Singapore Stock Alpha Picks (April 2021) - UOB Kay Hian 2021-04-06: Adding UMS, Removing Frencken


Singapore Stock Alpha Picks (April 2021) - Adding UMS, Removing Frencken


Outdone by a historically strong performance by the STI.

Adding UMS Holdings (SGX:558).

  • We initiated coverage on UMS on 15 Mar 21 with a BUY rating and a target price of S$1.65.
  • We like UMS as it is exposed to significant secular demand for semiconductor chips arising from 5G-related spending and the growth of data, with both showing resilient demand in 2020 despite COVID-19. As a company that provides modules and precision components for machines used to manufacture semiconductor chips, we believe that UMS will be a key beneficiary of the industry’s demand.

Removing Frencken Group (SGX:E28).

  • As Frencken has exhibited strong share price performance in Mar 21 with a 13.3% m-o-m increase, we close out our position on Frencken and add UMS given the latter’s better secular story in our view.

Singapore Stock Alpha Picks For April 2021

UMS Holdings (SGX:558) – BUY (Clement Ho)

  • Riding on strong uptrend. The semiconductor industry is riding on a strong uptrend, with significant demand for semiconductor chips arising from 5G-related spending and the growth of data. Demand has shown resilience despite being impacted by supply chain disruption from global lockdowns related to the COVID-19 pandemic. UMS, which provides modules and precision components for machines used to manufacture semiconductor chips, will be a beneficiary of the phenomena.
  • Positive outlook from key client Applied Materials. About 93% of UMS’s recent 2020 revenue (2019: 92%) came from Applied Materials (AMAT), the semiconductor industry’s largest maker of machinery used to manufacture chips. In its latest outlook, AMAT is seeing strong order demand for its semiconductor segment, up 50% y-o-y at the midpoint of its 2QFY21 as at 18 Feb 21, due to acceleration of the economy’s digital transformation. The positive view meshes with the ones provided by peers KLA Corporation and Lam Research, which lead different parts of the upstream semiconductor market.
  • Positive operating leverage to kick in. The cyclical upturn is expected to provide further uplift to the current high factory utilisation rates ( > 70%). We believe competition would be rational among the suppliers, given the elevated capacity utilisation rates across the semiconductor industry. On the back of an expected 25% growth in 2021 revenue to S$205.0m, core net profit is estimated to jump 36% to S$59.0m, mainly due to positive operating leverage at UMS.
  • Maintain BUY with a target price of S$1.65, pegged to 14.9x 2021F P/E, or +1.5 standard deviation of its historical 5-year average. We think current valuations of 10.8x forward P/E for UMS is attractive, given that the industry is riding along an uptrend. Additionally, UMS offers a respectable 2.9% dividend yield for 2021/22.
  • See UMS Share Price; UMS Target Price; UMS Analyst Reports; UMS Dividend History; UMS Announcements; UMS Latest News.

Share Price Catalysts

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

  • Positive 2H20 results reflect strong demand. China Sunsine Chemical (SGX:QES)’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. The bottom line benefitted from the expansion of the 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 per share.
  • 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, the ASP of rubber accelerators, the main earnings driver for 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 for China’s recovering 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 for China Sunsine 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

  • Higher ASPs for rubber accelerators, and higher-than-expected utilisation rates.
  • Timeline: 3-6 months.

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

Share Price Catalysts

  • Events: Resumption of concerts, contract wins for the production of drama series, M&As, wider analyst coverage
  • Timeline: 3-6 months.

InnoTek (SGX:M14) – BUY (John Cheong)

  • Attractive valuation. Trading at 2021F 9.2x P/E (4.5x ex-cash P/E) and 2021F 0.9x 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 par with its Singapore peers at 2021F P/E and P/B of 13.0x P/E and 2.5x respectively.
  • 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 accounting 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) had 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 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 margins also increased from 6.5% in 2015 to 24.6% in 2020. As such, 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 Corp (SGX:V03), has been underappreciated by the market. Mr Neal Chandaria has been the chairman since 2017 to date, 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 buyback underlines confidence in business outlook. Since the start of the buyback mandate on 23 Apr 20, a total of 3,483,600 shares have been purchased, forming about 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 about 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 about 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 the 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 have 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

  • Events:
    • Stronger-than-expected recovery in volume consumption and improvement in operating leverage.
    • Potential takeover target given its attractive valuation and distribution network.
  • Timeline: 3-6 months.

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

  • Delay in border opening will lead to higher cash burn. As 2Q21 beckons, there are still no signs of border openings or the formation of travel bubbles. Instead news flow centres on new variants of COVID-19 and even restrictions on SIA’s flights to Hong Kong. We now believe border openings would likely be pushed back to late-3Q21 at best and even then it will likely be gradual. Under such a scenario, SIA could even tap into the additional S$6.2b in mandatory convertible bonds, a scenario which the market has not factored in. We have assumed that SIA’s pax traffic for FY22 would rebound by 1,100% and amount to 25% of pre-COVID-19 levels. There is downside risk to this estimate. For now, we continue to value SIA at S$4.47, or 1x FY22 & FY23’s average book value.
  • See SIA Share Price; SIA Target Price; SIA Analyst Reports; SIA Dividend History; SIA Announcements; SIA Latest News.

Share Price Catalysts

  • Events: Global vaccination by 3Q21.
  • Timeline: 3-6 months.

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. OCBC's 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 from 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. OCBC's 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 no M&A plans under review. Management intends to maintain dividend payout at 40-50%. The Monetary Authority of Singapore (MAS) is expected to announce its guidance on Singapore banks' dividend in May-Jun 21.
  • See OCBC Share Price; OCBC Target Price; OCBC Analyst Reports; OCBC Dividend History; OCBC Announcements; OCBC Latest News.

Share Price Catalyst

  • Events: OCBC’s dividend yield improving from 4.2% for 2021 to 4.7% for 2022.
  • Timeline: 6-12 months.

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 licence from MAS. We view this positively as it will allow SingTel to stack a new business segment to help drive future earnings growth and diversify from its key telecoms 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. 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 drop 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 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

  • 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.

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. 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. Ascendas REIT's 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%. AREIT 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

  • Events:
    • Resiliency from business parks and logistic segments,
    • contributions from development projects and asset enhancement initiatives.
  • Timeline: 6-12 months.

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

  • Announced a US$1.74b order win. Yangzijiang announced a 31-vessel order win worth US$1.74b after the market close on 5 Mar 21. As the majority of the orders this year are containerships, Yangzijiang Shipbuilding’s higher shipbuilding margins from 2020 will spill into 2021 and be a secular trend for the company going forward. In our estimates, about 75% of the US$1.74b order was attributable to the containerships.
  • Upgraded order-win expectations for 2021. After the US$1.74b order win, we upgraded our 2021 order-win expectation of Yangzijiang Shipbuilding from US$3b to US$4b. Our 2022 order-win expectation of US$3b is unchanged at present. After its IPO in 2007, Yangzijiang Shipbuilding announced record orders worth US$5b but it has not seen those levels in the past 13 years. As a result, the year-to-date order wins of US$3.04b are the highest since 2008, and we rate chances for Yangzijiang Shipbuilding to exceed these levels as reasonably high, in our view.
  • 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 5.5x and 0.7x respectively, a PEG ratio of 0.72 and net cash of S$0.28/share (or 21% of current Yangzijiang Share Price). In addition, if we add its 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$5.0b. This implies that investors are paying less than 0.2x 2021 P/B for the company’s shipbuilding assets.
  • 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 the 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 about 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. Thai Beverage had recently announced the receipt of a conditional eligibility-to-list letter from SGX.
  • Valuations still attractive. Thai Beverage currently trades at 17.7x FY21F P/E, at about 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

  • Events: Potential listing, vaccine administration news.
  • Timeline: 3-6 months.

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

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 2022.
  • Timeline: 6-12 months.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-04-06
SGX Stock Analyst Report BUY MAINTAIN BUY 1.650 SAME 1.650