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Singapore Market Focus - DBS Research 2021-01-04: Game Of Predator Vs Prey; Possible Candidates For Privatisation, M&A In 2021

Singapore Market Focus - DBS Research | SGinvestors.io DELFI LIMITED (SGX:P34) THAI BEVERAGE PUBLIC CO LTD (SGX:Y92) SPINDEX INDUSTRIES LIMITED (SGX:564) FU YU CORPORATION LTD (SGX:F13) VALUETRONICS HOLDINGS LIMITED (SGX:BN2) YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Singapore Market Focus - Game Of Predator Vs Prey; Possible Candidates For Privatisation, M&A In 2021




Crisis breeds opportunities

  • The sharp plunge in valuation arising from the pandemic in 2Q20 led to a revival of M&A and privatisation deals, with the momentum picking up in 2H20. With the on-going pandemic, small-to mid-size businesses with less robust cash positions will continue to struggle as government support dries up.
  • Bankruptcies and the number of distressed companies are likely to rise, presenting opportunities for M&A as companies look for both shelter and new opportunities in all directions.
  • YTD in 2020, only 14 deals were concluded, half of the 28 deals that we saw in 2019, mainly attributable to the global pandemic, which raised roadblocks to deal-making fundamentals, including travel restrictions and quarantine requirements. We expect the M&A momentum to continue, as valuations have yet to reach pre-COVID levels while hopes of a recovery spurred by positive vaccine development will speed up the process.


Technology sector – shift in supply chain, COVID-19 pandemic and trade war to hasten M&A/privatisation needs

  • In the technology space, the shift in supply chain – out of China, to other ASEAN countries or back to the US to avoid the hefty tariffs – is taking a toll on manufacturing firms. Given that such changes will take time to materialise, the M&A route could be another option to consider.
  • M&A allows companies to take advantage of common customer platforms, or synergise their operations and product offering. Synergistic acquisitions can also offer other significant benefits such as economies of scale and increased market share.
  • Furthermore, delisting can also lead to cost savings arising from compliance and associated costs relating to listing requirements and regular disclosures. These resources could be channelled to their business operations instead.


Low trading liquidity, economic uncertainty were among the reasons for privatisation.

  • Elec and Eltek was privatised after the controlling shareholder, Kingboard Holdings, with a 73.6% stake, offered to acquire the remaining shares at HK$18.07 (U$2.33) cash per offer share. The offer price was at a hefty premium of 99% based the last transacted price on the SGX-ST before the announcement. The low trading liquidity of the shares and low trading price were among the reasons for the privatisation.
  • The chairman of Sunningdale Tech (SGX:BHQ), Mr Koh Boon Hwee, has teamed up with Novo Tellus PE Fund 2 to make an offer at S$1.55 in cash per share via a scheme of arrangement. Mr Koh currently owns 15.6% of Sunningdale Tech. The continuing global trade tension and the shift in supply chain that require the group's operations to better align with these changing market dynamics, coupled with low trading liquidity, prompted the privatisation offer.


Potential privatisation candidates – Spindex, Fu Yu, Valuetronics.

  • We believe Spindex Industries (SGX:564) could potentially be back in the market, after its failed attempt in February 2017, given the low free float of c.25% and net cash accounting for 43% of its market capitalisation.
  • Fu Yu (SGX:F13) trades at an EV/EBITDA of close to 4x, which is the lowest among its industry peers in the region, which are trading at an average of c.6-7x EV/EBITDA. Net cash accounts for ~40% of its current market capitalisation, with an attractive dividend yield of 5.2%.
  • Similarly, Valuetronics (SGX:BN2) also has high net cash level, accounting for ~70% of its current market capitalisation, with ~5% yield. The stock is trading at 9.4x/10.9x FY21/22F P/E, at a discount to peers, and its ex-cash P/E is less than 1x.


Property & REITs – M&A at work

  • The low interest environment coupled with ample capital looking for deployment opportunities drove a further compression in yields for real estate while most investors look at COVID-19 income disruption to be more cyclical rather than structural. We saw close to S$10bn in real estate transactions within the real estate space, as S-REITs continue to acquire for growth or merge in order to compete for capital more efficiently.
  • Following on the S-REIT mergers in 2019, we saw the merger of Frasers Commercial Trust and Frasers Logistics & Industrial Trust as Frasers Logistics & Commercial Trust (SGX:BUOU) catapult the combined REIT into the top 10 market cap S-REITs. The stock now trades at premiums to NAV coupled with an exciting growth pipeline.
  • Other notable M&A activities in 2020 include Frasers Centrepoint Trust (SGX:J69U) acquisition of its sponsor’s remaining stake in PGIM retail fund which hold interests in a portfolio of retail malls across Singapore worth S$3.0bn.
  • Separately, CapitaLand Retail China Trust (SGX:AU8U) emerged as a “China pure-play” as it pivots towards the new economy real estate sectors (such as business parks).
  • The valuation disparity between the physical and listed space have prompted founder-led privatisations (i.e. Perennial Real Estate and in the mid-cap industrial S-REIT space) while M&A activity within the mid-cap industrial S-REITs picked up momentum, as expected.
  • Looking ahead, while the planned merger between Sabana REIT (SGX:M1GU) and ESR-REIT (SGX:J91U) did not materialise, we maintain our view that AIMS APAC REIT (SGX:O5RU) remains an attractive M&A target given its attractive yields in excess of 7.0% coupled with development upside within its portfolio. With ESR Cayman (sponsor of ESR-REIT (SGX:J91U)) holding a strategic stake in the REIT, we believe that the merger between the two REITs is a matter of time.
  • We like the mid-cap developers space given their attractive valuations coupled with tepid trading liquidity. This group of developers typically
    • have founders holding a significant controlling stake in the company,
    • own a distinctive and valuable portfolio of commercial or landbank, and
    • trade at significant discounts to their respective book values (and thus replacement costs).
  • This in our view may prompt possible conversations around a privatisation or a possible re-listing in the future as a REIT in order to unlock value. Some of the mid-cap developers that we like include Tuan Sing (SGX:T24) and Bukit Sembawang (SGX:B61) and developers (non-covered) with attractive commercial portfolios like GuocoLand (SGX:F17) and Ho Bee Land (SGX:H13) fit the above criteria.


Mega waves in the shipyard and industrial sector Sembcorp demerger a symbolic restructuring of Temasek linked company in 2020.



Keppel O&M and SMM merger could be next?

  • We believe the ongoing shipbuilding consolidation will accelerate an industry recovery, phase out excess capacity, alleviate competition, and boost pricing power eventually. The Korean yard merger – Hyundai Heavy Industries (HHI) + Daewoo Shipbuilding (DSME) – proposed in early 2019, followed by merger of two largest Chinese SOE yards (CSIC and CSSC), substantiates our thesis of continued consolidation in the shipbuilding sector.
  • Speculation over the merger of Singapore rigbuilders have reignited, further fuelled by Keppel Corp (SGX:BN4)’s ongoing strategic review of its O&M business. We hold on to our belief that Keppel O&M should be injected and merged with Sembcorp Marine, making Keppel Corp (SGX:BN4) a pure sustainable urbanisation play that focuses on property, connectivity and infrastructure.


Yangzijiang a “deep value” privatisation candidate.

  • Yangzijiang Shipbuilding (SGX:BS6) ticked all the checkboxes as a perfect candidate for privatisation.
    • Yangzijiang Shipbuilding is deeply undervalued trading at 0.55x P/BV and 6x P/E, below its net cash level (include financial assets) of S$1.15/share, despite having superior financial metrics of 8% ROE and 4% dividend yield.
    • The market has underappreciated Yangzijiang Shipbuilding’s solid fundamentals. It is among the few shipyards in the world that remain profitable throughout the protracted downturn since the GFC with its distinctive economic moat as the largest and most cost-efficient private shipbuilder in China, bolstered by a strong balance sheet.
    • Yangzijiang Shipbuilding is also the best proxy to ride the shipping recovery, which has seen shipping rates climbing to multi-year highs. This is expected to translate to robust contract flow ahead. In fact, Yangzijiang Shipbuilding has commendably secured US$1.42bn new orders in 2020, close to its annual target of US$1.5-2.0bn, despite 2020 being a challenging year.
    • Yangzijiang Shipbuilding could get an uplift in valuation by re-listing on China’s stock exchanges, as its peers are fetching significantly higher valuations of above 1x P/BV (SOE yards are trading at 1.1-1.7x P/BV).
    • Yangzijiang Shipbuilding's key shareholders – Founder & Honorary Chairman Mr Ren Yuanlin, CEO Mr Ren Letian and key management personnel – hold a 32% stake in the company. Based on a market cap of S$3.5bn plus a premium of 30%, the key shareholders require S$3.2bn to acquire the remaining 68% stake, which could be funded by a combination of some cash on hand (~S$2bn as of end-Sep 2020), financial assets (net of debt, ~S$2.5bn) and some borrowings or private equity funds.
  • Hutchison Port Holdings Trust (SGX:NS8U) could be a privatisation candidate given that its share price is 80% below its IPO price of US$1.01, its prospects and earnings are turning more positive and it has strong shareholders (Hutchison Port Holdings and Temasek own nearly 42%).
  • China Aviation Oil (SGX:G92) has net cash of ~US$400m, which it can use to make earnings-accretive acquisitions. Management has stated that it is on the lookout for complementary acquisitions. Any significant EPS accretive acquisition(s) could help the stock to re-rate further.


‘Sweetened’ deals in consumer sector

  • The consumer sector was robust in terms of 2020 M&A activity. Six companies in our Singapore consumer universe made one privatisation, three key acquisitions and disposals.
    • BreadTalk delisted its shares from the SGX with the help of Minor International after it breached its financial covenants so that it could better restructure itself. F&B Foodservice companies continued to expand with bite-sized acquisitions, expanding their brands and product offerings into other F&B sub-segments to support growth in the long term.
    • Upstream food companies such as Japfa (SGX:UD2) were targeted for its Dairy business by both financial and strategic investors wanting to ride on the positive outlook of rising raw milk prices from robust demand and short supply. In the grocery retail space,
    • Dairy Farm (SGX:D01) hived off its Wellcome Taiwan supermarket business to Carrefour in line with its long-term transformation plans.
    • SPH (SGX:T39)’s continued its restructuring and M&A activities into 2020 with the disposal of its land and former HQ at Genting Lane for redevelopment into a datacentre via a JV with Keppel Corp (SGX:BN4); acquisition of aged care assets in Japan in line with diversifying away from media and expanding its aged care segment. However, due to the COVID-19 pandemic, it cancelled its proposed acquisition of the aged care assets in Canada.
  • Overall, interest in acquiring and disposing assets was buoyant in 2020, with sellers cashing out of their businesses and buyers looking to grow targets to enhance long-term shareholder value. 2021 may see continued acquisitions by consumer companies including Japfa (SGX:UD2) after spinning off its dairy business, as well as Koufu (SGX:VL6) and Jumbo Group (SGX:42R) as they look to expand their brand portfolio.

Possible candidates for M&A in 2021

  • Possible candidates for M&A in 2021 include the following:
    • Delfi (SGX:P34): Delfi could be an attractive takeover or privatisation target. The company had previously spun off its upstream cocoa processing business. In 2013, Delfi sold the division to Barry Callebaut AG for US$950m. Delfi is now left with a strong branded consumer business in Indonesia. It is a market leader with c.50% share in the branded chocolate market in Indonesia.
    • Delfi's competitive advantage lies in its first-mover advantage and extensive network across Indonesia, which gives it considerable reach in the country. Global players are already competing in the market, but their market shares remain relatively low. We believe Delfi’s strong brand and network will be attractive to investors who are keen to dominate the chocolate space in Indonesia. Despite its strong brand equity, the stock has been illiquid and it has not tapped capital markets funding in recent years.
    • Thai Beverage (SGX:Y92): According to news reports, Thai Beverage has been planning for an IPO of its regional beer assets from as early as 2020. The regional portfolio is likely to include breweries in Thailand, Vietnam and Myanmar. The listing will enable Thai Beverage to deleverage and unlock value within the group. The majority of its debt arose from its acquisition of Sabeco in December 2017. More importantly, the proposed IPO could include premium brands in the beer category which we believe is lacking within Thai Beverage’s portfolio.

Refer to the PDF report attached below for complete analysis.






Kee Yan YEO CMT DBS Group Research | Janice CHUA DBS Research | Woon Bing Yong DBS Research | https://www.dbsvickers.com/ 2021-01-04
SGX Stock Analyst Report BUY MAINTAIN BUY 0.980 SAME 0.980
BUY MAINTAIN BUY 1.400 SAME 1.400
BUY MAINTAIN BUY 0.930 SAME 0.930
NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000
BUY MAINTAIN BUY 0.310 SAME 0.310
HOLD MAINTAIN HOLD 0.530 SAME 0.530


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