Singapore Stock Alpha Picks - UOB Kay Hian 2020-04-08: Slight Underperformance Due To Small Cap


Singapore Stock Alpha Picks - Slight Underperformance Due To Small Cap

Reviewing our alpha picks in March.

  • Our portfolio recorded a 20.3% m-o-m decline vs the FSSTI’s retreat of 17.6% m-o-m. The hardest hit within our portfolio were the small-cap stocks (CSE Global (SGX:544): -33.7% m-o-m, Food Empire (SGX:F03): -30.8% m-o-m, Japfa (SGX:UD2): -26.8% m-o-m) as investors reduced risk and raised cash; DBS (SGX:D05) also underperformed, falling 23% m-o-m.
  • The most resilient within our portfolio was SPH (SGX:T39), which recorded a marginal decline of 3.2%, significantly outperforming the FSSTI.

Reshuffling our picks.

  • We remove Frasers Centrepoint Trust and SPH from our Alpha Picks as we recently downgraded both stocks to HOLD. To position our portfolio towards larger caps, we remove CSE Global and introduce SingTel (SGX:Z74), Mapletree Industrial Trust (SGX:ME8U) and ST Engineering (SGX:S63) into our portfolio.
  • With defensive earnings, relative to the broader market, in addition to attractive dividend yield, we add SingTel as a defensive play.
  • At current prices, Mapletree Industrial Trust allows investors exposure to its expansion into high-growth hi-tech buildings and data centres at a reasonable price. Furthermore, data centres are beneficiaries of the COVID-19 pandemic in our view, given the shift towards telecommuting which results in increased usage of online conferences and seminars.
  • For ST Engineering, one-third of ST Engineering's business is defense-related and will be largely unaffected by the COVID-19 outbreak. We also think ST Engineering is a beneficiary of the latest budget round and we estimate cost savings of S$45m-48m for ST Engineering in 2020.


Analyst Company Rec Performance# Catalyst
Lee Len Chong SingTel (SGX:Z74) BUY - Sustained net DPS of 17.5 S cents for FY21, market repair in Singapore, faster-than-expected recovery in Optus consumer and enterprise business.
Jonathan Koh/ Peihao Loke Mapletree Industrial Trust (SGX:ME8U) BUY - Resiliency from exposure to data centres.
K Ajith ST Engineering (SGX:S63) BUY - Incremental contract wins.
Peihao Loke/ Adrian Loh PropNex (SGX:OYY) BUY -13.5 Positive newsflow on new launches and take-ups.
John Cheong/ Joohijit Kaur Japfa (SGX:UD2) BUY -16.1 Better-than-expected prices of products for key segments.
Joohijit Kaur/ Clement Ho Food Empire (SGX:F03) BUY -27.1 Higher-than-expected volume growth, better-than-expected performances of currencies in key markets.
Adrian Loh Keppel Corp (SGX:BN4) BUY -10.0 Continued recovery in new-order flow in 2H19.
Adrian Loh Yangzijiang Shipbuilding (SGX:BS6) BUY -4.7 New ship-building order announcements.
Jonathan Koh DBS (SGX:D05) BUY -30.8 US-China trade deal and strong deposit franchise which ensures firmer NIM.

* 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

SingTel (SGX:Z74) – BUY (Lee Len Chong)

  • We recently upgraded the stock from HOLD to BUY as we like its resilient earnings and attractive valuations. The stock has fallen 22% ytd and currently trades at 2SD below its 5-year mean EV/EBITDA of 13x. Historically, SingTel has fallen between 20% (SARS) and 40% (Asian Financial Crisis and Global Financial Crisis) but would outperform the STI in the following six-months’ period. Importantly, the yield spread (dividend yield vs 10-year bond) has widened to 550bp, by far the widest in the past five years.
  • Limited impact from COVID-19, data usage has risen by 10-15%. The COVID-19 induced lockdown is expected to have a minimal impact on SingTel’s earnings.
    • For one, limited travel restrictions will lead to lower roaming charges but this is limited to 2-5% of service revenue.
    • Second, the prepaid markets will experience physical distribution channel disruptions (due to lockdown measures) but this will be partly mitigated by the digital deliveries. Over the years, SingTel and its opcos have invested in digitisation efforts to deliver cost savings.
    • Lastly, we gathered that data traffic has increased 10-15% since the start of countries’ lock-downs.
  • Potential capex deferment, Singtel may be able to sustain 17.5 S cents DPS. We take the view that 5G capex may be put on hold as countries grapple to conserve cashflow in the next 6 months. As such, we have pencilled in a deferment of 5G and non-essential capex (eg additional fibre routs for resiliency purposes) by 6 months and lowered our FY21 capex projection to mimic FY20’s S$2.1b maintenance capex (previously S$2.5b). This may pave the way for Singtel to sustain a 17.5 S cents DPS for FY21, we opine.
  • See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.

Share Price Catalyst

  • Events:
    1. sustained net DPS of 17.5 S cents for FY21,
    2. market repair in Singapore, and
    3. faster-than-expected recovery in Optus consumer and enterprise business.
  • Timeline: 6-12 months.

Mapletree Industrial Trust (SGX:ME8U) – BUY (Jonathan Koh & Peihao Loke)

Share Price Catalyst

  • Events: Resiliency from exposure to data centres.
  • Timeline: 3-12 months.

ST Engineering (SGX:S63) – BUY (K Ajith)

Share Price Catalyst

  • Events: Incremental contract wins.
  • Timeline: 6-12 months.

PropNex (SGX:OYY) – BUY (Peihao Loke & Adrian Loh)

  • Cash-rich business with potential for higher dividend distributions, organic growth and acquisitions. PropNex maintained a strong net cash position of S$81.6m as at end-19, representing 40% of its market cap (S$0.22/share). The group has demonstrated strong cash generation capabilities, with positive (and growing) FCF in the last five years (based on listing records in 2015-19).
  • Going forward, management intends to pay out > 50% of its net profits. They are also looking at deploying cash for overseas acquisitions (eg 20% stake in PropNex Malaysia) as well as growing its agent network (8,452 sales persons as at 27 Feb 20) by improving its technology, infrastructure and training programmes.
  • Market leader in project launches; strong earnings visibility from 2020 launch pipeline. PropNex continues to expand its market share in new launches (48% in 2019), selling the most number of units for the top 10 selling projects in 2019. For 2020, 38 projects (13,054 units) are expected to be ready for launch, of which PropNex has been appointed to handle 25 projects (11,864 units).
  • We believe PropNex will continue to ride on this pipeline with its strong execution amid the current low-interest rate environment (ie supportive of home mortgages).
  • See PropNex Share Price; PropNex Target Price; PropNex Analyst Reports; PropNex Dividend History; PropNex Announcements; PropNex Latest News.

Share Price Catalyst

  • Events: Positive newsflow on new launches and take-ups.
  • Timeline: 3-12 months.

Food Empire (SGX:F03) – BUY (Joohijit Kaur & Clement Ho)

  • Coffee-mix market leader in CIS countries with successful diversification efforts. Food Empire’s flagship brand, MacCoffee, is the leading 3-in-1 coffee mix brand in CIS countries. With its strong brand equity and broad network of distributors, it commands the largest market share of Russia’s coffee mix market. Sales contribution from Russia was about 60% prior to the ruble’s collapse in 2H14 but has since fallen to 40%, mainly due to its geographical expansion into regions such as Vietnam and diversification efforts into the upstream business.
  • Successful entry into Vietnam. Food Empire has successfully gained entry into Vietnam through its iced coffee mix product, Café Pho, which was launched in 2013. Café Pho is among the top 5 leading brands by volume share and a top 3 player based on value share in the Vietnam 3-in-1 coffee mix market. Revenue from Indochina, which includes Vietnam, grew nearly five-fold from US$10.5m in 2014 to US$50.4m in 2018. The Vietnam business contributes close to 18% of top-line, making it Food Empire’s second-largest market and its stronghold in Asia. We believe Food Empire will be able to continue to gain market share through the introduction of new products, leveraging on its extensive network of distributors and sales representatives in Vietnam.
  • Margin expansion and steady revenue growth to drive bottom-line. We think there is room for improvement in margins, especially in emerging markets such as Vietnam that is still operating at lower margins compared with its core markets and should benefit from better scale as the group grows its operations in the country. Furthermore, management will continue to restructure business operations and streamline the organisation into a more cost efficient and sustainable global business.
  • See Food Empire Share Price; Food Empire Target Price; Food Empire Analyst Reports; Food Empire Dividend History; Food Empire Announcements; Food Empire Latest News.

Share Price Catalyst

  • Event: Higher-than-expected volume growth, and better-than-expected performance of currencies in key markets.
  • Timeline: 3-6 months.

Japfa (SGX:UD2) – BUY (John Cheong & Joohijit Kaur)

  • Vietnam’s swine prices have exceeded 5-year high due to the ASF. We believe the development of the African swine fever (ASF) in Vietnam is somewhat similar to that in China, where the number of affected cases will peak in the first six months and then start to fall. This is in line with Japfa’s base-case scenario. Also, we understand that the affected swine count is within Japfa’s expectation of < 25% of its total swine population. We estimate that on a net basis, the profitability of Japfa’s Vietnam swine segment should benefit as the spike in swine ASP should more than offset the volume decline.
  • China’s raw milk prices have exceeded 5-year high due to undersupply. Dairy used to be Japfa’s most stable segment due to stable raw milk ASP in China. However, ASP has exceeded its 5-year high since late-3Q19. We believe this can be attributed to undersupply in the market due to a prolonged low ASP environment which has not incentivised the building of new dairy farms.
  • See Japfa Share Price; Japfa Target Price; Japfa Analyst Reports; Japfa Dividend History; Japfa Announcements; Japfa Latest News.

Share Price Catalyst

  • Event: Better-than-expected prices for Indonesia poultry, China dairy and Vietnam swine products.
  • Timeline: 3-6 months.

Yangzijiang Shipbuilding (SGX:BS6) – BUY (Adrian Loh)

  • COVID-19 impact. We understand that as at end-March, Yangzijiang Shipbuilding has seen 80-90% of its workforce back at its shipyards with both local and central governments being very supportive of their resumption of work. Recall that at its post-results investor call on 28 Feb 20, the company stated that it needed to have at least 80% of its workforce back at its shipyards in order to achieve its profit and production targets for 2020.
  • On 16 Mar 20, YZJ announced that it had received new orders for 10 dual-fuelled containerships worth US$1.15b (including options), representing the second largest order that it has received in its operating history. Yangzijiang Shipbuilding's total new order wins for 2020 stands at US$1.3b, assuming that the eight options for this order from Tiger Group are exercised. Excluding the eight options, Yangzijiang Shipbuilding's orderbook for this year stands at c.US$370m while our forecast assumes US$1.5b, which is below the company's own target of US$2b.
  • Strong balance sheet and undemanding valuation. As at end-19, the company had net cash of some Rmb5b. We highlight that its one-year forward P/B of 0.54x is 13% below its -1SD level and near its all-time low of 0.51x, while its 2020 yield is attractive and sustainable at 6.2%, in our view.
  • Maintain BUY and P/B-based target price of S$1.25.
  • See Yangzijiang Share Price; Yangzijiang Target Price; Yangzijiang Analyst Reports; Yangzijiang Dividend History; Yangzijiang Announcements; Yangzijiang Latest News.

Share Price Catalyst

  • New ship-building order announcements.
  • Timeline: 2-3 months.

Keppel Corp (SGX:BN4) – BUY (Adrian Loh)

  • Temasek’s partial offer to acquire an additional 31% of Keppel shares at S$7.35 each is still in the process of receiving global regulatory approvals. Keppel Corp is currently trading at 22% below the offer level which we view as an excessive discount. As a result, we believe there is room for further upside as the company has been executing its strategic plans well prior to Temasek’s partial offer, investing heavily into new areas (telecommunications and asset management) while its offshore & marine unit has made good headway in targeting new clients in the offshore renewable space.
  • Decent growth outlook. During its 2019 results, Keppel Corp reported that, with the exception of a slight decline in its property segment, all other business units saw y-o-y operating profit growth. In our view, the company’s growth outlook is likely to be robust this year with demand continuing at healthy levels for its China properties, its offshore marine segment looking to increase headcount due to higher business activity, and the Keppel Marina East Desalination Plant coming close to completion and scheduled to commence operations in 1H20.
  • See Keppel Corp Share Price; Keppel Corp Target Price; Keppel Corp Analyst Reports; Keppel Corp Dividend History; Keppel Corp Announcements; Keppel Corp Latest News.

Share Price Catalyst

  • Event: Continued recovery in new-order flow in 2020.
  • Timeline: 3-6 months.

DBS (SGX:D05) – BUY (Jonathan Koh)

  • Wealth management continued to outperform in 4Q19. Fees grew 17% y-o-y, driven by wealth management (+31% y-o-y). AUM grew 11% y-o-y to S$245b. Contribution from investment banking grew 176% y-o-y and 45% q-o-q (private placements, rights issues and mergers among S-REITs).
  • BUY for sustainable yield. DBS aims to provide sustainable dividends that rise progressively. The board has recommended a final dividend of 33 S cents, up 10% q-o-q. We see S$24.00 as attractive levels to accumulate for dividend yield of 5.5%.
  • Impact from COVID-19. Assuming the outbreak of COVID-19 is controlled by Jun 20, management estimates the negative impact on revenue at 1-2% (management expects negative impact to last one quarter, which is similar to the outbreak of SARS). Specific provisions could increase by a few basis points (base case: 4-5bp). DBS has built sufficient general provisions to guard against the negative impact from the trade conflict between the US and China and social unrest in Hong Kong during 9M19.
  • See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.

Share Price Catalysts

  • Event: Recovery in economic activities after COVID-19 outbreak subsides.
  • Timeline: 3-6 months.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-04-08
SGX Stock Analyst Report BUY MAINTAIN BUY 3.000 SAME 3.000