Singapore Airlines
Price target:
UOB Kay Hian “sell” $4.40
“Less optimistic” of a traffic recovery by 3Q2021
UOB Kay Hian analyst K Ajith has downgraded Singapore Airlines (SIA) to “sell” with a slightly lowered target price.
“We had previously valued SIA at 1.0 times FY2022 and FY2023’s book value to derive a target price of $4.43. We now raise our fair value price-to-book (P/B) assumption to 1.1 times FY2022 and FY2023 average and derive a target price of $4.40,” he writes in a report dated April 14.
“Excluding [the] $6.2 billion in mandatory convertible bonds (MCB) which is recognised as equity, SIA is trading at about 1.6 times FY2022’s book value or about 70% premium to pre-Covid-19 levels… [which] is anything but cheap,” he adds.
Ajith believes at current levels, SIA’s stock price is trading higher than its foreseeable fundamental value.
Since 4QFY2020 ended Dec 31, 2020, the airline’s stock price has tracked the US Global Jets (JETS) ETF, and its stock price is only about 7% away from its pre-Covid-19 levels, as vaccines became available.
“We believe that much of the re-rating on SIA was led by ETF purchases on expectation that vaccinations would lead to a swift recovery in traffic. While domestic air travel has recovered in China and moderately in the US, international air travel has shown no signs of recovery as governments grapple with increasing infections and new strains,” he writes.
For SIA, this translates to a monthly operating cash burn of between $200 million to $250 million.
The carrier had also guided for $4 billion in capital expenditure (capex) for FY2022 and another $4.5 billion in FY2023.
“Assuming that capex is distributed evenly, at 1HFY2022, SIA could have utilised at least $3.8 billion in cash or 30% of its liquid funds,” notes Ajith.
“A key uncertainty is whether SIA will exercise the option to tap into another $6.7 billion in MCB. The option will expire by July. Given these uncertainties, we downgrade SIA to ‘sell’,” he adds. — Felicia Tan
Sheng Siong Group
Price target:
CGS-CIMB “add” $1.88
Supermarket sales still in growth mode
CGS-CIMB Research analyst Cezzanne See remains positive on supermarket chain Sheng Siong Group, following healthy sales reported for the first two months of 2021.
In a research note dated April 13, she has maintained her ‘add’ call for the counter with an unchanged target price of $1.88.
According to the Singapore Department of Statistics (SingStat), supermarket and hypermarket sales rose 7.3% y-o-y in January and 13.6% y-o-y in February, respectively. This, See says, is a “pleasant surprise” given the higher bases of 9.4% in January 2020 and 15.4% in February 2020.
She attributes this performance to many still working from home, as well as brisk sales during the Lunar New Year (LNY) period when many were unable to travel.
Noting that 1Q is historically a strong quarter due to LNY celebrations, See estimates Sheng Siong’s revenue grew 6% y-o-y to $348.5 million in the 1Q2021 ended March.
But she opted for a more conservative revenue growth estimate, despite the 10% average sales growth for local supermarkets and hypermarkets for January and February.
There could also be a potential shrinkage in Sheng Siong’s March sales, as Covid-19 restrictions continue to ease.
Nonetheless, See expects the group’s 1Q2021 ended March gross profit margin to grow to 27.4%, compared to 27% in 1Q2020 as Sheng Siong improves its sales mix and supply chain efficiency.
Based on the higher revenue and margin, she also estimates net profit increased 3.3% y-o-y to $29.7 million in 1Q2021.
Looking ahead, See still believes Sheng Siong’s FY2021 net profit will decrease 21.7% y-o-y. “Our forecasts are intact as revenue growth could decline as the country normalises from the impact of Covid-19,” she adds.
“While earnings should normalise in FY2021, we still think Sheng Siong deserves to trade at a premium over its historical average due to its strong balance sheet and strong market share in Singapore’s supermarket space”.
See also expects Sheng Siong to increase its store acreage by around 25,000 sq ft in FY2021 and 20,000 sq ft in FY2022 — a move that could potentially catalyse earnings. — Atiqah Mokhtar
Sunpower Group
Price target:
UOB Kay Hian “buy” $1.11
Positive on “year of transformation”
UOB Kay Hian analysts John Cheong and Clement Ho have kept “buy” on Sunpower with a higher target price of $1.11, from $1.10, after following the group’s record profit after tax and minority interests (PATMI) in 2020.
Cheong and Ho are expecting 2021 to be a “year of transformation” for the group, and have also raised their net profit forecasts for FY2021 to FY2022 to RMB466 million ($95.3 million) and RMB563.9 million respectively.
“With enhanced cash flow generation ability and long-term revenue visibility, valuations should improve going forward, in our view,” the analysts write.
As Sunpower awaits approval for its order-driven manufacturing and services (M&S) segment, it will turn its focus towards the remaining green investment (GI) business and achieving scale as an industrial steam-power producer in China.
The GI business is a stable asset-based business that generates recurring income and cash flow through the industrial infrastructure projects that Sunpower owns and operates.
“This provides relatively superior revenue visibility and certainty over the M&S segment, which is an inherently cyclical, orderbook-driven business that requires high working capital. Management sees many business opportunities in the anti-smog sector in China, due to regulatory mandated closure of high-emission polluting boilers and the structural shift to low emission centralised steam and electricity facilities,” say Cheong and Ho.
The M&S business will be sold to a special purpose vehicle (SPV) owned by a consortium of China funds, the group’s two largest shareholders, Guo Hong Xin and Ma Ming, as well as certain employees of the M&S segment.
The sale price for the business of RMB2.29 billion translates to 9.5 times FY2020 earnings and a 27% premium over the value given by two independent valuers.
“Furthermore, net proceeds per share of approximately 36.17 cents translate to 42% of Sunpower’s current market cap [will] be unlocked in cash”, note the analysts. “Overall, we deem the deal as attractive, at a valuation more than twice the 5-7 times typically ascribed by the street.”
Once the sale is completed, Sunpower will pay out a special distribution of around 23.98 cents per share or RMB1.34 billion from the net sale proceeds of RMB2.02 billion
The remaining RMB681 million will be used as capital to undertake Sunpower’s existing GI projects and general working capital, as well as to repay payables due from the GI business to the M&S business.
Cheong and Ho also view Sunpower as a fast-growing power-producer with nine plants in operation and two under construction.
“With four of the plants acquired through M&A (almost half of its existing portfolio), acquisition opportunities have been abundant and the proposed M&S disposal would put the group in a good position to source for more targets,” they write. — Felicia Tan
AusGroup
Price target:
KGI Research “unrated”
Not fully out of the woods, but turning around
Prospects in AusGroup, an Australia-based integrated solutions provider, may finally be “turning around”, even if it isn’t “fully out of the woods yet”, says KGI Research analyst Joel Ng in an unrated report.
The group saw a “challenging” FY2020 ended June 2020 as it posted a full-year loss of A$59.5 million ($60.8 million). The loss came amid reduced work on their facilities, as well as impairments of PPE and intangible assets.
However, Ng expects the group’s prospects to see better days due to faster-than-expected growth in the Australian economy, which is estimated to grow by 4.4% and 3.2% in 2021 and 202 respectively, according to Bloomberg consensus’ figures.
“As a major commodity exporter, the country also stands to benefit if the global economy picks up. Most recently, the International Monetary Fund (IMF) is projecting a stronger recovery for the global economy, and now expects the world economy to grow by 6.0% in 2021 and 4.4% in 2022, compared to its previous forecast of 5.5% and 4.2% respectively,” Ng writes.
In addition, the completion of new LNG construction projects and continued “significant investments” in the resources sector are positive for AusGroup’s prospects in the next 12 to 24 months, he adds.
The group also scored a 10-year maintenance contract with Chevron Australia on March 22, which is estimated to provide revenue of A$100 million per annum.
Ng adds that other project-related works should start to resume in 2HFY2021 as clients have largely delayed their projects since 2020, according to AusGroup’s management.
He also expects earnings to recover going forward, with “upside potential” as the group secures more projects and maintenance contracts.
Despite the optimism on the group’s prospects, Ng is slightly cautious as he notes a “key overhang over the value of its port and marine business, which accounted for 47% of non-current assets and 26% of total assets as at Dec 31, 2020”.
“We will have to closely monitor the commercialisation of its port and marine business given that its auditors issued a disclaimer of opinion on its FY2020 financial statements. This was mainly due to PPE and intangible assets worth A$38.7 million related to the port and marine business”. — Felicia Tan
Jiutian Chemical Group
Price target:
CGS-CIMB “add” 13.5 cents
Record 1QFY2021 seen on higher selling prices
As dimethylformamide (DMF) prices continue on a strong uptrend year to date, CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan estimate that Jiutian Chemical Group will post a “record quarter” in 1QFY2021 ended March.
More specifically, they expect Jiutian’s core net profit for the quarter will see more than a 28-fold surge to RMB78.5 million ($16.1 million).
“Despite 1Q being a seasonally-weaker quarter due to the Chinese New Year, we understand that plant utilisation remained high amid robust orders. We forecast Jiutian achieving revenue of RMB431 million (+7% q-o-q, +116% y-o-y), mainly due to average selling price (ASP) increases,” they write in an April 12 report.
“We also expect a sequential expansion in Jiutian’s profit spread, as ASP hikes in 1Q outpace raw material cost increases,” they add.
According to 100ppi.com, an online platform for commodity prices in China, the asking price for DMF now stands at RMB11,000 per tonne, representing a 120% growth y-o-y and 40% growth year to date. “We attribute the strength to robust downstream demand, and raw material price increases, and expect DMF prices to remain elevated in 2QFY2021,” say Ong and Tan.
“China’s industrial output rose 35.1% in February and Jiutian notes healthy incoming orders, especially from PU leather, semiconductor, electric vehicle, animal feed and pharma industries. Meanwhile, the price of methanol, a key raw material, has also trended higher by around 15% q-o-q in 1QFY2021”.
With these factors in mind, Ong and Tan have kept their earnings estimates unchanged. They have also maintained “add” on the counter with an unchanged target price of 13.5 cents pegged to 5.7 times FY2022 earnings.
The estimate represents a 20% discount to SGX-listed peer China Sunsine, say the analysts. — Felicia Tan
