Singapore Stock Alpha Picks (Dec 2020) - UOB Kay Hian 2020-12-07: Reshuffling After A Strong November; Drop DBS, Short SIA, Add Nanofilm


Singapore Stock Alpha Picks (Dec 2020) - Reshuffling After A Strong November

Reviewing our Singapore stock alpha picks

  • Our portfolio rose 11.4% m-o-m in Nov 20 but fell short compared to the FSSTI’s gain of 15.8% m-o-m. Notable outperformers include Thai Beverage (+27.6% m-o-m), DBS (+23.8% m-o-m), ComfortDelGro (+22.2% m-o-m) and Frencken (+19.6% m-o-m).
  • On the flip side, Venture Corp (-2.2% m-o-m) and Yangzijiang (-4.3% m-o-m) underperformed.

Switch out DBS for OCBC, adding Singtel.

  • We remove DBS from our picks after the stock had a stellar month in Nov 20, rising 23.8% m-o-m. In its place, we add OCBC which trades at a more attractive 2021F P/B valuation of 0.9x.
  • OCBC’s exposure to moratorium loans has also reduced significantly, from 9% to 5% of group loans, after the expiry of the relief programme in Malaysia on 30 Sep 20. Barring the MAS’ interference with banks’ dividend policies, we expect OCBC to provide a dividend of S$0.50 for 2021F and S$0.56 for 2022F, translating into an attractive dividend yields of 5.0% and 5.5% respectively.
  • We also add SingTel post the announcement from MAS that its JV with Grab had been granted a digital banking licence.

Remove ComfortDelGro, add SIA as a short idea.

  • We remove ComfortDelGro to lock in gains as ComfortDelGro's share price rose 22.2% m-o-m in Nov 20.
  • SIA has been added to our Dec 20 portfolio as a short idea as we believe that the post-vaccine euphoria is unjustified and thus believe that SIA is overvalued, even after the recent pullback. At $4.42, SIA is trading at 10.9x FY20 pre-COVID-19 EV/EBITDA, more than 2SD higher than its 5-year mean.

Reshuffling mid-cap picks.

  • We remove Food Empire and add in BRC Asia as well as newly-initiated NanoFilm.
  • With the gradual normalisation of construction activities and sustained margins, we are optimistic of BRC Asia’s recovery and expect earnings to rebound by 88% y-o-y in FY21.
  • For NanoFilm, we believe its unique technology - which makes it the single source supplier for 90% of its top 10 customers - provides the group with a competitive edge and superior net margins compared to peers. We forecast 3-year earnings CAGR of 38.7% for 2019-22F due to bigger wallet share from its existing customers and new applications of technology.

Singapore Airlines (SGX:C6L) – SELL (Ajith K)

More expensive than it was pre-COVID-19.

  • At $4.42, SIA is trading at 10.9x FY20 pre- COVID-19 EV/EBITDA and 11.4x post-COVID-19 (FY22F) EV/EBITDA. In comparison SIA used to trade at 5.2x EV/EBITDA over the past five years. Current EV/EBITDA multiple is more than 2SD above long-term mean. We value SIA at 0.9x FY22F’s book value, factoring in lower losses than the street’s estimates.

Stock price has run ahead of foreseeable fundamentals.

  • We believe that the euphoria following the announcement of vaccines is unjustified and opine that SIA is overvalued. For a start, we had already imputed a recovery in traffic for FY22 and had pegged fair value at 0.9x to FY22’s book value.
  • While there is a great deal of uncertainty on the pace of traffic and load factor recovery, we believe pre-COVID-19 level FY20 EBITDA offers a fair hurdle in terms of earnings prospects for FY21. With that, we have valued SIA on a pre-COVID-19 and post-COVID-19 EV/EBITDA multiple. The enterprise value factors in:
    1. S$8.8b in rights and mandatory convertible bonds issue;
    2. new convertible debt of S$850m and exercise of S$500m from a S$10b medium-term notes (MTN).
  • We believe that long-term ROE is likely to be severely crimped by higher interest payments, especially if SIA uses part of its S$10b MTN to fund capex.

SIA share price catalyst

OCBC (SGX:O39) – BUY (Jonathan Koh)

Exposure to moratorium loans significantly reduced.

  • OCBC has reduced total loans under moratorium from S$23.7b at end- September to S$13.6b at end-October after adjusting for the end of Malaysia's relief programme on 30 Sep 20. As a percentage of group loans, the exposure was reduced from 9% to 5%. The proportion of moratorium loans secured with collateral, such as residential, commercial and industrial properties, expanded from 91% to 93%.

Smooth expiry of moratorium loans in Malaysia.

  • The bulk of the reduction came from Malaysia where moratorium loans were reduced from S$11.8b to S$1.7b, of which businesses (mostly modified repayment) and individuals requesting further relief accounted for S$1.0b and S$0.7b respectively. Within Malaysia, the exposure to moratorium loans has contracted from 53% to 8% of country loans.
  • From 1 Oct 20, OCBC provides targeted relief extension and loan repayment flexibility only on an application and approval basis (no longer blanket and automatic inclusion).

Guarded optimism.

  • OCBC has maintained guidance for peak gross NPL ratio at 2.5- 3.5% and aggregate credit costs at 100-130bp for the 2-year period during 2020-21. Management is optimistic that the eventual outcome could gravitate toward the bottom-end of the range at 2.5% and 100bp, although management cautioned against uncertainties relating to COVID-19 outbreaks in regional countries.

OCBC share price catalyst

NanoFilm Technologies International (SGX:MZH) – BUY (John Cheong, Joohijit Kaur)

Differentiated technology-based solutions provider with strong competitive edge.

  • NanoFilm’s differentiated technology-based solutions, especially in the field of vacuum coating, has enabled its blue-chip customers to achieve greater user life, enhanced aesthetics and functionality (eg energy efficiency, corrosion resistance adhesion and hardness) in their end products. Its unique technology makes it the single source supplier for 90% of its top 10 customers. NanoFilm is also able to generate a superior net margin of around 25% vs the industry average of 12% in 2019.

Net profit CAGR of 38.7% in 2019-22F.

  • We expect NanoFilm's growth to be led by:
    1. continued revenue growth from advanced materials customers in the smartphone and wearables industry;
    2. ramp-up of the group’s recent JV with China’s largest piston ring maker, Asimco Shuanghuan Piston Ring (Yizheng) (CYPR); and
    3. ramp-up of its nanofabrication business in Vietnam through its 90%-owned subsidiary, NanoFab Technologies.
  • NanoFilm is also looking to capture more of its customers’ value chains across various end-user industries by offering one-stop solutions.

Nanofilm Technologies share price catalyst

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

  • On 4 Dec 20, the Grab-SingTel (60:40) consortium secured a digital full banking (DFB) licence from the Monetary Authority of Singapore (MAS). We view this positively as it will allow SingTel to stack new business segment to help drive future earnings growth and diversify away from its key telco mature assets. In the near term, we see little earnings impact and assume the venture will take 4-5 years to breakeven. In addition, an initial S$600m equity injection is manageable (raising FY21 net debt/EBITDA from 1.9x to 2x) as we expect SingTel to maintain its dividend mandate.
  • We value SingTel's digital banking licence win at 4 cents (or 2% of SingTel's market capitalisation). This is based on 1x paid-up capital, or a 30% discount to large bank’s mean P/B of 1.45x.
  • SingTel's share price appears to have bottomed in Nov 20 when it traded at -1SD below its 5-year mean EV/EBITDA. At our target price of S$2.84, SingTel trades at 14x FY22F EV/EBITDA (5-year mean EV/EBITDA).
  • Recent 1HFY21 results were weak with core net profit declining 36% y-o-y to S$837m due to a 27% y-o-y decline in National Broadband Network (NBN) migration revenue and margin compression in its Australia consumer segment and higher net interest expense. India and Africa operations were stronger y-o-y.

SingTel's dividend above expectations.

  • SingTel declared an interim net dividend of 5.1 cents/share. This is based on 100% net profit payout and above our expectation of 7.5 cents/share (50% payout) for the year.

SingTel's share price catalyst

BRC Asia (SGX:BEC) – BUY (Lucas Teng, Llelleythan Tan)

Robust margins set to continue.

  • BRC Asia's gross margin of 12.2% in 4QFY20 was impressively held up (+3.3 ppt y-o-y) as the group continues to benefit from lower costs for bulk raw material purchases since its acquisition of Lee Metal in 2017. BRC Asia noted that construction activities have reached economically-viable levels from the second half of Aug 20 onwards.

Building back up in 2021.

  • Construction demand is expected to recover to some extent from 2021, supported by public residential developments and upgrading works, developments at the Jurong Lake District and Cross Island MRT Line. Current construction activities are at 70% of pre-COVID-19 levels.

Building up for a strong rebound.

  • We see BRC Asia's earnings rebounding strongly in FY21, up 88% y-o-y.
  • BRC Asia currently trades at 8.5x FY21F earnings, below its long-term average (excluding outliers).

BRC Asia's share price catalyst

Ascendas REIT (SGX:A17U) – BUY (Jonathan Koh/ Peihao Loke)

Portfolio occupancy edges higher by 0.4ppt q-o-q to 91.9% in 3Q20.

  • Singapore occupancy improved 0.9ppt q-o-q to 88.8% due to higher occupancies at Cintech II and 40 Penjuru Lane. Occupancies in the UK and US were stable at 97.5% and 92% respectively.
  • Occupancy for Australia eased slightly by 0.9ppt to 97.5% due to non-renewal at 92 Sandstone Place at Brisbane.

Management maintained guidance of positive low single-digit rental reversion for full year of 2020.

  • Ascendas REIT's rental reversion swung from a positive 4.3% in 2Q20 to a negative 2.3% in 3Q20.
  • In Singapore, its business & science parks segment registered a positive reversion of 4.5%. Overall, 3Q20 rental reversion for Singapore was a negative 2.8% due to its high-specifications industrial (-3.3%) and logistics & distribution centres (-16.2%) segments.
  • In the US, Ascendas REIT’s business park properties achieved positive rental reversion of 11.5%. That being said, on a year-to-date basis, rental reversion is a positive 4.2%. Furthermore, management maintained its guidance of positive low single-digit rental reversion for the full year of 2020.

Overseas properties more resilient.

  • In Australia, Ascendas REIT has suspended rent collection for F&B and retail tenants at its three suburban offices. Lease for one hospitality/leisure tenant was restructured and rent waiver/deferment was provided to four SME tenants.
  • In the UK, Ascendas REIT has changed rental payment frequency from quarterly to monthly to ease tenants’ cash flow management. The UK portfolio benefits from high e-commerce penetration and long weighted average lease to expiry (WALE) of 9 years.
  • In the US, Ascendas REIT’s business parks properties benefit from growth in technology and healthcare sectors. It has provided rental rebates to a cafe operator in Portland and restructured the lease of a tenant whose supply chain was disrupted by the COVID-19 pandemic.

Ascendas REIT's share price catalyst

Venture Corp (SGX:V03) – BUY (John Cheong & Joohijit Kaur)

New products expected in 2021.

  • Venture Corp plans to release several new products throughout 2021. These include domains such as life science & genomics, healthcare & wellness, as well as COVID-19-related detection, testing, diagnostic products and solutions. Demand for medical devices, networking & communications and semiconductor-related modules & equipment is also resilient.

Consensus revenue forecasts suggest strong recovery for some of Venture’s clients in 2021.

  • Consensus revenue forecasts show expectations of a strong recovery in 2021, to levels comparable or higher than 2019’s for key clients in its Test & Measurement and Life Sciences/Medical domains. We estimate these domains (including contribution from the “I Quit Ordinary Smoking” (IQOS) device) form more than 50% of the group’s revenue.
  • Other domains where we think Venture Corp could see more traction, include semiconductor-related equipment and networking & communications. We expect a sequential recovery for earnings in 4Q20 (+6.3% q-o-q) and net profit to decline 18.7% y-o-y for 2020 and rebound by 20.3% in 2021.

Strong balance sheet and good dividends limit share price downside.

  • As of end-1H20, Venture Corp recorded net cash of S$834.1m (forming 15% of its current market cap) and led the pack of US-listed peers which were mostly in net debt positions. More importantly, Venture Corp has consistently paid the same amount of dividends or better than that in the preceding year. We expect a dividend of 75 cents/share this year which translates into an attractive dividend yield of 4.0%.

Venture Corp's share price catalyst

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

Optimistic earnings outlook for 4Q20 and 1Q21.

  • After posting a record-high 3Q profit, Wilmar is likely to deliver another strong set of results in 4Q20. The key supporting factors are still the strong recovery in sales of medium pack and bulk, as well as good oilseeds crushing and margins. The other two major segments, ie tropical oils and sugar, may see flattish contribution as the pick-up in sales volumes may be offset by lower margins.
  • Meanwhile, the sugar segment is likely to post one of the best performances in 2020 as margins are strongly supported by the good white sugar premium.

Special dividend + final dividend to give a dividend yield of 3.6%.

  • Besides the ~6.5 cents special dividend from the listing proceeds of Yihai Kerry Arawana (YKA) in China, Wilmar is likely to announce a final dividend of no less than 9.5 S cent/share in the coming full year results announcement in Feb 21. A total of at least a 16 cents dividend translates into a reasonable good dividend yield of 3.6% based on the closing price of S$4.22.

Huge holding company discount not justified.

  • Based on the last closing prices, YKA has a market cap of US$41.9b vs Wilmar’s US$20.0b. As a holding company of YKA, Wilmar is currently trading at an almost 50% discount to YKA, which is not justified. This has the non-YKA divisions appearing undervalued and Wilmar as a much cheaper entry into YKA.

Wilmar's share price catalyst

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

Overhang is gone.

  • Effective 30 Nov 20, Yangzijiang is no longer a constituent member of the MSCI Singapore index. This led to significant selling by index funds during the week of 30 Nov 20; however, going forward, this overhang has been removed.
  • We highlight that Yangzijiang is in a strong financial position and has used this to good order by continuing to buy back its shares in the past few weeks. In the current share buy-back programme, it has purchased 48m shares or 1.2% of its total outstanding shares, and spending on average S$1m per day on the buyback. In our view, this is a strong signal of confidence from the company in its ability to continue to garner new order wins in the coming quarters.

Ytd order wins total nearly US$1.3b

  • Yangzijiang's year-to-date order wins total nearly US$1.3b, which has exceeded our estimate of US$1.0b. The company’s order wins exclude the value of options in hand that total nearly US$1.0b.

Maintain BUY with a target price of S$1.17.

  • We view Yangzijiang as an attractive buyout candidate, given that the value of the current portion of its debt investments plus its net cash is more than its current market capitalisation of S$3.7b. 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, Yangzijiang is trading below its -1SD level of 0.57x, while on a PE basis, Yangzijiang is trading c.13% below its 10-year average of 8x which we view as undemanding.

Yangzijiang's share price catalyst

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

1H20 issues now resolved.

  • Internal supply chain issues, reflected in Frencken'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 fulfil some urgent deliveries to clients.

EUV lithography technology in stage of maturity.

  • Frencken’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.

ROEs rising as company moves up value chain.

  • Frencken is deepening its core competency to provide unique components, modules and designing of a whole product. The group has been moving away from the built-to-print model, ie contract manufacturing, which management believes does not add much value to its clients. When materialised, the shift translates to a structural increase in gross profitability.
  • Maintain BUY on Frencken with target price of S$1.42, pegged to 12.6x 2021F earnings or 1SD above its historical mean. At the current price, Frencken trades at 10.3x 2021F PE, a 14% discount to the peer average.

Frencken's share price catalyst

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

Solid cost control.

  • Thai Beverage has taken steps to control costs and adapt to the pandemic, which largely protected its profitability. SG&A expense-to-revenue ratio fell to 15.9% in FY20 (-1.1ppt y-o-y) as the group reduced advertising and promotional expenses. Advertising and promotion spending in areas such as premise activities in bars and concerts will likely continue to be muted.

Spirits volume growth remains strong.

  • Volumes had risen 9.0% y-o-y in 4QFY20 with a higher rural population from out-of-work labourers on the back of the pandemic. Government programmes such as agriculture price support as well as cash handouts will also bode will in sustaining volume levels.

Valuations attractive; discount drinks.

  • Thai Beverage currently trades at 16x FY21F PE, at slightly below -1SD to its 5-year mean PE.

Thai Beverage's share price catalyst

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

Downside protection from high fixed rent component.

  • All Far East Hospitality Trust's hotels and serviced residences are under master lease agreements with companies within sponsor Far East Organisation (FEO). The fixed rent component from its master leases totalled S$67m per year, which is equivalent to 72% of total gross revenue from its hotels and serviced residences in 2019. These master leases run till 2032.

Getting ready for recovery in 2H21.

  • Far East Hospitality Trust has plans for asset enhancement at The Elizabeth Hotel (renovations in main lobby, reception areas, lift lobbies, dinning outlets, function rooms, 156 superior & deluxe rooms, 100 premier rooms), Orchard Rendezvous Hotel (upgrading outdoor refreshment area) and Rendezvous Hotel Singapore (repainting to highlight decorative corbels). The Elizabeth Hotel will be closed for four months for asset enhancement works once it is taken off from government contracts. Far East Hospitality Trust’s share of the capex is estimated at S$2m.

No distress despite onslaught of COVID-19 pandemic.

  • Financially-strong holders with deep pockets, such as City Developments (SGX:C09) and FEO, own most of the hotels in Singapore. Thus, there are no distressed sellers and no comparable transaction to act as valuation benchmarks despite the tumultuous COVID-19 pandemic. Valuers have to rely on the DCF methodology to value hotels and serviced residences.

Far East Hospitality Trust's Share Price Catalyst

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.

Japfa's share price catalyst

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2020-12-07
SGX Stock Analyst Report BUY MAINTAIN BUY 1.88 SAME 1.88