Singapore Stock Alpha Picks April 2022 - UOB Kay Hian 2022-04-04: Add mm2 Asia, SIA Engineering, Venture Corp; Remove BRC Asia, Yangzijiang


Singapore Stock Alpha Picks April 2022 - Add mm2 Asia, SIA Engineering, Venture Corp; Remove BRC Asia, Yangzijiang

Strong outperformance in March.

More exposure to reopening plays.

Taking profit on stocks that have done well.

  • Stocks that have done well since their inception into our portfolio have been removed for Apr 22.
    • BRC Asia (SGX:BEC) (+11.4% since being selected as an Alpha Pick) saw strong share price performance after its 1QFY22 results and while we remain bullish on BRC Asia (SGX:BEC) for the long term, we remain cautious due to short-term headwinds such as rising steel prices.
    • While we continue to like Yangzijiang Shipbuilding (SGX:BS6) (+52.5% since inclusion into our portfolio), we believe that near-term catalysts remain scarce and would look to re-enter at lower levels.

SIA Engineering (SGX:S59) – BUY (Roy Chen)

Venture Corporation (SGX:V03) – BUY (John Cheong)

  • Venture Corporation anticipates a robust demand outlook. In its recent 2021 results, Venture Corporation (SGX:V03) highlighted that it expects a robust demand outlook based on customers’ orders and forecasts across various technology domains. Positive market momentum is also visible across instrumentation, test and measurement, networking and communications. In the list of Venture Corporation’s customers that we track, all the customers are guiding for revenue growth for 2022. More importantly, we believe Venture Corporation could capture higher growth than its customers’ revenue growth, given its ability to provide customised solutions for new product launches and entrance into new high growth domains including semiconductor and electric vehicles.
  • Easing of border restrictions globally should help improve component shortages. In Feb 22, Hon Hai, the biggest assembler of iPhones, highlighted that a major improvement in part shortages is likely in the first quarter, with “overall supply constraints” set to ease in the second half of the year. In addition to this, the further easing of border restrictions globally should help to improve the component shortage issues, from easier access to labour and reduction of air freight rate.
  • Positive signal from recent share purchases of the Executive Chairman. On 8 Nov 21, Mr Wong Ngit Leong, the Executive Chairman and largest shareholder of Venture Corporation, acquired 200,000 shares at S$18.73/share. Previously, his acquisition of 566,300 shares at an average price of S$14.45/share from Jul-Sep 17 turned out to be a strong positive signal as Venture Corp's share price hit an all-time high of S$29.50 in Apr 18.
  • Attractive valuation at 13x 2022F ex-cash P/E. Our target price of S$22.80 is pegged to 19.5x 2022F earnings, +1 standard deviation above its forward mean P/E. At the current price, Venture Corporation offers an attractive dividend yield of 4.5%.
  • See
  • Share price catalysts:
    • Events: Better-than-expected earnings or dividend surprise, and potential takeover
    • Timeline: 3-6 months.

mm2 Asia (SGX:1B0) – BUY (Llelleythan Tan)

  • Cinematic recovery. Domestic cinema attendance is poised for recovery as Singapore further eased capacity limits and safe distancing restrictions in cinemas starting 29 Mar 22. Also, 2022 is set to see a strong line-up of blockbuster movies with highly anticipated Marvel movies helping to boost ticket sales. Dining-in and F&B consumption in cinemas, a large and vital contributor of revenue, has also been permitted in Singapore.
  • Robust core production pipeline. Over the next 2-3 years, mm2 Asia’s core production pipeline remains sizeable, amounting to S$150-190m. Currently, the group has over 30 projects that are in various stages of development, production and distribution. As production of films/TV series ramps up in FY22, mm2 Asia is set to produce and distribute highly anticipated titles in new and existing markets.
  • Restart of live in-person concerts. In-person concerts/shows have resumed as more countries gradually ease restrictions. Unusual Entertainment (Unusual) has already started producing sold-out shows and concerts in 1HFY22. Furthermore, Unusual is expected to announce a slate of concerts on 6 Apr 22, which we reckon would be met with overwhelming pent-up demand.
  • Spinoff of cinema business. mm2 Asia is still exploring other ongoing options that include an IPO of its wholly-owned cinema business sometime in 2HFY22. Assuming mm2 Asia sells more than 50% of Cathay, a spinoff listing would help mm2 Asia restructure its debt as almost all of its debt would be tagged to Cathay once it becomes an associate company.
  • See
  • Share price catalysts:
    • Events: Film production delivery, full-easing of COVID-19 measures, and spinoff of the cinema business.
    • Timeline: 3-6 months

Bumitama Agri (SGX:P8Z) – BUY (Leow Huey Chuen)

  • We expect earnings to continue performing. Being a pure upstream palm oil producer, Bumitama Agri (SGX:P8Z) will have high earnings leverage during the current high CPO price environment. In addition, management also has reassured the market that Bumitama Agri has not entered into any forward sale since 1H21, thus giving it full exposure to the high prevailing CPO prices.
  • FFB production growth for 2022. For 2022, management guided for a 5-10% y-o-y nucleus FFB production growth with the production pattern having normalised recently. CPO production is expected to deliver a 17% y-o-y growth as we expect Bumitama Agri to increase its third-party FFB purchases in view of the expectation of higher production from Indonesia in 2022, as a result of the good rainfall over the past two years. Higher utilisation rate at its mills will enhance its milling margin as well.
  • After 2021, we upgraded earnings forecasts by about 35% for 2022, factoring in higher CPO price assumption of RM4,200/tonne. Our net profit forecasts for 2022-24 net profit are at Rp2.30t, Rp1.80t and Rp1.97t respectively. Maintain BUY with a target price of S$0.85 based on 7x 2022F P/E. As cash flow improves with a significantly lower gearing, we expect Bumitama Agri to potentially announce a higher-than-expected dividend in the coming quarter.
  • See
  • Share price catalysts:
    • Events: Strength/stability in CPO prices, evidence of >15% production growth at its 1Q22 business update, and better-than-expected dividends.
    • Timeline: 3-6 months.

CapitaLand Investment (SGX:9CI) – BUY (Adrian Loh)

  • Exciting growth in its fund management platform. CapitaLand Investment (SGX:9CI) has > S$120b in AUM which makes it one of the largest real estate invesment managers in Asia. Of this, S$86b are funds under management (FUM) and the company has plans to grow this to over S$100b by 2023/24. We forecast FUM fee income to grow at a 13% CAGR over 2021-24. In addition, the company has > S$10b in assets that it will look to monetise in the next few years. We have a BUY rating on CapitaLand Investment with a SOTP-based target price of S$4.13.
  • Lodging – potentially a major earnings driver for CapitaLand Investment in 2022. While this business continued to experience difficult operating conditions in 2021, CapitaLand Investment nevertheless still progressed the build-out of its long-stay business as well as the moving into adjacent segments such as purpose build student accommodation (72% of its lodging investment in 2021 was in this segment). Over the course of the next 12-18 months, we should see the return of international travel which should then allow margin expansion in CapitaLand Investment’s lodging assets as well as higher ROE. During the analyst call, management stated that this business could generate about S$150m in EBITDA vs our current 2022 and 2023 estimate of S$48m and S$78m respectively. The company is targeting 160,000 lodging units in 2023 vs 133,000 in 2021
  • A strong set of maiden results. In late-Feb 22, CapitaLand Investment reported 2021 core PATMI of S$497m (+12% y-o-y) that was slightly ahead of our expectations. Importantly, the strong numbers were the result of a broad-based recovery in CapitaLand Investment’s assets with higher contributions from both its fee-income-related business as well as its real estate investment business.
  • See
  • Share price catalysts:
    • Events: Evidence of earnings growth in lodging business and growth in FUM at Apr 22’s business update.
    • Timeline: 3-6 months

Aztech (SGX:8AZ) – BUY (John Cheong)

  • Optimistic on 2022 business outlook, backed by robust orderbook. Aztech (SGX:8AZ) is optimistic on its 2022 business outlook as it expects its operations to benefit from:
    1. healthy global demand for IoT and data communication products,
    2. improving vaccination rates against COVID-19. To date, 98% of Aztech’s employees in China had been fully vaccinated and 46% have received their third dose. In Malaysia, its manufacturing facility is back to operating at 100% workforce after achieving a plant-wide vaccination rate of 100% with close to 17% of eligible workforce being vaccinated with the third dose, and
    3. recording a robust orderbook of S$762m as at 22 Feb 22, which is 22% higher than its 2021 revenue, indicating a strong revenue growth for 2022.
  • Easing of border restrictions globally should help improve component shortages. In Feb 22, Hon Hai, the biggest assembler of iPhones, highlighted that a major improvement in part shortages is likely in the first quarter, with “overall supply constraints” set to ease in the second half of the year. In addition to this, the further easing of border restrictions globally should help to improve the component shortage issues, from easier access to labour and reduction of air freight rate. Malaysia's reopening of its border with Singapore from 1 Apr 2022 is also a positive news for Aztech's Johor plant.
  • China's operations remain intact. Aztech has resumed full operations in its Dongguan plant on 21 Mar 22, after a closure for six days for all the staffs to undergo PCR test. We understand that Aztech’s facilities are currently enjoying high utilisation rates and it is managing the components shortages well on the back of:
    1. leveraging the strong brand name of customers,
    2. maintaining its good long-term relationship with suppliers, and
    3. modifying the product designs to switch reliance to parts that are more readily available.
  • Attractive valuation. Trading at 8x 2022F P/E, we opine this is unjustified as peers are trading at above 10x. We continue to like Aztech as it is a proxy to high-growth IoT products, where we believe orders are just starting to ramp up in 2021 and would sustain into 2022. Maintain BUY. Target price S$1.55.
  • See
  • Share price catalysts:
    • Events: More order wins, better-than-expected cost management, and earnings or dividend surprise.
    • Timeline: 2-6 months

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

  • Make tourism great again. Over the next few months, both the Thai and Vietnamese authorities will simplify the entry procedures to their respective countries, eg scrapping the need to show a negative pre-departure PCR test for Thailand, and only one negative PCR or ART test needed prior to entry to Vietnam. These measures are positive for Thai Beverage (SGX:Y92) as both Thailand and Vietnam represented 76% and 18% respectively in revenue for the company for FY21 (Sep year-end).
  • Transition to endemic living. Thailand’s authorities have proposed several guideline changes to further boost the tourism sector. Pending approval from Thailand’s authorities, the costly on-arrival PCR tests would be replaced by the quicker and cheaper ART tests on 1 May 22. Also, Thailand authorities are planning to revoke the Thailand Pass requirement or cancel the Test and Go Scheme for all international arrivals from 1 Jun 22 onwards, simplifying the travel application process for international tourists.
  • Expect more domestic alcohol rules to be relaxed nationwide. Starting 1 Apr 22, Thailand’s authorities eased alcohol restrictions in 24 orange provinces to the less stringent yellow or blue zones, implying that alcohol can now be served at eateries to 11pm in these provinces. Bangkok has also eased restrictions for MICE events whereby alcoholic drinks can now be served. Thailand’s authorities also announced plans to debate allowing the kingdom’s nightlife industry to reopen fully and legally which would lead to a revival in the country’s bustling nightlife and alcohol consumption volumes.
  • See
  • Share price catalysts:
    • Events: BeerCo IPO, and resumption of international tourism.
    • Timeline: 6+ months.

OCBC (SGX:O39) – BUY (Jonathan Koh)

  • Three-year strategy refresh. OCBC (SGX:O39) plans to tap on four growth drivers:
    1. rising wealth in Asia through hubs in Singapore and Hong Kong,
    2. ASEAN-China trade and investment flows,
    3. new economy and high-growth industries, and
    4. transition to a sustainable low carbon world.
  • OCBC will invest to strengthen its comprehensive regional franchise and accelerate digital transformation. Management aims to achieve growth at CAGR of above 10%.
  • Guidance for 2022. OCBC's management guided mid-to-high single-digit loan growth for 2022. NIM is expected to be stable at 1.50-1.55%. Credit costs are expected to be 22-25bp (2021: 29bp). Management estimated that every 100bp increase in local interest rates will lead to NIM expansion of 18bp.
  • Benefitting from higher interest rates. Fed Funds Rate is expected to reach 1.9% by end-22, which implies about six hikes totalling 175bp in 2022 (one of the hikes could be 50bp). We expect NIM to be unchanged at 1.55% in 2022 and expand 15bp to 1.70% in 2023.
  • Maintain BUY. Our target price of S$15.00 for OCBC is based on 1.19x 2023F P/B, derived from the Gordon Growth Model (ROE: 10.0%, COE: 8.5%, growth: 0.5%). In our view, its 2022 P/B is very inexpensive at 1.04x.
  • See
  • Share price catalysts:
    • Events: OCBC’s dividend yield improving from 4.5% for 2022 to 4.8% for 2023, and OCBC expected to benefit from NIM expansion in 2H22.
    • Timeline: 6-12 months.

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

  • Slight delay in announcement of merger terms with Keppel Offshore Marine. On 31 Mar 22, Sembcorp Marine (SGX:S51) and Keppel Corporation (SGX:BN4) announced that while merger talks have been progressing well, the complexity of the deal has led to a slight delay and both companies expect to be able to update the market by end Apr 22. This does not change our positive view on Sembcorp Marine and thus we maintain BUY with a P/B-based target price of S$0.11.
  • Recently won a large order for a Wind Turbine Installation Vessel. In late-Mar 22, Sembcorp Marine secured a contract for the construction of a Wind Turbine Installation Vessel (WTIV) based on its in-house design in collaboration with Maersk Supply Services, one of the world’s largest offshore marine companies. Delivery of the vessel will be in 2025 with milestone payments. Our channel checks with the industry indicate that the contract value for this WTIV is in the range of S$600m to as much as S$800m. As a point of comparison, Keppel Corporation won a S$600m order for a WTIV in 4Q20.
  • Confidence in 2022. We highlight that management appeared to be very confident in 2022, commenting that 2022 results will be “significantly better” than 2021.
  • Challenges at the shipyard appear to have dissipated. While Singapore has seen COVID-19 cases numbers at > 25,000 per day, there appears to be progress towards endemic living and thus we believe that the worse is behind Sembcorp Marine in terms of access to labour and that we will not see any shutdowns of its shipyards nor a material increase in costs and negative effects on productivity.
  • Carbon taxes. We do not expect the materially higher carbon taxes, announced in Feb 22’s ‘Budget 2022’, to have a major impact on Sembcorp Marine.
  • See
  • Share price catalysts:
    • Events: New orders for rigs, and offshore renewable installations or production assets.
    • 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 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 (1 standard deviation 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 its strategic shareholder given the high entry barriers of the defence business.
    • Timeline: 3-6 months.

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

  • The sixth consecutive quarter of sequential recovery. RevPAU maintained an upward trajectory and increased 78% y-o-y and 24% q-o-q to S$87 in 4Q21, powered by higher occupancy (which improved from 50% to 60% on a portfolio basis) and higher average daily rate. Countries with large domestic markets (e.g. the US, the UK and Australia) registered the strongest recovery. France and Japan also registered healthy growth in 2H21.
  • Value creation through asset recycling. Ascott Residence Trust (SGX:HMN) divested six properties at an average exit yield of 2% and total proceeds of S$580m. The capital freed up was reinvested in 11 yield-accretive rental housing and student accommodation properties for total consideration of S$780m and an average EBITDA yield of 5%. Ascott Residence Trust’s longer-stay assets currently account for 16% of assets under management (AUM). Occupancy for its student accommodation properties was close to 100%.
  • Setting sights on a higher goal. Ascott Residence Trust's management plans to raise the asset allocation target in longer-stay assets by 10ppt from 15-20% to 25-30% in the medium term.
  • Reiterate BUY. Our target price of S$1.29 for Ascott Residence Trust is based on DDM (cost of equity: 6.5% and terminal growth of 1.8%).
  • See
  • Share price catalysts:
    • Events: Easing of travel restrictions and reopening of borders globally, and yield-accretive acquisitions in the student accommodation and rental-housing space.
    • 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 about 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 after the divestment).
  • The endgame: A regional digital infra 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. 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). The stock currently trades at 1 standard deviation below its five-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.

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

  • Market will eventually price in 2022-23 recovery. Genting Singapore (SGX:G13) is a major direct beneficiary of Singapore’s COVID-19 national vaccination programme and reopening of the economy. We believe that valuations will partially factor in Genting Singapore’s return to pre-pandemic earnings dynamics. We have a BUY rating on Genting Singapore with a target price of S$1.08 which implies a 2022E EV/EBITDA of 8.8x, or -0.5SD to its historical mean.
  • Towards restoration of normalcy. While Singapore has transitioned to its COVID-19 Resilience Phase since Nov 21, the nation has further relaxed some of its cumbersome standard operating procedures (SOP) and Resorts World Sentosa (RWS) has been allowed to operate with higher gaming capacity since Dec 21. We expect more inbound travel in 1H22 which will eventually benefit Genting Singapore as international patronage rebounds.
  • Significantly better capital management moving forward. With Genting Singapore finally dropping its decade-long pursuit of clinching a pricey Japan integrated resort (IR) concession, and with no new compelling projects to consider, management is targeting to enhance capital management and to develop a dividend policy. Theoretically, the scope of the company’s capital management can be significant, considering its net cash of S$3.3b (27 cents/share) and that post-pandemic EBITDA is largely sufficient to fund its S$4.5b RWS 2.0 expansion.
  • Lush prospective yields. We expect Genting Singapore’s dividend yield to normalise to 4.7% in 2023, assuming revenue and cash flows recover back to pre-pandemic levels, and that Genting Singapore restores its 2019 dividend payout level of 4.0 cents.
  • See
  • Share price catalysts:
    • Events: Wide dispensation of COVID-19 vaccines which will allow herd immunity; initiation of more Vaccinated Travel Lanes between Singapore and neighbouring countries; and appealing 2023 yield of > 4%.
    • Timeline: 3-6 months

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

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-04-04
SGX Stock Analyst Report BUY MAINTAIN BUY 2.900 SAME 2.900
SGX Stock Analyst Report BUY MAINTAIN BUY 1.080 SAME 1.080
SGX Stock Analyst Report BUY MAINTAIN BUY 22.800 SAME 22.800