Singapore Stock Alpha Picks (Jun 2022) - UOB Kay Hian 2022-06-02: Add Frencken & Lendlease REIT, Remove SingTel & SingPost


Singapore Stock Alpha Picks (Jun 2022) - Add Frencken & Lendlease REIT, Remove SingTel & SingPost

Outperforming in May.

Adding Frencken and Lendlease REIT.

  • For June, we add Frencken (SGX:E28) as we view its current valuations as being inexpensive, trading at 2022E P/E and EV/EBITDA of 7.5x and 3.4x respectively along with a prospective 4% yield.
  • Lendlease REIT (SGX:JYEU) has been added as we like its organic growth from its new asset Jem, as well as its exposure to sequentially higher tourist arrivals which will benefit its Orchard Road asset.

Taking out Singtel and Singpost.

  • We have taken profit on SingTel (SGX:Z74) as it has done well for us, up 5% since inception into our portfolio.
  • While we remain bullish on SingPost (SGX:S08) in the medium term, we have removed it as air freight rates have not shown signs of dropping and appear to remain elevated instead in the near term.

Frencken (SGX:E28) – BUY (Clement Ho)

  • Growth across most but the automobile segment. Frencken (SGX:E28)’s 1Q22 revenue of S$198.4m (+9.3% y-o-y) was led by growth from the semiconductor (+15.5% y-o-y), analytical & life sciences (+16.7% y-o-y) and industrial automation segments, while sales in the medical segment remained relatively stable. However, the automobile segment (-10.7% y-o-y) was impacted by constrained customer demand as a result of:
    1. semiconductor chip supply chain challenges, and
    2. disruptions arising from the Russia-Ukraine conflict, which hosts assembly plants for automobile components ranging from electrical cables to catalytic converters and seatbelts.
  • Continued growth in the semiconductor segment to buffer automobile slowdown. We expect the semiconductor sub-segment to contribute 39% of 2022 revenue, an increase from 38% in 2021 (2020: 30%). The relatively more profitable semiconductor segment is anticipated to help bolster a sufficient buffer for the group amid the volatile period that the automobile industry is undergoing.
  • Maintain BUY with a target price of S$1.63, pegged to 10.4x 2022F P/E, or Frencken’s historical mean P/E range, as we believe the global automobile industry will face an extended period of slow production amid adjustments in the global supply chain. We maintain the view that the current forward P/E valuation of 7.7x for Frencken is attractive due to its diverse stream of revenue sources, which would help Frencken stand out amid a volatile macro environment.
  • See
  • Share price catalysts:
    • Events:
      • Higher-than-expected factory utilisation rates,
      • better-than-expected cost management.
    • Timeline: 6+ months.

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

  • Maximising returns from JEM. JEM attracts shopper traffic of 22m per year due to an attractive mix of anchor tenants, such as IKEA, FairPrice Xtra, Don Don Donki, H&M, and UNIQLO. It provides organic growth from positive rent reversion and annual rental escalation of 3.2%. Management plans to unlock additional NLA at level one (4,600sf) and basement one (850sf) to cater for demand for more retail space.
  • Welcoming tourists back to 313@Somerset. Visitor arrivals to Singapore have increased 43% m-o-m to 294,304 in Apr 22 (19% of pre-pandemic levels). The return of tourists in 2H22, which typically accounts for 20-25% of shopper traffic, would restore shopper traffic at 313@Somerset back to pre-pandemic levels. Construction for the redevelopment of Grange Road Car Park into a multi-functional event space had commenced at end-21. The event space is expected to be operational by early-23 (18 months to complete).
  • Reiterate BUY. Our target price for Lendlease REIT (SGX:JYEU) of S$1.01 is based on DDM (cost of equity: 6.25%, terminal growth: 1.2%).
  • See
  • Share price catalysts:
    • Events: Reopening of Singapore’s international borders with the vaccinated travel framework (VTF) would bring tourists back to 313@Somerset.
    • Timeline: 6-12 months.

AEM (SGX:AWX) – BUY (Clement Ho)

  • System-in-Package design shift to revolutionise semiconductor manufacturing. AEM (SGX:AWX)'s key customer Intel Corporation’s (Intel) March IDM 2.0 strategy is a major bet that future demand and profitability lie in the packaging of modular dies (or chips), known as “tiles”, which can squeeze more compute within a single package. Driving towards that goal, Intel intends to build new fabrication plants (fabs) for these new “tiled” chips, and is expected to outsource the production of certain modules. Existing capacity has also been earmarked for the foundry services market.
  • Sustained demand for AEM’s total portfolio. Intel’s decision to maintain old fabs and build new ones means that AEM will enjoy:
    • steady demand for its consumables and services,
    • recurring but cyclical demand for equipment upgrades at Intel’s old fabs, and
    • demand for new equipment to test the new “tiled” chip products.
  • That said, AEM provides mainly backend test equipment, where demand typically comes 6-9 months following the installation of front-end equipment at the new fabs. Additionally, management expects engagements with 10 of the top 20 global semiconductor companies to result in meaningful revenue contributions in 2H22 and beyond.
  • Acquisition of CEI to lead to cost savings. We further estimate AEM to generate meaningful cost savings at the gross level of S$5.6m-9.0m a year, by in-sourcing some of its production activities to CEI Limited (CEI). At the entity level, CEI is expected to also contribute S$4.0m a year of incremental net profit to the overall group. We believe our estimates are conservative as we have not factored in further upside from capacity expansion in CEI’s box-build business.
  • Maintain BUY. We value AEM at S$5.60/share, implying 15.6x 2022F earnings. Our valuation is at a premium to the Singapore peer average forward P/E of 10.1x. More direct competitors listed in the US and Japan trade at an average of 18.8x forward earnings.
  • See
  • Share price catalysts:
    • Events:
      • Higher-than-expected revenue growth rates,
      • better-than-expected cost management, and
      • earlier-than-expected integration synergies with CEI.
    • Timeline: 6+ months.

Keppel Corporation (SGX:BN4) – BUY (Adrian Loh)

  • Landmark merger. Keppel Corp (SGX:BN4)’s and Sembcorp Marine (SGX:S51)’s merger announced on 27 Apr 22 has been gestating for a long time. In our view, the merger benefits both parties, both in the short and long term. For Keppel Corp, the divestment of Keppel Offshore & Marine (KOM) will allow it to focus more on asset-light and/or recurring-fee businesses.
  • Value accretion in place. Keppel Corp’s shareholders will realise approximately S$9.4b over time, comprising of:
    • S$4.1b as consideration for the divestment of its legacy rigs and associated receivables,
    • S$4.9b as the pro forma estimate of the value of KOM, and
    • S$500m in cash from KOM to partially redeem certain perpetual securities previously issued to Keppel Corp.
  • The transaction for Keppel Corp is more complicated relative to Sembcorp Marine’s given that Keppel Corp’s includes a transaction for its legacy rigs.
  • Maintain BUY. We value Keppel Corp at S$10.11 using a SOTP-based valuation methodology. Given the relatively more complex nature of the transaction, it may take time for the value of the merger to be realised; however, we believe that Keppel Corp’s share price will react positively heading into the completion date in 4Q22.
  • See
  • Share price catalysts:
    • Events:
      • Completion of merger with SMM and divestment of legacy rigs, and
      • further divestment of non-core assets for capital recycling purposes.
    • Timeline: 6+ months.

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

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

  • VMS anticipates a robust demand outlook. In its 2021 results, Venture Corp (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 Corp’s customers that we track, all the customers are guiding for revenue growth for 2022. More importantly, we believe Venture Corp 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 rates.
  • 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 Corp, 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 Corp 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 completely removed capacity limits in cinemas starting 26 Apr 22. Heading into the June school holidays, a strong line-up of blockbuster movies has been planned with highly anticipated blockbuster movies helping to boost ticket sales. Dining-in and F&B consumption in cinemas, which are large and vital contributors of revenue, have also been permitted in both Singapore and Malaysia.
  • Robust core production pipeline. Over the next 2-3 years, mm2 Asia (SGX:1B0)’s core production pipeline remains sizeable, amounting to S$150m-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 (SGX:1D1) has already started producing sold-out shows and concerts in 1HFY22 and is expected to reveal more concerts in 2H22. The recently-announced Justin Bieber concert was sold out in one day, implying strong pent-up domestic demand for live in-person concerts.
  • We have a BUY rating on mm2 Asia with a target price of S$0.115 which is based on an SOTP-based valuation, with:
    1. the core production business at 11.4x (7x) FY22F EV/EBITDA, in line with larger peers,
    2. the cinema business at 7.4x (7x) EV/EBITDA, in line with larger peers, and
    3. UnUsUaL (SGX:1D1) and Vividthree (SGX:OMK) at market value.
  • See
  • Share price catalysts:
    • Events:
      • Film production delivery,
      • full-easing of COVID-19 measures, and
      • spinoff of the cinema business.
    • 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 an SOTP-based target price of S$4.13.
  • Strong operational numbers in 1Q22. CapitaLand Investment’s solid 1Q22 revenue growth of 23% y-o-y to S$665m displayed the strengths of its fee-related earnings as well as the resurgence of its lodging business. The company’s outlook for 2022 remains strong with China potentially providing more earnings certainty should COVID-19 restrictions be lifted.
  • Lodging – potentially a major earnings driver for CapitaLand Investment in 2022. While this business experienced difficult operating conditions in 2021, we highlight that 1Q22 saw a turnaround with CapitaLand Investment witnessing a 34% y-o-y increase in revenue per available unit (RevPAU) to S$71 in 1Q22 (1Q21: $53). This was led by Europe (+167% y-o-y) and Singapore (+40% y-o-y) with only China stagnating.
  • See
  • Share price catalysts:
    • Events: Evidence of earnings growth in the 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 rates. Malaysia reopened its border with Singapore on 1 Apr 22 which is 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 staff to undergo the 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. We do not believe that Aztech’s 2022E P/E of 7.4x is justified given that its 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)

  • Complete removal of COVID-19 tests. Shortly after scrapping the need for a negative pre-departure PCR test in Apr 22, Thailand eliminated on-arrival testing for all vaccinated travellers from 1 May 22 onwards. The minimum insurance coverage required was also further reduced from US$20,000 to US$10,000. In Vietnam, the country has fully reopened its international borders since 15 Mar 22, with only one negative PCR (72 hours pre-departure) or ART test (24 hours pre-departure/upon arrival) required before entering the country quarantine-free.
  • Transition to endemic living. With the removal of the “Test & Go” Scheme starting 1 May 22, the cancellation of the “Thailand Pass” registration scheme is expected to take place next on 1 Jun 22, streamlining the travel process for international travellers. Thailand’s authorities 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.
  • Recent 1HFY22 core earnings were above expectations with revenue up 9% y-o-y and core PATMI growing 13% y-o-y, forming 57.2% and 56.1% of our full-year estimates respectively. Thai Beverage (SGX:Y92) declared a similar interim dividend of Bt0.15 per share (1HFY21: Bt0.15), representing a 1HFY22 earnings payout ratio of 23.1%. The strong 1HFY22 outperformance was largely driven by a robust 2QFY22, with strong y-o-y contributions from the beer, non-alcoholic beverages (NAB) and food segments, backed by the full reopening of Thailand’s international borders as well as the easing of social distancing measures. Maintain BUY with an SOTP-based target price of S$1.05 for Thai Beverage.
  • See
  • Share price catalysts:
    • Events:
      • BeerCo IPO, and
      • potential spin-off listing, and
      • full reopening of bars in Vietnam and Thailand.
    • 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.
  • It 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. 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$14.88 fof OCBC is based on 1.2x 2023F P/B, derived from the Gordon Growth Model (ROE: 9.8%, COE: 8.25%, 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.

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

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 -0.5 standard deviation 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 Genting Singapore’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.

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-06-12
SGX Stock Analyst Report BUY MAINTAIN BUY 1.630 SAME 1.630
SGX Stock Analyst Report BUY MAINTAIN BUY 5.600 SAME 5.600