Singapore Stock Alpha Picks (Dec 2021) - UOB Kay Hian 2021-12-06: Removing Sea, iFAST & Our Tactical Short On DBS OCBC, Adding Sembcorp Marine, BRC Asia


Singapore Stock Alpha Picks (Dec 2021) - Removing Sea, iFAST & Our Tactical Short On DBS OCBC, Adding Sembcorp Marine, BRC Asia

Nov Alpha Picks scraping through with a slight win.

  • Our Alpha Picks portfolio outperformed the STI by a slight 0.8ppt in Nov 21, declining by 4.1% m-o-m vs a 4.9% drop in the STI with much red ink seen towards the end of the month due to the news about the new Omicron variant. Only Lendlease Global Commercial REIT had a positive return within our portfolio, with Sea Ltd (-16.2% m-o-m) and ComfortDelGro (-12.2%) exhibiting the highest share price declines.

Removing our tactical short on the financials, and taking out Sea and iFast

  • Our call to short financials worked well with DBS share price declining 5.3% m-o-m and OCBC share price falling by 6.9% m-o-m as Sea’s re-weighting within the MSCI Singapore index took place at the end of November. In addition, we have removed Sea and iFAST given the lack of share-price catalysts in the near term.

Adding Sembcorp Marine and BRC Asia to our Alpha Stock Picks.

  • We have added Sembcorp Marine (SGX:S51) as we believe that the current share price has already priced in most of the company’s negatives and the outlook for the offshore renewables and drilling sector has improved markedly over the past 12 months. With its S$1.5b capital raising behind it, Sembcorp Marine is now in a much stronger financial position to take advantage of a potential upswing in the offshore construction sector.
  • For BRC Asia (SGX:BEC), we like the company as it is a proxy to the Singapore economy’s continued reopening and should benefit from the government’s infrastructure spending.

Sembcorp Marine (SGX:S51) – BUY (Adrian Loh)

  • An improved financial position post S$1.5b capital raising that was completed in Sep21. On its 3Q21 business update call, Sembcorp Marine’s management commented that it has a relatively strong liquidity position with its gearing at 0.4x as at end-3Q21. Importantly, the capital raising proceeds can be used more ably to execute and complete the projects as well as for working capital needs for new orders and projects. The company does not expect any more capital raisings given that its banks can see that the overall industry is improving and that Sembcorp Marine is transitioning well into renewables.
  • New order flow enquiries have improved from management standpoint as well as ours, so 2022 will be much better than 2021. At present, Sembcorp Marine is working on tenders worth in excess of US$10b and commented that its addressable market has improved tremendously. In addition, we highlight that its repairs and upgrades segment saw a sequentially higher volume of business in 3Q21 and this should continue over the coming quarters.
  • Maintain BUY with a target price of S$0.11. Our target price for Sembcorp Marine price is based on a target multiple of 0.74x which is pegged to our 2022 estimated book value per share of S$0.14. Our target P/B multiple is a 30% discount to Sembcorp Marine’s past-five-year average P/B of 1.07x. In our view, we believe this discount is a reasonable reflection of the industry risks that Sembcorp Marine faces in at least the next 12 months. With its S$1.5b rights issue completed, and with Temasek’s mandatory general offer at S$0.08/share having lapsed in early-Nov 21, we believe that much of the corporate-level risk has dissipated and there is very limited downside at the current Sembcorp Marine share price.
  • Share Price Catalysts:
    • Events:
      • New orders for rigs; offshore renewable installations or fabrication works.
      • Merger or JVs with other shipyards.
    • Timeline: 3-6 months.
  • See

BRC Asia (SGX:BEC) – BUY (Llelleythan Tan/John Cheong)

  • Endemic transition to improve labour supply. With Singapore’s fully vaccinated rate reaching 88%, Singapore’s transition to endemic living would help boost worksite activity as more construction workers return in the absence of lockdown restrictions.
  • Proxy to Singapore's reopening. In spite of the ongoing COVID-19 pandemic, BRC Asia has maintained its monopolistic market share which has seen its orderbook grow steadily to S$1.2b. BRC Asia is set to benefit from the recovery in the construction sector and major upcoming projects including the new Tuas Megaport, Changi Airport Terminal 5, Greater Southern Waterfront, which would help raise earnings.
  • Government spending to spur demand. Singapore’s government passed an infrastructure bill which allowed the government to borrow S$90b in bonds to fund national infrastructure projects and upgrades. With its dominant market share, BRC Asia would benefit as close to 90% of total annual revenue derives from Singapore.
  • Maintain BUY with a target price of S$1.76. We think that the full reopening of Singapore's international borders to foreign labour would cause a higher re-rating to BRC Asia's share price.
  • Share Price Catalysts
    • Events:
      • Faster-than-expected recovery in construction activities,
      • more public housing projects awarded, and
      • full relaxation of foreign labour restrictions.
    • Timeline: 3-6 months.
  • See

Civmec (SGX:P9D) – BUY (John Cheong)

  • One of Australia’s leading construction and engineering services provider to three key sectors: defence, resources and energy. Civmec’s notable clients include Chevron, Rio Tinto, Alcoa Australia, BHP, Thyssenkrupp and the Royal Australian Navy.
  • We expect Civmec to deliver record earnings (+18% y-o-y) in FY22 (fiscal year ending June), backed by a robust orderbook of A$1b, almost doubling orderbook from A$0.6b in 2017. In FY21, Civmec delivered a strong earnings growth of 94% y-o-y. Civmec’s 1QFY22 earnings grew 62% y-o-y and sees a strong pipeline of new projects in the sectors it operates in. It also sees new opportunities in the green energy space.
  • Massive potential in new defence business underappreciated. In Apr 18, the Royal Australian Navy awarded a huge contract to Civmec and Lurssen Shipyard to construct 12 offshore patrol vessels (OPV) by 2029. The contract is worth around A$3b and is part of the country’s A$89b continuous shipbuilding contract.
  • We have a BUY rating and target price of S$0.98, pegged to 12x FY22F P/E (1 standard deviation below its 5-year mean). We think the current valuation of 9x FY22F P/E for Civmec is attractive, given its strong growth profile and orderbook, especially in the defence sector which has a long tenure and high barriers to entry. Peers are trading at 15x FY22F P/E.
  • Share Price Catalysts
    • Earnings surprise due to higher-than-expected contract wins and margin.
    • Better-than-expected dividend.
    • Takeover offer by strategic shareholder given the high entry barrier of defence business.
  • See

Thai Beverage (SGX:Y92) – BUY (Llelleythan Tan)

  • Return of international tourism. Vaccinated travelers from 63 countries are allowed to enter Thailand without quarantine from 1 Nov 21 onwards, providing a boost to Thailand’s battered tourism sector. With increasing tourist arrivals, this would help boost domestic alcohol consumption and volumes. Commanding 95% and 40% domestic market share for spirits and beer respectively, Thai Beverage is expected to benefit from Thailand’s reopening.
  • Lifting of nationwide alcohol ban and nightlife venue closures. In line with Thailand’s reopening, Thailand’s authorities have allowed for the sale and consumption of alcohol in restaurants/eateries in four popular tourist locations. The government is also considering lifting the ongoing nationwide alcohol ban and reopening of nightlife entertainment venues by Dec 21. Once lifted, we reckon this would help boost Thai Beverage’s on-trade alcohol consumption and volumes.
  • Vietnam and IPO to follow suit. Vietnam is gradually reopening its economy as the country transitions from a COVID-19--zero policy. Vietnam’s government has recently allowed the sale and consumption of alcohol in restaurants in two districts on a trial basis, which may be extended nationwide if successful. Also, consideration for Thai Beverage’s IPO of its beer business may resume as market conditions improve.
  • Share Price Catalysts
    • Events: Lifting of nationwide alcohol bans in Thailand and Vietnam; full reopening of international borders in Thailand and Vietnam; IPO of the beer business.
    • Timeline: 3-6 months.
  • See

Uni-Asia Group (SGX:CHJ) – BUY (Clement Ho)

  • Drybulk operator with solid dividend track record. Listed on the Singapore Exchange since Aug 07, Uni-Asia Group operates two key segments: shipping and property. Under shipping, Uni-Asia has a combined fleet of 18 handy-sized drybulkers, with 10 wholly-owned and eight jointly-owned. The fleet is typically hired out on a time charter basis, with Uni-Asia undertaking most of the voyage expenses, including bunker, port, fuel and crew costs. Uni-Asia has a solid dividend track record since 2017 and continued paying dividends despite a loss-making 2020.
  • Freight rates to remain elevated till at least end-22. The recent spike in drybulk freight rates was primarily caused by a supply squeeze (as vessels are stuck longer in ports) and strong demand for various commodities. Furthermore, a meaningful increase on the supply end is absent, based on the global outstanding orderbook for smaller-sized vessels (up to 40,000 dwt). This is because buyers are staying on the sidelines of new orders in anticipation of new ESG standards on vessel emissions. Also, any new vessel orders placed now will still require at least 24 months of construction. We believe the perfect storm has begun for a demand surge in the dry bulk industry, where shipowners will likely benefit with the anticipation that freight rates will stay elevated into end-22.
  • Renewal of vessels’ rate to boost earnings. Of the 10 wholly-owned dry bulk carriers, six are up for renewal in 2H21 and three in 1H22. Based on current freight rates, we estimate that Uni-Asia's 2H21 and 2021 revenue would rise 38% and 42% respectively on a y-o-y basis, translating into a significant EPS turnaround in 2H21 at US$0.0457 (2H20: -US$0.0497) and 2021 at US$0.217 (2020: -US$0.098). As charter rates remain elevated in 2022 given the industry supply shortage, our estimates suggest a revenue growth of 15% in 2022, which implies a two-year CAGR of 27.1% over 2020-22.
  • Maintain BUY and a target price of S$2.34, pegged to 8x 2021F P/E (-1 standard deviation to the mean). This is in comparison to regional peers which trade at an average 8.6x 2021F P/E. Current valuations for Uni-Asia are attractive at 4.8x/4.2x 2021/22F P/E and 2022 dividend yield of 4.3%. Historically, the low valuation peg appended to Uni-Asia was due to a lack of liquidity, which we believe will improve given the strong earnings profile.
  • Share Price Catalysts:
    • Event: Higher-than-expected freight rates in the handy-size segment; better-than-expected cost management.
    • Timeline: 3-6 months.
  • See

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.
  • 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.
  • See

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 about 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 infra 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.
  • Share Price Catalysts
    • Events:
      • successful monetisation of 5G, and
      • faster-than-expected recovery in Optus’ consumer and enterprise businesses.
    • Timeline: 6-12 months.
  • See

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

  • Another record quarter earnings for 3Q21. Core net profit came in above expectation despite very weak performance from China. Palm and sugar operations delivered one of the best set of results for 3Q21.
  • Good earnings momentum for 4Q21 as well and on track for another record core profit for 2021. Post briefing, we remain positive and Wilmar International is on track to deliver its record net core profit for 2021 since its listing. Overall, good earnings from the palm and sugar divisions are sustainable into 4Q21 with improvement from its China operation. The diversified business model again paid off well this year with weak performance from China well compensated by its palm and sugar operations.
  • AWL listing target by mid-Dec 21. This is relatively a smaller IPO vs the listing of Yihai Jerry Arawana (YKA). IPO roadshow has started and is on track to be listed by mid-Dec 21. The listing of Adani Wilmar Limited (AWL) would be positive for Wilmar International to unlock shareholder value. The IPO proceeds will be mainly used to fund AWL’s expansion in India, especially to expand their product range, which will eventually mirror the business model in China.
  • Share Price Catalysts
    • Events: Listing of AWL and expectation of announcing strong 4Q21 results by end-Feb 22.
    • Timeline: 2-4 months.
  • See

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 the 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 of 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$1.03 is based on dividend discount model (cost of equity: 6.0%, terminal growth: 1.0%).
  • Share Price Catalysts
    • Events:
      • Redevelopment of Grange Road Car Park, and
      • acquisition of Jem.
    • Timeline: 6-12 months.
  • See

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

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

ComfortDelGro (SGX:C52) – BUY (Llelleythan Tan)

  • Recovery in progress. Once Singapore’s COVID-19 infection numbers taper down, ComfortDelGro is set to benefit from Singapore's economic reopening. With 84% of the population fully vaccinated, favourable tailwinds such as Singapore's transition to endemic living, and reopening of Singapore’s international borders through VTLs, should give a boost to CD’s rail and taxi ridership moving forward.
  • Wind in its sails: ComfortDelGro 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.
  • Favourable transition to boost ridership. Australia has repositioned its COVID-19-zero approach to endemic living as vaccination rates near 80% in Victoria and New South Wales. Relaxation in COVID-19 restrictions would also help boost ridership in these two critical states. UK operations will likely remain stable given its high vaccination rates but the emergence of a new Delta subvariant may hinder progress.
  • Share Price Catalysts
    • Events: Lifting of COVID-19 stay-home restrictions in Singapore; unlocking of value in the Australia business; and regulatory changes for Downtown Line financing.
    • Timeline: 3-6 months
  • See

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 risen 98% year-to-date and up 24% thus far in 2H21.
  • 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.
  • 9M21 gross profit of RMB2.6b made up about 60% of our full-year 2021 estimates; however, we remain sanguine given that:
    1. the revived Chango yard will be nearly fully ramped up in 4Q21,
    2. the acquisition of the remaining 20% of the Xinfu yard was completed at end-3Q21 thus enabling full profit contribution in 4Q21 onwards, and
    3. another 10-15 vessels to be delivered in the current quarter.
  • While 3Q21 gross margins for shipbuilding were lower y-o-y, we highlight that 3Q20 margins was a high base given that Yangzijiang Shipbuilding had material deliveries of very large containerships. Importantly, 3Q21 gross profit margins of 13.2% was in line with our estimates and management guidance.
  • 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).
  • Share Price Catalysts
    • Events:
      • New order wins,
      • shipbuilding margin expansion from 4Q21 onwards,
      • clarity regarding the metrics on the divestment of its debt investments arm.
    • Timeline: Two months.
  • See

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-12-06
SGX Stock Analyst Report BUY MAINTAIN BUY 1.20 SAME 1.20