Singapore Stock Strategy - UOB Kay Hian 2020-05-13: Value Within Book Value

Singapore Stocks - UOB Kay Hian Research | SGinvestors.io CDL HOSPITALITY TRUSTS (SGX:J85) ASCOTT RESIDENCE TRUST (SGX:HMN) ARA US HOSPITALITY TRUST (SGX:XZL) GOLDEN AGRI-RESOURCES LTD (SGX:E5H) SINGAPORE PRESS HLDGS LTD (SGX:T39)

Singapore Stock Strategy - Value Within Book Value

  • The ytd economic effects brought on by the COVID-19 outbreak have been dire. In the current 1Q20 results season, less than one in five companies reported better-than-expected results. We expect 2Q20 results to be even worse as stricter circuit-breaker measures were only implemented in April.
  • We highlight a number of companies that are at medium to high risk of seeing a deterioration in book value by end-20.
  • Stick to banks, telcos and select REITs; avoid aviation-related stocks and retail REITs.



Looking closely at book value of Singapore stocks.

  • In a bear market, investors often examine a company’s P/B metric and whether it is -1SD, -2SD or even -3SD away from its historical average, since companies whose stock sells for less than book value is generally considered undervalued, or having less risk than companies selling for greater than book value.
  • However in a crisis like COVID-19 which has already caused significant financial and economic dislocation, we need to look at whether the book value denominator really is a “true” number or whether adjustments at the year-end will be needed to account for material negative economic effects from the COVID-19 outbreak.

Value according to Benjamin Graham.

  • One of the ten rules listed by Benjamin Graham’s value investing book, “Security Analysis” (1934), states that the stock price should be less than 75% of the firm's book value, minus any values for goodwill or other intangible assets, ie 0.75x P/B. Intangible assets could be inflated due to the presence of goodwill from M&As. However, the common market practice is to use the company’s annual financial statements instead of subtracting such intangible assets.

IAS 36 and IAS 38 are the accounting standards that could affect companies’ balance sheets at the end of 2020.

  • Under IAS 38, goodwill does not need to be amortised especially after an M&A, but instead companies only have to perform impairment testing based on long-term growth projections.
  • Meanwhile IAS 36 “Impairment of Assets” seeks to ensure that companies do not carry assets that are higher than their recoverable amount. Thus, drastically adverse economic conditions – such as the effects of COVID-19 – would negatively affect a company’s tangible and intangible assets, eg an asset’s inability to generate a “normal” level of earnings lowers its market price and thus results in impairments that deteriorate a company’s book value.

Six companies faced with “high risk” of book value deterioration in 2020



An eye on resumption of economic activity.

  • Tactically we remain UNDERWEIGHT on the aviation, transport, and retail-centric REIT sectors due to aversion to air travel, slower-than-expected rebound in retail/F&B spending, and normalisation of tourism and MICE-related businesses.

COMPANIES AT HIGH RISK OF BOOK-VALUE DETERIORATION IN 2020



CDL Hospitality Trusts (SGX:J85) Portfolio pre-dominantly exposed to short-stay hotels across Singapore, Japan, Maldives, Europe, Oceania and one retail mall (Claymore Connect in SG); faces a dearth of demand due to travel restrictions and social-distancing measures that may last for at least a year.
Ascott Residence Trust (SGX:HMN) Its portfolio of extended-stay service residences globally faces shrinking demand, especially for properties with transient-guest exposure. Lodging demand is expected to be subdued, at least until international travel restrictions are lifted.
ARA US Hospitality Trust (SGX:XZL) Portfolio of 41 select-service hotels across US secondary locations faces a dearth of demand until domestic travel resumes with loosening of pandemic containment measures.
Golden Agri Resources (SGX:E5H) High risk as its book value is inflated with assets and investment revaluation
SPH (SGX:T39) SPH REIT (SGX:SK6U) book value susceptible to weaker retail sector from COVID-19 while student accommodation is also affected from restrictions in air travel. Investment properties makes up close to 100% of book value.
Sembcorp (SGX:U96) Even prior to the COVID-19 outbreak, Sembcorp had projected its UK Power Reserve business to continue operating below its initial investment case for the remainder of 2020 due to excess energy supply and a lack of demand. With COVID-19, we expect Sembcorp's UK, India and China business to potentially degrade.



COMPANIES AT MEDIUM RISK OF BOOK-VALUE DETERIORATION IN 2020



Sunningdale Tech (SGX:BHQ) Marginal net cash position of S$0.1m as of end-19. Largest constituent of assets include trade receivables (31%), PPE (24%) and inventories (16%).
Singapore Airlines (SGX:C6L) Singapore Airlines’s book value should deteriorate by at least 27% y-o-y in FY20 (Mar 20), due to mark-to-market losses on Brent crude oil and jet fuel hedges.
Overseas Education (SGX:RQ1) Overseas Education's net gearing ratio of c.50% as at end-19 is acceptable in our view, given that the group has a low working-capital requirements and therefore strong operating cash flow, allowing the group to make timely repayment of borrowings.
Japfa (SGX:UD2) On 15 Apr 20, Japfa announced it will sell 25% of its wholly-owned AustAsia Investment Holdings (AIH) which operates Japfa’s dairy farming business in China, to Meiji for US$254.4m cash. The entire sales proceeds will be used to pare down its debt, which will reduce its net gearing from 111% to 84% for 2020F. See Japfa Ltd - UOB Kay Hian 2020-04-16: Partial Divestment Of Dairy Business To A Strategic Investor. Additionally, the group has a decent interest coverage ratio of 4.3x for 2020F.
CSE Global (SGX:544) Due to the acquisition of Volta in 2019 which was funded by additional borrowings, the group transitioned into a net debt position of S$44.5m as of end-19. Net gearing is however at an acceptable level of 25%.
Food Empire (SGX:F03) Net cash position of US$4.7m as of end-19. Largest constituent of assets include PPE (32%), cash and cash equivalent (18%) and trade receivables (18%). We note that during the ruble crisis in 2H14, there were no significant bad debts or inventories write-off.
Oxley Holdings (SGX:5UX) Some 60% of its GAV is exposed to higher-beta property segments, namely hotel (10%) and residential (50%) which could see valuations affected by low-demand if COVID-19 leads to a prolonged economic downturn.
Bumitama Agri (SGX:P8Z) Plantation asset values are still below market value.
Wilmar (SGX:F34) Plantation asset values are still below market value.
Thai Beverage (SGX:Y92) Goodwill is approximately 90% of book value, mostly from Sabeco's acquisition. Any potential sizeable impairment to Sabeco, either from Vietnam's new drink driving law or COVID-19, would be a risk to book value.
Keppel Corp (SGX:BN4) Acquisition of M1 in 2019 materially contributed to a 10x y-o-y increase in Keppel Corp's 2019 intangible assets with goodwill amounting to S$988m. At end-19, intangible assets totalled S$1.68b or 5.4% of total assets. We do not expect deterioration in book value for its M1 stake, however, parts of its property and investments portfolio are at risk in our view.
Keppel Corp’s shipyards may be impaired in 2020 should the difficult market conditions impact its assets. Its Floatel business could see further impairments at end-20 where the carrying amount as at end-19 was S$477m after accounting for impairment loss of SS$20m.
Sembcorp Marine (SGX:S51) Owing to the continuing difficult market conditions impacting the offshore and marine sector, Sembcorp Marine’s shipyards in Singapore (together with their sub-contracting yards in Indonesia and the United Kingdom) and Brazil may be impaired. There were no impairments losses in 2019 for its shipyards. Intangibles made up 4% of the Sembcorp Marine’s non-current assets in 2019.
City Developments (SGX:C09) Its investment properties and hotel operations comprise 28% and 26% respectively of its total assets of S$23.2b and these could see impairments due to COVID-19 disruptions.
CapitaLand (SGX:C31) CapitaLand saw a 56% y-o-y increase in its intangible assets in 2019 as a result of its Ascendas Singbridge merger. Despite the increase, intangible assets make up only 1.2% of the total asset base. Its investment properties comprise 59% of its total asset base and could result in impairments if COVID-19 results in a material decline in the company's profitability.
CapitaLand Mall Trust (SGX:C38U) Shopper traffic and tenant sales are affected by social distancing and Circuit Breaker measures. Financial performance for retail REITs will be negatively affected in 2020. Potential losses from revaluation are mitigated by the good locations for most retail malls, which are near major transportation nodes.





Adrian LOH UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-13
SGX Stock Analyst Report BUY MAINTAIN BUY 1.320 SAME 1.320
BUY MAINTAIN BUY 1.160 SAME 1.160
BUY MAINTAIN BUY 0.700 SAME 0.700
HOLD MAINTAIN HOLD 0.220 SAME 0.220
BUY MAINTAIN BUY 1.390 SAME 1.390



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