Singapore Stock Alpha Picks (Jul 2022) - UOB Kay Hian 2022-07-04: Add ComfortDelGro, DBS & Yangzijiang Shipbuilding, Remove OCBC


Singapore Stock Alpha Picks (Jul 2022) - Add ComfortDelGro, DBS & Yangzijiang Shipbuilding, Remove OCBC

  • Our Alpha Picks outperformed the STI in 2Q22, declining by 3.1% vs the market’s 9.0% fall. For June, however, we marginally underperformed the STI by 0.5ppt.
  • For Jul 22, we add ComfortDelGro (SGX:C52) due to the potential for better business conditions in 2H22, and also Yangzijiang Shipbuilding (SGX:BS6) as we like its very inexpensive valuations and its defensive business for at least the next 12-18 months.
  • We have taken out OCBC (SGX:O39) and replaced it with DBS (SGX:D05) as the latter is the most sensitive to interest rates in the Singapore banking sector.

SG market review.

Adding ComfortDelGro and Yangzijiang Shipbuilding to our Singapore Stock Alpha Picks

  • For July, we add ComfortDelGro (SGX:C52) as we believe the stock’s risk-reward is very favourable at present, given higher ridership domestically and in its key overseas markets.
  • Yangzijiang Shipbuilding (SGX:BS6) has been added as it has executed well on its projects in 2022; despite this, Yangzijiang's share price trades at a 2022F P/E of 5.3x and yields 4.8%. We expect the company to re-rate as it wins more new orders in 2H22.
  • Taking out OCBC. We have removed OCBC (SGX:O39) as its share price may see increased volatility in the near term due to investor concerns over the negative impact of a recession on the financial sector.
  • Switching horses in the financials sector. We have taken out OCBC (SGX:O39) in favour of DBS (SGX:D05) latter is the most sensitive to interest rates in the Singapore banking sector on our estimates.

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

  • Transition to endemic living. From 26 Apr 22, Singapore’s authorities announced the easing of most of its social distancing measures, which includes the removal of group size limits, safe distancing no longer being mandatory and 100% of workers now being allowed to return to their respective workplaces. Also, Singapore’s international borders have fully reopened, welcoming back international tourists. Backed by a population that is almost fully vaccinated, these favourable tailwinds would help underpin ComfortDelGro’s public transport and taxi earnings as mobility improves.
  • Improving ridership. SBS Transit (SGX:S61) experienced a strong recovery in rail ridership for May 22 (+56.8% y-o-y, +4.6% m-o-m), forming 81% of pre-pandemic levels (May 19). We reckon that this was due to more office workers returning to office spaces and the removal of dine-in group size limits. According to Land Transport Authority (LTA), passenger demand for point to point trips has gradually improved, albeit seeing slight dips due to COVID-19 outbreaks. Overall, we expect rail and taxi ridership to reach near pre-pandemic levels by 1Q23.
  • Increased ridership and footprint in key markets. With the exception of China, ridership levels in key markets have increased as most social distancing restrictions have been relaxed. The UK and Australia have also transitioned to endemic living with the resumption of international travel. In Australia, ComfortDelGro was awarded a new public bus contract that is expected to commence on Jul 22, worth around A$220m and would boost our 2022-24 PATMI estimates by 2-3%.
  • Maintain BUY with a 2022F PE-based target price of S$1.73, pegged to ComfortDelGro’s average 5-year mean P/E of 16.4x. The higher target price is due to higher 2022 earnings forecasts from the new Northern Territory contract.
  • See
  • Share price catalysts:
    • Events: Bus tender contract wins, earnings-accretive overseas acquisitions.
    • Timeline: 6+ months.

DBS Group (SGX:D05) – BUY (Jonathan Koh)

  • DBS is most sensitive in the Singapore banking sector to higher interest rates due to its high CASA ratio of 76%, which is highest amongst the three Singapore banks. We expect DBS’s NIM to expand by 9bp to 1.54% in 2022 and 43bp to 1.97% in 2023. We forecast earnings growth of 15.9% in 2023 and 9.7% in 2024.
  • We expect dividend of S$1.44 in 2022 and S$1.48 in 2023, which represents dividend payout ratios of 56.4% and 50.0% respectively. DBS provides dividend yields of 4.8% for 2022 and 4.9% for 2023.
  • Maintain BUY. Our target price of S$38.78 is based on 1.69x 2023F P/B, derived from the Gordon Growth model (ROE: 13.3%, COE: 8.5% (previous: 8.25%), growth: 1.5%).
  • See
  • Share price catalyst:
    • Events: Rapid NIM expansion starting 3Q22, and dividends increasing in tandem with NIM expansion and growth in earnings.
    • Timeline: 6-12 months.

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

  • Executing well in 2Q22. Our channel checks indicate that Yangzijiang (SGX:BS6) has had a very busy 2Q22 to date with around 18 vesssels having been delivered (see table overleaf). Importantly, we note that three of its 2Q22 deliveries were for the larger class of containerships (i.e. larger than 10,000TEU) which we believe should generate higher shipbuilding margins for in 2022.
  • Impressive operational performance, especially in light of external hurdles. In our view, these deliveries are even more impressive in light of the challenges that it and its suppliers have faced due to China’s “dynamic zero-COVID” strategy with disruptions and delays to the domestic and international supply chain as well as labour issues. Yangzijiang Shipbuilding had previously disclosed that it has a target of delivering 60 vesesels in 2022 – given that 34 of these vessels have been delivered thus far, the company could potentially exceed this and achieve its stretch target of 70 vessels.
  • Maintain BUY with SOTP-based target price of S$1.16. Yangzijiang Shipbuilding currently trades at a 2022 P/E of 5.4x which is a 17% discount to, and 1 standard deviation below, its 5-year average of 6.6x. While its 2022F P/B of 1.1x is higher than its past five-year average of 0.7x, we highlight that the company is forecast to increase its ROE from 10.8% in 2021 to 12.8% in 2022. In addition, assuming that Yangzijiang Shipbuilding maintains a payout ratio of 25% for 2022 (2021: 26%), the stock would yield 4.7% and thus providing downside support to the share price.
  • See
  • Share price catalysts:
    • Events: Evidence of margin expansion in 1H22 results, new order wins.
    • Timeline: 6+ months.

Frencken (SGX:E28) – BUY (John Cheong)

  • Growth across most segments except automobile. 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 (Ukraine hosts assembly plants for automobile components ranging from electrical cables to catalytic converters and seatbelts).
  • Continued growth in 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 the company 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 Global Commercial 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 increased 43% m-o-m to 294,304 in Apr 22 (19% of pre-pandemic levels). The return of tourists in ounts 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 Global Commercial REIT of S$0.96 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 (John Cheong)

  • System-in-Package design shift to revolutionise semiconductor manufacturing. 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:
    1. steady demand for its consumables and services,
    2. recurring but cyclical demand for equipment upgrades at Intel’s old fabs, and
    3. 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 per 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 catalyst:
    • Events: Higher-than-expected revenue growth rates, better-than-expected cost management, earlier-than-expected integration synergies with CEI.
    • Timeline: 6+ months.

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

  • Landmark merger. Keppel Corporation’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:
    1. S$4.1b as consideration for the divestment of its legacy rigs and associated receivables,
    2. S$4.9b as the pro forma estimate of the value of KOM, and
    3. 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 catalyst:
    • Events: Completion of merger with Sembcorp Marine and divestment of legacy rigs, 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)

  • Anticipates robust demand outlook. In its 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 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 in air freight rates.
  • Positive signal from recent share purchases of 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 per 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.
  • Maintain BUY. 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 has 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 food and beverage consumption in cinemas, a large and vital contributor of revenue, has also been permitted in 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 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.
  • Maintain BUY rating on mm2 with a target price of S$0.115 which is based on a SOTP-based valuation, with:
    1. core production business at 11.4x (7x) FY22F EV/EBITDA, in line with larger peers;
    2. 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)

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 have 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 reopened of its border with Singapore on 1 Apr 22 which is positive news for Aztech's Johor plant.
  • China's operations remain intact. Aztech resumed full operations in its Dongguan plant on 21 Mar 22, after a closure for six days for all the staffs to undergo PCR testing. 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 7.0x 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.

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

  • Seventh consecutive quarter of sequential recovery. RevPAU maintained an upward trajectory and increased 22% to S$67 in 1Q22, powered by higher occupancy and higher average daily rate. Countries with large domestic markets, such as the US, the UK, Japan and Australia, registered the strongest recovery especially in Mar 22.
  • 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 17% of assets under management (AUM). Occupancy for its student accommodation properties was close to 100%.
  • Setting sights on a higher goal. 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$1.33 for Ascott Residence Trust is based on DDM (cost of equity: 7.5% and terminal growth of 2.0%).
  • 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.

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.
  • 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 (S$0.27 per 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.
  • 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.
  • 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.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-07-04
SGX Stock Analyst Report BUY MAINTAIN BUY 1.550 SAME 1.550
SGX Stock Analyst Report BUY MAINTAIN BUY 5.600 SAME 5.600