Singapore Stock Alpha Picks (Oct 2021) - UOB Kay Hian 2021-10-05: Removing OCBC, SIA; Adding Ascott REIT, SingTel, Wilmar


Singapore Stock Alpha Picks (Oct 2021) - Removing OCBC, SIA; Adding Ascott REIT, SingTel, Wilmar

  • In 3Q21, our Alpha Picks portfolio marginally underperformed the STI, declining 2.2% q-o-q on an equal-weighted basis vs the latter’s 1.4% decline.
  • For Oct 21, we have removed OCBC and SIA, and added Ascott Residence Trust, SingTel and Wilmar.

A weaker-than-expected performance in 3Q21.

  • On an equal-weight basis, our Alpha Picks portfolio underperformed the STI by a slight 0.8ppt in 3Q21, down 2.2% vs the STI’s 1.4% q-o-q decline.
  • For Sep 21, our portfolio fell 3.5% m-o-m vs the STI’s 1% m-o-m increase with the biggest negative impact on our portfolio coming from Yangzijiang Shipbuilding (- 15.9% m-o-m), ComfortDelGro (-6.8% m-o-m) and Genting Singapore (-5.9% m-o-m).

Share buybacks helped the STI’s outperformance.

  • We note that the STI’s relative strength in Sep 21 was significantly helped by Hongkong Land (SGX:H78) which announced a material US$500m share buyback that resulted in its share price jumping ~14% m-o-m.
  • We also note that Jardine Matheson (SGX:J36) announced a US$250m share buyback on 30 Sep 21.

Alpha Picks for October 2021: Removing OCBC and SIA, adding Ascott Residence Trust, SingTel and Wilmar

  • In the lead up to Sea doubling its weighting within the MSCI Singapore index (from 11% currently to 20%) at end-November, we believe that bank stocks may perform in-line in October and have thus removed OCBC (SGX:O39) from our Alpha Picks. In addition, we have removed SIA (SGX:C6L) as we believe downside is limited at this stage.
  • Additions to our Alpha Picks portfolio include:

Ascott Residence Trust (SGX:HMN) – BUY (Jonathan Koh)

  • Benefitting from reopening and recovery in the EU and UK. The EU had eased a longstanding ban on non-essential travel to member states in May 21. It launched digital vaccination certificates to allow travel without the need for quarantine within the bloc on 1 Jul 21. The UK has reopened its international borders by allowing fully-vaccinated travellers from EU member states to enter England, Scotland and Wales without the need for quarantine since 2 Aug 21 (the UK previously imposed a 10-day self-isolation requirement). The UK is currently enjoying a staycation boom. Ascott Residence Trust’s Europe portfolio, which accounts for 20.4% of its total assets, benefits from the recovery in intra-regional travel and reopening of international borders.
  • Enhancing diversification and resiliency by building scale in long-stay assets. Ascott Residence Trust has acquired three student accommodation properties in the US (Georgia Institute of Technology, University of South Carolina and Texas Tech University) and three rental housing properties in Japan (Sapporo) in 9M21. Student accommodation provides resilient and stable income streams as leases typically last for a year. The allocation to these long-stay assets increased by 6ppt year-to-date to 11% of portfolio value. Student accommodation provides higher gross margin compared with 50% for other hospitality assets. Ascott Residence Trust has a medium-term plan to increase asset allocation to student accommodation and rental housing to 15-20% of portfolio value, which will enhance resiliency.
  • See
  • Share Price Catalysts
    • Yield-accretive acquisitions for student accommodation and rental housing properties.
    • Contribution from lyf one-north, its maiden development project, which is scheduled for completion in 4Q21.
    • Timeline: 6-12 months.

SingTel (SGX:Z74) – BUY (Chong Lee Len & Chloe Tan)

  • Monetisation of Optus tower asset for A$1.9b. Optus announced that it is selling a 70% stake in Australia Tower Network (ATN) – a wholly-owned subsidiary that houses Optus’ towers – to AustralianSuper for A$1.9b. The stake sale values ATN at 38x FY21 EV/EBITDA, or EV/sites of ~A$1m/tower and while it is a premium vs Telstra’s recent tower sales and appealing vs traditional telco multiples of 8-12x EV/EBITDA, this premium is reflective of the loss of control by Optus (which will retain only a 30% minority stake post divestment).
  • The end game: A regional digital infrastructure player. Beyond unlocking value, the long-term goals for SingTel are to:
    1. drive organic growth through strong management,
    2. partner with capital providers to expand regionally, and
    3. focus on smart capital management to potentially explore JVs.
  • This will allow them to set a regional digital infrastructure platform across multiple asset classes.
  • Positive monetisation exercise by Singtel. We are positive on the monetisation exercise to drive future data centre portfolio worth S$7b-8b. To recap, SingTel will continue to execute its strategic reset targets, following the repositioning of Amobee and Trustwave in May 21 and its digital infrastructure strategy. The focus will include:
    1. capitalising the digital/IT growth trend via strategic partnerships,
    2. leveraging its infrastructure assets (data centres, towers and fibre) to unlock value,
    3. sweating its key assets, and
    4. investing in 5G for network superiority and future monetisation.
  • This is expected to help SingTel bridge the current market valuation gap as a conglomerate.
  • Maintain BUY with a DCF-based target price of S$2.75 (discount rate: 7%, growth rate: 1.5%). At our target price, SingTel will trade at 13x FY22F EV/EBITDA (5-year mean EV/EBITDA). SingTel currently trades at 1 standard deviation below its 5-year mean EV/EBITDA of 13x.
  • See
  • Share Price Catalysts
    • Events:
      • successful monetisation of 5G, and
      • faster-than-expected recovery in Optus’ consumer and enterprise businesses
    • Timeline: 6-12 months.

Wilmar (SGX:F34) – BUY (Leow Huey Chuen & Jacquelyn Yow)

  • Benefitting from increase in soymeal price. The impact from China’s temporary electricity curbs should not be great and thus we believe that the impact on Wilmar soybean-crushing plants will be very marginal. However the electricity curbs has led to operational shutdowns resulting in an increase in soymeal prices, which will boost soybean crushing margins. On our estimates, Wilmar will benefit from better margins and possibly higher sales volume, as supplies from some peers are being affected by the temporary shutdown.
  • Unlocking shareholder value. Adani Wilmar Limited (AWL) has submitted the draft prospectus for the listing on the National Stock Exchange of India (NSE). The listing application is now back to “under process” on 24 Sep 21 before some hiccups where this application was kept “in abeyance” by the Securities and Exchange Board of India (SEBI). AWL’s IPO will unlock shareholder value for Wilmar, with the IPO proceeds mainly used to fund AWL’s expansion of its product range. In our view, this will eventually mirror the business model in China.
  • See
  • Share Price Catalysts
    • Events:
      • Wilmar's 3Q21 results by end Oct-21 where we expect better q-o-q performance due to the recovery of China’s soybean crushing operations and also better consumer-pack sales, and
      • higher profit contribution from sugar business will start in 3Q21. However we highlight that Wilmar's net profit could be slightly lower y-o-y as 3Q20 was an exceptionally strong quarter from China, driven by higher soybean crushing and tropical oil margins.
    • Timeline: 2-4 months.

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 Car Park 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 latest 4Q21. 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 is based on dividend discount model (cost of equity: 6.0%, terminal growth: 1.0%).
  • See
  • Share Price Catalysts
    • Events:
      • redevelopment of Grange Road Car Park, 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 and thus achieving herd immunity, we believe that valuations will partially factor in Genting Singapore’s return to pre-pandemic earnings dynamics.
  • Hopes of more travel corridors opening upon herd immunity. With the current resumption of some international travel 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 EBITDA after tax is sufficient to fund a dividend of S$0.035 (4.7% yield).
  • See
  • 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%.
    • Timeline: 3-6 months

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

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, Not Rated) 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
  • Share Price Catalysts:
    • Event: 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.
  • Share Price Catalysts
    • Events: 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 (Llelleythan Tan)

  • Looking forward to a recovery. With a surge in the number of COVID-19 cases, Singapore recently re-imposed stricter COVID-19 protocols to stem infection rates. However, we reckon that once COVID-19 infection numbers taper down, ComfortDelGro is set to benefit from Singapore's economic reopening. With 80% of the population fully vaccinated, favourable tailwinds such as Singapore's transition to endemic living, along with the easing of taxi rental rebates, should give a boost to ComfortDelGro's rail and taxi ridership moving forward.
  • Wind in its sails: Potential IPO listing in Australia and 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
  • Share Price Catalysts
    • Events: 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 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 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 electric vehicles (EV) and parts assembly business.
  • New customers and Vietnam expansion to drive growth. InnoTek’s precision metal components division has recently added more customers in its new segments including healthcare equipment and gaming console. In addition, InnoTek is expanding into Vietnam, with operations targeted to start 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 8x 2022F P/E (4x ex-cash 2022F PE), 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
  • Share Price Catalysts
    • Events:
      • Better-than-expected demand from automobile segments and winning of more EV customers,
      • potential takeover target given its attractive ex-cash multiple, and
      • better-than-expected dividend.
    • Timeline: 3 months.

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

  • For Yangzijiang Shipbuilding’s end customers, container shipping remains strong with A.P. Moeller- Maersk recently raising its guidance for 3Q21 and full-year 2021 as continuing bottlenecks in supply chains have led to higher freight rates. Although two major global container liners – Hapag Lloyd and CMA CGM – have instituted rate freezes, this may partially be a strategy to regain market share after having lost ground to smaller players outside of the three major shipping alliances. The Shanghai Container Export Index continues to remain on an upward trend after having risen 50% in 1H21.
  • Traditional year-end spike in end consumer demand will continue to support container rates with US retailers’ inventory-to-sales ratio at 30-year lows. As a result of this, the Far East to North America route, which has already seen rates increase 33% y-o-y, will remain robust in our view. In the longer term, the 2024-25 period will witness the delivery of the majority of the current record global orderbook of 3.3m TEUs of containerships; however the shipping association BIMCO believes that higher long-term rates will ensure the profitability of these vessels.
  • New orders on the horizon. According to industry sources, Yangzijiang Shipbuilding has US$565m in containership and bulk carrier orders from Seaspan and Mitsui & Co that it has yet to announce as these contracts are not active yet. Once active, this would bring its total number of orders won this year to 118 vessels totalling US$7.21b.
  • 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).
  • See
  • Share Price Catalysts
    • Events:
      • New order wins,
      • shipbuilding margin expansion from 2H21 onwards,
      • better returns on its debt investments portfolio, and
      • divestment of its debt investments arm.
    • Timeline: 3 months.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-10-05
SGX Stock Analyst Report BUY MAINTAIN BUY 1.160 SAME 1.160
SGX Stock Analyst Report BUY MAINTAIN BUY 1.010 SAME 1.010