ST Engineering
Price target:
RHB “buy” $4.25
CGS-CIMB “buy” $4.00
Consistent dividend of at least 4% a year
Few stocks are like ST Engineering, consistently maintaining a dividend yield of 4% or more over the years. Even with the significant exposure to the Covid-19-hit aerospace sector, the company is able to keep its full-year payout of 15 cents per share. Analysts such as RHB’s Shekhar Jaiswal and CGS-CIMB’s Lim Siew Khee are not expecting this to change any time soon, even though the engineering business reported 10% y-o-y drop in earnings for FY2020 ended December 2020. The stronger bottom line was aided by some $350 million in government grants, with another $100 million expected for FY2021. But with less government support this year, management plans to further cut around $180 million in costs.
“We remain optimistic on 2021’s earnings recovery — aided by order delivery normalisations across all business segments. A y-o-y higher order backlog, robust balance sheet, and ability to generate positive free cash flow and sustain dividend payments supports our call on the stock,” says Jaiswal in his Feb 22 report, where he has a price target of $4.25 on the stock.
In any case, demand for passenger-to-freighter (PTF) conversion in ST Engineering’s aerospace business is strong. ST Engineering inducted 10 aircraft in 2020 and is seen to induct another 30 in 2021 and 40 in 2022. It also has four PTF conversion lines and will increase this to eight by end FY2021 to meet the rising demand, with three to 12 months required for this process to be completed.
“We expect Aero profit to decline 5% y-o-y in FY2021 to factor in fewer nacelle deliveries and slow recovery in aviation travel,” says Lim, who has an “add” call and $4 price target on this stock. An impairment of assets saw its 2HFY2020 net profit coming in 16% lower h-o-h and 38% lower y-o-y at $87.9 million, which led to a loss of $1.5 million in Engineering & Material Services.
“Aero is on the lookout for new growth opportunities including engine/ aircraft leasing to enhance recurring income,” reports Lim of CGS-CIMB.
Still, a bright spot has been Aircraft Maintenance & Modification (AMM), which saw a 67% y-o-y rise in net profit to reach $60 million — possibly on the back of government relief. ST Engineering’s aerospace business was also able to win $821 million in new contracts in 4QFY2020. This was out of a group total of around $1.3 billion in 4QFY2020. The firm won a total of $5.7 billion contracts in FY2020 — an 18% y-o-y drop.
With these new contract wins, following revenue delivery and project cancellations of about $1 billion, ST Engineering saw a higher order backlog of $15.4 billion y-o-y, implying a book-to-bill ratio of 2.2 years. Jaiswal sees $5.3 billion of this high outstanding order book to be delivered in 2021, accounting for 71% of his revenue estimate for the firm.
“Relative to its peers in the industrial/conglomerate space, ST Engineering has fared better in FY2020 earnings although largely helped by the grant. We like the diversification of the group, disciplined cost management and
strong ROE,” says Lim.
While defence contracts and a lifting of border restrictions would benefit
the counter, investors should watch out for significant cost overruns and a
resurgence in Covid-19. Jaiswal also warns of slower demand recovery and
delays in new business initiatives as potential risks. — Ng Qi Siang
BRC Asia
Price target: PhillipCapital “buy” $1.87
Record profit for FY2021 and FY2022
PhillipCapital’s analyst Terence Chua on Feb 22 started coverage on BRC Asia with a “buy” call and a target price of $1.87. On the back of a general recovery of the construction sector, the leading steel supplier with a 70% market share, is expected to generate record earnings forecast for FY2021 ended Sept 30, 2021, and FY2022 of $42 million and $45 million respectively.
He estimates that construction activity has resumed to about 75% of pre-Covid 19 levels at the moment, and expects this to go up to 80% by June 2021. Furthermore, construction demand is expected to recover to between $23 billion to $28 billion in 2021, driven by public housing and infrastructure projects. In contrast, demand was around $21.3 billion for 2020, according to the Building and Construction Authority.
With better earnings, BRC Asia could potentially declare dividends of 10 cents and 11 cents for FY2021 and FY2022 respectively, translating into a dividend yield of 6.3% and 6.9%, says Chua. — Lim Hui Jie
Oxley Holdings
Price target: RHB “buy” 27 cents
Set to enjoy ‘fruits of its labour’ for next few years
RHB Group Research analyst Jarick Seet is maintaining his “buy” call on Oxley Holdings but with a lower target price of 27 cents from 29 cents previously. For 1HFY2021 ended December 2020, the developer reported 117% y-o-y jump in patmi of $34.1 million.
According to Seet, Oxley looks set to enjoy the “fruits of its labour” for the next few years due to the near-completion and sale, as well as the receipt of its temporary occupation permit of its overseas properties. As at Jan 31, about 3,293 units — or 84% of the group’s total portfolio — have been sold, with $3.7 billion to be collected progressively from buyers.
These projects, both local and overseas, include The Royal Wharf project in London; residential blocks at Dublin Landings in Ireland and The Peak project in Cambodia.
“Upon their completion, Oxley should finally be able to realise the fruits of its labour, strengthen its balance sheet, and still pay attractive dividends to shareholders,” writes Seet. — Felicia Tan
iX Biopharma
Price target: PhillipCapital “buy” 44.5 cents
Net loss in 1HFY21 but on cusp of profitability
PhillipCapital is maintaining its “buy” call on iX Biopharma, but with a lower target price of 44.5 cents, down 10 cents from previously, according to analyst Tay Wee Kuang.
“While many business plans have been put on hold by the Covid-19 pandemic, the company should be on the cusp of profitability once the disruptions are over,” says Tay in his Feb 19 report.
In its recent results for 1HFY2021 ended December 2020, the company reported net losses of $2.8 million, down 51% y-o-y. Revenue for the six-month period was up 182% y-o-y to $830,000, following a 112% surge in income from the specialty pharmaceutical segment.
Tay notes that income from the segment could have been even stronger if not for the on-off lockdowns in Melbourne which affected footfall in pharmacies and sales to clinics.
The company’s inability to conduct training for its newly-launched medicinal cannabis wafer, Xativa, had hurt potential sales too, adds Tay. Meanwhile, revenue from Nutraceuticals grew 267% y-o-y to $488,000, following strong sales on their JD.com and Tmall online platforms. Similarly, the company also benefitted from stronger demand for its skincare supplement LumeniX, anti-ageing NAD (nicotinamide adenine dinucleotide) products, MetaboliX and RestoriX.
Overall, iX Biopharma’s gross margin was down 16% in 1HFY2021, improving from the 57% plunge a year ago.
He adds that the Covid-19 pandemic and the resultant disruptions to supply chains has delayed the installation of additional freeze dryers. Once installed, these will increase wafer production by between five and six times.
Tay notes that the timeline for this hinges on when border restrictions will ease in Australia.
“The disruptions will slow down iX’s business turnaround that was previously expected by FY2021. Nevertheless, with vaccine rollout in Australia soon, we are confident that deal-making and production expansion can resume by early FY2022,” he adds.
Against this backdrop, Tay has cut his FY2021 earnings forecast for iX Biopharma by $9.5 million to reflect a sales loss of $1.5 million due to the delays in capacity installation. — Amala Balakrishner
StarHub
Price target:
PhillipCapital “neutral” $1.24
Maybank Kim Eng “hold” $1.25
RHB Group Research “neutral” $1.38
CGS-CIMB “add” $1.60
Hold the line for stronger connection to recovery
Analysts are generally “neutral” on StarHub, with most keeping their “hold” calls on the stocks following its FY2020 ended December 2020 results.
The telco saw an earnings drop 15.2% y-o-y to $157.9 million and revenue down 13.0% y-o-y to $2.02 billion, as the economic impact of the pandemic weighs down the numbers.
However, the 4QFY2020 earnings were 3.5% higher y-o-y, while revenue was down 4.8% y-o-y to $579.5 million.
As at end-December 2020, StarHub held cash and cash equivalent of $403.7 million while generating free cash flow of $387.7 million, a 77.3% y-o-y increase. Newly appointed CEO Nikhil Eapen attributes it to “cost management, working capital management and tax deferrals.” He further expects the “strong free cash flow and funding position should position us to fulfill our obligations as well as drive transformation and growth for 2021”.
StarHub also declared a final dividend of 2.5 cents per share for the period, bringing total FY2020 dividend payout to 5 cents, a 44% drop from 9 cents in FY2019.
PhillipCapital’s head of research Paul Chew, who has a “neutral” call and $1.24 price target, notes that StarHub’s cost-control has helped to save the day.
Despite StarHub’s cost control measures and healthy cash-flows, Chew is however concerned that it faces a postpaid mobile ARPU of $30 — down 25% y-o-y — due to the absence of roaming revenue.
The telco also lost 40,000 subscribers in 4QFY2020, while rivals M1 and Singtel added 23,000 and 24,000 postpaid subscribers respectively. Meanwhile, StarHub also suffered an accelerated decline in its pay TV subscriber base, with some 7,000 customers leaving in 4QFY2020, versus some 3,000 in the prior quarter.
Chew also sees StarHub’s cybersecurity business to be its “silver lining”, albeit with low profitability.
“Cost management will be crucial for sustaining margins. However, major rationalisation of staff costs and variable pay TV content expenses are at their tail end. So are operating efficiencies,” adds Chew.
Maybank Kim Eng has also kept its “hold” recommendation, but with a lower target price of $1.25 from $1.32, due to StarHub’s mixed bag of results and outlook.
Overall, the research house is positive on the telco sector on potential 5G ARPU uplift and post-Covid-19 recovery, while preferring Singtel and NetLink NBN Trust within the space.
Despite a drop in mobile, Pay TV and equipment sales revenue, StarHub has seen encouraging uptake of their higher-priced 5G plan, driven by the launch of popular 5G premium handsets.
StarHub has seen a gradual resumption of business activities. Its managed services segment also saw recovery in orderbook as enterprise customers committed to strategic initiatives in FY2021 and beyond.
The telco also secured an exclusive distributorship of Disney+ content in January 2021.
Analyst Kareen Chan does see StarHub’s outlook stabilising, but she has cut revenue estimates by 2% to 3%, as she believes that revenue will take more time to recover. As a result of lower service ebitda margin guidance, FY2021–2022 EPS estimates are reduced by 0% to 5%.
“We forecast FY2021 DPS at 6 cents, translating to a yield of 4.7%,” adds Chan.
RHB Group Research also continues to rate StarHub “neutral” with a higher target price of $1.38 from $1.30 previously.
While the 4QFY2020 numbers beat RHB’s expectations, it expects ebitda to weaken further in FY2021 despite ebitda margin (service revenue) outperforming guidance. FY2020 ebitda margin (service revenue) of 31.1% outperformed management’s guidance of 27% to 29% on good OPEX savings from cost rationalisation.
Moving into FY2021, StarHub has guided for stable service revenue, with growth in enterprise offsetting the decline in mobile and pay TV revenues.
The weakness in mobile revenue is expected to persist, with border restrictions still in place for the better part of the year.
With a more bullish stance on StarHub, CGS-CIMB Research reiterates its “add” call on StarHub with an unchanged target price of $1.60.
In a Feb 22 report, analyst Foong Choong Chen likes the stock for its growing enterprise segment and more specifically, its cybersecurity business.
Overall, Foong expects lower revenue across the board and higher net interest cost, as well as 5 cents per annum DPS in FY2021-2023. — Samantha Chiew
DBS Group Holdings
Price target:
UOB Kay Hian “hold” $29.20
Legal woes in India
UOB Kay Hian analyst Jonathan Koh warns that DBS Bank is facing potential legal actions in India arising from the amalgamation of Lakshmi Vilas Bank (LVB).
However, he is keeping his “hold” call albeit with a lower target price of $29.20 from $29.30 on the bank.
Citing local reports, Religare Finvest (RFL) has filed a petition with the Delhi High Court to name DBS Bank India as the defendant instead of LVB due to the merger of the two banks. RFL, one of the leading non-banking finance companies in India, has a pending case against LVB for misappropriating fixed deposits worth INR750 crore ($136.4 million).
The amount has since swelled to INR900 crore due to compounding of interest.
Two senior employees of LVB were alleged to have conspired with two former owners of RFL, Malvinder Mohan Singh and Shivinder Mohan Singh, to illegally siphon off and misappropriate RFL’s fixed deposits.
The complaint was first brought up to the Delhi police in May 2019. The employees were subsequently arrested in September 2020. The next hearing for the case is scheduled on Feb 25.
DBS chief Piyush Gupta had said that he is “optimistic” that its takeover of LVB is expected to turn profitable in the next 12 to 24 months, with asset quality concerns accounted for.
To UOB’s Koh, the lawsuit comes as a “negative surprise” as previous LVB shareholders were supposed to be wiped out under the scheme of amalgamation. “The amalgamation was alleged to be on a fast track and was completed within 10 days. Previous shareholders supposedly were not given sufficient notice,” he writes in a Feb 19 report.
“The two ongoing lawsuits create legal uncertainties for DBS Bank India. According to local Indian media, LVB is alleged to have serious governance issues and lacked internal control. LVB’s loan book is said to have expanded five times from 2007 to 2019,” he adds.
The Reserve Bank of India, on Nov 17, 2020, proposed that LVB be merged into DBS India. The merger was approved by the Indian cabinet on Nov 26 last year.
On Feb 10, DBS Bank included expenses of $33 million from the merger of LVB with DBS Bank India in its FY2020 ended December results, with provisional goodwill of $153 million. — Felicia Tan
