Singapore Stock Alpha Picks - UOB Kay Hian 2021-01-08: Strong Outperformance In Dec 20; Add First Resources, Sunpower, Food Empire, Drop Nanofilm, Japfa, Wilmar


Singapore Stock Alpha Picks - Strong Outperformance In Dec 20; Add First Resources, Sunpower, Food Empire, Take Profit Nanofilm, Japfa

Robust performance in Dec 20.

Add Sunpower Group and Food Empire.

  • We add Sunpower Group to our portfolio, given the recent announcement of the sale of its M&S business at an attractive 12x 2019 P/E, or twice the 5-7x ascribed by the street and represents 50% of its market cap. Post-sale, the group intends to pay out a special dividend of S$0.2359/share, split into two tranches, translating into an attractive dividend yield of 29%.
  • For Food Empire, its share buyback amounting to S$1.6m (0.4% of market cap) in 4Q20 and Jan 21 underlines management’s confidence in its business outlook and signals potentially strong 4Q20 results, in our view. Furthermore, the group trades at a compelling 9.8x 2021F P/E.

Switching out of Wilmar for First Resources.

  • Given Wilmar International’s strong share price performance, we switch it out of our portfolio and add First Resources, given that it is a direct beneficiary of higher CPO prices. We upgraded its 2021 CPO price forecast by 15% to RM3,000/tonne.
  • Take profit on NanoFilm Technologies and Japfa to lock in gains of 41.4% and 37.5% respectively since their inception into our portfolio.

Singapore Stock Alpha Picks for Jan 2021

First Resources (SGX:EB5) – BUY (Leow Huey Chuen & Jacquelyn Yow)

First Resources share price catalyst:

  • Events:
    • Better-than-expected results; and
    • higher CPO prices in 2021.
  • Timeline: 2-3 months.

Sunpower Group (SGX:5GD) – BUY (John Cheong)

  • Disposal of M&S business. Sunpower Group is selling its manufacturing & services (M&S) business for RMB2.29b. The sale price translates into 12.2x 2019 P/E and represents close to 50% of Sunpower Group’s current market cap. We deem the deal as attractive, at a valuation more than twice the 5-7x ascribed by the street. Furthermore, the disposal of the order-driven M&S business will leave investors with the remaining power-producing-related green investments (GI) business, which offers greater revenue visibility and certainty.
  • Special dividend proposed post-sale. Sunpower Group intends to pay out a special dividend amounting to RMB1.34b, or S$0.2359/share, split into two tranches. After which, the remaining amount will also be used to repay payables due from the GI business to the M&S business of RMB130m, as well as RMB551m earmarked for existing GI projects and working capital.
  • Redirects strategic focus to successful GI business. The GI business has significantly more potential to deliver long-term sustainable benefits to the group due to its proven capacity to deliver sizeable recurring income and cash flow. Unlike M&S which is an inherently cyclical, order book-driven business that requires high working capital, GI has the ability to generate recurring cash flow that is sustainable over the long term. This is due to:
    1. the 30-year operating concession rights;
    2. Sunpower Group’s exclusive supplier status with a captive customer base; and
    3. mission-critical, non-discretionary products such as steam and heating.
  • See Sunpower Group Share Price; Sunpower Group Target Price; Sunpower Group Analyst Reports; Sunpower Group Dividend History; Sunpower Group Announcements; Sunpower Group Latest News.

Sunpower's share price catalysts:

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

  • Daily share buy-back underlines confidence in business outlook. Since the start of the buy-back mandate on 23 Apr 20, 2,761,000 shares have been purchased, forming 0.5% of its outstanding shares. This was mainly carried out in 4Q20 and Jan 20 where Food Empire bought back a total of around 2.5m shares for about S$1.6m, potentially signalling a strong set of results for 4Q20 and confidence in its business outlook in 2021.
  • Compelling valuation. Food Empire trades at an undemanding 9.8x 2021F P/E, a significant discount to peers’ average of 20x 2021F P/E despite its growing presence in the Vietnam market and leading position in its core markets in Eastern Europe.
  • Resilient product offerings 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 in spite of 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 and cost cuts.
  • We are encouraged by Food Empire’s core earnings (excluding forex) growth of 11.2% y-o-y in 9M20 despite stringent lockdowns in 2Q20. We believe this is a testament to its strong brand equity in its core markets that has been developed over many years.
  • See Food Empire Share Price; Food Empire Target Price; Food Empire Analyst Reports; Food Empire Dividend History; Food Empire Announcements; Food Empire Latest News.

Food Empire's share price catalyst:

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

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

  • More expensive than it was pre-COVID-19. At S$4.28, Singapore Airlines is trading at 10.8x FY20 pre-COVID-19 EV/EBITDA and 11.2x post-COVID-19 (FY22F) EV/EBITDA. In comparison, Singapore Airlines used to trade at 5.2x EV/EBITDA over the past five years. Current EV/EBITDA multiple is more than 2SD above its long-term mean. We value Singapore Airlines at 0.9x FY22F book value, factoring in lower losses than the street’s estimates.
  • Stock price has run ahead of foreseeable fundamentals. We believe the euphoria following the announcement of vaccines is unjustified and opine that Singapore Airlines is overvalued. For a start, we had already imputed a recovery in traffic for FY22 and had pegged fair value at 0.9x to FY22F book value. While there is a great deal of uncertainty on the pace of traffic and load factor recovery, we believe pre-COVID-19 FY20 EBITDA offers a fair hurdle in terms of earnings prospects for FY21. With that, we have valued Singapore Airlines on pre-COVID-19 and post-COVID-19 EV/EBITDA multiples. The enterprise value factors in:
    • S$8.8b in rights and mandatory convertible bonds issue; and
    • 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 Singapore Airlines uses part of its S$10b MTN to fund capex.
  • See Singapore Airlines Share Price; Singapore Airlines Target Price; Singapore Airlines Analyst Reports; Singapore Airlines Dividend History; Singapore Airlines Announcements; Singapore Airlines Latest News.

Singapore Airlines share price catalyst:

  • Events: Rapid global vaccination by 1Q21.
  • Timeline: 3-6 months.

OCBC (SGX:O39) – BUY (Jonathan Koh)

  • Exposure to moratorium loans significantly reduced. OCBC has reduced total loans under moratorium from S$23.7b as at end-Sep 20 to S$13.6b as at end-Oct 20 after adjusting for the end of Malaysia’s loan 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 collaterals, 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 cost at 100-130bp for 2020-21. Management is optimistic that the eventual outcome could gravitate toward the bottom-end of the range at 2.5% and 100bp, although it cautioned against uncertainties relating to COVID-19 outbreaks in regional countries.
  • See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.

OCBC's share price catalyst:

  • Events:
    • OCBC’s dividend yield improving from 5% for 2021F to 5.6% for 2022F; and
    • OCBC Wing Hang could complete implementation of an internal ratings-based approach to compute risk-weighted assets by 4Q20 or 1H21.
  • Timeline: 6-12 months.

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

  • On 4 Dec 20, the Grab-SingTel (60:40) consortium secured a digital full banking licence from the Monetary Authority of Singapore. 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 break even. 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. See also report: SingTel - UOB Kay Hian 2020-12-07: Grab-SingTel Secures Digital Full Banking Licence, Positive In The Long Term.
  • We value the digital banking licence win at 4 cents (or 2% of 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).
  • SingTel's 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 migration revenue and margin compression in its Australia consumer segment and higher net interest expense. India and Africa operations were stronger y-o-y.
  • 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 expectations of 7.5 cents/share (50% payout) for the year.
  • See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.

Singtel share price catalyst:

  • Events: Rolling out of digital banking licence plans in 1H21, reopening of economies towards end-20/early-21, faster-than-expected recovery in Optus’ consumer and enterprise business.
  • Timeline: 3-6 months.

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

  • Robust margins set to continue. Gross margin of 12.2% in 4QFY20 was impressively held up (+3.3 ppt y-o-y) as BRC Asia 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.
  • 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 earnings rebounding strongly in FY21, up 88% y-o-y. BRC Asia currently trades at 9.0x FY21F P/E, below its long-term average (excluding outliers).
  • See BRC Asia Share Price; BRC Asia Target Price; BRC Asia Analyst Reports; BRC Asia Dividend History; BRC Asia Announcements; BRC Asia Latest News.

BRC Asia share price catalyst:

  • Events: Faster-than-expected recovery in construction activities, and more public housing projects.
  • Timeline: 3-6 months.

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

  • Portfolio occupancy edged up 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 2020. 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 was a positive 4.2%. Furthermore, management maintained its guidance of positive low single-digit rental reversion for 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 of nine 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.
  • See Ascendas REIT Share Price; Ascendas REIT Target Price; Ascendas REIT Analyst Reports; Ascendas REIT Dividend History; Ascendas REIT Announcements; Ascendas REIT Latest News.

Ascendas REIT share price catalyst:

  • Events:
    • Resiliency from business parks and high-specifications industrial segments; and
    • contributions from development projects and AEIs.
  • Timeline: 3-6 months.

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” device) form more than 50% of Venture Corp’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 profits 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 14.5% 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 of the preceding year. We expect a dividend of 75 cents/share this year, which translates into an attractive dividend yield of 4.0%.
  • See Venture Corp Share Price; Venture Corp Target Price; Venture Corp Analyst Reports; Venture Corp Dividend History; Venture Corp Announcements; Venture Corp Latest News.

Venture Corporation share price catalyst:

  • Events:
    • Better-than-expected recovery in 2H20; and
    • more traction in other segments such as semiconductor-related equipment.
  • Timeline: 3-6 months.

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

  • Orderbook wins this year have been solid, in our view. Yangzijiang Shipbuilding has outperformed our expectations with US$1.8b worth of new orders in 2020 in a tough year, given the COVID-19 pandemic. Importantly, the company appears to have expanded its market share in China, given that almost all of its orders in 2020 were from China clients compared to the past which saw a more even distribution of orders originating from clients in Europe, the US and Asia. We expect the company to build on this momentum in 2021 and conservatively forecast a similar level of order wins of US$1.8b. We also highlight commentary from management that global new ship-building orders declined by about 50% in 9M20 amid a depressed market, which makes the company’s order wins this year all the more compelling.
  • Expecting solid 4Q20 results. Yangzijiang Shipbuilding’s 4Q20 results should be strong, given that its new order wins peaked during the quarter at nearly US$1bn . In addition, results may be bolstered by the potential of a tax write-back at the end of 2020 as its new shipyard may qualify as a “New High Tech Enterprise”, thus attracting a lower tax rate of 15% vs the current 25% tax rate that Yangzijiang Shipbuilding has provisioned for. This would equate to a tax write-back of around RMB100m which we have not factored into our current forecasts.
  • We believe Yangzijiang Shipbuilding remains a compelling stock for this year as its valuations remain undemanding, with 2021 EV/EBITDA and P/B of 2.6x and 0.52x respectively, a PEG ratio of 0.69 and net cash of S$0.22/share (or 23% of its current share price). In addition, if we add its net cash to the current portion of its debt investments of RMB13.6b as at end-3Q20, this would be equivalent to its current market capitalisation of S$3.5b. This implies that investors are essentially getting its shipbuilding business for free.
  • See Yangzijiang Share Price; Yangzijiang Target Price; Yangzijiang Analyst Reports; Yangzijiang Dividend History; Yangzijiang Announcements; Yangzijiang Latest News.

Yangzijiang 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 would sustain Frencken’s growth in the semiconductor segment going forward.
  • ROE 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 and target price of S$1.42, pegged to 12.6x 2021F P/E, or 1SD above its historical mean. At the current Frencken share price, the stock trades at 11.5x 2021F P/E, a 14% discount to peers’ average.
  • See Frencken Group Share Price; Frencken Group Target Price; Frencken Group Analyst Reports; Frencken Group Dividend History; Frencken Group Announcements; Frencken Group Latest News.

Frencken share price catalyst:

  • Events:
    • Higher-than-expected factory utilisation rates;
    • new product introductions to drive gross margin expansion;
    • higher-than-expected capex spending by Seagate for new hard-disk-drive manufacturing lines for the industrial automation segment; and
    • better-than-expected cost management.
  • Timeline: 6-12 months.

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 profits. 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 remained strong. Sales volume 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 well in sustaining volume levels.
  • Valuations attractive; discount drinks. Thai Beverage currently trades at 16.0x FY21F P/E, at slightly below -1SD to its 5-year mean P/E.
  • See Thai Beverage Share Price; Thai Beverage Target Price; Thai Beverage Analyst Reports; Thai Beverage Dividend History; Thai Beverage Announcements; Thai Beverage Latest News.

Thai Beverage share price catalyst:

  • Events: M&As, vaccine administration news.
  • Timeline: 3-6 months.

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

Far East Hospitality Trust share price catalyst:

  • Event:
    • Downside protection from fixed rents embedded in master leases with sponsor FEO, which owns 61% of Far East Hospitality Trust;
    • recovery in occupancy, average daily rate and RevPAR in 2H21; and
    • acquiring the remaining 70% stake in three Sentosa hotels from sponsor FEO.
  • Timeline: 6-12 months.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-01-08
SGX Stock Analyst Report BUY MAINTAIN BUY 3.680 SAME 3.680