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Singapore Stock Alpha Picks (Oct 2020) - UOB Kay Hian 2020-10-06: Adding In Wilmar International

Singapore Stock Alpha Picks - UOB Kay Hian Research | SGinvestors.io CAPITALAND MALL TRUST (SGX:C38U) COMFORTDELGRO CORPORATION LTD (SGX:C52) DBS GROUP HOLDINGS LTD (SGX:D05) FOOD EMPIRE HOLDINGS LIMITED (SGX:F03) FAR EAST HOSPITALITY TRUST (SGX:Q5T) FRENCKEN GROUP LIMITED (SGX:E28) JAPFA LTD. (SGX:UD2) SINGTEL (SGX:Z74) THAI BEVERAGE PUBLIC CO LTD (SGX:Y92) WILMAR INTERNATIONAL LIMITED (SGX:F34) YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Singapore Stock Alpha Picks (Oct 2020) - Adding In Wilmar International

  • Our portfolio fell 1.7% m-o-m in Sep 20, but outperformed the FSSTI’s decline of 2.6% m-o-m. Outperformers include our recent additions, Yangzijiang Shipbuilding and Frencken Group. Top decliners were SingTel and Food Empire.
  • For Oct 20, we add in Wilmar International as we believe it is a much cheaper entry into YKA, which we expect would have a strong listing debut given the overwhelming response.



Our Alpha Picks Outperformed in 3Q20.

  • On an equal-weighted basis, our portfolio’s 8.2% return in 3Q20 beat the FSSTI’s and MSCI World Index’s gains of 5.0% and 7.5% over the quarter respectively.


Reviewing our picks in September.



Adding in Wilmar International.

  • Based on the IPO price, the implied market capitalisation of Yihai Kerry Arawana (YKA) is Rmb139b (US$20.6b). This suggests that excluding the 90% stake valuation in YKA, the other 40% of Wilmar International’s non-YKA core net profit of US$461m in 2019 is only being valued at 4.5x 2019 PE. This undervalues Wilmar International’s other divisions and positions Wilmar International as a much cheaper entry into YKA, in our view.
  • In addition, given the overwhelming response to YKA’s IPO, we are expecting a strong debut on Day 1 of listing and this will likely be a strong catalyst to Wilmar's share price.


Wilmar International (SGX:F34) – BUY (Leow Huey Chuen & Jacquelyn Yow)


Non-YKA assets undervalued.

  • Wilmar International announced that YKA’s IPO price at Rmb25.70, translating into 31.1x 2019 PE. The IPO price implies a potential market capitalisation of Rmb139b (or US$20.6b) for YKA upon listing and that it will have a similar market capitalisation to Wilmar International.
  • Excluding YKA’s 2019 earnings, it suggests that the other 40% non-YKA core net profit of US$461m is only valued at 4.5x 2019 PE. This undervalues the other divisions and also positions Wilmar International as a much cheaper entry into YKA.

Expect strong debut upon YKA listing in mid-October.


Wilmar International Share Price Catalysts



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


Continuation of proven strategy.

  • News reports indicate that Yangzijiang Shipbuilding may be close to buying the half-finished 300,000dwt Very Large Crude Carrier from troubled HNA Group-owned Jinhai Yard, and then finishing off the vessel and selling it. This would mirror a very profitable Suezmax deal that the company carried out in 2Q20.
  • During its 1H20 results call, the company said that this refurbish-to-sell strategy will be a continuing one for the future given the large number of uncompleted vessels in China.
  • Yangzijiang Shipbuilding's ytd order wins total US$714m, which exclude the value of options on 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 target price of S$1.17.


Yangzijiang Share Price Catalysts

  • Events: New order wins; better returns on its debt investments portfolio; strong 3Q20 results.
  • Timeline: 3-6 months.


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


Worst 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 from 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-19 levels while its sales in Vietnam is gradually reverting to pre-COVID-19 levels.
  • Post results, we have revised our forecasts 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 prices, 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 despite the weaker ruble against the US dollar, 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 costs and report a decent set of 2Q20 results amid the lockdown, which we believe is testament to its strong brand equity in its core markets that has been developed over many years.

Compelling valuation.


Food Empire Share Price Catalysts



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


1H20 issues now resolved.

  • Internal supply chain issues, reflected in 1H20 financials, due to lockdown measures carried out across the globe, are now largely resolved. Frencken Group's 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 at maturity stage.

  • Frencken Group’s decade-long investment in producing tools for extreme ultraviolet 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 would sustain Frencken Group’s growth in the semiconductor segment going forward.

Poised for recovery after healthy share price consolidation.


Frencken 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; and
    3. better-than-expected cost management.
  • Timeline: 6-12 months.


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


Domestic consumption still key.

  • The authorities are still aiming at boosting domestic consumption, despite the potential political uncertainties. We note the domestic tourism stimulus package, welfare support for locals and farm income have been well supported by agriculture prices ytd.

Vietnam recovers again.

  • Recall that after COVID-19 resurfaced in Jul 20 in hotspots of Da Nang and Quang Nam, bars and pubs in Vietnam were forced to close to curb the spread of the second wave. Recently, in mid-Sep 20, with the daily reported new cases substantially under control, the authorities have gradually allowed 180 bars and clubs to be reopened in Ho Chi Minh City while Hanoi has allowed reopening with compliance measures.

Valuations attractive.


Thai Beverage 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 reported DPU of 2.11 S cents, down 27.7% y-o-y but in line with our expectations. CapitaLand Mall Trust's 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 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.

  • Taxi rides and fares have seen an encouraging uptrend, while we also note that taxis have largely maintained their market share of point-to-point rides despite the effects of the pandemic, a positive sign for continued demand in street hail rides. Gradual ridership recovery still remains in play as the Phase 3 re-opening could ease further COVID-19 restrictions.

Upturn in Australia.

  • COVID-19 daily cases have eased in Australia, especially in hard-hit Victoria, Australia while the gradual easing of restrictions could aid transportation services. According to ComfortDelGro, public bus routes are still largely operational.

Watching bus tenders.


ComfortDelGro 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. The 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 (FEHT) master leases with its sponsor, which run till 2032, provide downside protection and accounted for 72% of rental income from its hotels and serviced residences in 2019. Management estimates that fixed rents provide a distribution yield of 4% based on the 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 at 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 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 the 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.


Far East Hospitality Trust Share Price Catalyst



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


Earnings recovery in 2HFY21.

  • We 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.

  • See SingTel Dividend History. 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 FY21-22 net DPS to 12.25 S cents and 13.95 S cents respectively (~80% payout). This translates into net dividend yields of 5.6% and 6.4%. Management also announced a share scrip scheme.

Tower sales.


SingTel Share Price Catalyst

  • Events:
    1. Opening of economies allow for recovery of roaming revenue lost in 2HFY21;
    2. market repair in Singapore post damaging competition between the telecommunications 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 exceeded 5-year high due to African Swine Fever.

  • 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.


Japfa Share Price Catalyst

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

DBS Group (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%.

DBS' guidance for 2020.

  • DBS expects loan growth of 5% y-o-y, 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 on a stable cost-to-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.


DBS Share Price Catalysts

  • Events:
    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; and
    3. recovery in DPS in 2021.
  • Timeline: 6-12 months





Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-10-06
SGX Stock Analyst Report BUY MAINTAIN BUY 2.550 SAME 2.550
BUY MAINTAIN BUY 1.780 SAME 1.780
BUY MAINTAIN BUY 22.900 SAME 22.900
BUY MAINTAIN BUY 0.850 SAME 0.850
BUY MAINTAIN BUY 0.720 SAME 0.720
BUY MAINTAIN BUY 1.370 SAME 1.370
BUY MAINTAIN BUY 0.980 SAME 0.980
BUY MAINTAIN BUY 2.800 SAME 2.800
BUY MAINTAIN BUY 0.780 SAME 0.780
BUY MAINTAIN BUY 5.350 SAME 5.350
BUY MAINTAIN BUY 1.170 SAME 1.170


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