Singapore Stock Alpha Picks - UOB Kay Hian 2020-05-06: Significant Outperformance

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FAR EAST HOSPITALITY TRUST (SGX:Q5T) KOUFU GROUP LIMITED (SGX:VL6) SINGTEL (SGX:Z74) MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) PROPNEX LIMITED (SGX:OYY) JAPFA LTD. (SGX:UD2) YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6) KEPPEL CORPORATION LIMITED (SGX:BN4) DBS GROUP HOLDINGS LTD (SGX:D05)

Singapore Stock Alpha Picks - Significant Outperformance

• Our portfolio rose 13.3% m-o-m in April, significantly outperforming the FSSTI’s gain of 5.8% m-o-m.
• For May, we add Far East Hospitality Trust (SGX:Q5T) and Koufu (SGX:VL6), and remove ST Engineering (SGX:S63) and Food Empire (SGX:F03).

WHAT’S NEW

Reviewing our picks in April.

• Our portfolio increased 13.3% m-o-m, surpassing the FSSTI’s gain of 5.8% m-o-m as the market rebounded on the back of investor interest in undervalued stocks. The outperformance was led by Japfa (SGX:UD2) (+39% m-o-m), Yangzijiang Shipbuilding (+18.7% m-o-m) and Keppel Corp (SGX:BN4) (+13.0% m-o-m).
• Except for PropNex (SGX:OYY) (+4.4% m-o-m), Mapletree Industrial Trust (SGX:ME8U) (+4.9% m-o-m) and DBS (SGX:D05) (+7.5% m-o-m), most of our other picks also recorded gains of more than 10% and outperformed the FSSTI in April.

ACTION

For large caps, we remove ST Engineering and add Far East Hospitality Trust (FEHT).

• We remove ST Engineering (SGX:S63) as we had recently downgraded the stock to a HOLD as we expect headwinds to persist into 2021. In its place, we add Far East Hospitality Trust (SGX:Q5T) and highlight that its 1Q20 business update on 4 May 20 demonstrates the company’s resilience as its hotel portfolio provides fixed rents and downside protection.
• Importantly, its serviced-residences portfolio outperformed in 1Q20 with occupancy improving 3.4ppt y-o-y to 83.6%. Distributable income was near the trough during 1Q20 and things can only get better, in our view. Additionally, Far East Hospitality Trust trades at an attractive P/NAV of 0.58x and we expect its distribution yield should improve to 7.3% in 2021.

For small caps, we switch out of Food Empire and into Koufu.

• Low oil prices have resulted in a weaker Russian rouble ytd. Given our expectations of further forex volatility for Food Empire (SGX:F03) which would negatively impact its business and operations in Russia, we remove Food Empire and switch to Koufu (SGX:VL6).
• In our view, the potential phased reopening of the Singapore economy post the circuit breaker (CB) and potential lifting of travel restrictions between China and Macau should improve market sentiment for Koufu.

ANALYSTS’ TOP ALPHA* PICKS

Analyst	Company	Rec	Performance#	Catalyst
Jonathan Koh/ Peihao Loke	Far East Hospitality Trust (SGX:Q5T)	BUY	-	Inbound travel will start to recover in 4Q20.
Joohijit Kaur/ John Cheong	Koufu (SGX:VL6)	BUY	-	Travel restriction easing, faster-than-expected recovery of COVID 19.
Lee Len Chong	SingTel (SGX:Z74)	BUY	2.2	Sustained net DPS of 17.5 cents for FY21, market repair in Singapore, faster-than-expected recovery in Optus consumer and enterprise businesses.
Jonathan Koh/ Peihao Loke	Mapletree Industrial Trust (SGX:ME8U)	BUY	6.2	Resiliency from exposure to data centres.
Peihao Loke/ Adrian Loh	PropNex (SGX:OYY)	BUY	-11.7	Positive newsflow on new launches and take-ups.
John Cheong/ Joohijit Kaur	Japfa (SGX:UD2)	BUY	0.9	Better-than-expected prices of products for key segments
Adrian Loh	Yangzijiang Shipbuilding (SGX:BS6)	BUY	0.0	New shipbuilding order announcements
Adrian Loh	Keppel Corp (SGX:BN4)	BUY	-5.7	Continued recovery in new-order flow in 2H19
Jonathan Koh	DBS (SGX:D05)	BUY	-28.6	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

Far East Hospitality Trust (SGX:Q5T) – BUY (Jonathan Koh & Peihao Loke)

• 1Q20 business update in line with expectations. The 1Q20 business update on 4 May 20 demonstrates Far East Hospitality Trust’s resiliency with its hotel portfolio providing fixed rents and downside protection. Its serviced-residences portfolio outperformed with occupancy
• improving 3.4ppt y-o-y to 83.6%, driven by higher corporate demand.
• Downside protection from master-lease agreement. The negative impact from the outbreak of COVID-19 is mitigated by its master-lease structure, under which fixed rents accounted for 72% of Far East Hospitality Trust's 2019 gross revenue. Sponsor Far East Organisation (FEO) owns 61% of Far East Hospitality Trust.
• Review of management fee structure. With effect from 1 Jan 20, base fee was reduced from 0.30% to 0.28% of deposited property. Performance fee was reduced from 4.0% of NPI to 4.0% of NPI, or 4.0% of annual distributable amount, whichever is lower. The change in fee structure for base fee and performance fee reduces total management fees by S$1.74m or 14.2% if these changes were applied retrospectively in 2019.
• No refinancing risks. Far East Hospitality Trust does not have any term loans due for refinancing in 2020.
• Anticipate recovery in 4Q20. Inbound travel will be impacted over the next few months. Visitor arrivals, whether corporate or leisure, can only recover after travel restrictions are lifted. Management expects a partial recovery in 4Q20 and normalcy to return at end-20.
• Maintain BUY. Far East Hospitality Trust trades at an attractive P/NAV of 0.58x and distribution yield should improve to 7.3% in 2021 on our estimates. Our target price of S$0.62 is based on DDM (required rate of return: 7.5%, terminal growth: 1.8%).
• See Far East Hospitality Trust Share Price; Far East Hospitality Trust Target Price; Far East Hospitality Trust Analyst Reports; Far East Hospitality Trust Dividend History; Far East Hospitality Trust Announcements; Far East Hospitality Trust Latest News. 

Share Price Catalyst

• Event: Inbound travel starting to recover in 4Q20.
• Timeline: 6-12 months.

Koufu (SGX:VL6) – BUY (Joohijit Kaur & John Cheong)

• Reopening of Singapore economy in phases post CB and potential relaxation of travel restrictions in Macau should improve stock sentiment. We believe Koufu’s food courts will stand to benefit once Singapore economy gradually reopens. The situation in Macau could also improve as travel restriction between China and Macau may ease in May-Jun 20 as the daily number of new cases declines. Additionally, unlike restaurants, Koufu’s business model of collecting the higher of a fixed monthly fee or a variable monthly fee (pegged to gross turnover) from stall tenants reduces the risk of its operations running into losses.
• Government wage support should cushion earnings impact. We estimate Koufu could receive a cash grant of S$8.5m from the government’s job support scheme and foreign worker levy waiver and rebate. The budget relief is meaningful, making up 20% of Koufu staff cost and 36% of our 2020 earnings estimate. Accounting for the cash grant, we forecast net profit of S$20m (-25% y-o-y) for 2020.
• Healthy balance sheet provides strong cash buffer. Koufu’s cash generation ability has helped it build significant net cash of S$90.3m as at end-19, equivalent to 26.5% of its market capitalisation. This provides the group with a large enough cash buffer to weather tough times, in our view. At current price, the stock trades at an inexpensive 13.5x 2021F PE.
• See Koufu Share Price; Koufu Target Price; Koufu Analyst Reports; Koufu Dividend History; Koufu Announcements; Koufu Latest News. 

Share Price Catalyst

• Event: Travel restriction easing, faster-than-expected recovery from COVID-19.
• Timeline: 3-6 months.

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

• Resilient earnings and attractive valuations. SingTel has fallen 20% ytd and 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-month 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 10-15%. The COVID-19 induced lockdown is expected to have 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 digital deliveries. Over the years, SingTel and its opcos have invested in digitisation efforts to deliver cost savings (see table overleaf). Lastly, we gather that data traffic has increased 10-15% since the start of countries’ lockdown.
• Potential capex deferment; Singtel may be able to sustain DPS of 17.5 S cents. We take the view that 5G capex may be put on hold as countries grapple to conserve cash flow in the next six months. As such, we have pencilled in a deferment of 5G and non-essential capex (eg additional fibre routs for resiliency purposes) by six 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 cents for FY21,
  2. market repair in Singapore,
  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)

• Accelerated expansion into hi-tech buildings and data centres. Post completion of a 50% stake acquisition in 13 data centres in North America in Dec 19, exposure to Hi-tech buildings has further expanded from 43.3% to 52.9% of AUM. Its exposure to data centres has also expanded from 17.7% to 31.5% of AUM (Singapore: 7.2%, US & Canada: 24.3%).
• Data centres are beneficiaries of COVID-19 pandemic. Data centres benefit from the shift toward telecommuting, which has resulted in a pick-up in online conferences and seminars. Social media websites and e-commerce platforms have also experienced a noticeable increase in online activities. We see value in Mapletree Industrial Trust as an entry into high-growth data centres at a reasonable price. Our target price of S$2.85 is based on DDM (cost of equity: 6.0%, terminal growth: 1.8%).
• See Mapletree Industrial Trust Share Price; Mapletree Industrial Trust Target Price; Mapletree Industrial Trust Analyst Reports; Mapletree Industrial Trust Dividend History; Mapletree Industrial Trust Announcements; Mapletree Industrial Trust Latest News.

Share Price Catalyst

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

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

• Cash-rich business with potential for higher dividend distribution, organic growth and acquisitions. PropNex maintained strong net cash 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 net profits. It is 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. With 48% market share in 2019, PropNex continues to expand its market share in new launches, selling the most number of units for the top 10 selling projects in 2019. For 2020, 38 projects comprising 13,054 units are expected to be ready for launch, of which PropNex has been appointed to handle 25 projects comprising 11,864 units, or 91% of units to be launched. 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.

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

• Vietnam’s swine prices have exceeded 5-year high due to 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)

• Business conditions should hit the trough in the next two quarters. While share price drivers appear to be thin on the ground at present, we believe the business conditions faced by Yangzijiang Shipbuilding will trough in the next 4+ months. We believe its share price of up to at least S$1.10 should be protected by its 2020F dividend yield of 4.6%, which we view as reasonably secure. As at end-1Q20, the company had net cash of Rmb4.7b, or S$946m, which equates to S$0.24/share.
• On 16 Mar 20, YZJ announced it had received new orders for 10 dual-fuelled containerships worth US$1.15b (including options), representing the second largest order it has received in its operating history. Yangzijiang Shipbuilding's total new order wins for 2020 stand at US$1.3b, assuming the eight options for this order from Tiger Group are exercised. Excluding the eight options, Yangzijiang Shipbuilding's orderbook for this year stands at US$370m while our forecast assumes US$1.0b, which is below the company's own target of US$2.0b. During the 1Q20 results call with analysts and media, management appeared downbeat regarding prospects for new-order flow this year due to the global economic downturn, coupled with the difficulty in negotiating sales & purchase contracts with international customers over video calls or email.
• Delivery risk appears to have dissipated. We had previously highlighted that travel restrictions could result in delays in delivery of Yangzijiang Shipbuilding’s vessels to its clients. However, the ytd delivery of 19 vessels to Korean, Greek and other international clients only necessitated a 14-day quarantine for inbound staff and crew in an otherwise untroubled delivery schedule thus far.
• 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 19% 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. On 4 May 20, the company appointed an independent financial advisor in relation to the partial offer from Temasek.
• Positive outlook for property segment. In 1Q20, Keppel Corp's property sales rose 15% y-o-y to 450 units (of which 73% were generated in China) with total sales of about S$320m; it has a remaining landbank of about 45,000 units. Going forward, we believe the property segment may be able to buttress the company's earnings in a difficult year, given that China has started to relax its COVID-19 lockdown rules and thus property transactions have resumed. In Apr 20, Keppel Corp launched a residential development in Wuxi which saw a 65% sell-through in its opening weekend, while its Tianjin Eco City sold a residential plot for Rmb1.17b at a land price that was comparable to a similar plot sold in 2019. The latter will enable Keppel Corp to recognise a S$30m gain for 2Q20. Keppel Corp has a number of projects that are launch-ready in China, so it can take advantage of the revival post COVID-19.
• Our target price of S$7.15 is based on sum-of-the-parts valuation. In our view, Temasek's partial offer for Keppel Corp at S$7.35 remains valid and is unlikely to be pulled out, in our view. At its 1Q20 earnings call, management said that in relation to the Temasek offer, there were no material adverse changes to its financials in 1Q20. Keppel Corp's current one-year forward PE of 12.3x appears inexpensive as it is 14% below its 5-year average of 14.3x. In addition, the company's one-year forward P/B of 0.92x is -1SD below its 10- year historical average of 1.45x.
• 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 1Q20. Fees grew 14% y-o-y, driven by wealth management (+14% y-o-y) and loan-related fees (+17% y-o-y). Other non-interest income grew by a hefty 39% y-o-y. Net trading income was robust due to increased customer flows from hedging of interest rates and forex risks as a result of heightened uncertainties. DBS also recognised gains from investment securities.
• BUY for sustainable yield. DBS aims to provide sustainable dividends that rise progressively. For 2019, the board has recommended a final dividend of 33 S cents (unchanged) that will be paid on 26 May 20.
• Guidance for 2020. DBS expects full-year PPOP at around 2019’s level after factoring in declines for the rest of the year. It expects credit costs to rise to S$3b-5b (80-130bp) cumulatively over 2020-21. Management guided credit costs at 65bp each for 2020 and 2021. The new guidance factors in a deeper and more prolonged economic impact from COVID-19 pandemic. This is in line with our expectations.
• 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 the COVID-19 outbreak subsides.
• Timeline: 3-6 months.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-06

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