China Sunsine Chemical Holdings
Price targets:
38 cents UPGRADE ADD (CGS-CIMB Research)
Fu Yu Corp
Price targets:
21 cents UPGRADE ADD (CGS-CIMB Research)
32 cents BUY (RHB Group Research)
21 cents DOWNGRADE HOLD (DBS Group Research)
Companies are expected to see immense pressure on their cash flows as business grinds to a halt amid the Covid-19 pandemic.
SMEs, in particular, are expected to face a liquidity crunch as business dwindles on efforts to contain the outbreak. But bigger businesses that are higher geared are also not expected to be spared.
And, in this uncertain climate, cash is king.
“In the manufacturing sector, all the companies under our coverage have net cash balance sheets with some having zero borrowings. As such, we think these companies will not face cash flow issues even if the Covid-19 outbreak extends till the end of 2020,” says CGS-CIMB Research lead analyst William Tng in an April 1 report.
Among these companies, Tng highlights two small-cap manufacturing firms that are poised to survive — and perhaps even thrive — amid the Covid-19 crisis.
The brokerage is upgrading China Sunsine Chemical Holdings and Fu Yu Corp to “add”, with target prices at 38 cents and 21 cents, respectively.
Tng notes that China Sunsine is debt-free, with 89% of its share price backed by net cash.
“We determine 26.5 cents as the trough price for China Sunsine,” Tng says. “We believe that China Sunsine’s near-term challenging outlook has been more than priced in by the market, and recommend long-term investors accumulate at this level.”
Meanwhile, the analyst also sees value emerging for Fu Yu Corp, which has seen its share price drop sharply by more than 30% since its 52-week high of 28.5 cents on Jan 17.
“Hence, we upgrade our recommendation from ‘hold’ to ‘add’ even after our 16–23% earnings cuts to factor in lower revenue,” Tng says.
CGS-CIMB’s earnings downgrade for Fu Yu Corp comes amid lockdowns arising from the Covid-19 outbreak and concerns of weaker end demand as global economic growth slows.
However, Tng believes the company has enough ammunition in its war chest to weather the storm.
“We estimate Fu Yu’s net cash position at end-FY2020 to be $93.7 million — representing zero debt balance sheet. As at March 26 this year, net cash was 61% of Fu Yu’s market cap,” Tng says.
Meanwhile, he projects Fu Yu’s FY2020 dividend yield to hit 8.5%. — Stanislaus Jude Chan
Singapore Exchange
Price targets:
$9.10 NEUTRAL (RHB Group Research)
$10.00 OUTPERFORM (Macquarie Research)
$9.60 BUY (DBS Group Research)
$8.00 SELL (Goldman Sachs Research)
$8.70 UPGRADE NEUTRAL (Credit Suisse Research)
$9.40 UPGRADE ADD (CGS-CIMB Research)
Even as markets continue to struggle with the economic impact of Covid-19, the resulting market volatility spells good news for Singapore Exchange (SGX), says RHB Group Research.
SGX is expected to announce its results for 3QFY2020 ended March on April 24.
But Bloomberg data already points to a robust 59% y-o-y increase in securities average daily volume (SADV) to $1.55 billion in 3QFY2020. This also marks a 51% q-o-q jump from 2QFY2020.
“The sharp spike was due to significantly higher trading volumes, as investors repositioned their portfolios following the disruptions from the Covid-19 pandemic,” says analyst Leng Seng Choon in a April 6 report.
He notes that derivatives average daily contracts traded stood at 1.16 million for January–February 2020, some 38% higher than in the preceding quarter.
“We believe market volatility will keep derivatives volumes firm,” Leng says. “The equity market indices also showed extreme volatility during this period.”
On the back of higher expected contributions from both derivatives and equities, Leng is raising his FY2020 earnings forecast by 11%.
The brokerage is raising its target price on SGX from $8.80 to $9.10. However, it is maintaining its “neutral” recommendation for the stock.
“Given the counter’s 8% share price rise over the past six months, we believe the positives — particularly for equities trading volume surges — are largely priced in,” Leng explains.
In particular, he likes SGX for its resilient fundamentals, which make it an attractive defensive play during this time of economic uncertainty.
With a monopoly over the trading of Singapore-listed equities, the company has maintained a strong balance sheet and a net cash position — putting it in good stead to withstand external shocks arising from Covid-19.
SGX will also draw long-term investors due to its respectable dividend yield. It declared a dividend of 30 cents per share in FY2019, representing an 82% payout ratio.
The counter is expected to offer 35 cents per share in FY2020 – representing an 85% payout ratio and translating to a dividend yield of 3.8%.
These optimistic forecasts, however, are subject to global uncertainty over the Covid-19 situation in the short to medium term as well as uncertain global economic fluctuations and geopolitical developments in the medium to long term.
How long the pandemic lasts could also have a bearing on SGX’s earnings.
“If the Covid-19 pandemic is prolonged, trading volumes could experience a gradual decline from current high levels,” Leng warns. “If Covid-19 is resolved soon, we could see another round of short-term trading volume surges.” — By Ng Qi Siang
