Singapore Stock Alpha Picks (September 2022) - UOB Kay Hian 2022-09-05: Add Nanofilm Technologies, Remove AEM, Venture Corp & ComfortDelGro


Singapore Stock Alpha Picks (September 2022) - Add Nanofilm Technologies, Remove AEM, Venture Corp & ComfortDelGro

Our Alpha Picks outperformed the STI in Aug 22

  • Our Singapore Stock Alpha Picks (August 2022) portfolio outperformed during Aug 22, increasing by 2.9% on a market cap weighted basis vs the STI’s 0.3% increase. Outperformance was broad-based, with the tech manufacturing, banks and industrial sectors being clear outperformers. Despite global geopolitical uncertainty, most corporates continued to deliver y-o-y profit growth, in line with market expectations.
  • In addition, overall market sentiment marginally improved as expectations for significant future interest rate hikes eased somewhat. However, facing an uncertain global macroeconomic outlook, stock investors were broadly on the sidelines, leading to a muted 0.3% increase for the STI in Aug 22 as compared to Jul 22 which saw a 3.5% increase.
  • 5 stocks in our Singapore Stock Alpha Picks (August 2022) recorded positive absolute returns of more than 4%, largely led by
    1. Sembcorp Industries (SGX:U96) (+17.9% m-o-m),
    2. DBS (SGX:D05) (+4.7% m-o-m),
    3. Yangzijiang Shipbuilding (SGX:BS6) (+4.3% m-o-m),
    4. AEM (SGX:AWX) (+4.1% m-o-m) and
    5. Venture Corp (SGX:V03) (+4.0% m-o-m).
  • The stock which saw a weak month was CapitaLand Investment (SGX:9CI) (-5.9% m-o-m), which reported weaker-than-expected 1H22 results, dragged by ongoing COVID-19 lockdowns in China and higher rental rebates.

Switching out AEM for Nanofilm while removing ComfortDelGro and Venture Corp for September Portfolio.

Singapore Stock Picks for September 2022 (Alpha Picks)

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. Singapore's persistent labour supply-demand imbalance is expected to ease moving forward as construction companies step up hiring and ramp up construction activities.
  • Orderbook remains robust. BRC Asia has maintained its dominant market share and has seen its orderbook grow slightly to S$1.14b from S$1b last quarter. 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 70% starts to ramp up. Management noted that 3QFY22 delivery volumes were higher q-o-q as demand for construction recovers.
  • Maintain BUY recomendation on BRC Asia with a target price of S$2.00, 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 catalyst
    • Events: More public housing projects awarded, faster-than-expected recovery in construction activities.
    • 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 investment 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.
  • Slightly weaker-than-expected results for 1H22. CapitaLand Investment reported 1H22 revenue that was in line with our estimates, but its PATMI of S$433m (-38% y-o-y) was weaker than expected as it formed only 41% of our full-year estimates. This was due to:
    1. the China malaise – the country’s COVID-19-related lockdowns delayed the CapitaLand Investment’s planned capital recycling deals in 2Q22 (which resulted in a lower level of portfolio gains in 1H22 compared to 1H21), and
    2. higher levels of rental rebates for its retail assets.
  • Lodging resurgence. The highlight continues to be lodging, with CapitaLand Investment increasing its units under management by 10% with > 7,500 units signed, as well as the acquisition of the Oakwood Worldwide portfolio which brought in another 15,000 units into its fold. With a total of 153,000 units in its portfolio, CapitaLand Investment is well on track to hit its 2023 target of 160,000 units. Importantly, the overall travel environment has continued to improve as many countries regionally and globally have relaxed travel restrictions as COVID-19 infections have waned.
  • CapitaLand Investment witnessed a 44% y-o-y increase in revenue per available unit (RevPAU) to S$82 in 1H22 (1H21: $57), led by Europe (+228% y-o-y) and Singapore (+54% y-o-y) with only China stagnating (-11% y-o-y).
  • Maintain BUY recommendation on CapitaLand Investment with a SOTP-based target price of S$4.28.
  • See
  • Share Price Catalysts
    • Events: Continued earnings growth in lodging business and growth in FUM at its 3Q22 business update.
    • Timeline: 3-6 months.

DBS (SGX:D05) – BUY (Jonathan Koh)

  • DBS (SGX:D05) is the most sensitive to higher interest rates due to its high CASA ratio of 72%, which is the highest among the three Singapore banks. NIM expanded by a sizeable 12bp q-o-q to 1.58% in 2Q22. We expect DBS’s NIM to expand by 28bp to 1.73% in 2022 and 44bp to 2.17% in 2023. We forecast earnings growth of 11.5% in 2023 and 18.9% in 2024.
  • We expect dividend of S$1.44 from DBS in 2022 and S$1.68 in 2023, which represents dividend payout ratios of 49.5% and 48.5% respectively. DBS provides dividend yields of 4.4% for 2022 and 5.2% for 2023.
  • Our DBS's target price is based on 1.86x 2023F P/B, derived from the Gordon Growth Model (ROE: 15.4%, COE: 8.5%, growth: 0.5%).
  • See
  • Share price catalyst
    • Events: Continued rapid NIM expansion in 2H22, and dividends increasing in tandem with NIM expansion and growth in earnings in 2023.
    • Timeline: 6-12 months.

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

  • Growth across most segments except medical and automobile. Frencken (SGX:E28)’s 1H22 revenue of S$389m (+3.6% y-o-y) was led by growth from the semiconductor (+9% y-o-y), analytical & life sciences (+7% y-o-y) and industrial automation segments (+7% y-o-y). Growth in the semiconductor space was lifted by higher orders for front-end semiconductor equipment from customers in Europe and Asia, while the analytical & life sciences segment enjoyed higher sales to customers in Europe and Asia. However, sales in the medical (-7% y-o-y) and automobile segment (-17% y-o-y) were impacted by constrained customer demand as a result of continuing bottlenecks in the global supply chain.
  • Better outlook for 2H22. Frencken has witnessed success in its efforts to mitigate the inflationary cost pressures through its operational initiatives and passing on some of the increased input costs to customers from 2H22. Supply chain challenges weighing down the global automotive industry are also anticipated to ease in 2H22.
  • Frencken expects 2H22 revenue to show a moderate increase h-o-h. In 2H22, we expect to see growth in the semiconductor, medical, analytical & life sciences, and automobile segments, while the industrial automation segment is anticipated to register lower revenue.
  • Maintain BUY recommendation on Frencken with target price of S$1.60, pegged to 10.4x 2022F P/E, or Frencken’s historical mean P/E. We maintain the view that its 2023F P/E valuation of 7.5x 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.

NanoFilm Technologies (SGX:MZH) – BUY (John Cheong)

  • Results in line with healthy y-o-y adjusted PATMI growth. NanoFilm Technologies (SGX:MZH) reported adjusted PATMI of S$21m (+17% y-o-y), in line and accounting for 27% of our full-year estimate. 1H typically accounts for close to 30% of full-year earnings due to seasonality of strong year-end demand. NanoFilm Technologies’s largest segment, Advanced Materials Business Unit (AMBU), recorded an 11% y-o-y growth and contributed 76% of revenue in 1H22, with 3C products contributing 76%. On the other hand, Sydrogen, NanoFilm Technologies’s hydrogen fuel cell JV with Temasek, achieved its maiden revenue in 1H22 with the provision of coating services for a customer. While Sydrogen has not contributed significantly, it has made a significant breakthrough.
  • Optimistic outlook and dividend increase of 10%. NanoFilm Technologies is optimistic about the outlook of the markets it serves and believes that its deep-tech solutions will address the business opportunities available in these markets, independent of the shorter-term macro trends. NanoFilm Technologies’s multiple growth avenues in different industries, which are driven by its deep-tech and BU structure, are in different phases of growth. In addition, NanoFilm Technologies’s 10% y-o-y increase in interim dividend to 1.1 cents is also a signal of its confidence.
  • Maintain BUY recommendation on Nanofilm with a target price of S$2.72. We value NanoFilm Technologies based on an unchanged PEG of 1.0x (growth based on 3-year EPS CAGR of 20% from 2021-24). Our target P/E multiple of 20x 2023F P/E is at a slight discount vs NanoFilm Technologies’s peers’ 21x 2023F P/E.
  • See
  • Share Price Catalysts
    • Events: Positive newsflow from Apple product launches and EV battery developments, better-than-expected ramp-up in the nanofabrication business, and share buy-back.
    • Timeline: 6+ months.

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

  • Recovery strength to accelerate from 2H22 onwards. Genting Singapore (SGX:G13) is a major direct beneficiary of Singapore’s post-pandemic economic reopening and tourism recovery. We expect Genting Singapore's Share Price recovery to be further catalysed alongside visibility of earnings delivery over 2H22. Meanwhile, the resilient international tourist arrivals to Singapore and Resorts World Sentosa (RWS) will also be an effective booster to Genting Singapore's return to pre-pandemic earnings dynamics.WS
  • Tangible easing of pandemic-related restrictions to lift investor sentiment. Singapore has scrapped the previous quota-based VTL arrangement and on-arrival COVID-19 tests requirement earlier in April, while RWS has been allowed to operate with higher gaming capacity since Dec 21. We expect the removal of these cumbersome restrictions to lift Singapore's inbound travel in 2H22 which will eventually benefit Genting Singapore as international patronage rebounds.
  • Upbeat on China patronage’s reinstatement. We retain our view that China’s eventual borders easing (potentially in 4Q21-1Q23 onwards) remains as a strong re-rating catalyst for Genting Singapore. To recap, China visitors made up 19-20% of Singapore’s pre-pandemic tourist arrival in 2018-19. We think that Chinese footfall made up about 20% of RWS’ footfall and 20-25% of Genting Singapore’s top-line revenue.
  • Well-positioned to fulfil better capital management particularly in 2H22. 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$3.1b (26 cents/share) and that post-pandemic EBITDA is largely sufficient to fund its S$4.5b RWS 2.0 expansion.
  • Normalisation of lush prospective yield to 4.1-4.9% in 2022-23. We expect Genting Singapore’s dividend yield to normalise to 4.9% 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: Reopening of China’s borders, better capital management following the recent withdrawal of its Japan IR pursuit, and appealing 2023 yield of about 4.9%.
    • Timeline: 3-6 months.

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

  • Maximising returns from Jem. Jem, Lendlease Global Commercial REIT (SGX:JYEU)’s largest asset which accounts for 59.3% of its portfolio valuation, will benefit from the revival of the HSR. The upcoming HSR, if agreed and constructed, would bring more vibrancy to Jurong Gateway as the second CBD in Singapore. Jem will benefit from an increase in shopper traffic due to patronage of employees working in office buildings nearby and tourists from across the ASEAN region.
  • Welcoming tourists back to 313@Somerset. Visitor arrivals to Singapore increased 34% m-o-m to 726,601 in Jul 22 (40.3% 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. Redevelopment of Grange Road Car Park into a multi-functional event space is expected to be completed by early-23.
  • Reiterate BUY. Our target price for Lendlease Global Commercial REIT of S$0.99 is based on DDM (cost of equity: 7.25%, terminal growth: 2.2%).
  • See
  • Share Price Catalysts
    • Events: Positive newsflow on HSR between Singapore and Kuala Lumpur, reopening of Singapore’s international borders bringing more tourists back to 313@Somerset.
    • Timeline: 6-12 months.

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

  • Blow out numbers. Sembcorp Industries (SGX:U96) reported an extremely strong 1H22 with revenue increasing 45% y-o-y to S$4.8b. This generated pre-exceptional NPAT of S$490m, double that of the year-ago period. Sembcorp Industries’s results were much better than expected with renewables and conventional energy segments seeing strong net profit growth on a y-o-y basis. Sembcorp Industries’s 1H22 revenue and EBITDA formed 56% and 87% of our full-year estimates respectively. A dividend of $0.04 per share (payout ratio of 15%) was declared vs $0.05 for 2021.
  • Continued positive guidance on its outlook. In its outlook statements, Sembcorp Industries continued to paint a rosy 2H22 with results for the full year “expected to be significantly higher” on a y-o-y basis. Sembcorp Industries expects its conventional energy segment to maintain its strong revenue performance while the renewables segment will exhibit sequential earnings growth due to a full half-year contribution from its new acquisitions in China, however the latter should be tempered somewhat by higher corporate and financing costs arising from the acquisitions. In addition, Sembcorp Industries has two assets – Sembcorp Biomass Power Station in UK and India’s SEIL Project 2 – that will be offline for maintenance shutdowns in 2H22.
  • After the strong 1H22 results, we maintain BUY with a target price of S$4.10. Our target price is based on an unchanged target P/E multiple of 13.6x which is 1 standard deviation above Sembcorp Industries’s past 5-year average P/E of 10.1x (excluding 2020 where the company reported impairment-related losses) and is applied to our 2023 EPS estimate which we believe is a better reflection of the company’s ‘normalised’ earnings compared to 2022’s earnings. We note that on both P/E and P/B basis, Sembcorp's Share Price trades at a discount to its utilities peers in developed Asia.
  • See
  • Share Price Catalysts
    • Events: Sustained economic recovery post COVID-19, thus leading to increased energy and utilities, value-accretive acquisitions in the green energy space.
    • Timeline: 6+ months.

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

  • Already profitable without government support. After eight consecutive quarters of core losses since the onset of COVID-19, SIA Engineering (SGX:S59)’s core earnings have finally returned to the positive territory, at S$4.2m in 1QFY23. We expect SIA Engineering to strengthen further in the remaining FY23 and FY24, as flight activities continue to pick up at Changi Airport. SIA Engineering is a market leader in the line maintenance services at Changi Airport, with the lion’s market share of about 80%.
  • Singapore Airlines’ capacity reactivation plan offers good visibility for SIA Engineering’s recovery. National carrier Singapore Airlines (SIA Engineering’s parent company) is SIA Engineering’s anchor customer, accounting for about 70% of SIA Engineering’s revenue in FY22. Singapore Airlines has guided a plan to restore its pax capacity from 61% of pre-pandemic levels in 1QFY23 (i.e. Apr-Jun 22) to about 68% in 2Q, to 76% in 3Q and to 81% in Dec 22. This offers good visibility for SIA Engineering’s revenue recovery.
  • Undemanding valuation and dividend resumption. SIA Engineering's Share Price currently trades at FY25 (normalised year) P/E of 16.2x and only 11.5x if excluding its significant net cash position of about S$600m. With the core profitability recovery, we expect SIA Engineering to resume dividend payment this year and forecast a dividend payment of 6/10/13 cents in FY23-25, translating to a yield of 2.4%/4.0%/5.3%. We do not rule out the possibility of a sizeable special payout which can potentially unlock more value for shareholders.
  • See
  • Share Price Catalysts
    • Events: organic earnings recovery, dividend resumption, M&As.
    • Timeline: 6+ months.

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

  • Operationally a strong set of numbers in 1H22. Yangzijiang Shipbuilding (SGX:BS6) reported 1H22 revenue growth of 70% to RMB9.7b which resulted in a 32% y-o-y increase in net profit from continuing operations to RMB1.2b. As guided by management and as previewed in our previous note, the company delivered 35 vessels during 1H22 which, on a run-rate basis, is ahead of its previous 2022 delivery target of 60 vessels. In our view Yangzijiang Shipbuilding is highly likely to achieve its new target of 70 vessels. At the bottom line however, the results missed expectations due to fair value loss on currency hedges.
  • Still holding a lot of cash. As at end-1H22, Yangzijiang Shipbuilding had net cash of RMB3.7b equating to S$0.19/share. During the analyst briefing, management stated that its capex in 2022 may increase slightly given its RMB6m investment in the Jianying LNG terminal and will also look to return cash to its shareholders. Management however did not commit to whether this would be in the form of a share buyback or a higher dividend payout.
  • Maintain BUY with SOTP-based target price of S$1.16. Yangzijiang's Share Price currently trades at a 2022 P/E of 5.4x which is a 17% discount to, and 1SD 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 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 continued margin expansion, new order wins.
    • Timeline: 6+ months.

Singapore Research UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-09-05
SGX Stock Analyst Report BUY MAINTAIN BUY 1.160 SAME 1.160