Singapore Stock Alpha Picks (Jan 2022) - UOB Kay Hian 2022-01-03: Adding OCBC, Removing Thai Beverage


Singapore Stock Alpha Picks (Jan 2022) - Adding OCBC, Removing Thai Beverage

  • Our Alpha Picks portfolio was flat on a m-o-m basis in Dec 21 and underperformed the STI which rose 2.7%. For 2021, we underperformed with our portfolio rising by 3.9% on an equal-weighted basis vs the STI’s 9.8% increase.
  • For Jan 22, we have made a minor change with only the addition of OCBC (SGX:O39) to our portfolio, with the bank being our preferred play over DBS (SGX:D05) in the financial sector, and the removal of Thai Beverage (SGX:Y92) due to the current Omicron situation in Thailand.

Our Alpha Picks portfolio had a flat month in Dec 21

Adding OCBC and removing Thai Beverage for Jan 22 Singapore Stock Alpha Picks.

  • For Jan 22, we have only made a minor change to our portfolio by adding OCBC and removing Thai Beverage.
  • We prefer OCBC (SGX:O39) to DBS given the former’s better 2022 earnings growth of 3% y-o-y (driven by our expectation of 7.1% y-o-y loan growth and 1.53% NIM in 2022) vs DBS’s 2% decline. In addition, we view OCBC’s valuations as inexpensive given its 2022 P/B of 1.0x. Our target price for OCBC of S$15.35 implies 35% upside from current share price levels.
  • Although we remain bullish on Thai Beverage’s post COVID-19 recovery, we are cautious on Thailand’s current Omicron situation and the government’s movement control measures, and thus its short-term impact on consumption levels. Hence, we have removed the company from our Alpha Picks portfolio and will relook when the Omicron situation improves.

OCBC (SGX:O39) – BUY (Jonathan Koh)

  • Anticipating stellar loan growth in 2022. OCBC (SGX:O39)’s management guided for high single-digit loan growth for 2022. We expect the pick-up in loan growth in 2H21 to be sustained into 2022 while NIM is expected to be stable at 1.51-1.52%. Credit costs are expected to be 21bp, which is similar to the level seen in 3Q21.
  • Maintained double-digit growth of 13.6% in fee income, a reflection of higher volume of customer activities. OCBC saw relatively flat wealth management fees q-o-q in 3Q21, but continued to expand assets under management (AUM) by 6%. In addition, we saw a stabilisation of asset quality with the bank’s NPL ratio again unchanged at 1.5% in 3Q21 with higher upgrades/recoveries of NPLs at S$359m, an increase of 42% q-o-q.
  • 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. New CEO Helen Wong emphasised focus on organic growth from:
  • capturing investment and trade flows between ASEAN and Greater China,
    1. retail wealth management,
    2. sustainable finance, and
    3. accelerated growth in digitalisation.
  • See
  • Share Price Catalyst

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

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 (SGX:S51)’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. Sembcorp Marine does not expect any more capital raisings given that its banks can see that the overall industry is improving and that the company is transitioning well into renewables.
  • New order flow enquiries have improved, so from management’s standpoint as well as ours, 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 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 at a 30% discount to the company’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.
  • See
  • Share Price Catalysts
    • Events:
      • New orders for rigs, offshore renewable installations or fabrication works.
      • Merger or JVs with other shipyards.
    • Timeline: 3-6 months.

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

  • Endemic transition to improve labour supply. With Singapore’s fully vaccinated rate reaching 89%, 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 (SGX:BEC) has maintained its monopolistic market share, which has allowed its orderbook to 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 to 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 its total annual revenue is derived from Singapore.
  • Maintain BUY with a target price of S$1.76. We opine that the full re-opening of Singapore's international borders to foreign labour would cause a higher re-rating to BRC Asia's share price.
  • See
  • Share Price Catalyst

  • Events:
    • Faster-than-expected recovery in construction activities,
    • more public housing projects awarded, and
    • full relaxation of foreign labour restrictions.
  • Timeline: 3-6 months.

Civmec (SGX:P9D) – BUY (John Cheong)

  • One of Australia’s leading construction and engineering services providers to three key sectors: defence, resources and energy. Civmec (SGX:P9D)’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. This is almost double its orderbook of A$0.6b in FY17. In FY21, Civmec delivered a strong earnings growth of 94% y-o-y. Civmec’s 1QFY22 earnings grew 62% y-o-y, and the company 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 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 (1SD below its five-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.
  • See
  • Share Price Catalysts
    • Events:
      • Earnings surprise due to higher-than-expected contract wins and margin;
      • better-than-expected dividend; and
      • takeover offer by strategic shareholder given the high entry barriers of the defence business.
    • Timeline: 3-6 months

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 (SGX:CHJ) operates two key segments: shipping and property. Under shipping, Uni-Asia has a combined fleet of 18 handy-sized drybulkers, of which 10 are 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 had a solid dividend track record since 2017 and has 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 of freight rates remaining elevated into end-22.
  • Renewal of vessels’ rates 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 2H21 and 2021 revenue would rise 38% and 42% respectively on a y-o-y basis, translating to a significant earnings per share turnaround in 2H21 at US$0.04.57 (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 compares to regional peers which trade at an average 8.6x 2021F P/E. Current valuations for Uni-Asia are attractive at 4.8x 2021F and 4.2x 2022F P/E, with 2022 dividend yield at 4.3%. Historically, the low valuation peg appended to Uni-Asia has been due to a lack of liquidity, which we believe will improve given the strong earnings profile.
  • See
  • Share Price Catalysts
    • Events:
      • Higher-than-expected freight rates in the handysize segment, and
      • better-than-expected cost management.
    • Timeline: 3-6 months.

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 (SGX:HMN)’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
    • Events:
      • 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’ sale of a 70% stake in Australia Tower Network (ATN – a wholly-owned subsidiary that houses Optus’ towers) to AustralianSuper for A$1.9b values ATN at 38x FY21 EV/EBITDA, or EV/sites of ~A$1m/tower. This is a premium vs Telstra’s recent tower sales and appealing vs traditional telco multiples of 8-12x EV/EBITDA, with the premium being 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 (SGX:Z74) 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 International (SGX:F34) – BUY (Leow Huey Chuen & Jacquelyn Yow)

  • Another record quarter earnings for 3Q21. Wilmar International's core net profit came in above expectation despite very weak performance from China. Palm and sugar operations delivered one of the best sets of results for 3Q21.
  • Good earnings momentum for 4Q21; on track for another record core profit for 2021. Post briefing, we remain positive on Wilmar International, and believe that the company is on track to deliver a record-high core net profit for 2021, the highest since its listing. Overall, good earnings from palm and sugar divisions are sustainable into 4Q21 with improvement from its China operation. Its diversified business model paid off well again this year, with weak performance from China well compensated by its palm and sugar operations.
  • Adani Wilmar (AWL) listing targeted for mid-Dec 21. This is a relatively smaller IPO vs the listing of Yihai Jerry Arawana (YKA). The IPO roadshow has started and is on track to be listed in 1H22. The listing of 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.
  • See
  • Share Price Catalysts
    • Events: Listing of AWL, and the expected announcement of strong 4Q21 results by end-Feb 22.
    • 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 1Q22. 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)

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 (SGX:C52) is set to benefit from Singapore's economic reopening. With more than 88% of the population fully vaccinated, favourable tailwinds such as Singapore's transition to endemic living, reopening of Singapore’s international borders through Vaccinated Travel Lanes, should give a boost to ComfortDelGro’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-zero approach to endemic living as vaccinations 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 new COVID-19 variants may hinder progress.
  • 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

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

  • For Yangzijiang Shipbuilding’s end-customers, container shipping remains strong with A.P. Moeller- Maersk recently raising full-year guidance for 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 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-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 estimate. However we remain sanguine given that:
    1. the revived Chango yard will be nearly fully ramped up in 1Q22,
    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 were delivered in 4Q21.
  • 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 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 current Yangzijiang's share price).
  • See
  • 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: 2 months.

Singapore Stock Top Picks

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-01-03
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