RIVERSTONE HOLDINGS LIMITED (SGX:AP4)
FOOD EMPIRE HOLDINGS LIMITED (SGX:F03)
FRENCKEN GROUP LIMITED (SGX:E28)
Singapore Small-Mid Cap 1H20 Results Round-up - More Beats Than Misses; Stay Selective On Quality Names
- The majority (40%) of the companies under our small-mid cap coverage that reported 2Q20 results met expectations this earnings season while 40% surprised on the upside; beats were higher compared to misses at 20%.
- Notable beats include Riverstone, Sheng Siong, Sunningdale Tech, Food Empire and PropNex.
- We continue to recommend investors selectively accumulate deep-value names with good track records. Our top picks are Riverstone (SGX:AP4), Food Empire (SGX:F03) and Frencken Group (SGX:E28).
Beneficiaries of COVID-19 – Riverstone & Sheng Siong beat expectations.
- Riverstone (SGX:AP4) and Sheng Siong (SGX:OV8) being beneficiaries of COVID-19 outperformed on the back of higher sales from overwhelming demand and also saw better margins.
- We expect Riverstone (SGX:AP4) to post significantly stronger earnings for 2H20 (120% h-o-h), led by more aggressive ASP hikes (+10% in Jul and Aug 20 for healthcare gloves) which only started in Jun 20. Post results, we raised our 2020 and 2021 net profit forecasts by 41% and 83%, respectively. Concurrently, we raised our target price to S$6.00.
- For Sheng Siong (SGX:OV8), although we do expect demand to moderate in 2H20 - as the Singapore economy gradually reopens in phases – it is likely to be gradual as companies continue to implement work-from-home (WFH) measures. Therefore we reckon consumers’ consumption shift to eating at home could continue to support supermarket sales going into 2H20, albeit at a lower level. As such, we raised our 2020 earnings forecast by 22% and upgraded Sheng Siong to BUY with higher target price of S$1.95.
Manufacturing – Largely in line; better cost management helped curb sales decline.
- Unsurprisingly, most EMS players under our coverage that have reported results this quarter saw a revenue decline ranging from 14-27% y-o-y in 2Q20, largely due to the impact from lockdowns/movement restriction orders implement by various governments. To an extent, revenue from better performing domains such as healthcare and semiconductors as well as cost-cutting measures have helped mitigate the impact on earnings. This is especially the case for Sunningdale Tech (SGX:BHQ) whose results came in above expectations. Key positives from the 2Q20 results include:
- strong gross margin in 2Q20 (+4.9ppt) despite challenges from COVID-19,
- robust operating cash flow of S$46m in 1H20 (+283% y-o-y), and
- strong revenue growth for the healthcare business in 1H20 (+18% y-o-y).
- Results for Fu Yu (SGX:F13) and Frencken Group (SGX:E28) came in largely within expectations with both showing stronger operating leverage led by cost-cutting measures and an improvement in operational efficiency.
Consumer – Consumer staples outperformed but F&B services missed.
- Apart from Sheng Siong, another consumer staple player that came in ahead of expectations is Food Empire (SGX:F03).
- Food Empire’s 2Q20 core earnings of US$4m was above our expectations of a break even position for the quarter. This was largely on the back of a narrower-than-expected decline in sales from Russia and higher gross margin (in spite of the RUB/US$ depreciation) as the group managed to raise ASP to mitigate some of the impact from the weaker currency. We expect the next two quarters to be better as we believe that the worst is over for Food Empire’s key markets as lockdown measures in core markets ease, especially Russia. Post results, we raised our Food Empire's target price by 35% to S$0.85.
- On the flip side, Koufu (SGX:VL6)’s 2Q20 results missed expectations, in part due to higher-than-expected other operating costs. That being said, we do expect a significantly stronger 2H20 earnings on a q-o-q basis led by gradual sales recovery, especially in heartland areas, and additional government grants of approximately S$5m.
Other beats include Sunpower Group (SGX:5GD) and PropNex (SGX:OYY).
- Sunpower Group (SGX:5GD)’s results were above our expectations on the back of a stronger-than-expected China recovery. 1H20 PATMI came in at Rmb173.6m, forming 46.6% of our full-year forecasts, compared to 30-40% normally. The 56.3% h-o-h surge in PATMI was largely caused by the full work resumption of GI plants.
- Looking forward, resumption of full GI production and further ramp-up of existing GI projects will continue to drive earnings growth from 2H20 onwards. We maintain BUY on Sunpower Group with a 5% higher SOTP-based target price of S$0.92.
- For PropNex (SGX:OYY), the group delivered a nice surprise with better-than-expected 1H20 profit of S$14.8m, up 160% y-o-y and forming 74% of our full-year forecast. The outlook remains positive. Maintain BUY on PropNex with a higher PE-based target price of S$0.69.
Other small mid cap company results highlights.
BRC Asia (SGX:BEC)
- BRC Asia (SGX:BEC)’s 3QFY20 net loss of S$2.5m did not come as a surprise, given the curb to construction works. Credit risk remains as the fulfilment of certain pre-COVID contracts could become unprofitable, given heightened costs and lower efficiencies associated with current construction works. While there have been positive developments, we await better visibility on the rate of recovery as well as a better pick-up in new project tenders.
- Downgrade BRC Asia to HOLD with a lower PE-based target price of S$1.18. Entry price: S$1.05.
CSE Global (SGX:544)
- CSE Global (SGX:544)’s 2H20 core net profit of S$12m (+27% y-o-y) was in line, forming 49%/50% of our/consensus full-year estimates. Revenue grew 25% y-o-y in 2Q20 with growth across all segments. Order intake rose 8.5% y-o-y in 2Q20, setting up a strong order backlog of S$294m (+57% y-o-y), providing the group with a steady revenue base for 2020.
- Outlook for infrastructure and mining remain positive while O&G could see some weakness. Dividend yield is attractive at 5.1%.
- Maintain BUY on CSE Global with a lower PE based target price of S$0.59.
Penguin International (SGX:BTM)
- Penguin International (SGX:BTM) reported weak results on the back of strong headwinds. 1H20 revenue and net profit formed 38.7% and 30.1% of our respective full-year forecasts. Both shipbuilding and chartering segments suffered drops in revenue due to depressed oil prices along with weak market sentiment caused by the ongoing COVID-19 pandemic.
- We cut our 2020 EPS by 34.5% and our PE-based target price by 30% to S$0.42. Downgrade Penguin International to HOLD as we expect revenue growth to stay flat. Entry price: S$0.34.
Singapore Medical Group (SGX:5OT)
- Singapore Medical Group (SGX:5OT)’s 1H20 net profit fell 48% y-o-y to S$3.5m, affected by the deferment of elective medical services as well as a decline in foreign patient load. 2H20 will likely see a resumption of deferred medical services, though a recovery in the number of medical tourists is expected to be gradual in nature. We like the group’s strong balance sheet, which is prime to take advantage of any industry consolidation.
- Maintain BUY for Singapore Medical Group on the undervalued healthcare player with a revised PE based target price of S$0.37.
Tianjin Zhongxin Pharmaceutical (SGX:T14)
- Tianjin Zhongxin Pharmaceutical (SGX:T14)’s 1H20 revenue (-6.9% y-o-y) and net profit (-6.7% y-o-y) were slightly below expectations, forming 44.5% and 46.1% of our full-year forecasts respectively. Demand for traditional Chinese medicine fell in 1H20 due to COVID-19 lockdown measures. We expect a strong rebound in 2H20 as China’s economy recovers and reopens.
- Maintain BUY on Tianjin Zhongxin Pharmaceutical with a lower PE-based target price of US$1.25, based on peers’ average of 9.9x 2020F PE.
Singapore Small/Mid Cap Top picks: Riverstone, Food Empire, and Frencken.
Riverstone (SGX:AP4).
- We expect Riverstone (SGX:AP4) to post much stronger results for 2H20 as ASPs for healthcare gloves continue the uptrend (+10% m-o-m in July and Aug 20) as global glove demand continues to outpace supply. Additionally, with an ASP hike already in place for Jun-Jul 20, the robust demand for clean room gloves has led to a second ASP hike that management expects in Aug-Sep 20.
- At the current Riverstone Share Price, we believe there is room for upside as Riverstone is trading at only 15.8x 2021F PE, below the sector’s 19x 2021F PE.
Food Empire (SGX:F03).
- Trading at 8.7x 2021F PE vs > 20x for its regional peers, Food Empire's valuation is due for a re-rating in our view. Although some of Food Empire's core markets in Eastern Europe are still under a partial lockdown, the restrictions are much less stringent compared to Mar-Apr 20 and have gradually eased since May-Jun 20. This is evident through the significant improvement in the retail sales for countries such as Russia (retail food sales: Jul 20: -2.2% y-o-y, Apr 20: -9.2% y-o-y), Ukraine (retail trade turnover: Jul 20: +7.8% y-o-y, Apr 20: -11.6% y-o-y) and other CIS markets.
- Furthermore, we believe Food Empire’s sales should be more resilient against an economic slowdown given that its products are consumer staples with relatively inelastic demand.
Frencken Group (SGX:E28).
- Frencken Group's 2Q20 earnings were in line with our expectations. Despite supply chain disruptions in 1H20, the strong showing from group’s semiconductor segment revenue in 1H20 (+73.6% y-o-y) reflected strength in demand for both front-end and back-end equipment and management expects a better 2H20 for the segment, relative to 1H20. The 19% retracement in share price since the beginning of August presents a good buying opportunity, in our view.
- At current Frencken Group Share Price, the stock trades at 8.7x 2021F PE which compares favourably to the current peers’ average of 12.9x.
John Cheong
UOB Kay Hian Research
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Singapore Research Team
UOB Kay Hian
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https://research.uobkayhian.com/
2020-08-28
SGX Stock
Analyst Report
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