JUMBO GROUP LIMITED (SGX:42R)
VALUETRONICS HOLDINGS LIMITED (SGX:BN2)
FU YU CORPORATION LTD (SGX:F13)
CHINA AVIATION OIL(S) CORP LTD (SGX:G92)
CHINA SUNSINE CHEM HLDGS LTD (SGX:QES)
SG Small Cap Stocks - COVID-19 ~ Net Cash Companies Will Survive
- If the COVID-19 outbreak lasts till the end of 2020, we think the manufacturing sector can survive given their net cash balance sheets.
- Value emerging in Fu Yu (SGX:F13) (zero debt) and China Sunsine (SGX:QES) (89% of share price backed by net cash); upgrade to ADD from Hold previously.
- Read also: SG Small Cap Stocks - CGS-CIMB Research 2020-04-01: COVID-19 ~ Be Mindful Of Highly Geared Companies.
Net cash companies will survive - Manufacturing sector
- In the manufacturing sector, all the companies under our coverage have net cash balance sheets with some having zero borrowings. As such, we think these companies will not face cash flow issues even if the COVID-19 outbreak extends till the end of 2020F. We also note that the average dividend yield for FY20F for the manufacturing sector is 6.5%.
Valuetronics (SGX:BN2)
- Amongst manufacturing stocks, we note that Valuetronics offers an attractive dividend yield of c.9% and the highest margin of safety with net cash position representing 90% of its market cap.
- The group announced that while over 80% of its employees in China have resumed work, widening virus transmission, travel bans and city lockdowns in its major markets have led to factory shutdowns at some of its suppliers and end customers. We expect wider repercussions from these and potential global slowdown in consumer demand, and trim our FY21F EPS by 20.0%, resulting in a lower target price of S$0.50; we keep our HOLD rating unchanged.
- We believe improving revenue visibility and new customer/product wins could pose upside risks to our HOLD call and re-rate the stock post the COVID-19 outbreak resolution. See Valuetronics Share Price; Valuetronics Target Price; Valuetronics Analyst Reports; Valuetronics Dividend History; Valuetronics Announcements; Valuetronics Latest News.
- Downside risks: higher costs of material and growing economic uncertainty. Upside risk is better than expected orders from customers.
- Valuetronics traded at a record-low (1 s.d. below historical mean) of 3.3x forward P/E and 0.7x P/BV during the 2008-09 global financial crisis, which was compounded by its Danshui plant flooding and goodwill impairment due to a poor acquisition. In the worst case scenario, those trough valuations imply entry prices of S$0.26 and S$0.35, respectively.
Fu Yu (SGX:F13)
- We see value emerging for Fu Yu as we think earnings risks are being reflected in its share price de-rating. The share price has fallen 32% from its 52-week high of S$0.285 (17 Jan 2020). Hence, we upgrade our recommendation from Hold to ADD even after our 16-23% earnings cuts to factor in lower revenue. Our non-consensus earnings downgrades are in response to lockdowns arising from the COVID-19 outbreak and concerns of weaker end demand as global economic growth slows.
- Our revised Target Price is lowered to S$0.21 (from S$0.26), based on Gordon Growth derived P/BV multiple of 0.95x (previously 1.16x) to reflect the ROE decline as earnings fall in the midst of the COVID-19 outbreak.
- Projected FY20F dividend yield is 8.5%. We estimate Fu Yu’s net cash position as at end FY20F to be S$93.7m (zero debt balance sheet). As at end 26 Mar 2020, net cash was 61% of Fu Yu’s market cap. See Fu Yu Share Price; Fu Yu Target Price; Fu Yu Analyst Reports; Fu Yu Dividend History; Fu Yu Announcements; Fu Yu Latest News.
- Downside risks are unfavourable foreign exchange movements, increased competition and the worsening COVID-19 outbreak.
Other Net Cash Companies
- For other small cap stocks under our coverage, China Sunsine (SGX:QES) and China Aviation Oil (SGX:G92) stood out with 89%/79% of their share prices backed by their net cash position.
China Sunsine (SGX:QES)
- We determine S$0.265 as the trough price for China Sunsine, based on our bear-case FY20F BVPS forecast of Rmb2.67/share; pegged to China Sunsine’s historical trough P/BV of 0.52x. Downside risk is cushioned by its FY20F net cash of S$0.21/share.
- We believe that China Sunsine’s near-term challenging outlook has been more than priced in by the market, and recommend long-term investors accumulate at this level. We upgrade China Sunsine from Hold to ADD on a valuation basis.
- We cut FY20-22F EPS forecasts (base case) by 21.8-36.5% to factor in lower ASP and margin assumptions; our lower Target Price of S$0.38 is based on 0.72x FY20F P/BV (-0.75 s.d. of historical mean). See China Sunsine Share Price; China Sunsine Target Price; China Sunsine Analyst Reports; China Sunsine Dividend History; China Sunsine Announcements; China Sunsine Latest News.
- Key risks include prolonged macro weakness and worse-than-expected pricing competition.
China Aviation Oil (SGX:G92)
- China Aviation Oil is trading at 6x FY21F EPS (closer to troughs of 4.4x in FY16 – the last crude oil crisis) post share price falling 32% YTD. China has recently limited the quantum of international flights into China while intense volatility could cap near-term trading activities, in our view.
- In the wake of the slowdown in global travel and uncertainties in the oil product industry we now forecast FY20F EPS to fall c.38% y-o-y, and ascribe a lower PER of 6.5x on FY21F EPS, resulting in a lower Target Price of S$0.86. We reiterate our Hold rating as we still like China Aviation Oil’s healthy balance sheet and FY21F dividend yield of c.5%.
- China Aviation Oil traded at a record-low of 4.4x forward P/E and 0.65x P/BV during the 2014-16 crude oil price crisis. See China Aviation Oil Share Price; China Aviation Oil Target Price; China Aviation Oil Analyst Reports; China Aviation Oil Dividend History; China Aviation Oil Announcements; China Aviation Oil Latest News.
- Upside risks include a swifter recovery in China’s international travel, faster recovery in global travel and less uncertainty in the oil markets (which could translate to higher earnings). Downside risks include a prolonged COVID-19 impact and lower dividends.
Jumbo Group (SGX:42R)
- We also downgrade Jumbo Group from Add to HOLD, as stringent measures by the government to minimise the spread of COVID-19 has resulted in a steep drop in footfall for its restaurants.
- Jumbo Group has rolled out multiple initiatives to cushion revenue loss and tightened cost control measures, but we believe that a steep earnings decline in FY20F is inevitable. Lowering our SSSG assumptions to factor in the impact from COVID-19, our FY20-22F EPS is cut by 19%-83%.
- Jumbo Group's balance sheet is strong with net cash position that accounts for c.36% of its market cap as at 26 Mar 2020. We lowered our Target Price to S$0.22, based on 11.5x FY21F P/E (2 s.d. below Jumbo Group's historical average).
- See Jumbo Group Share Price; Jumbo Group Target Price; Jumbo Group Analyst Reports; Jumbo Group Dividend History; Jumbo Group Announcements; Jumbo Group Latest News.
Not rated stocks
- We also screened through other Singapore-listed small cap stocks with market cap between USS$50m and US$1bn (excluding REITS and finance-related companies) using
- net cash as a percentage of market cap, and
- net gearing position.
- Figure 11 in attached PDF report shows small-cap names outside our coverage with net cash accounting for more than 50% of its current market cap. Companies on the list that has also demonstrated a track record of being profitable and cash flow generative for the past three years include
Company Reports:
- Valuetronics - CGS-CIMB Research 2020-04-01: Cautious Outlook.
- Fu Yu Corp - CGS-CIMB Research 2020-04-01: Downside Risks Getting Priced In.
- China Sunsine Chemical Holdings - CGS-CIMB Research 2020-04-01: Valuation Play.
- China Aviation Oil - CGS-CIMB Research 2020-04-01: Stay Grounded.
- Jumbo Group - CGS-CIMB Research 2020-04-01: Brace For A Long Winter.
Read also
William TNG CFA
CGS-CIMB Research
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NGOH Yi Sin
CGS-CIMB Research
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ONG Khang Chuen CFA
CGS-CIMB Research
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https://www.cgs-cimb.com
2020-04-01
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