933 Brokers' Digest

CGS-CIMB Research is reiterating its “add” call on Wilmar International with an unchanged target price of $4.58, representing a 29% upside for the counter. This comes despite a 12.7% y-o-y drop in earnings to US$224.3 million ($316.7 million) for 1QFY2020 ended March. on the back of mark-to-market losses on investment securities. Revenue in the same period was up 4.6% y-o-y to US$10.9 billion, driven by stronger demand for its consumer products but partially offset by a 20% reduction in sales volume of medium pack and bulk products.

CGS-CIMB analyst Ivy Ng says Wilmar’s earnings is “broadly in line with expectations” and at 27% of her full-year estimates. “Over the past 10 years, 1Q core net profit has on average made up 23% of its full-year core net profit,” notes Ng.

Wilmar, according to Ng, remains “cautiously optimistic” that its current 2Q will not be significantly impacted by the pandemic, if China’s economy recovers as expected.

“[Wilmar] expects consumer products business to continue its strong growth in 2Q, Hotel/Restaurant/Catering (HORECA) business to start to recover and feed demand to increase with swine production in China,” says Ng.

“It is optimistic that its downstream palm oil and sugar refining business will perform well in 2Q, but this is offset by weaker sugar milling and plantation earnings due to lower sugar and CPO prices,” she adds.

The brokerage also notes that Wilmar’s listing of its China business, Yihai Kerry Arawana Holdings (YKA) is on track for completion, and is expected to be approved in 2HFY2020.

Although near-term challenges due to the Covid-19 pandemic are inevitable, Ng says that key catalysts for the group include its relatively resilient earnings and YKA’s listing.

On the flipside, lower than expected crush margins and prolonged Covid-19 impact on economic activities pose key risks to the group. — Uma Devi

China Aviation Oil
Price target:
RHB BUY $1.25

CAO direct beneficiary of busier skies in China, M&A opportunities seen

RHB Group Research is reiterating its “buy” recommendation on China Aviation Oil, which remains a good proxy to the Chinese aviation industry, with a target price of $1.25. T

he company’s management is positive about its earnings revival from 4Q2020, aided by gradual improvements in China’s domestic aviation traffic. “CAO’s monopolistic position there and cost-plus business model should continue to ensure positive FCF generation,” says analyst Shekhar Jaiswal.

As the Covid-19 situation improves in China, there is scope for an earlier-than-expected recovery in domestic aviation traffic. Aviation regulator Civil Aviation Administration of China noted m-o-m improvement in air traffic for April.

Shanghai Pudong International Airport Aviation Fuel Supply (SPIA), the exclusive aircraft refuelling services provider at Shanghai Pudong International Airport (SPA), could report higher 2H2020 jet fuel volumes, as 50% of its traffic are domestic flights. SPA recently completed the expansion of a new runway, which could be used to further boost domestic traffic. SPIA, which is 33% owned by CAO, accounts for 65% of its PBT.

“Historically, CAO’s trading volumes for other oil products have been quite volatile. However, current contango prices for most oil products offer excellent opportunity for it to grow trading volumes,” says Jaiswal.

Moreover, CAO reiterates that 90% of its trades are for physical commodities and back to back in nature. Amid elevated price volatility, CAO foresees defaults by counterparties as the biggest source of risk in the trading business and continues to follow strong risk management measures. CAO says it is not exposed to troubled Singapore commodity traders Hin Leong or ZenRock Commodities.

Meanwhile, CAO has historically paid 30% of its earnings as dividends. In line with growing profits, its DPS has seen a steady rise since 2011.

“However, amidst expectations of weak earnings from its core jet fuel supply business in China and lower SPIA contributions, we believe CAO could pay 3.9 cents DPS in 2020 (2019: 4.7 cents) while maintaining the 30% payout ratio. This translates into a 4% FY21 dividend yield,” says Jaiswal.

With a strong net cash position of about 60% of its market cap, CAO is also at a good position to undertake earnings-accretive acquisitions, especially now that valuations for target companies are more reasonable. — Samantha Chiew

Venture Corporation
Price target:
DBS HOLD $15.80
RHB HOLD $15.10
CGS-CIMB BUY $16.78
MBKE HOLD $14.66

Analysts put Venture on hold following weak 1Q but long term prospects positive

Following a 33.6% y-o-y drop in earnings for 1Q20 due to global supply chain disruption, most analysts have recommended that investors to “hold” shares in Venture Corporation despite its long-term growth prospects.

“Venture’s 1Q20 was affected by the lockdown measures due to Covid-19. Net margins fell to 9%, the weakest quarter in the last two years,” says DBS analyst Ling Lee Keng, who has cut her earnings forecasts for FY20 and FY21 by 12% and 7% respectively. “The disruptions to the global supply chain in China, Malaysia and Singapore, and factory lockdowns in China, Spain, the US and Malaysia, mainly impacted the second half of 1QFY2020,” says Ling, who has downgraded Venture from “buy” to “hold” along with a slightly lower target price of $15.80 from $15.90. Similarly, RHB’s Jarick Seet and Lee Cai Ling have downgraded Venture from “buy” to “hold” or “neutral”, along with a new target price of $15.10 from $16.60.

Still, the gradual relaxation of lockdown measures has seen analysts remain positive about Venture’s longer-term prospects. CGS-CIMB’s William Tng has maintained his “buy” call and $16.78 target price, believing that the earnings drop is consistent with expectations following the Covid-19 shock and seasonal first quarter weakness.

“Venture is looking forward to the lifting of the lockdown of its global supply chain, as well as all of its operating entities in China, Malaysia, Singapore, Spain and the US. By end-April, almost all its operating entities received exemptions to operate without headcount or working hours constraints,” says Tng. “Venture believes that some realignment of the global supply chain will be inevitable, and its entities in Singapore and Malaysia will be potential beneficiaries.”

Meanwhile, Maybank Kim Eng’s Gene Lih Lai has upgraded his “sell” call to “hold”, with a revised target price of $14.66 from $13.90. His optimism stems from Venture’s strengths in life science, medical and wellness, semiconductor-related equipment, networking and communications, diagnostic and research equipment and test & measurement sectors, which Lai estimates constitute 60-80% of the firm’s revenue. This is bolstered by already strong demand for ventilators and DNA molecule testing and monitoring equipment, including those used for next-generation sequencing and related supply chains.

Despite the near term woes, Venture’s balance sheet remains solid. As at end 1QFY2020, its net cash of $852.5 million (up 19.5% y-o-y) is equivalent to $2.94 per share. As such, Venture is seen to sustain a dividend of 70 cents, which translates into a yield of around 4% - a level maintained since 2018.

RHB’s Seet and Lai, citing the management, sees a stronger 2HFY2020 and beyond, thanks to new orders from existing customers. “It also expects to gain momentum with several new partners in life sciences & genomics, as well as healthcare & wellness – where contributions should grow post-2020.”

“We continue to believe that given Venture’s expertise and its entrenched relationship with industry leaders in the various technology domains, coupled with its balance sheet strength, Venture would emerge stronger from the current crisis and is well-positioned for longer-term growth,” predicts DBS’s Ling. — Ng Qi Siang