Singapore Stock Alpha Picks - UOB Kay Hian 2019-12-05: Strong Outperformance Led By Large Caps; Take Profit On Wilmar


Singapore Stock Alpha Picks - Strong Outperformance Led By Large Caps; Take Profit On Wilmar

  • Our portfolio had a good month, increasing 3.3% m-o-m vs the FSSTI’s decline of 1.1% m-o-m in November. For December, we take profit on Wilmar International (SGX:F34) and remove it from our portfolio post its solid performance – its share price increased 21.1% over the Jun-Nov 19 period. See Wilmar Share Price.
  • We see further potential upside to the target prices for the rest of our picks.


Strong outperformance in November.


Remove Wilmar to lock in gains.


Analyst Company Recommendation Performance# Catalyst
Adrian Loh SEMBCORP MARINE (SGX:S51) SELL (11.5) Earnings announcements showing that profitability and margins have further deteriorated.
Adrian Loh YANGZIJIANG SHIPBUILDING (SGX:BS6) BUY 11.5 New ship-building order announcements.
Adrian Loh KEPPEL CORPORATION (SGX:BN4) BUY 6.2 Continued recovery in new-order flow in 2H19.
Loke Peihao/ Jonathan Koh CDL HOSPITALITY TRUSTS (SGX:J85) BUY (2.4) Recovery in contribution from Orchard Hotel; growing Singapore tourist arrivals
K Ajith ST ENGINEERING (SGX:S63) BUY 5.8 Already in place.
Jonathan Koh DBS GROUP (SGX:D05) BUY (9.7) US-China trade deal and strong deposit franchise which ensures firmer NIM.
John Cheong/ Joohijit Kaur KOUFU GROUP (SGX:VL6) BUY (5.6) Sale of its two central kitchens and better-than-expected contribution from R&B Tea.
John Cheong FU YU (SGX:F13) BUY 23.7 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.


  • Excessive premium currently in share price. Sembcorp Marine's share price reacted positively to Temasek's announcement of a partial offer for Keppel Corp (SGX:BN4). 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 reported lower-than-expected 3Q19 results and this is likely the case for 4Q19 results as well. Losses may even extend into 1Q20, in our view.
  • Recent order wins boosted margins 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 to bolster 2020 earnings.
  • 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 PriceSembcorp Marine Target Price.

Share Price Catalyst

  • Event: Earnings announcements showing that profitability and margins have further deteriorated.
  • Timeline: 3-6 months.


  • 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.
  • 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, have 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 at 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 Share PriceYangzijiang Target Price.

Share Price Catalyst

  • Event:
    1. New ship-building order announcements, specifically from Japanese shipowners due to the positive synergistic effects of the Mitsui JV, and
    2. news that the chairman is no longer assisting in the Chinese authorities’ investigations.
  • Timeline: 2-3 months.


  • 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, 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 9M19, gross revenue grew 26% y-o-y to S$5.4b. More importantly, revenue growth in 3Q19 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 Keppel Corp Share PriceKeppel Corp Target Price.

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 the 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 the F1 SG Grand Prix. Anecdotally, management also noted that they are contracting at higher prices for some 2020 corporate requests for proposals (although some accounts remain price sensitive).
  • Singapore RevPAR to improve further 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%) and 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) and the 103rd Lions Clubs International Convention (est. 20,000 foreign attendees). Exciting tourism infrastructure plans are also underway, which will help provide a favourable environment for medium-to long-term growth.
  • Liang Court redevelopment. CDL Hospitality Trusts will divest Novotel SG Clarke Quay (NCQ) at S$375.9m in Apr 20, unlocking S$36.3m in gains and avoiding significant capex obligations (ie for a 35-year old hotel). At the same time, CDL Hospitality Trusts will forward purchase the new hotel (with a refreshed 99-year lease) in 2025 at the lower of either a fixed price of S$475m (implying a valuation of S$1.35m/key) or 110% of development costs. Management also has plans to acquire W-hotel in early-20 for S$342.2m. On a combined basis, the transactions are expected to grow CDL Hospitality Trusts's Singapore portfolio valuation to 68% (from 62%) and NPI exposure to 64% (from 60%). The absence of contributions from NCQ (partially mitigated by W hotel) is expected to lead to a 8% dilution during the initial five years.
  • 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 PriceCDL Hospitality Trust Target Price.

Share Price Catalyst

  • Events: Newsflow on hotel room rates and occupancy, and tourist arrivals.
  • Timeline: 3-12 months.

DBS GROUP (SGX:D05) – BUY (Jonathan Koh)

  • Wealth management continued to outperform in 3Q19. Fees grew 17.1% y-o-y, driven by wealth management (+22% y-o-y). AUM expanded 9% y-o-y to S$241b. Contribution from cards and transaction services (cash management and trade finance) also increased 9% and 7% y-o-y respectively.
  • Hong Kong expected to remain resilient. DBS Hong Kong services large corporations, including conglomerates in Hong Kong and state-owned companies in China. The bulk of loans are China-related but booked in Hong Kong. The SME book is well collateralised, mainly secured by properties with low LTV ratios. Companies in industries affected by social unrest, such as retail, hospitality and tourism, are primarily depositors and have limited appetite to borrow.
  • See DBS Share PriceDBS Target Price.

Share Price Catalyst

  • Event: Improvement in cost-to-income ratio due to digitalisation and strategic cost management initiatives.
  • Timeline: 3-6 months.


  • S$1.3b M&As 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, defence and maritime segments.
  • Orderbook at S$15.9b stood at a record high (+2% from 2Q19), and STE expects to recognise S$2.2b (S$1.6b previously). ST Engineering expects its robust orderbook to “continue to provide revenue visibility for the next few years.”
  • We have valued ST Engineering on an EV/Invested Capital basis with ROIC at 13.4%, WACC at 5.9% and long-term growth rate of 2.3%. At our fair value of S$4.32, STE trades at 21.5x 2020F PE.
  • See ST Engineering Share PriceST 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 for 2019 with completed enhancement initiatives of Rasapura Masters, a pipeline of five new food courts and 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 PriceKoufu Target PriceKoufu 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 7.1% for 2019, and we expect this to increase to 7.5% in 2020 on the back of improving net profit, FCF and strong net cash of S$85m as of 3Q19 (or S$0.11 per share). In 2018, Fu Yu raised its interim dividend for the first time in 3 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:
    1. its attractive valuation at 3.2x 2020F EV/EBITDA (note that peers were privatised at EV/EBITDA of 5.0-25.7x in the past),
    2. Fu Yu’s geographically diversified plants and customers are highly sought after,
    3. its low utilisation rate of only around 50% could appeal to potential acquirers who are in a hurry to increase production capacity; and
    4. 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 PriceFu Yu Target Price.

Share Price Catalyst

  • Events:
    1. Higher-than-expected dividends,
    2. potential takeover offer, and
    3. 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/ 2019-12-05
SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.220 SAME 1.220