Singapore Stock Alpha Picks (August 2022) - UOB Kay Hian 2022-08-02: Add Sembcorp Industries & BRC Asia, Remove Keppel Corp & mm2 Asia


Singapore Stock Alpha Picks (August 2022) - Add Sembcorp Industries & BRC Asia, Remove Keppel Corp & mm2 Asia

  • Our Alpha Picks outperformed the STI in Jul 22, increasing by 5.4% on a market cap weighted basis vs the market’s 3.5% increase.
  • For Aug 22, we add Sembcorp Industries as we believe it will continue to re-rate on the back of its green energy expansion and BRC Asia to ride on the upturn in the construction industry.
  • We have taken out Keppel Corp (SGX:BN4) following a positive share price rally after 1H22 results. We have also removed mm2 Asia (SGX:1B0) due to a lack of near-term catalysts.

Market review.

  • We saw a broad-based outperformance in Jul 22, where the gaming, tech manufacturing, banks and industrial sectors were clear outperformers. This was attributable to the recovery in the overall market sentiment after the US Fed hiked its interest rate by 75bp, consistent with market expectations and removal of market uncertainty.
  • In addition, the starting of results reporting season has also lifted sentiment as most of the corporates continue to deliver y-o-y growth, in line with market expectations.
  • The STI’s increase of 3.5% in Jul 22 was a reversal of poor performance in Jun 22 which saw a 4.0% decline.

Our Alpha Picks Outperformed in Jul 22.

Singapore Stock Picks for Aug 2022: Switching out of Keppel for Sembcorp and out of mm2 Asia for BRC Asia.

AEM (SGX:AWX) – BUY (John Cheong)

  • 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:
    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/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:
      1. Higher-than-expected revenue growth rates,
      2. better-than-expected cost management, and
      3. earlier-than-expected integration synergies with CEI.
    • Timeline: 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$1.35 for Ascott Residence Trust is based on DDM (cost of equity: 6.25% and terminal growth of 1.8%).
  • See
  • Share Price Catalysts
    • Events:
      1. Easing of travel restrictions and reopening of borders globally, and
      2. yield-accretive acquisitions in the student accommodation and rental-housing space.
    • Timeline: 6-12 months.

BRC Asia (SGX:BEC) – BUY (Llelleythan Tan)

  • Positive outlook for construction sector. Singapore’s Building and Construction Authority (BCA) projects total construction demand for 2022 at S$27b-32b. BRC Asia (SGX:BEC) remains a strong proxy for Singapore’s construction sector, given its commanding market share domestically. The country has a strong pipeline of upcoming public sector projects along with an increased supply in HDB launches. Some notable projects include the relocation of Singapore Science Centre, Cross Island Line, Changi Terminal 5, and the Toa Payoh Integrated Development.
  • Lifting of border restrictions. Singapore has fully reopened its international borders, allowing foreign workers back into Singapore to easily return to Singapore. Singapore's persistent labor supply-demand imbalance is expected to ease moving forward as construction companies step up hiring and ramp up construction activities.
  • Resolute orderbook and diversified supply chain. BRC Asia’s orderbook remains robust, standing at S$1b, lower than the S$1.3b at end-1QFY22. This is due to higher delivery volumes made in 2QFY22. We expect the group to deliver half of its current orderbook in the next 3-4 quarters as BRC Asia’s current production capacity of around 70% starts to ramp up. Also, BRC Asia is not affected by China’s ongoing COVID-19 lockdowns as BRC Asia has diversified its supply chain to regional suppliers closer to home.
  • Maintain BUY with a higher target price of S$2.15, based on 7.0x FY22F P/E, pegged to -0.5 standard deviation of BRC Asia’s long-term average P/E.
  • See
  • Share price catalysts
    • More public housing projects awarded.
    • Faster-than-expected recovery in construction activities.

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.
  • 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. CapitaLand Investment’s outlook for 2022 remains strong with China potentially providing more earnings certainty should COVID-19 restrictions be lifted. We expect the company to report solid 1H22 results on 11 Aug 22.
  • Lodging – potentially a major earnings driver for CLI 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.
  • Maintain BUY rating on CapitaLand Investment with an SOTP-based target price of S$4.13.
  • 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.

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 (SGX:C52)’s public transport and taxi earnings as mobility improves.
  • Improving ridership. SBS Transit 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 has commenced in 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, and earnings-accretive overseas acquisitions.
    • Timeline: 6+ months.

DBS (SGX:D05) – BUY (Jonathan Koh)

  • DBS (SGX:D05) is most sensitive to higher interest rates due to high CASA ratio of 76%, highest among the three Singapore banks. We expect DBS’ 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.
  • Our target price of S$38.78 for DBS 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 Catalysts
    • Events: Rapid NIM expansion starting 3Q22, and dividends increasing in tandem with NIM expansion and growth in earnings.
    • Timeline: 6-12 months.

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

  • Growth across most with the exception of 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 (Ukraine 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 the company stand out amid a volatile macro environment.
  • See
  • Share Price Catalysts
    • Events: Higher-than-expected factory utilisation rates, and better-than-expected cost management.
    • Timeline: 6+ 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 (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.
  • 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.
  • 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.

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 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 of S$0.96 for Lendlease REIT (SGX:JYEU) 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) bringing tourists back to 313@Somerset.
    • Timeline: 6-12 months.

Sembcorp Industries (SGX:U96) – BUY (Adrian Loh)

  • Active on the business development front. In 2H21, Sembcorp Industries (SGX:U96) was notably active on the business development front with nearly one deal every month. Importantly, all of these deals were focused on expanding the company’s renewables footprint.
  • Well on target to build out its green energy portfolio. While a number of the acquistions are still in the planning stage, we highlight that Sembcorp Industries has built up its renewables portfolio quite aggressively from 2.6GW gross installed capacity at the start of 2021 to 5.3GW at present – this excludes another 1.1GW that is currently under development. Thus, we believe that the company is on target to achieve its plans of increasing its renewable capacity to 10GW by 2025.
  • Maintain BUY with a target price of S$3.59 based on a target P/E multiple of 13.6x. This target P/E multiple is 1 standard deviation above the company’s past 5-year average P/E of 11.2x (excluding 2020 where the company reported impairment-related losses). We highlight that Sembcorp Industries is inexpensive vs its Asia Pacific utilities peers, trading at 30-40% discount on both P/E and P/B bases for 2022. We expect Sembcorp Industries to continue to re-rate in the next six months due to the scarcity of solid ESG companies in Singapore.
  • See
  • Share Price Catalysts
    • Events: Sustained economic recovery after the peak of COVID-19, thus leading to increased energy and utilities, and value-accretive acquisitions in the green energy space.
    • Timeline: 6+ months.

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

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

  • Venture Corp 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 parts 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 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.
  • Maintain BUY. Attractive valuation at 13x 2022F ex-cash P/E. Our target price of S$22.80 for Venture Corp 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.

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

  • Executing well in 2Q22. Our channel checks indicate that Yangzijiang Shipbuilding (SGX:BS6) has had a very busy 2Q22 to date with > 20 vesssels having been delivered. 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 Yangzijiang Shipbuilding 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 exceed this and achieve its stretch target of 70 vessels.
  • Maintain BUY with an 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 5-year average of 0.7x, we highlight that Yangzijiang Shipbuilding 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, and new order wins.
    • Timeline: 6+ months.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-08-02
SGX Stock Analyst Report BUY MAINTAIN BUY 5.600 SAME 5.600