Singapore Stock Alpha Picks (Sep 2021) - UOB Kay Hian 2021-09-03: Adding Lendlease REIT, Removing Ascendas REIT, SGX, Hong Leong Asia


Singapore Stock Alpha Picks (Sep 2021) - Adding Lendlease REIT, Removing Ascendas REIT, SGX, Hong Leong Asia


  • A better performance in August. On an equal-weight basis, our Singapore Stock Alpha Picks (Aug 2021) portfolio outperformed the STI by 4.4ppt, rising by 0.9% vs the latter’s 3.5% m-o-m decline. The outperformance was admittedly generated by a narrow range of stocks with only one-third of the portfolio seeing positive m-o-m share price increase. On a price and market-cap weighted basis, a material portion of the outperformance was generated by SEA Limited.

Adding Lendlease Global Commercial REIT (LREIT) and removing Ascendas REIT (AREIT), Singapore Exchange (SGX) and Hong Leong Asia (HLA).

  • For September, we remove Ascendas REIT from our portfolio and add Lendlease Global Commercial REIT in its place as we prefer its growth profile, namely the redevelopment of the Grange Road carpark as well as the potential acquisition of Jem.
  • In addition, we have taken out SGX (SGX:S68) given challenges to its A50 derivatives volumes by HKEX as well as forecast lower treasury income, while Hong Leong Asia has been removed due to its more challenging outlook for 2H21 and lack of near-term catalysts.

Lendlease Global Commercial REIT (SGX:JYEU) – BUY (Jonathan Koh)

  • Redevelopment of Grange Road Car Park to draw more youths to 313@Somerset. Construction for the redevelopment of Grange Road carpark into a multi-functional event space is scheduled to commence by end-21. The project is 100% pre-committed and is anchored by Live Nation, a leading live entertainment company listed on NYSE. The event space is expected to be operational by early-23.
  • Sewing up the remaining 68.2% stake in Jem. Lendlease Global Commercial REIT is on track to complete the acquisition of a 28.1% effective stake for S$337.3m in Jem by end-Sep 21. The two funds – Lendlease Jem Partners Fund (LLJP) and Asia Retail Investment Fund 3 (ARIF3) – have reached their liquidity window this year whereby all investors have to decide whether to hold or divest Jem. Being the largest investor in LLJP and ARIF3, Lendlease Global Commercial REIT has significant influence over the decision. The company plans to sew up the acquisition of the remaining 68.2% stake in Jem worth S$1.2b-1.4b within the next 12 months.
  • Maintain BUY. Our target price of S$1.01 for Lendlease Global Commercial REIT is based on dividend discount model (cost of equity: 6.0%, terminal growth: 1.0%).
  • See

Lendlease Global Commercial REIT's share price catalysts

  • Events: Redevelopment of Grange Road carpark; and acquisition of Jem.
  • Timeline: 6-12 months.

Genting Singapore (SGX:G13) – BUY (Vincent Khoo, Jack Goh)

  • Market will eventually price in 2022 recovery. Genting Singapore is a major direct beneficiary of Singapore’s COVID-19 national vaccination programme and re-opening of the economy. With hopes riding high on the global dispensation of the vaccines in 2021, which will allow the government to achieve its plan to inoculate 5.7m citizens by 3Q21 and achieve herd immunity, we believe that valuations will partially factor in the Genting Singapore’s return to pre-pandemic earnings dynamics.
  • Hopes of more travel corridors being opened upon herd immunity. With the government eyeing the resumption of some international travel by Sep 21 and promise of easier travel for the vaccinated tourists, we expect more reciprocal green lane (RGL) and travel arrangements with neighbouring countries in 4Q21, which will eventually benefit Genting Singapore as international patronage rebounds.
  • Lush prospective yields. We expect Genting Singapore’s dividend yield to normalise to 4.1% in 2022, assuming revenue and cash flows recover back to pre-pandemic levels. Meanwhile, we also expect Genting Singapore to deliver significantly better dividends in 2H21. Theoretically, our projected 2021 after tax EBITDA is sufficient to fund a dividend of S$0.035 (4.1% yield).
  • See

Genting Singapore's share price catalysts

  • Wide dispensation of COVID-19 vaccines which will allow herd immunity.
  • Initiation of green lane travel arrangements or travel bubbles between Singapore and neighbouring countries.
  • Appealing 2022 yield of > 4%.

Frasers Logistics & Commercial Trust (SGX:BUOU) – BUY (Jonathan Koh)

Frasers Logistics & Commercial Trust's share price catalysts

  • Events:
    • Growth of e-commerce in Australia and Germany,
    • compression of cap rates for logistics properties leading to sizeable revaluation gains, and
    • continued expansion by tapping on sponsor’s pipeline
  • Timeline: 6-12 months.

UMS (SGX:558) – BUY (Clement Ho)

  • 1H21 seen as a slight beat. UMS’s 2Q21 core net profit of S$14.6m (+26.3% y-o-y) brought 1H21 net profit of S$30.0m (+34.6% y-o-y) to 51% of our 2021 estimate. This was deemed a slight beat based on historical seasonality of 45:55 for 1H:2H periods. 2Q21 revenue grew 65.6% y-o-y to S$66.8m (+34.6% q-o-q), driven by robust equipment spending and capex commitments from global wafer fabs. Gross material margin remained relatively stable y-o-y at 51.7% (2Q20: 50.8%), but narrowed sequentially from 53.1% in 1Q21, primarily due to the consolidation of JEP (SGX:1J4), which became a subsidiary (71.4% stake from 40.7% previously) as at 30 Apr 21.
  • Dividend maintained and surprise bonus issue. UMS has kept its interim dividend at S$0.01, and is undertaking a 1-for-4 bonus issue, which we think is a surprise. This is supported by strong net operating cashflow which almost doubled y-o-y from S$10.7m in 2Q20 to S$20.1m in 2Q21, while 1H21 grew 43% y-o-y to S$28.8m. Previous capital commitments for the capacity expansion, which we anticipated would reduce dividend payouts, have been adequately fulfilled from UMS’s robust free cash flow.
  • Key customer indicating growth momentum to continue ahead. Applied Materials (AMAT US) continues to forecast strong demand ahead as it expects to outperform its markets as large circular trends create sustainable demand for semiconductors. In its recent 2QFY21 earnings in May 21, the semiconductor giant disclosed that customers, for the first time, provided capital spending guidance for multiple years ahead, which will be a leading indicator for demand sustainability.
  • Maintain BUY with a slightly higher target price of S$2.08 (from S$1.92), which is pegged to 2022F P/E of 15.1x, or +2 standard deviation above its historical 4-year average. We believe the high valuation peg is supported by the structural upturn for the semiconductor industry.
  • See

UMS's share price catalysts

  • Higher-than-expected factory utilisation rates, better-than-expected cost management.
  • Timeline: 3-6 months.

Sea Limited – BUY (Clement Ho)

  • Solid growth in revenue surpassed estimate. Sea Limited’s (Sea) 2Q21 GAAP revenue of US$2.28b (+158.6% y-o-y, +29.3% q-o-q) surpassed our estimate, led by higher-than-expected bookings from continuing solid momentum in the self-developed hit, Free Fire. Adjusted EBITDA was -US$24.1m compared with US$7.7m in 2Q20 (1Q21: US$88.1m), while GAAP net loss was US$433.7m (2Q20: US$393.5m loss, 1Q21: US$422m loss) or EPS of -US$0.61 vs consensus estimate for -US$0.53.
  • Free Fire outperformance. Bookings under the gaming segment grew 11.9% sequentially to US$1.2b (+69.8% y-o-y), led by the continued increase in playing user base (QAU) to 725.2m (+45.1% y-o-y, +11.8% q-o-q). Percentage paying users (QPU) of 92.2m (+84.8% y-o-y, +15.5% q-o-q) represents 12.7% of QAU (1Q21: 12.3%, 2Q20: 10.0%). Average booking per user remained stable at US$1.6 (2Q20: US$1.4, 1Q21: US$1.7). Gaming EBITDA margin was stable at 62.8% (1Q21: 64.4%, 2Q20: 60.9%).
  • E-commerce tracking well. Segment revenue grew 30.1% q-o-q to US$1.2b (+160.7% y-o-y), driven by the increased scale of Shopee and higher income from transaction-based fees, value-added services, and advertising. Gross orders totalled 1.4b (+127.4% y-o-y, +27.3% q-o-q), with gross merchandise value (GMV) at US$15.0b (+87.5% y-o-y, +19.0% q-o-q). Take rate, however, was below our expectations of 6.3%, at 6.0% (1Q21: 5.68%, 2Q20: 1Q21: 5.78%), due to the continued ramp-up of marketing incentives. E-commerce adjusted EBITDA loss was -US$579.8m (2Q20: -US$313.7m, 1Q21: -US$412.9m).
  • We have a BUY on Sea with a target price of US$370.76, based on a blended PEG average of peers. The implied 2021F adjusted operating income of 73.5x, which excludes sales & marketing and R&D expenses for more effective comparison, is supported by Sea’s 5-year adjusted operating profit CAGR of 52.7% over 2020-25. The target price translates to 22.4x 2021F price-to-sales, backed by a 3-year revenue CAGR of 73.8% over 2020-23.

SEA Limited's share price catalysts

  • Earlier-than-expected reduction in cash burn.
  • Further market share gains for Shopee in their operating regions.
  • Timeline: 3-6 months.

ComfortDelGro (SGX:C52) – BUY (Lucas Teng)

  • Looking forward to recovery. Singapore is set to see a relaxation of COVID-19 restrictions as ~80% of the population has been vaccinated. This could also see the return of land transport activities which can aid rail ridership as well as ease taxi rental rebates. ComfortDelGro's 1H21 results tracked expectations with core profit of S$91m up substantially from a low base.
  • Wind in its sail: Potential IPO listing in Australia & Rail contract win in New Zealand. ComfortDelGro recently announced that it is pursuing an IPO listing on the Australian Stock Exchange (ASX) slated for 4Q21. We note that its closest peer on the ASX: Sealink Travel Group (SLK AU) trades at a higher multiple (13x 2021 EV/EBITDA, 11x 2022 EV/EBITDA) compared with ComfortDelGro’s approximately 8x EV/EBITDA investments in its Australian assets. ComfortDelGro also recently announced the tender win for Auckland Rail Franchise by its JV entity. The contract amounts to S$1.13b over eight years and is expected to contribute marginal earnings accretion from 2022 onwards.
  • Australia affected by COVID-19 restrictions though downside risks appear limited. Australia has since seen an increase in COVID-19 restrictions in 3Q21, though we opine that its public transport schedules remain largely intact. Non-scheduled buses, however, should likely see a q-o-q dip in 3Q21. UK operations will likely remain stable given its high vaccination rates.
  • See

ComfortDelGro's share price catalysts:

  • Lifting of COVID-19 stay-home restrictions in Singapore, unlocking of value in Australia business, regulatory changes for Downtown Line financing.
  • Timeline: 3-6 months.

InnoTek (SGX:M14) – BUY (John Cheong)

  • Robust growth in the automobile segment with new venture into EV business. InnoTek's earnings grew 94% y-o-y in 1H21 due to the strong performance of its auto segment. InnoTek’s exposure to the automobile industry is growing rapidly, with a 45% y-o-y growth in 1H21 and is now its largest revenue contributor (44% of total revenue in 1H21 vs 32% in 1H20). InnoTek has also ventured into the EV and parts assembly business.
  • New customers and Vietnam expansion to drive growth. InnoTek’s precision metal components division has added more customers recently in the new segments including healthcare equipment and gaming console. In addition, InnoTek is expanding into Vietnam, targeted to start operations in 2022.
  • 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 managed to turn 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, its gross margins have 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.
  • Attractive valuation and balance sheet loaded with cash. Trading at 2022F 8x P/E (4x ex-cash 2022F P/E), we opine this is unjustified as InnoTek has the third-best net margins and net cash position among similar Singapore peers. Coupled with the lowest P/B ratio, we believe InnoTek should be trading at a valuation nearer or on a par with its Singapore peers at 2022F P/E of 13.0x. As of 1H21, InnoTek had a net cash position of S$90m, up S$72m (+27% y-o-y) vs the level as at end-19, forming around 50% of its current market capitalisation.
  • See

InnoTek's share price catalysts

  • Better-than-expected demand from automobile segments and winning of more EV customers.
  • Potential takeover target given its attractive ex-cash multiple.
  • Better-than-expected dividend.

SIA (SGX:C6L) – SELL (Ajith K)

  • Gradual re-opening of borders is not a stock price catalyst, in our view, as street has already factored in a recovery. For FY23, we have already assumed that SIA’s passenger traffic will amount of 63% of pre-pandemic levels and have estimated that SIA will report S$1.3b in profit which is the highest post 2008 Global Financial Crisis. In the nearer term, SIA’s ability to generate incremental earnings on passenger flights over the next two quarters is highly dependent on continued bellyhold demand on the regions where it plans to add capacity to.
  • We value SIA at S$4.85 or 1.15x FY22/23 average book value excluding mandatory convertible bonds that are treated as equity. Conversely, Chinese airlines that have seen domestic recovery are trading at about 0.9x P/B for 2021. We highlight that Bloomberg consensus target price for SIA is S$4.52.
  • See

SIA's share price catalysts

  • Events: completion of domestic vaccination by 4Q21.
  • Timeline: 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. OCBC (SGX:O39)'s new CEO Helen Wong emphasised focus on organic growth from:
    1. capturing investment and trade flows between ASEAN and Greater China;
    2. retail wealth management;
    3. sustainable finance; and
    4. accelerated growth in digitalisation.
  • Maintained guidance. Management guided mid single-digit loan growth for 2021 (1H21: 2.8% h-o-h) driven by both corporate and retail loans. Growth momentum from Singapore and Greater China is expected to pick up in 2H21. Sales of private residential properties have picked up, which should translate to healthy disbursement in 2H21. OCBC's NIM is expected to stabilise at current levels. Management expects credit costs to be at the lower end of guidance of 100-130bp over the 2-year period in 2020 and 2021 (2020: 67bp).
  • Conservative dividend payout. OCBC's dividend payout ratio was 42% for 1H21. Economic recovery has been uneven and visibility of outlook for economic growth has not been fully restored. Vaccination rates for neighbouring countries lagged those of developed countries. Malaysia and Indonesia could also experience sporadic lockdowns and their pace of reopening could be slower. Thus, OCBC maintains a conservative dividend payout despite CET-1 CAR improving 0.6ppt q-o-q to 16.1%.
  • See

OCBC's share price catalysts

  • Events: OCBC’s dividend yield improving from 4% for 2021 to 4.5% for 2022.
  • Timeline: 6-12 months.

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

  • The new order flow continues. Yangzijiang Shipbuilding continues to win orders at an amazing pace with 3Q21 to date orders worth US$1.08b, of which 10 were for containerships. In addition, the company disclosed a further order worth US$0.5b for five containerships that has yet to become effective. Importantly, these containerships are dual-fuel vessel, which implies that Korean shipyards’ stranglehold on this valuable segment of the market is effectively over.
  • A record year. Year-to-date order wins for Yangzijiang Shipbuilding now total US$7.17b for 117 vessels if we include the order wins mentioned above. Post 1H21 results, we upgraded our order-win expectations to US$8b. Yangzijiang Shipbuilding's orderbook now stands at US$8.74b for 170 vessels.
  • We believe that Yangzijiang Shipbuilding remains compelling as its valuations remain undemanding, with 2021 EV/EBITDA and P/B multiples of 5.5x and 0.7x respectively, a 2022 PEG ratio of 0.2 and net cash of S$0.47/share (or 33% of its current share price). While we acknowledge that we have had Yangzijiang Shipbuilding included in our Alpha Picks portfolio for longer than expected, we believe there is still upside to the stock from more order wins in 2H21, shipbuilding margin expansion from 2H21 onwards (guided by management during its 1H21 results call) as well as a potential divestment of its debt investments arm.
  • See

Yangzijiang Shipbuilding's share price catalysts

  • Events: New order wins; shipbuilding margin expansion from 2H21 onwards; better returns on its debt investments portfolio; divestment of its debt investments arm.
  • Timeline: 3 months.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-09-03
SGX Stock Analyst Report BUY MAINTAIN BUY 1.200 SAME 1.200
SGX Stock Analyst Report BUY MAINTAIN BUY 2.080 SAME 2.080