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2020 Outlook & Strategy - DBS Research 2019-12-12: M&A Deals On A Roll 

2020 Outlook & Strategy - DBS Research | SGinvestors.io THAI BEVERAGE PUBLIC CO LTD (SGX:Y92) WILMAR INTERNATIONAL LIMITED (SGX:F34) DELFI LIMITED (SGX:P34)

2020 Outlook & Strategy - M&A Deals On A Roll 

  • M&A and privatisation deals have been proliferating in Singapore. In 2019, there were 19 companies undergoing privatisation, being merged or acquired. This has surpassed the number of deals done in the last two years – eight in 2018 and 14 in 2017. (see attached PDF report for summary table)
  • Cheap valuations, cash-rich companies, low liquidity, and strong brand franchise are some of the factors attracting predators to seek undervalued gems and takeover candidates on SGX. The privatisation momentum was fuelled by cheap valuation, lack of trading activity, cost of maintaining listing, and the need to restructure and streamline operations. In an environment of low interest rates, private equity investors seek higher returns from privatising candidates and relisting them for higher valuations in alternative bourses.
  • Singapore equities have been de-rated over the past ten years, as both GDP and corporate earnings growth slowed in an economy facing both structural and cyclical challenges. Despite the STI’s stable performance in 2019, valuation remains inexpensive vs regional peers. This, coupled with green shoots of recovery, should revive interests in Singapore equities, adding further fuel to the M&A momentum.
  • We expect this trend to continue. Trade war has also led to Chinese companies seeking alternative manufacturing/logistics hub in Southeast Asia, Singapore included. These companies will be in a sweet spot to complement their operations and value chain. Acquisition of existing facilities will enable them to scale up quickly as opposed to starting greenfield projects.



Reshaping Temasek

  • Temasek’s restructuring adds another spin to the M&A scenario. Changes in the government’s 2015 budget to include Temasek in the Net Investment Returns framework will lead to the group’s higher contribution to the government’s coffers. This has put more pressure on Temasek-linked companies to raise their ROE and dividend payouts. This can be achieved through
    1. optimal use of capital structure,
    2. seeking inorganic earnings growth,
    3. restructuring, mergers and acquisitions to sustain long-term competitiveness in the global arena,
    4. divestment of companies in non-performing sectors which face long-term challenges, and
    5. higher dividend payouts for cash-rich companies.
  • In FY Mar 2019, Temasek has gained S$9bn in dividend income from its net investment portfolio of S$313bn, a 29% jump compared to an average dividend income of S$7bn over the past decade.
  • Over the past three years, we have seen a number of restructuring and corporates actions among the Temasek-linked companies to raise shareholders’ return. Privatisation of SMRT, Tiger Airways, M1, Keppel T&T, sale of NOL and the merger of CapitaLand (SGX:C31) and Ascendas Singbridge were some of the key restructuring moves in recent years. This trend will continue, particularly among Singapore shipyards.
  • A dearth of orders for drilling rigs, the yards’ mainstay, has pushed yards to diversify into new products including newbuild production platforms, gas solutions such as FLNG vessel and Gravifloat LNG terminal. However, orders remain low and insufficient to fill the yards’ capacity. Sembcorp Marine (SGX:S51) reported losses over the past few quarters, due to a low baseload, and costs related to learning curve. Strategic review at the yards could lead to further consolidation and asset swaps in this sector. Sembcorp Marine and Sembcorp Industries (SGX:U96) are likely to play a key role in any potential restructuring of the sector.
  • The rationale for SIA Engineering (SGX:S59)’s privatisation is pretty strong. Singapore Airlines (SGX:C6L) currently has close to a 78% stake in its MRO unit, and the benefits of keeping SIA Engineering listed is not entirely apparent, given the low liquidity of the stock. Moreover, SIA Engineering does not really need to tap the equity capital markets for financing as it is a cash-rich company and does not have significant acquisitions under its belt. Given the structural challenges in the heavy maintenance industry, SIA Engineering’s share price has been weak over the last two years. The company’s current valuation is attractive at close to multi-year lows of about 17.5x forward PE and its dividend yield is healthy at 4.2%.


Telco – hot stock in data centres

  • Data centres have been hotly pursued as an asset class by SG REITS. Besides Keppel DC REIT (SGX:AJBU), Mapletree Industrial Trust (SGX:ME8U) has also added several data centres from the US in its portfolio.
  • Structural changes in demand driven by the rise in internet penetration, growth in IOT and development of 5G has pushed up demand for data storage and data centres. According to 451 Research LLC, demand for such hyperscale data centres is expected to grow at a 16.1% CAGR from 2017-2023F, while demand for insource and outsourced data centres is expected to grow by 4.9% over 2017-2023F.
  • The jewel in Singapore Telecoms and ST Telemedia (wholly owned by Temasek) are their assets in data centres. SingTel (SGX:Z74) owns about 2m GFA of data centres valued at a ballpark S$2bn while ST Telemedia owns 94 data centres, one of the largest in Asia-Pac. If SingTel seeks to unlock value in these data centres via a public listing, the proceeds can be used to fund Bharti’s expansion, which is in need of US$1bn to deleverage and acquire assets. In addition, the value proposition for listing will be enhanced if ST Telemedia combines its data centres with SingTel to create a much larger entity to attract international funds.


Property & REITs – Bigger is better



Tech sector – Opportunities from trade diversion

  • Technology sector – At the crux of the trade war. The electronics equipment supply chain that spans across Asia has been affected by the trade war. Suppliers within the supply chain would need to relook their strategies to survive in this trade-challenged environment. Relocation out of China and changing suppliers are some of the options. However, this process would take time and not all the manufacturing processes can be easily transferred out of China.
  • The M&A or privatisation route could be another option to consider. It makes economic sense for technology companies to adopt the M&A route as some of these companies may have common customers, provide similar services or manufacture similar products. Synergistic acquisitions can also offer other significant benefits such as economies of scale and increased market share. The share prices of these companies have been laggards due to trade war uncertainties.
  • Current levels remain attractive, making technology companies a more likely target for M&A/privatisation. Potential candidates are Hi-P International (SGX:H17), Fu Yu Corporation (SGX:F13), Spindex Industries (SGX:564) and Sunningdale Tech (SGX:BHQ). These companies are illiquid with low free float, net cash and trading at attractive valuations.


Consumer - Unlocking value in brand equity

  • Consumer companies with strong brand equity are highly sought after, as seen by privatisations and takeovers of OSIM, Eu Yan Sang and Super Group.
  • Delfi, Thai Beverage and Wilmar International stand out with their brand franchise, market leadership as well as strong distribution network. Besides privatisation, these groups are looking at ways to monetise their assets and brand equity via public listings.

Delfi (SGX:P34) (Rating: BUY; Target Price S$1.51)

  • Delfi (SGX:P34) could be an attractive takeover or privatisation target. The company had previously spun off its upstream cocoa processing business. In 2013, Delfi sold the division to Barry Callebaut AG for US$950m. Delfi is now left with a strong branded consumer business in Indonesia. It is a market leader with c.50% share in the branded chocolate market in Indonesia. Its competitive advantage lies in its first-mover advantage and extensive network across Indonesia, which gives it considerable reach in the country.
  • Global players are already competing in the market but their market shares remain relatively low. We believe Delfi’s strong brand and network will be attractive to investors who are keen to dominate the chocolate space in Indonesia.
  • Despite its strong brand equity, the stock has been illiquid, and undervalued with a forward PE of 15x vs peers in Indonesia which are trading at 22x.
  • See Delfi Share Price; Delfi Target Price; Delfi Analyst Reports; Delfi Dividend History; Delfi Announcements; Delfi Latest News.

Wilmar International (SGX:F34) (Rating: BUY, Target Price: S$4.60)


Thai Beverage (SGX:Y92) (Rating: BUY, Target Price S$1.04)



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Alfie YEO DBS Group Research | Andy SIM CFA DBS Research | https://www.dbsvickers.com/ 2019-12-12
SGX Stock Analyst Report BUY MAINTAIN BUY 1.040 SAME 1.040
BUY MAINTAIN BUY 4.600 SAME 4.600
BUY MAINTAIN BUY 1.510 SAME 1.510


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