijiang Shipbuilding's current 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. On 1 Nov 19, Yangzijiang Shipbuilding announced a small order for six bulk carriers. While no value was attributed to the order by Yangzijiang Shipbuilding, we estimate that it would be c.US$50m, thus bringing ytd order wins to US$650m vs our 2019 order-win estimate of US$1b which we still believe is achievable. Notably, this new order complies with IMO 2020 fuel regulations, so perhaps this is the first trickle of orders coming in from owners that need to replace their non-compliant fleet. See Yangzijiang Announcements.
Share Price Catalyst
- Event:
- New ship-building order announcements, specifically from Japanese shipowners due to the positive synergistic effects of the Mitsui JV,
- News that the chairman is no longer assisting in the Chinese authorities’ investigations.
- Timeline: 2-3 months.
KEPPEL CORPORATION (SGX:BN4) – BUY (Adrian Loh)
- Temasek’s partial offer to acquire an additional 31% of Keppel shares appears to have put a ‘floor price’ on the company of around $6.80/share or so. However we still believe there is room for further upside as the company has been executing well on its plans. Prior to Temasek’s partial offer, Keppel Corp had been investing heavily into new areas (telecommunications and asset management) while its offshore & marine unit has made good headway with targeting new clients in the offshore renewable space.
- All of its main businesses saw top-line growth. Its 3Q19 gross revenue of S$2.1b grew 60% y-o-y, while for 9M19, gross revenue grew 26% y-o-y to S$5.4b. More importantly, revenue growth in 3Q2019 was driven by all of Keppel Corp’s main segments, namely investments, infrastructure, offshore & marine and property. Pre-tax profit for 3Q19 was admittedly down 32% y-o-y – however this was due to the absence of lumpy property sales that occurred in 3Q18.
- See report: Keppel Corporation - Unlocking Value.
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 Portfolio (61.4% of Sep 19 ytd NPI) seeing light. In 3Q19, Singapore portfolio RevPAR grew 4.9% y-o-y, on back of improved S$190 ARR (+4.2ppt q-o-q), and 91.4% occupancy (+7.3ppt q-o-q; also highest level since 3Q14). The improvement came on the back of stronger leisure travel (est. to account for 50% of the business), potential diversion of tourism flows to Singapore as a result of the unrest in Hong Kong, and additional business generated by F1 SG Grand Prix. Anecdotally, management also noted that they are contracting at higher prices for some 2020 corporate request for proposal (although some accounts remain price sensitive).
- SG RevPAR to yield up in 2020; benefitting from benign supply and tighter event calendar. Forward supply (1.3% CAGR from end-18 to 2022) has moderated as compared with previous years’ 2014-17 (5.5% CAGR). Visitor arrivals grew to 12.9m (+1.9% y-o-y) for 8M19, as a result of growth from China (+5.1%) and developed markets like the US (12.3%), Japan (7.3%). On the corporate front, biennial 2020 will see Singapore hosting a number of inaugural events, like International Trademark Association’s 142nd Annual meeting (est. 8,000 attendees), 103rd Lions Clubs International Convention (est. 20,000 foreign attendees). Exciting tourism infrastructure plans are also underway, which will help to provide a favourable environment for medium-to long-term growth.
- Appetite for more acquisitions. In 3Q19, gearing increased marginally to 36.3% (+1.1ppt q-o-q), and CDL Hospitality Trusts still has ample debt headroom (S$461m). Management guided that they continue to like assets in Singapore (cap rates: 3-3.5%), and Europe (cap rates of 3-5%, depending on the city).
- See CDL Hospitality Trust Share Price; CDL Hospitality Trust Target Price.
Share Price Catalyst
- Events: Newsflow on hotel room rates and occupancy, and tourist arrivals.
- Timeline: 3-12 months.
WILMAR INTERNATIONAL (SGX:F34) – BUY (Leow Huey Chuen)
- 3Q is seasonally strong quarter. Wilmar is scheduled to release its 3Q19 results after trading hours on 12 Nov 19 (see Earnings Schedule for STI Constituents (September 2019 Quarter)). The third quarter is usually the best earnings quarter due to the festive demand in China and the start of sugar crushing season. While 3Q19 net profit is likely to be lower than 3Q18's US$435m, this is not a concern as 3Q18 earnings were driven by better crushing margins due to the market distortion from the US-China trade war, and also good palm refining margins as CPO price was down significantly due to strong production.
- Tropical oils division remains as the star performer. The good profit margin for palm downstream operation since 2H18 is likely to sustain into 3Q19 as CPO price has remained low and continues to favour downstream players. 2019 has been a very good year for downstream producers with low feedstock prices, good feedstock supplies and good demand that will sustain the processed products pricing as well. An impact of the recent surge in CPO, if any, will likely be in 2020.
- See Wilmar Share Price; Wilmar Target Price.
- See report: Wilmar International 3Q19 Results Preview - Tropical Oils Still The Star; Oilseeds & Grains Margin To Improve Q-o-q.
Share Price Catalysts
- Event: The announcement of the final approval for the listing of Yihai Kerry Arawana Holdings.
- Timeline: 1-3 months.
DBS GROUP (SGX:D05) – BUY (Jonathan Koh)
- On track for mid-single-digit loan growth in 2019. We estimate DBS’s loan growth at 4% y-o-y and 1% q-o-q in 3Q19, driven by non-trade corporate loans. Corporate loans would likely be driven by the building & construction and transport, and storage & communications segments. Bookings for residential mortgages have picked up in 1H19 but the pace of loan drawdown was trepid in 3Q19. See Earnings Schedule for STI Constituents (September 2019 Quarter).
- Narrower margins post rate cuts. We expect NIM to expand 3bp y-o-y but compress by 2bp q-o-q to 1.89%. The 3-month SIBOR and SOR have receded slightly to 1.88% (3Q19: -12bp) and 1.68% (3Q19: -15bp) respectively as at end-Sep 19 due to two rate cuts totalling 50bp from the Fed. However, DBS has maintained interest rates for fixed deposits in Singapore at 1.4% (fixed deposits accounted for only 11.1% of its S$ deposits).
- Beneficiary of partial trade deal between the US and China. We forecast net profit of S$1,496m for 3Q19, up 5.7% y-o-y but down 6.7% q-o-q (2Q19’s earnings boosted by gains on investment securities of S$131m). DBS is a beneficiary of the partial trade deal between the US and China as Greater China accounted for 29.9% of total loans and 27.1% of total income in 2Q19.
- See DBS Share Price; DBS Target Price.
Share Price Catalysts
- Event: Partial trade deal between the US and China, improvement in cost-to-income ratio due to digitalisation and strategic cost management initiatives.
- Timeline: 3-6 months.
ST ENGINEERING (SGX:S63) (K Ajith)
- S$1.3b in M&A in the aerospace and electronics division is expected to be earnings accretive and enable ST Engineering to move up the value chain. The acquisition of nacelle manufacturer MRA system (MRAS) will provide a steady pipeline of OEM aerospace work for the next 10 years. Meanwhile, the acquisition of Satcom firm, Newtec and Glowlink will enhance ST Engineering’s Satcom capabilities for applications in the aerospace, defense and maritime segments.
- S$6.5b increase in order wins as at 3Q19. This represents a 50% increase in orders from end-18 and holds scope for strong top-line growth over the next two years. Near-term earnings are likely to be robust, as orderbook recognition for 2H19 was guided to rise by 41% y-o-y. Orderbook revenue typically accounts for 60% of revenue.
- We have valued ST Engineering on an EV/Invested Capital with ROIC at 15.1%, WACC at 6.2% and long term growth rate of 2.5%. At our fair value of S$4.34, ST Engineering trades at 20.7x PE, in line with 5-year average mean PE of 20.6x.
- See ST Engineering Share Price; ST Engineering Target Price.
Share Price Catalyst
- Event: New contract wins for the marine division.
- Timeline: 3-6 months.
KOUFU GROUP (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 3.5% 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 with 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.
- See Koufu Share Price; Koufu Target Price; Koufu Dividend History.
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 (SGX:F13) – BUY (John Cheong)
- High and sustainable dividend yield, inexpensive EV/EBITDA. Fu Yu offers a high and sustainable dividend yield of 7.4% 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 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.
- See Fu Yu Share Price; Fu Yu Target Price.
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 Team
UOB Kay Hian Research
|
https://research.uobkayhian.com/
2019-11-04
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