Singapore Stock Alpha Picks (December 2022) - UOB Kay Hian 2022-12-05: Add SIA & UMS; Remove First Resources, ComfortDelGro & Yangzijiang

Singapore Stock Alpha Picks (December 2022) - Add SIA & UMS; Remove First Resources, ComfortDelGro & Yangzijiang


Singapore stock market review.

  • See Performance of the Straits Times Index (STI) & constituents. The STI had an impressive month in Nov 22 where there was broad-based outperformance from most sectors, driven by signs of slowing US inflation coupled with dovish comments from the US Fed, raising hopes for less aggressive interest rate hikes. This led to improved market and investor sentiment which attracted cash-rich investors that were mostly on the side-lines in Oct 22.
  • Also, the slight easing of China’s COVID-19 restrictions lifted hopes for an earlier-than-expected shift away from its ongoing zero-COVID policy, boding well for Asia’s regional economic outlook.

Outperformance in Nov 22.

For December 2022 Singapore stock alpha picks – Add SIA and UMS, take profit on Yangzijiang Shipbuilding and First Resources while removing ComfortDelgro.

Singapore Stock Alpha Picks for December 2022

Singapore Airlines (SIA, SGX:C6L) – BUY (Roy Chen)

  • Upcoming 3QFY22 results likely to beat consensus expectations. We expect SIA (SGX:C6L) to achieve peak performance in 3QFY23 at S$800m-1b, driven by the strong passenger yields locked in by the advanced bookings as well as the upbeat passenger volume recovery as pent-up air travel demand gets fulfilled during the seasonally strong Sep-Dec quarter. Sales in advance of carriage, a leading indicator for near-term revenue recognition, stood at S$4.16b as at end-1HFY23; this was about 40% above the end-1HFY20 (pre-pandemic) levels.
  • We forecast SIA’s FY24 net profit to hit S$2.3b, a record level, while believing that there is still scope for upside surprises. The consensus’ FY23 net profit forecast of S$1.69b is on the conservative side (27% below ours) and due for surprises, in our view.
  • Proposed merger of Vistara into Air India a positive development. See SIA's announcement dated 29 Nov 2022. We are positive towards SIA’s planned merger of Vistara into Air India, which will allow SIA to strengthen its presence in the fast-growing Indian market via its 25.1% strategic stake in a stronger and more competitive Air India (the surviving entity). Expected to be completed within FY24, the merger will lead to a one-off accounting gain of S$1.1b upon completion, raising SIA’s FY24 net asset value per share by about 8% by our estimate. Due to the significantly larger scale of the new Air India than Vistara, this strategic move would also enhance the long-term profitability prospects of SIA’s Indian investment, in our view.
  • Valuation not cheap, but sentiment could be high in the near term. SIA's Share Price currently trades at 1.09x P/B, or 1.3 standard deviation above its historical mean P/B of 0.97x. We expect SIA’s core profitability to normalise from 4QFY23 onwards, as competition catches up and drives down pax yields. The current favourable fuel hedge position would also largely come to an end by 1QFY24. In view of the likely profitability normalisation ahead, we have a fundamental HOLD rating on SIA, with a fundamental-driven target price of S$5.35. See report: Singapore Airlines (SIA) - UOB Kay Hian 2022-12-01: Potential Merger Of Vistara Into Air India A Positive Development
  • Having said that, we believe that market sentiment towards SIA would be high leading up to the 3QFY23 results early next year, and therefore there could be trading buy opportunities in the short term.
  • See
  • Share price catalysts
    • Events: High sentiment towards a stellar financial performance in 3QFY23, and news on China’s shifts in stance towards treating COVID-19.
    • Timeline: 3 months.

UMS (SGX:558) – BUY (John Cheong)

  • Robust outlook with huge order backlog, ready to take on more orders from new customers. The slightly lower forecast given by UMS (SGX:558)’s key customer recently is unlikely to have a significant impact on UMS's performance given the huge order backlog from its key customer. According to SEMI, semiconductor manufacturers worldwide are expected to expand 300mm fab capacity at a nearly 10% compound average growth rate from 2022 to 2025, hitting an all-time high of 9.2m wafers per month. Also, Mckinsey predicts that the semiconductor market will surpass US$1t by 2030, led by autos and data centres.
  • Robust revenue growth across all sectors. For 9M22, semiconductor sales increased 45%, while aerospace revenue grew 79%. Sales in the “others” category jumped by 70% to S$15m. Semiconductor Integrated System sales grew 45% to S$107m. Component sales also shot up 44% to S$132m. All of UMS's key geographies experienced growth. Malaysia and the "others" market reported the strongest growth, clocking in triple-digit sales increases. Revenue in Malaysia grew 124% and revenue in the “others” market soared 147% in 9M22. Sales in Singapore went up by 48%, while revenue in Taiwan and the US increased by 28% and 12% respectively.
  • Expansion plans progressing well. Construction of the new Penang factory is on schedule for completion by the end of the year and UMS is preparing to ramp up production from the middle of 2023. UMS will continue active engagement with prospective customers.
  • Maintain BUY on UMS with target price of S$1.38 is based on 8.5x 2023F EPS. This is pegged to -1 standard deviation of the historical mean P/E.
  • See
  • Share price catalysts
    • Events: Better-than-expected earnings or dividend surprise, and winning of new customers.
    • Timeline: 3-6 months.

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

  • Benefitting from reopening of international borders and pent-up demand. CapitaLand Ascott Trust (SGX:HMN)’s portfolio RevPAU recovered 88% y-o-y and 6% q-o-q to S$132 in 3Q22, which is 87% of pre-pandemic levels on a pro forma basis, due to higher occupancy (>70% in 3Q22) and ADR (9M22: +40% y-o-y). China and Singapore recorded strong sequential growth, while Australia and the US continued to perform at close to pre-pandemic levels.
  • Value creation through asset recycling. CapitaLand Ascott Trust 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 a total consideration of S$780m and an average EBITDA yield of 5%. CapitaLand Ascott Trust’s longer-stay assets currently account for 17% of portfolio valuation. 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.
  • Maintain BUY on CapitaLand Ascott Trust with target price of S$1.27 based on DDM (cost of equity: 7.5%, terminal growth: 2.6%).
  • 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.

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 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 on CapitaLand Investment target price of S$4.28 based on SOTP.
  • 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 Group (SGX:D05) – BUY (Jonathan Koh)

  • Benefitting from higher interest rates. DBS (SGX:D05) is most sensitive to higher interest rates due to high CASA ratio of 66%, highest among the three Singapore banks. NIM expanded by a sizeable 32bp q-o-q to 1.90% in 3Q22. We expect DBS’s NIM to expand 32bp to 1.77% in 2022 and 47bp to 2.24% in 2023. We forecast earnings growth of 16.6% in 2023 and 8.3% in 2024.
  • 5.0%/5.5% dividend yields for 2023/2024. We expect DBS to provide dividend of SS$1.76 in 2023 and $1.92 in 2024, which represents dividend payout ratios of 49.2% and 49.6% respectively. DBS provides dividend yields of 5.0% for 2023 and 5.5% for 2024.
  • Maintain BUY on DBS with target price of S$45.00 based on 1.91x 2023F P/B, derived from the Gordon Growth Model (ROE: 15.8%, COE: 8.5%, growth: 0.5%).
  • See
  • Share price catalysts
    • Events: Continued rapid NIM expansion in 2H22 and 1H23, and dividends increasing in tandem with NIM expansion and growth in earnings in 2023.
    • Timeline: 6-12 months.

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

  • Recovery strength to accelerate in 4Q22. Genting Singapore (GENS, 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 4Q22. 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.
  • 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 4Q22 which will eventually benefit Genting Singapore as international patronage rebounds.
  • Upbeat on China patronage’s reinstatement. We retain our view that China’s eventual border easing (potentially in 4Q22-1Q23 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 4Q22. 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$3.1b (26 cents/share) and that post-pandemic EBITDA can fund its S$4.5b RWS 2.0 expansion.
  • Normalisation of lush prospective yield to 4.1-5.0% 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 5.0%.
    • Timeline: 3-6 months

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

  • Revised terms for sale of its offshore & marine business. Keppel Corporation (SGX:BN4) and Sembcorp Marine (SGX:S51) announced in late-Oct 22 that they have varied the terms of the merger that was previously announced in Apr 22. Instead of merging with Keppel Offshore & Marine (KOM) under a new company, Sembcorp Marine will now acquire KOM with the consideration being the issuance of new Sembcorp Marine shares. The benefit of this new method is that it is simpler given that it does not require lengthy court approvals.
  • Impact to Keppel Corp's shareholders. While the consideration for KOM has been lowered, Keppel Corp's shareholders will receive a larger amount of shares worth S$2.33 vs S$2.26 previously. Importantly, Keppel Corp has positively modified the terms of the Vendor Notes that will be issued by the Asset Co. Recall that as part of the merger with Sembcorp Marine, Keppel Corp had linked the sale of legacy oil rigs and associated receivables into a separate entity called Asset Co to be owned by a third-party investor comprising of Baluran Limited (74.9%), Temasek’s wholly-owned Kyanite (15.1%) and Keppel Corp (10%). Part of the Asset Co consideration was via 10- year fixed-rate notes with a 2% p.a. coupon, which have now been re-negotiated up to a 4% p.a. coupon instead. Additionally, the sale of KOM has been de-linked to the divestment of Asset Co which at least ensures the success of the latter.
  • Reported strong 3Q22 business update. In a separate announcement, Keppel Corp reported a strong 3Q22 business update with revenue rising 24% y-o-y to S$6.8b and above our expectations. While the company did not disclose net profit numbers for 3Q22, it did state that net profit was lower y-o-y due to the high base effect of lumpy en bloc sales which boosted 3Q21 profits. The two key segments that performed well was energy & environment and asset management while, as expected, the management sounded bearish on its China property business.
  • Maintain BUY on Keppel Corp with a target price of S$10.11. Given the more complex nature of the transaction, it may take time for the value of the merger to be realised. In addition, Keppel Corp estimates the monetisation timetable for Asset Co will be between 3-5 years.
  • See
  • Share price catalysts
    • Events: Successful conclusion of the divestment of its offshore & marine business, resumption of normal business conditions in China, continued success in its capital recycling program.
    • Timeline: 3-6 months.

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

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

  • Investor call assuaged some concerns over the recent sale of its Indian coal assets. We recently hosted a call between Sembcorp Industries (SGX:U96) and Asian investors with one of the major talking points being Sembcorp’s recent sale of coal-fired power plants within Sembcorp Energy Indial Limited (SEIL). The key takeaway for us was that the pricing of these assets at slightly over 1.0x P/B was a premium to comparable transactions at 0.2-0.6x P/B: should SEIL have been sold at these levels, Sembcorp would have had to impair its book by >S$800m. The external environment has not been conducive to coal M&A in the past few years so the fact that Sembcorp was able to get this deal done was positive in our view.
  • New solar expansion in Singapore. Sembcorp recently announced that it had been that it had been awarded the SolarNova 7 project by the Housing & Development Board (HDB) and the Singapore Economic Development Board (EDB). This project involves the installation of 75MWp of solar capacity across 1,290 HDB blocks and 99 government sites. The 1,290 blocks, which will be located in areas under the Bishan-Toa Payoh, Tanjong Pagar and Jurong-Clementi Town Councils, will have a combined solar capacity of 50.5MWp. As of end-3Q22, Sembcorp’s gross solar capacity stands at 535MWp.
  • Maintain BUY on Sembcorp 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 the company’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 Sembcorp’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, 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)

SingTel (SGX:Z74) – BUY (Chong Lee Len/Llelleythan Tan)

  • Mobile recovery on track. SingTel (SGX:Z74)’s Singapore Consumer segment is benefitting from the resumption of international travel. Roaming revenue has returned to ~60% of pre-COVID-19 levels and is expected to improve further. Optus is also set to benefit from the return of international travel which has helped roaming revenue, currently at ~50% of pre-COVID-19 levels. Postpaid ARPU for both Optus and Singapore’s Consumer segment continues to increase from the strong take-up of 5G-bundled plans.
  • Fundamentals remain robust. Despite Optus’ near-term setbacks, SingTel and its regional associates face strong tailwinds as economic activity continues to ramp up, driven by the removal of most COVID-19 measures in key regional markets. For 1HFY23, underlying operating revenue (+4.3% y-o-y) and EBITDA (+2.8% y-o-y) grew and is expected to continue growing moving forward.
  • Maintain BUY on SingTel with a DCF-based target price of S$3.15 (discount rate: 7%, growth rate: 2.0%). At our target price, SingTel will trade at 14x FY23 EV/EBITDA (+1.0 standard deviation of its 5-year mean EV/EBITDA).
  • With a decent yield of 5.5% for FY23, SingTel remains an attractive play against elevated market volatility, underpinned by improving near-to medium-term fundamentals.
  • See
  • Share price catalysts
    • Events: successful monetisation of 5G, monetisation of data centres and/or NCS, and market repair in Singapore and resumption of regional roaming revenue.
    • Timeline: 6+ months.

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

  • Gradual recovery in tourist arrivals and reopening of nightlife entertainment venues. Thailand’s international tourist arrivals continued to grow in Oct 22, reaching a pandemic high of 1,475,430, increasing by 12.7% m-o-m. This was driven by the removal of most COVID-19 restrictions in Jul 22 and the return of international travel. Although we expect around 9-10m tourist arrivals in 2022, this is still a fraction of the 40m arrivals pre-pandemic.
  • Additional ASP hikes. To combat rising inflation, Thai Beverage (SGX:Y92)'s management noted that the group had adjusted its ASPs higher for its beer and spirits products in 1QFY23, supporting margins. Thai Beverage also plans to lift ASPs for its international spirits business in Myanmar as well, which would give the spirits segment a boost.
  • Fighting to be number one. Thai Beverage’s beer businesses are gaining market share in both Thailand and Vietnam, driven by increased advertising and promotional activities. In Thailand, Thai Beverage has the second largest market share at around 40%, closing in on the number one spot. The market share gap has been closing and is at the narrowest in 13 years. As Vietnam’s economic activities continue to recover, management expects second-placed Sabeco to outperform moving into FY23 and beyond, catching up to its closest competitor.
  • Maintain BUY on Thai Beverage with SOTP-based target price of S$0.73. We reckon Thai Beverage remains attractively priced at below -1.5 standard deviation of its 5-year mean P/E, backed by an expected earnings recovery underpinned by favourable tailwinds.
  • See
  • Share price catalysts
    • Events: better-than-expected consumption volume, and M&As.
    • Timeline: 6+ months.

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

  • Diversified customer base with less sensitivity to consumer sentiment. Venture Corporation (VMS, SGX:V03) should be able to deliver relatively resilient performance given its highly diversified customer base across seven technology domains. In addition, most of Venture Corp’s customers are in industrial segments such as life science, medical and testing, which are less sensitive to consumer sentiment.
  • Outlook for demand remains promising. Venture Corp expects to continue producing resilient results in the coming quarter. Based on its customers’ orders and forecasts, it expects demand to remain healthy. Venture Corp sees resilient demand across its diversified customer base, especially in the life science & genomics, healthcare & wellness, networking & communications, test & measurement instrumentation and process & test equipment in the semiconductor technology domains.
  • Enhancement and creation of differentiating capabilities help Venture Corp to stand out. Venture Corp persistently initiates ways to stay afloat amid macroeconomic headwinds, including:
    1. redesigning its products to reduce dependency on parts that are experiencing shortages,
    2. working with customers to obtain a longer order forecast for better procurement and production planning, and
    3. increasing stockpiles of inventories and sharing the working capital burden with customers.
  • These, along with its R&D capabilities, allow Venture Corp to continue attracting strong customer demand to maintain its market position.
  • Maintain BUY on Venture Corp with target price of S$20.06 pegged to 16x 2023F earnings, based on its mean P/E. At the current Venture Corp's Share Price, the stock offers an attractive dividend yield of around 4.5%.
  • See
  • Share price catalysts
    • Events: Better-than-expected earnings or dividend surprise, and potential takeover.
    • Timeline: 3-6 months.

Singapore Research Team UOB Kay Hian Research | 2022-12-05

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