Singapore Stock Alpha Picks (Sep 2020) - UOB Kay Hian 2020-09-04: Adding In Yangzijiang & Reshuffling Mid Cap Picks


Singapore Stock Alpha Picks (Sep 2020) - Adding In Yangzijiang & Reshuffling Mid Cap Picks


Reviewing our picks in August.

  • Our portfolio rose 1.2% m-o-m in Aug 20, outperforming the FSSTI’s more moderate gain of 0.1% m-o-m. More than half of the stocks in our portfolio delivered decent gains of 4-12% with Far East Hospitality Trust (+12.2% m-o-m) and ComfortDelGro (8.8% m-o-m) leading the pack. On the flip side, Keppel Corp (-15.2% m-o-m) and SingTel (-7.3% m-o-m) were the top decliners.
  • Despite decent 1H20 results, Thai Beverage and Japfa also dipped 3.9% m-o-m and 5.3% m-o-m respectively in Aug 20. We note that the former trades at a compelling valuation at -2SD SD to its 5-year mean PE and the recent low in share price provides a good entry point.

For the large caps, we switch out Keppel Corp for Yangzijiang.

  • With Temasek surprisingly abandoning the Keppel Corp partial offer, we drop Keppel Corp from the portfolio due to a lack of near-term catalysts. We replace it with Yangzijiang Shipbuilding as we believe that its decent order wins this year totalling US$714m to date (and higher than both Keppel Corp and Sembcorp Marine combined) should continue in the near to medium term.
  • As at end-1H20, its net cash of Rmb4.4b translates to net cash per share of S$0.22.

For the mid cap stocks, we reshuffle our picks by locking in gains for CSE Global & Riverstone and replacing with Food Empire and Frencken.

  • Since including them into our portfolio in Jun 20, Riverstone and CSE Global have delivered solid returns of 63% and 8.5% (dividend adjusted) respectively. At this juncture, we replace them with Food Empire and Frencken Group - both of which trade at attractive valuations.
  • For Food Empire, the worst is likely over as its recent 2Q20 results showed that the adverse impact of the lockdown in its core markets was narrower than expected given:
    1. the gradual easing of restrictions since early-May 20, and
    2. relatively inelastic demand for its products.
  • Food Empire trades at 8.9x 2021F PE vs > 20x for its regional peers.
  • For Frencken Group, 1H20 supply chain issues have largely been resolved and management has indicated that most clients have returned to normal production levels. The mechatronics division is now back in full operations, working to meet clients’ urgent deliveries. We believe its current PE valuation of 9.5x for 2021F could improve going into a stronger 2H20.

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

  • Good news on the new order front. On 31 August, the company announced SITC had placed an order for up to 12 feeder containerships from Yangzijiang Shipbuilding with six of the 1,800 TEU vessels being firm orders and the remaining six vessels being options. The six firm orders are worth US$126m or US$22m per vessel with delivery dates ranging from April to Oct 22. The options for the remaining six vessels may be exercised in three separate tranches (ie for two vessels a time) according to SITC. In addition to these feeder containerships, Yangzijiang Shipbuilding also disclosed that it had won a US$57m order for two 82,000dwt dry-bulk carriers.
  • Ytd order wins now total US$714m, which exclude the value of options in hand that total US$1.3b. Our current estimate for Yangzijiang Shipbuilding to win US$1b of orders in 2020 remains unchanged.
  • Maintain BUY with a target price of S$1.17. Our target price is based on 0.68x P/B, which is a 10% discount to its 5-year average P/B multiple. On a P/B basis, the company is trading below its -1SD level of 0.57x, while on a PE basis, the company is trading c.13% below its 10-year average of 8x which we view as undemanding.
  • No risk to dividends in our view. While our forecasts project a 17.7% y-o-y decline in 2020 net profit, we do not expect dividends to be negatively impacted, unlike other companies in the same sector or even in sectors which traditionally have been viewed as ‘safe’. In 2019, Yangzijiang Shipbuilding paid a final dividend of S$0.045/share and we forecast the company to pay a similar dividend this year. This equates to a yield of 4.8% at current share price. As at end-1H20, the company’s net cash position of Rmb4.4b translates to S$0.22/share.
  • See Yangzijiang Share Price; Yangzijiang Target Price; Yangzijiang Analyst Reports; Yangzijiang Dividend History; Yangzijiang Announcements; Yangzijiang Latest News.

Share Price Catalysts

  • Events: New order wins; better returns on its debt investments portfolio; strong 3Q results.
  • Timeline: 3-6 months.

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

  • The worst is likely over in core markets. Although some of Food Empire’s core markets in Eastern Europe are under a partial lockdown, the restrictions are much less stringent compared with Mar-Apr 20, and have been gradually eased since May-Jun 20. The gradual resumption of activities in these markets are evident in the improvement in the country’s retail sales, including the group’s largest contributors in the region - Russia (retail food sales: Jul 20: -2.2% y-o-y, Apr 20: -9.2% y-o-y) and Ukraine (retail trade turnover: Jul 20: +7.8% y-o-y, Apr 20: -11.6% y-o-y). Mirroring this, management shared that its business in Russia - the group’s largest revenue contributor - has reached to more than 90% of pre-COVID levels while its sales in Vietnam is gradually reverting to pre-COVID-19 levels. Post results, we have revised our forecast to a more marginal earnings decline of 2.4% in 2020 before resuming growth of 9.6% in 2021.
  • Resilient product offering and strong brand equity. Given the low price, relatively inelastic and consumer staple nature of its products, Food Empire is likely to be more resilient and sheltered from an economic slowdown, in our view. Additionally, we highlight that in spite of the weaker Ruble against USD, the group has managed to mitigate some of the adverse impact on bottom-line through gradual increases in ASP, which helped to boost gross margin in 2Q20 by 1.4ppt. We are encouraged by the group’s ability to pass on cost and report a decent set of 2Q20 results amid the lockdown, which we believe is testament of its strong brand equity in its core markets that has been developed over many years.
  • Compelling valuation. At the current price, Food Empire trades at 8.9x 2021F PE, a significant discount compared to >20x for its regional peers.
  • 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 Catalysts

  • Events: Stronger-than-expected recovery in volume consumption and improvement in operating leverage.
  • Timeline: 3-6 months.

Frencken Group (SGX:E28) – BUY (Clement Ho)

  • 1H20 issues now resolved. Internal supply chain issues, reflected in Frencken Group's 1H20 financials, due to lockdown measures carried out across the globe, are now largely resolved. Management has indicated that most clients have returned to normal production levels, and that the mechatronics division is back in full operations, working to fulfill some urgent deliveries to clients.
  • EUV lithography technology in stage of maturity. Frencken Group’s decade-long investment in producing tools for Extreme Ultraviolet (EUV) lithography machines is finally gaining traction. Samsung will be using EUV lithography to build its newest batch of 10-nanometer 16Gb LPDDR5 memory modules, a signal that the technology is ripe for ramp up and sustain Frencken’s growth in the semiconductor segment going forward.
  • Poised for recovery after healthy share price consolidation. Frencken Group's share price has retraced 25.4% from its all-time high of S$1.26, following the release of its 1H20 results. On more solid operational footing, we believe valuation could improve going into a stronger 2H20. Current valuation is at 9.5x 2021F earnings, and compares favourably to peers average of 13.1x.
  • See Frencken Group Share Price; Frencken Group Target Price; Frencken Group Analyst Reports; Frencken Group Dividend History; Frencken Group Announcements; Frencken Group Latest News.

Share Price Catalyst

  • Events:
    1. Higher-than-expected factory utilisation rates;
    2. higher-than-anticipated capex spending by Seagate for new hard-disk-drive manufacturing lines for the industrial automation segment;
    3. better-than-expected cost management.
  • Timeline: 6-12 months.

Thai Beverage (SGX:Y92) – BUY (Lucas Teng)

  • Spirits segment provided resilient support, exemplified in recent quarter’s business update. Thai Beverage's 9MFY20 EBITDA only declined marginally by 3% y-o-y. This came in spite of the alcohol ban in Thailand amidst COVID-19 restrictions, and was a solid quarter for the group. Recovery was seen in May and June to the extent of covering most of the sales lost during the lockdown. Spirits’ EBITDA margins also came in strongly in the quarter with reduced selling expenses.
  • Beer segment: Recovery in Thailand a bright spot. The beer segment in Vietnam still appears to be under pressure, especially with the recent second round of lockdown measures in early-Aug 20, despite Sabeco seeing good q-o-q growth in 3QFY20. Thailand’s beer segment is a bright spot and has recovered since the initial lockdown with a third-party market report citing increased market share for Thailand beer. Thailand industry beer production was up 25% y-o-y in Jul 20.
  • Valuations attractive; discount drinks. Thai Beverage currently trades at 16.4x FY20F PE, at - 2SD to its 5-year mean PE.
  • See Thai Beverage Share Price; Thai Beverage Target Price; Thai Beverage Analyst Reports; Thai Beverage Dividend History; Thai Beverage Announcements; Thai Beverage Latest News.

Share Price Catalysts

  • Events: Recovery of volume consumption due to easing of stay-at-home measures
  • Timeline: 3-6 months.

CapitaLand Mall Trust (SGX:C38U) – BUY (Jonathan Koh & Peihao Loke)

  • CapitaLand Mall Trust (CMT) reported DPU of 2.11 S cents, down 27.7% y-o-y but in line with our expectations. Distributable income of S$78.1m was lower by 27.5% y-o-y and included the release of S$23.2m or one-third of the taxable distribution of S$69.6m retained during 1Q20.
  • Tenant sales gaining momentum. Management has maintained a cautious view due to the uncertain economic climate. Currently, 95% of CapitaLand Mall Trust’s tenants have resumed operations. The remaining 5% of tenants are likely to return to retail malls as more activities are permitted to resume operations. Tenant sales are gaining momentum although consumer sentiment remains cautious.
  • Steady recovery of shoppers’ traffic post-circuit breaker. Shopper traffic and tenant sales in 2Q20 contracted 40.6% and 15.4% y-o-y respectively in 1H20 due to the nationwide Circuit Breaker, which lasted eight weeks (7 April to 1 June). However, shopper traffic has recovered steadily since the transition to Phase 2 of reopening (19 June to 5 July) to 53% of the level prevailing a year ago (downtown malls: 49%, suburban malls: 57%).
  • Flexible leasing to adapt to new operating environment. CapitaLand Mall Trust will explore alternative leasing strategies to maximise occupancy, including:
    1. signing short-term extension, and
    2. restructuring leases with higher turnover rent and lower fixed rents during the initial years and vice versa during the later years.
  • See CapitaLand Mall Trust Share Price; CapitaLand Mall Trust Target Price; CapitaLand Mall Trust Analyst Reports; CapitaLand Mall Trust Dividend History; CapitaLand Mall Trust Announcements; CapitaLand Mall Trust Latest News.

Share Price Catalysts

  • Events: Recovery in consumer spending as safe distancing measures are gradually eased.
  • Timeline: 6-12 months.

ComfortDelGro (SGX:C52) – BUY (Lucas Teng)

  • Remain optimistic on Singapore. Management noted busier taxis in ComfortDelGro's recent 1H20 results, highlighting that attrition rates have stabilised. Taxi rental waivers have been eased progressively (June to mid-July: 50%; mid-July to mid-August: 40%; mid-August onwards: 30%). While public transport ridership recovery has been slightly slower than expected, it continues to show an uptrend, with rail ridership at 50% of pre-COVID-19 levels as of end-Jul 20.
  • Watching bus tenders & fare review. On the local front, bus contracts for Sembawang and Bulim are expected to be announced in the next 1-2 months. In Australia, regional bus contracts were opened for tender by Transport for New South Wales. Annual fare reviews for Singapore public transport are also expected to commence, which could be affected by the decline in energy index prices.
  • See ComfortDelGro Share Price; ComfortDelGro Target Price; ComfortDelGro Analyst Reports; ComfortDelGro Dividend History; ComfortDelGro Announcements; ComfortDelGro Latest News.

Share Price Catalyst

  • Events: Faster-than-expected recovery in riderships from easing stay-home measures and bus tender contract wins
  • Timeline: 3-6 months.

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

  • Paid while waiting for recovery. Inbound travel continues to be impacted by the closure of international borders. Timing of recovery for international travel is contingent on an effective vaccine, which is being developed across various countries. We expect recovery to take place in mid-21 and normalcy to return in 2H21. Meanwhile, Far East Hospitality Trust’s master leases with its sponsor, which run till 2032, provide downside protection and accounted for 72% of rental income from its Hotels and SR in 2019. Management estimates that fixed rents provide a distribution yield of 4% based on current share price.
  • Prudent to retain 21.5% of distributable income in 1H20. Management estimated the out-of-pocket rental waivers (net of property tax rebate and cash grants provided by the government) for retail and office tenants to be S$2m-3m. We have assumed that Far East Hospitality Trust disburses S$3m of the S$5.5m retained in 4Q20. Our estimated payout ratio for 2020 is 95% (management intends to maintain payout at minimum of 90% of taxable income).
  • Staycation provides some reprieve. The government has earmarked S$45m to promote staycations among Singaporeans. Far East Hospitality Trust will receive local guests on staycation at Oasia Downtown and Barracks Hotel in 2H20. The government will set up “green lane” arrangements with partner countries to provide the first wave of corporate travellers.
  • No refinancing risks. Finance expenses declined 14.9% y-o-y due to repayment of revolving credit facilities and lower interest rates. The average cost of debt has further improved by 0.3ppt q-o-q to 2.5%. Aggregate leverage was stable at 39.2%. There are no term loans due for refinancing in 2020.
  • Maintain BUY. Our Far East Hospitality Trust's target price is S$0.58 based on DDM (required rate of return: 7.5%, terminal growth: 1.8%). Distribution yield should improve to 6.4% in 2021.
  • 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: Green lanes, travel bubbles and staycation demand to provide some reprieve in 2H20.
  • Timeline: 6-12 months.

SingTel (SGX:Z74) – BUY (Lee Len Chong/Chloe Tan Jie Ying)

  • Earnings recovery in 2HFY21. Expect SingTel to experience the full impact of COVID-19 in 1HFY21 as consumer wallets shrink across the region. To recap, SingTel withdrew its FY21 guidance in view of the COVID-19-induced uncertainties. We expect consumer weakness to be reflected in 1HFY21 alongside pockets of cutbacks in enterprise business revenue. Thereafter, the opening of economies in the ASEAN region will provide for the gradual recovery in roaming revenue and sentiment towards 2HFY21.
  • Dividends. Management will focus on preserving cash amid global uncertainties and will prepare to invest in 5G from FY22 onwards. As a result, we have cut our SingTel's FY21-22 net DPS to 12.25 S cents and 13.95 S cents respectively (~80% payout). This translates to a net dividend yield of 5.3% and 6.1%. Management also announced a share scrip scheme.
  • Tower sales. Management has confirmed the tower sales deal in Australia is ongoing, and deems the asset monetisation will be value-accretive to shareholders.
  • See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.

Share Price Catalyst

  • Event:
    1. Opening of economies allow for recovery of roaming revenue lost in 2HFY21,
    2. market repair in Singapore post damaging competition between the telco companies,
    3. faster-than-expected recovery in Optus consumer and enterprise business,
    4. better-than-expected regional earnings, and
    5. dividend visibility by Nov 20.
  • Timeline: 6-12 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 ASPs 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.

DBS (SGX:D05) – BUY (Jonathan Koh)

  • DBS surpassed expectations in 2Q20 with a vast improvement in CASA ratio and continued expansion of AUM. It fortified its balance sheet by increasing general provisions 51% h-o-h to S$3.8b, which is 24% above MAS’ minimum requirement. Loan-loss coverage has improved 21.3ppt h-o-h to 105.4%.
  • Guidance for 2020. DBS expects loan growth of 5%, driven by non-trade corporate loans in 2020. Total income is expected to be flat compared to last year. NIM is expected to be 1.60% for the full year. Management guided stable cost/income ratio at 43%. Management maintained its guidance on credit costs at S$3b-5b (80-130bp) cumulatively over two years.
  • Recovery in fee income. Management foresee fee income streams to improve after hitting the trough in April as the lockdown eases. Wealth management fees have recovered to pre-COVID-19 record levels. Contributions from cards and bancassurance have rebounded in June but remain below pre-COVID-19 levels.
  • DBS has unrealised mark-to-market (MTM) gains of S$1.5b in its book to provide a cushion against lower NIM in 2H20.
  • See DBS Share Price; DBS Target Price; DBS Analyst Reports; DBS Dividend History; DBS Announcements; DBS Latest News.

Share Price Catalysts

  • Event:
    1. Targeted fiscal measures from Singapore government will bring some relief to vulnerable industry sectors,
    2. easing of social distancing measures will help to generate some recovery in domestic consumption,
    3. recovery in DPS in 2021.
  • Timeline: 6-12 months.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-09-04
SGX Stock Analyst Report BUY MAINTAIN BUY 2.550 SAME 2.550