Singapore Stock Alpha Picks (Mar 2021) - UOB Kay Hian 2021-03-05: Add Frencken & China Sunsine; Remove BRC Asia & First Resources

Singapore Stock Alpha Picks - UOB Kay Hian Research | SGinvestors.io FRENCKEN GROUP LIMITED (SGX:E28) CHINA SUNSINE CHEM HLDGS LTD (SGX:QES) GHY CULTURE&MEDIA HLDG CO LTD (SGX:XJB) INNOTEK LIMITED (SGX:M14) FOOD EMPIRE HOLDINGS LIMITED (SGX:F03) OVERSEA-CHINESE BANKING CORP (SGX:O39) SINGTEL (SGX:Z74) ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6) FAR EAST HOSPITALITY TRUST (SGX:Q5T) THAI BEVERAGE PUBLIC CO LTD (SGX:Y92) SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Stock Alpha Picks (Mar 2021) - Add Frencken & China Sunsine; Remove BRC Asia & First Resources




WHAT’S NEW


In-line performance for Feb 21.


Adding Frencken and China Sunsine.

  • We like Frencken Group (SGX:E28) as its 2H20 results showed strong earnings momentum and margin expansion on the back of robust demand for semiconductor components. In our view, this should lead to higher ROEs for the company in 2021.
  • For China Sunsine Chemical (SGX:QES), its 2H20 results were compelling, showing that it is benefiting from its increased capacity as well as higher ASPs, thus allowing it to capture the recovery in China’s auto industry.

Removing First Resources and BRC Asia.

  • While construction activities have improved, we remove BRC Asia (SGX:BEC) from our portfolio given the lack of near-term catalysts.
  • We also remove First Resources (SGX:EB5) at this juncture as 1H21 earnings momentum will be uninspiring in our view, given the company’s guidance that, prior to recent CPO price increases, it had sold a meaningful amount of its 1H21 production.


Singapore Stock Alpha Picks For March 2021



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

  • A solid set of 2H results, in line with our estimate. Frencken's earnings of S$23.8m (+5.2% y-o-y) was led by gross margin expansion from a shift in product mix towards the more profitable segments.
  • Revenue slipped 2.3% y-o-y to S$328.1m, as a result of lower sales from the industrial automation (-38%) and medical (-8%) segments. The relatively more profitable semiconductor (+50.6%) segment drove the uplift in gross margin to 18.3% (2H19: 16.4%). Additionally, tight cost control measures contributed to the increase in net margin to 7.3% (2H19: 6.1%).
  • Demand for semiconductor components remains strong. The semiconductor segment is estimated to contribute 35% of Frencken’s overall sales in 2021 (2019: 18%). This will mainly be driven by the huge demand stemming from the accelerating development of 5G technology, reflected in the record capex spending by major foundries TSMC and Samsung in 2020-21. Pricing environment for the components manufactured by Frencken is understood to be healthy, and indicative demand from clients outstrips production capacity.
  • ROEs rising as company moves up value chain. Frencken is deepening its core competency to provide unique components, modules and designing of the 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. For instance, Frencken is the sole global supplier of the reticle masking unit (REMA), a key module for the Extreme Ultraviolet (EUV) lithography system developed by ASML. Apart from the mechanical design, assembly and test, Frencken also manages the supply chain and provides lifecycle support for REMA.
  • Maintain BUY with target price of S$1.42, pegged to 12.6x 2021F earnings or +1 standard deviation above its historical mean. At the current price, Frencken trades at 10.4x 2021F P/E.
  • 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 Catalysts

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


China Sunsine Chemical (SGX:QES) – BUY (Clement Ho)

  • Positive 2H20 results reflect strong demand. China Sunsine’s 2H20 net profit rose 11% y-o-y to RMB136.4m, as revenue grew to RMB1,291m (+1%) mainly due to record sales volume of 93,556 tonnes (+9.6%), which helped offset the slip in ASPs (-9%) of rubber accelerators. Bottom-line benefitted from the expansion of gross profit margin to 27.8% (2H19: 22.9%, 1H20: 23.2%), as well as tight cost control measures. This brought 2020 net profit to RMB218.8m (-43.9%), 7% above our estimate. China Sunsine maintained its final dividend of S$0.01.
  • Gaining from higher capacity and elevated ASPs. The good set of results was attributed to management’s perseverance with continued investments to expand capacity over the past few years, despite the downward trend in rubber accelerator prices. The move is now paying off, with market share for China Sunsine more entrenched, alongside rising demand for new vehicles in China. Furthermore, ASP of rubber accelerators, the main earnings driver for China Sunsine, has continued to gain ground, in tandem with aniline, the major feedstock for rubber accelerators, due to higher crude oil prices. The average price of aniline has risen an estimated 17% qtd as at 25 Feb 21 to RMB8,372/tonne, a 29% sequential increase over 4Q20’s average.
  • Good proxy to recovering China auto sector. China Sunsine derives the bulk of its sales from China (2020: 69%, 2019: 61%), which has been strengthening since Mar 20. The Chinese economy is seeing robust growth due to government stimulus measures.
  • Maintain BUY with an unchanged target price of S$0.58. We keep our valuation peg at 3.5x EV/EBITDA, +1 standard deviation of its 5-year average. The target price implies a 2021F P/E of 9.6x and ex-cash of 4.1x. This represents a steep discount to larger peers, which are trading at 7.7x forward EV/EBITDA and 15.3x 2021F P/E.
  • See China Sunsine Share Price; China Sunsine Target Price; China Sunsine Analyst Reports; China Sunsine Dividend History; China Sunsine Announcements; China Sunsine Latest News.

Share Price Catalysts



GHY Culture & Media (SGX:XJB) – BUY (Lucas Teng, John Cheong)

  • Stellar maiden results. 2020 core earnings surged strongly by 244% y-o-y. Revenue of S$127.1m was up 93% y-o-y while gross margin was 44% (+15ppt) as the group noted strong demand in its drama series. In 2020, GHY Culture & Media had six drama series sold and completed, while two dramas and one online short drama series were in production as at 31 Dec 20.
  • Pipeline with larger-scale projects, higher episode count. GHY Culture & Media has another 13 dramas and one film series to be produced and released progressively through 2021-22. Management also noted that potential drama series produced in 2021 are larger scale projects with higher episode count, which will contribute to sustainable growth and earnings resilience
  • Share purchases and potential M&As. GHY Culture & Media's CEO Guo Jingyu recently purchased approximately 0.66m shares at S$0.75/share, accumulating almost 1.74m shares since the company’s listing. In addition, the group also has net cash of S$105m and is positioned for growth with potential M&As.
  • Valuations still attractive. GHY Culture & Media currently trades at 13x 2021F P/E, below peers’ average of 20x 2021F P/E, while exhibiting stronger earnings growth.
  • See GHY Culture & Media Share Price; GHY Culture & Media Target Price; GHY Culture & Media Analyst Reports; GHY Culture & Media Dividend History; GHY Culture & Media Announcements; GHY Culture & Media Latest News.

Share Price Catalysts



InnoTek (SGX:M14) – BUY (John Cheong)

  • Attractive valuation. Trading at 2021F 8.0x 2021F P/E (3.5x ex-cash PE) and 0.7x P/B, we opine this is unjustified as InnoTek has the third-best net margins and net cash position among similar Singapore peers. Coupled with the second lowest P/B ratio, we believe InnoTek should be trading at a valuation nearer or on a par with its Singapore peers at 2021F 13.0x 2021F P/E and 2.5x P/B.
  • Set to benefit from recovery in China’s auto sales. China has successfully contained the COVID-19 outbreak and eased most of its social distancing measures. This has led to a surge in passenger vehicle (PV) sales back to pre-COVID-19 levels. InnoTek, which has large exposure to China’s automobile market (historically accounted for 30% of annual revenue), is set to benefit from 2H20 onwards.
  • New CEO’s successful restructuring initiatives and strong major shareholder backing. InnoTek’s new CEO and Non-Independent Director Lou Yiliang (who joined at end-15) has implemented several restructuring initiatives to boost profitability, including an incentive scheme which rewards employees based on units produced per day and production yield. As a result, InnoTek turned around from a net annual loss of S$16.3m in 2015 to decade-high annual net profits of S$20.2m/S$16.7m in 2018/19 respectively. Meanwhile, gross margin rose from 6.5% in 2015 to 24.6% in 2020. Thus, InnoTek has become more resilient during economic downturns due to the initiatives. The track record of its major shareholder, the Chandaria family which is involved in the founding of Venture Corporation, has been underappreciated by the market. Mr Neal Chandaria has been the Chairman since 2017, which are InnoTek’s most profitable years.
  • Balance sheet loaded with cash. As of end-20, InnoTek had a net cash position of S$92m, up S$72m (+28% y-o-y) vs the level as at end-19, forming 57% of its current market capitalisation.
  • See InnoTek Share Price; InnoTek Target Price; InnoTek Analyst Reports; InnoTek Dividend History; InnoTek Announcements; InnoTek Latest News.

Share Price Catalysts

  • Events: Better-than-expected results and higher dividend.
  • Timeline: 2-3 months.


Food Empire (SGX:F03) – BUY (Clement Ho)

  • Daily share buy-back underlines confidence in business outlook. Since the start of the buy-back mandate on 23 Apr 20, a total of 3,483,600 shares has been purchased, forming approximately 0.65% of its outstanding shares. This was mainly carried out in 4Q20 and Jan 20 where Food Empire bought back a total of around 3.0m shares for a consideration of approximately S$2.0m, potentially signalling a strong confidence in its 2021 business outlook.
  • Compelling valuation. Food Empire trades at an undemanding valuation of 11x 2021F P/E, a significant discount to peers’ average of approximately 25x 2021F P/E despite its growing presence in the Vietnam market and leading position in its core markets in Eastern Europe.
  • 2020 earnings growth amid COVID-19 pandemic reflects 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 the US dollar, the group has managed to mitigate some of the adverse impact on bottom-line through ASP hikes and cost management. We are encouraged by Food Empire’s core earnings (ex foreign exchange) growth in 2020 at 14% y-o-y 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.

Share Price Catalysts



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


Share Price Catalysts



OCBC (SGX:O39) – BUY (Jonathan Koh)

  • New CEO, but unchanged focus to expand in Greater Bay Area. Ms Helen Wong is a competent leader with a strong track record, having led HSBC’s Greater China operations, which is the largest profit centre of HSBC. We expect her to focus on expansion in the Greater Bay Area, Sustainable Finance and cross-selling. We look forward to OCBC improving its dividend policy, and with more intensified focus on technology and digitalisation.
  • Guidance points to lower credit costs in 2021. Management expects the NPL ratio to be at the lower end of guidance of 2.5-3.5% for 2020 and 2021. Credit costs are also expected to be at the lower end of guidance of 100-130bp over the two-year period (2020: 67bp). The guidance on credit costs has factored in higher probability of default for loans under moratorium that were extended.
  • Orderly exit to loan relief programmes. Exposure to loans under moratorium dropped from 9% to 4% of total loans in 4Q20 (expiry in Malaysia) and further declined to 2% of total loans in Jan 21 (expiry in Singapore). 91% of the loans under moratorium of S$5.7b are secured by collateral.
  • Possesses capacity to pay more dividends. CET-1 CAR has improved 0.8ppt q-o-q to 15.2%, which is substantially higher than its target range of 12.5-13.5%. The implementation of an internal ratings-based approach at OCBC Wing Hang has improved OCBC’s CET-1 CAR by 0.5ppt. While OCBC is currently bloated with excess capital, management reassured investors that there are currently no M&A plans under review. Management intends to maintain dividend payout at 40-50%. MAS is expected to announce its guidance on dividend for Singapore banks in May-June.
  • See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.

Share Price Catalyst



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

  • Entering digital banking. 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 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 banks’ mean P/B of 1.45x.
  • SingTel's share price appears to have bottomed in Nov 20 when it traded at -1 standard deviation below its 5- year mean EV/EBITDA. At our target price of S$2.84, SingTel trades at 12.1x 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.
  • Dividend above expectations. SingTel declared an interim net dividend of S$0.051 per share. This is based on 100% net profit payout and is above our expectation of S$0.075 per share (50% payout) for the year.
  • See SingTel Share Price; SingTel Target Price; SingTel Analyst Reports; SingTel Dividend History; SingTel Announcements; SingTel Latest News.

Share Price Catalysts



Ascendas REIT (SGX:A17U) – BUY (Jonathan Koh)

  • Portfolio occupancy was stable at 91.7% as of end-Dec 20. Singapore occupancy edged lower by 0.4ppt q-o-q to 88.4% due to non-renewal of lease for 11 Changi North Way. Occupancies in Australia and the UK were stable at 97.4% and 97.5% respectively. Occupancy for the US improved 0.9ppt to 92.9% due to the two newly-acquired office properties in San Francisco with occupancy of 100%.
  • Recovery to positive reversion driven by business parks in the US. Ascendas REIT's rental reversion swung from negative 2.3% in 3Q20 to positive 2.5% in 4Q20. The recovery was supported by strong positive rental reversion of 18.8% for its US portfolio, driven by business park properties in Portland. On a full-year basis, rental reversion was positive at 3.8% in 2020. The government sector accounted for 22.7% of new demand by gross rental income. Management guided for positive low single-digit rental reversion for full-year 2021 due to current market uncertainties
  • Further expansion in Australia and the US. Ascendas REIT completed the acquisition of an 8-storey suburban office building at 254 Wellington Road in Melbourne for S$100.6m in Sep 20. Nissan has leased 65% of the office space to serve as its head office and training centre for 10 years. The suburban office provides NPI yield of 5.8%. Ascendas REIT has also acquired two suburban office properties at Macquarie Park, Sydney MQX4 (completion: mid- 22) and 1-5 Thomas Holt Drive (completion: Jan 21) for total consideration of S$445m. The two suburban office properties provide NPI yield of 6.1% and 5.9% respectively. The acquisition of two office properties in San Francisco 505 Brannan Street and 510 Townsend Street for S$768m and NPI yield of 4.9% was completed in Nov 20.
  • See Ascendas REIT Share Price; Ascendas REIT Target Price; Ascendas REIT Analyst Reports; Ascendas REIT Dividend History; Ascendas REIT Announcements; Ascendas REIT Latest News.

Share Price Catalysts


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

  • 2020 profit beat our estimates. Despite the 37% y-o-y decrease in revenue, Yangzijiang Shipbuilding saw gross profit margins increase 10ppt y-o-y to 28% which resulted in NPAT declining by a lower 21% y-o-y and beating our estimates by ~7%. This was attributable to its construction of containerships which attract higher profit margins relative to bulk carriers. In our view, these higher shipbuilding margins may potentially be a secular trend for Yangzijiang Shipbuilding as it increases its concentration on containerships.
  • Highest payout ratio in four years. Yangzijiang Shipbuilding declared a final dividend of S$0.045/share, flat from last year, and representing a 35% payout ratio which is the highest since 2017. This represents a 4.8% yield from Friday’s closing price.
  • Raising our order-win expectations. Post the results call, we upgrade our 2021 order win expectation from US$2.5b to US$3b, which we view as conservative.
  • We believe that YZJ remains a compelling stock for this year as its valuations remain undemanding, with 2021 EV/EBITDA and P/B multiples of 4.4x and 0.56x respectively, a PEG ratio of 0.61 and net cash of S$0.28/share (or 26% of its current share price). In addition, if we add Yangzijiang Shipbuilding's net cash position to the current portion of its debt investments of RMB13.6b as at end-20, this would equate to S$3.7b vs its current market capitalisation of S$4.2b. This implies that investors are getting most of its shipbuilding business for free.
  • See Yangzijiang Share Price; Yangzijiang Target Price; Yangzijiang Analyst Reports; Yangzijiang Dividend History; Yangzijiang Announcements; Yangzijiang Latest News.

Share Price Catalysts



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

  • Resilient earnings. Thai Beverage’s 1QFY21 net profit of Bt8.5b was up 0.5% y-o-y. Profitability continues to remain impressive, given the y-o-y comparison to a pre-COVID-19 high-base year-end period in 1QFY20.
  • Continued cost mitigation efforts. Cost control efforts continue to be in place, the SG&A expense-to-revenue ratio fell to 13.3% in 1QFY21 (-1.5ppt y-o-y) and we estimate improved EBITDA margins of 20.1% (+3.0ppt y-o-y; +1.9ppt q-o-q).
  • Potential listing of BeerCo still in the balance. There could be potential public offering for up to approximately 20% of the issued shares of BeerCo. While there is no certainty of the proposed spin-off, we view that it will help unlock shareholder value, given the growth potential in the Vietnam beer market.
  • Valuations still attractive. Thai Beverage currently trades at 17x FY21F P/E, at 1 standard deviation below its 5-year mean P/E of 20.4x.
  • 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



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


Share Price Catalyst






Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-03-05
SGX Stock Analyst Report BUY MAINTAIN BUY 1.420 SAME 1.420
BUY MAINTAIN BUY 0.580 SAME 0.580
BUY MAINTAIN BUY 1.180 SAME 1.180
BUY MAINTAIN BUY 0.820 SAME 0.820
BUY MAINTAIN BUY 1.300 SAME 1.300
BUY MAINTAIN BUY 14.680 SAME 14.680
BUY MAINTAIN BUY 2.840 SAME 2.840
BUY MAINTAIN BUY 3.680 SAME 3.680
BUY MAINTAIN BUY 1.250 SAME 1.250
BUY MAINTAIN BUY 0.720 SAME 0.720
BUY MAINTAIN BUY 0.950 SAME 0.950
HOLD MAINTAIN HOLD 4.470 SAME 4.470



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