952 Brokers' Digest

“Happy Hour” is back
With a declining number of new daily Covid-19 cases in Thailand and Vietnam, coupled with Thai Beverage’s (ThaiBev) cheap valuation, CGS-CIMB Research’s Cezzane See is optimistic on the alcohol beverage manufacturer.

“We think near-term conditions have improved for longer-term investors who are looking to revisit recovery plays and ride out the political uncertainties in Thai- land,” says See, writing in her Sept 23 note with the headline “Back to Happy Hour”. While she has kept her target price of 70 cents, her new rating on the stock is an “add”.

On Sept 23, Thailand had three new daily Covid-19 cases, while Vietnam had none. Thailand is now at Phase 5 of its lockdown easing.

Vietnam, on the other hand, has resumed normal operations in most parts of the country except for the city of Da Nang.

She has raised her earnings per share forecast for ThaiBev for FY20 by 4.8%, on higher revenues and better margins, though she is keeping her FY2021-2022 EPS forecasts largely unchanged for now.

See says ThaiBev is down about 35% year-to-date and is trading at a forward 13.9 times earnings. This is below two standard deviations of its five-year average price earnings multiple of 15 times and below the 26 times FY2021 earnings of regional peers. “We think the risk-reward ratio is now skewed to the upside for longer-term investors,” she says.

ThaiBev should benefit from Thailand’s upcoming stimulus measures. The Thai government is drafting stim- ulus plans in order to boost domestic consumption. “This may lower cost of living and bode well for consumer purchasing power in FY2021,” says See. — Jeffrey Tan

ComfortDelGro
Price target:
UOB Kay Hian “buy” $1.78

Smooth ride ahead
UOB Kay Hian’s Lucas Teng has maintained his “buy” rating on ComfortDelGro (CDG) with a target price of $1.78, citing an “encouraging uptrend” in taxi fares and rides, as well as extended government support.

Teng says taxi rides are back to 70% of pre-Covid-19 levels, while fares are at 70-80% of pre-Covid-19 levels, comparable with its ride-hailing peers.

Furthermore, CDG’s rental waivers for taxi drivers are be- ing progressively reduced, coming down from 30% in August to 25% in September.

The government has also set aside $106 million for the six- month extension of the Special Relief Fund (SRF) to March 2021. The SRF was enacted to help active taxi and private-hire drivers defray business costs by providing a monthly payout of $300 per vehicle per month, which averages out to about $10 per day.

The extended support aims to continue the assistance for drivers, and the temporary liberalisation of point-to-point regulations that allow for the use of taxis and private hire in delivery services continues to be in place.

Teng also expects the new regulations for the Private Hire Car Driver’s Vocational Licence (PDVL) to level the playing field for taxis while potentially right-sizing the large number of private-hire fleets in the market.

He estimates indicate that taxis have largely retained its market share of total point-to-point rides, comparable to 2019 levels, which is “a positive sign for continued demand in street hail rides.”

Overseas, he says that the gradual easing of restrictions in Australia will be positive for the counter, considering that new Covid-19 daily cases have eased in Australia, especially in hard-hit Victoria.

While bus routes are still in operation with 50%-60% pre-Covid-19 ridership in New South Wales, the slight easing of restrictions in Victoria could be a “positive first step.” he says. Australia accounts for 19% of CDG’s normalised operating profit in 2019.

He also pointed out that CDG’s share price had been substantially discounted in June this year with the rise in cases in Australia. — Lim Hui Jie

First Sponsor
Price target:
PhillipCapital “buy” $1.65

Developer with strong fundamentals
First Sponsor Group’s strong fundamentals have led Phillip- Capital to initiate coverage on the company with a “buy” rating and target price of $1.65.

The brokerage says the property developer has unrecognised property development revenue of $586 million.

This is not including another $1.95 billion worth of gross development value (GDV) yet to be unlocked, which is equivalent to five years of sales, it adds.

Moreover, First Sponsor, which is also involved in property financing, has seen its loan book grow at a compounded annual rate of 19% over the past five years.

These securitised loans offer recurring income at low to mid-teens returns. “We are estimating loan book growth of around 8% for FY2020 and FY2021,” PhillipCapital analyst Tan Jie Hui writes in a note dated Sept 21. — Jeffrey Tan

ISDN Holdings
Price target:
CGS-CIMB “add” 50.1 cents

Proxy to Industrial 4.0 revolution
ISDN Holdings, which is a proxy to the Industrial 4.0 revolution, has continued to be a favourite of CGS-CIMB Research.

The brokerage highlights that the engineering company’s industrial automation (IA) solutions business is now able to meet the hardware and software requirements of clients.
It is also capable of offering complete Industrial 4.0 solutions to manufacturers, CGS-CIMB adds.

Citing management, CGS-CIMB notes that the company hopes to improve its net profit margin of 7.7% in 1H2020 to 10%.

This will come on the back of offering better solutions and increasing the software content offered in such solutions, says CGS-CIMB.

The brokerage has kept its “add” rating for the stock with an unchanged target price of 50.1 cents.

“Potential re-rating catalysts for the stock could come from stronger-than-expected sales orders for its mainstay IA, and profit contribution from its hydropower segment,” CGS-CIMB analyst William Tng writes in a note dated Sept 21 — Jeffrey Tan

Micro-Mechanics

Growth momentum seen following resilient 4Q

UOB Kay Hian has maintained its “hold” call on Micro-Mechanics Holdings (MMH), with a higher target price of $2.01 as compared to its previous target price of $1.82.

Analyst Clement Ho said this was due to a strong earnings showing for the company in 4QFY2020. During the quarter, MMH recorded a net profit of $3.9 million, bringing its earnings to $14.7 million for FY2020. This also surpassed the brokerage’s estimates by 23%.

Ho said this is due to “resilient demand” for high-precision parts and tools, despite global lockdowns that have left industries at a standstill.

Customers have also increased their orders in 4QFY2020 to stock up on their inventory. This will prove beneficial to MMH in case of future lockdowns.

Furthermore, Ho also expects growth momentum in the semiconductor industry to continue, and “anticipates continued strength going into the second half of 2020.”

According to World Semiconductor Trade Statistics, 2H2020 billings are projected at US$217.84 billion ($296.15 billion), 4.7% higher compared to 1H2020 and 0.9% higher compared
to 2H2019.

The increase comes from integrated circuits (except analog), memory and logic. For 2021, the global semiconductor market is forecasted to grow 6.2% y-o-y, driven by double-digit growth in the memory segment.

Ho also believes MMH is “positioned as a key industry downstream supplier”, and cited management’s “astute positioning” as a leading parts and consumables supplier in the semiconductor industry.

This is reflected in its solid long-term revenue, with a compounded annual growth rate (CAGR) of 8.2% and net profit CAGR of 14.9% from FY2002 to FY2020, he says.

He also said the extensive product range, production scale and geographical coverage have put MMH in the lead among their peers and a trusted brand for customers.

Furthermore, the group’s stable gross profitability range between 46% and 63% since its listing (excluding the 2009 GFC figure of 39%) is a strong testament to its competitive edge and management’s ability to retain pricing power in the cyclical sector. — Lim Hui Jie

SingPost
Price target:
DBS Group Research “fully valued” 64 cents

Slowing growth in domestic mail revenue and international mail
DBS analysts Sachin Mittal and Lim Rui Wen have maintained their “fully valued” rating on Singapore Post (SingPost) with the same target price of 64 cents.

The analysts note that the company is experiencing a structural decline in high-margin domestic mail revenue driven by the increasing pivot to going online.

Operating profit from its international mail segment has also slowed and is unable to mitigate the drop from domestic mail. “Growth may only slowly recover in 2H2021F as economic activities resume, but held back by intense competition and the expansion of the tax net on cross-border e-commerce deliveries,” say Mittal and Lim in a report dated Sept 17.

“According to management, volumes may temporarily be diverted away from Singapore due to disruption in international air freight out of Changi Airport,” add the analysts who justified their recommendation due to the “lack of near-term catalysts”. Key catalysts, they say, include stabilisation of post and parcel operating profit.

The rating also comes after SingPost announced on Sept 15 that it will be flattening its price structure for domestic and international package and parcel deliveries.

The company has also reduced its turnaround time for basic packages to be delivered within two working days instead of three previously.

On that, Mittal and Lim believe that SingPost may be able to enjoy growth in its mail volumes as it seeks to capitalise on the rising trend of e-commerce packages with its revised rates going forward.

The analysts also note that e-commerce sales — at only 4% of retail sales in Asean (compared to around 24% in China) — has plenty of room to grow.

“Venture capitalists are funding loss-making third-party (3PL) regional logistics players in the hope of attaining scale to generate profits in a few years’ time. Many small players are also subsidising e-commerce deliveries to increase their market share. Hence, competition in this space may remain irrational unless there is a change in the funding landscape,” they say.

As SingPost continues to streamline its operations, Mittal and Lim believe the changes may enable the company to seek higher volume growth with lower delivery rates.

“We note that some players in the sector continue to undercut each other to gain market share and believe there may still be heated competition locally between the players as package volumes continue to ride on the e-commerce volume growth,” they add. — Felicia Tan

SBS Transit
Price target:
CGS-CIMB “add” $3.40

Betting on ridership recovery
CGS-CIMB Research has initiated coverage on SBS Transit with an “add” rating, making it the first brokerage in Singapore to do so. CGS-CIMB has also given the stock a target price of $3.40.

Analysts Ong Khang Chuen and Darren Ong are positive on the counter as they expect passenger traffic on public transport to return to around 90% of pre-Covid-19 levels by FY2021F.

They are also upbeat on the stock due to its position as a market leader in the public bus industry, which generates defensive earnings and stable cash flow under the Bus Contracting Model (BCM).

Since the lifting of the “circuit breaker” measures in June, ridership on SBS Transit’s bus- es and trains have “steadily improved”. SBS’s rail ridership rose to around 55% of pre-Covid-19 levels in August, five percentage points up from the 50% logged in July.

With Singaporeans resuming social activities and Covid-19 community cases remaining low, both analysts see room for further relaxation of safe dis- tancing measures that could lead to higher ridership numbers.

While ComfortDelGro owns a 74.4% stake in SBS Transit, the analysts say they “prefer” the latter due to better earnings protection from the Covid-19-induced social distancing measures. SBS Transit also offers direct exposure to potential catalysts such as tender wins for Bulim and Sembawang-Yishun bus packages, and reforms in the rail financing policy.

“With strong free cash flow (FCF) generation post the implementation of the BCM in 2016, SBS Transit has turned into a net cash position by end 1H2020,” they write in a note dated Sept 18.

“We see upside to its dividend payout ratio (FY2019: 50%) post earnings normalisation, as its parent company ComfortDelgro had a dividend payout ratio of 80% in FY2019,” they add.
Believing that the worst is over for SBS Transit, the analysts estimate a net profit recovery (+35% y-o-y) in FY2021F.

“SBS Transit currently trades at 11.7x CY2021F price-to-earnings ratio (P/E), or –0.5 standard deviation (s.d.) below its 5-year historical average, which we think hasn’t factored in the recovery scenario and potential catalysts,” they say.

For FY2020F ending December, the analysts have estimated a price-to-book value (P/BV) of 1.58x and dividend yield of 3.17%.

However, they add that a key downside risk to the stock is a slow pace of rail ridership recovery.— Felicia Tan