Broker's Digest: ST Engineering, Food Empire, China Aviation Oil, Hutchison Port Holdings Trust

Analysts are mostly positive on ST Engineering’s prospects after the group announced that it was acquiring mobility business TransCore on Oct 3.

CGS-CIMB Research, DBS Group Research and RHB Group Research analysts have kept their “add” or “buy” recommendations, with DBS and RHB increasing their target prices to $4.55 (from $4.36) and $4.85 (from $4.50).

CGS-CIMB has kept its target price unchanged at $4.54.

To CGS-CIMB analyst Lim Siew Khee, the sizeable acquisition is the “fastest way for ST Engineering to grow its smart city as a key business”.

The acquisition has also lifted ST Engineering’s portfolio of business, allowing it to gain immediate access to the US transportation market from its current focus in Singapore and Asia.

The opportunity also sees a synergy in technology in the green or low emissions zone segment such as electric vehicle (EV) charging, notes Lim.

While the US$2.68 billion ($3.64 billion) deal is in line with current peers in the traffic systems business at 16.2 times FY2020 EV/Ebitda, it is “not cheap” compared to ST Engineering’s valuations or 12 times 2021 EV/Ebitda and 20 times 2021 P/E.

That said, ST Engineering will get a high cash generative business in return as TransCore’s ebitda margin of 25% is more than double ST Engineering’s electronics ebitda margins of 10%– 11% in FY2019–FY2020.

ST Engineering has guided for 1% transaction costs and integration costs of US$24 million to US$25 million.

“Assuming 3% revenue growth and 1.5% interest costs, we forecast TransCore to contribute 3%–7% of ST Engineering’s post acquisition profit in FY2022–2023,” she writes in an Oct 4 report.

DBS analysts Suvro Sarkar and Jason Sum say the deal not only complements and enhances ST Engineering’s suite of smart mobility offerings, it also opens the door to a big new market in the US.

“While not immediately accretive to earnings, the deal should help drive strong rebound in earnings for ST Engineering from FY2023 onwards, as the commercial aerospace division should be staging a recovery as well in that timeframe,” write Sarkar and Sum in an Oct 4 report.

While the group’s gearing is expected to increase, the analysts from DBS expect “limited impact” on funding costs. ST Engineering’s cash flows should also remain firm.

“We expect no changes to its full-year dividend payout of 15 cents for FY2021 and beyond,” say the analysts.

While Sarkar and Sum are more conservative on the group’s earnings for the FY2021 and FY2022 compared to consensus due to the slow recovery in the commercial aerospace aircraft maintenance, repair and overhaul (MRO) business, they have estimated a “strong 23% growth” in FY2023.

Their increased target price has factored in the long-term accretion in cash flows from the acquisition.

RHB analyst Shekhar Jaiswal says his new target price has incorporated an environmental, social and governance (ESG) rating premium.

“Using our in-house proprietary methodology, we derived an ESG score of 3.4. Accordingly, we apply an 8% premium to our blended fair value of $4.50 to arrive at a $4.85 target price,” he writes in an Oct 4 report.

He also views the proposal to acquire TransCore as a positive one. “Once completed, the acquisition should enhance ST Engineering’s offerings in smart mobility solutions and boost 2023 earnings by 9%. Even without this acquisition, we remain positive on its earnings recovery over the next 12 months,” he says.

Should Jaiswal’s estimates for the FY2023 be met, he expects ST Engineering’s fair value and target price to be at $4.90 and $5.25 respectively

Like DBS’s Sarkar and Sum, Jaiswal is also confident on ST Engineering’s ability to sustain its dividend payout given TransCore’s strong positive EBITDA margins, despite the expected increase in gearing.

To this end, “near-term catalysts may come from contract wins, a recovery in the commercial aerospace unit, and higher business margins,” says Jaiswal.

On the other hand, Citi Research and CLSA’s analysts are not as upbeat.

Citi analyst Jame Osman has a “sell” rating and $3.68 target price, which is based on a target P/E ratio multiple of 20 times (around the past 10-year mean) applied to his FY2022 per shell forecasts.

“We believe positive narratives are already been priced in, while downside risks could lead to near-term earnings disappointment and a de-rating of the stock,” he writes in an Oct 3 report.

“Our target multiple accounts for the expected earnings recovery over our forecast period (6.0% compound annual growth rate or CAGR over FY2020–23 vs. 1.5% CAGR over FY2010–19), as well as strong orderbook momentum,” he adds.

Despite the “sell” call, Osman is positive on the TransCore acquisition, as the company looks to be a “strategic fit”.

“Unlocking its potential could hinge on the execution of key existing projects and ability to cross-sell between markets (North America— Southeas Asia) for it to contribute meaningfully to ST Engineering’s bottom-line growth. Near term, we remain cautious primarily on the headwinds facing ST Engineering’s core commercial aerospace MRO business, as well as integration costs from its series of recent acquisitions,” he says.

CLSA’s Low Hong Harn, similarly, remains cautious about the stock. He is keeping his “underperform” call and $3.78 target price.

ST Engineering has stated its aim to bring the electronic toll collection technologies from TransCore to markets in Asean, a market segment seen to grow from US$650 million now to around US$1.2 billion come 2030. “However, we are relatively more cautious on the ability to drive synergy as the dynamics, such as technical specifications and price sensitivity in Southeast Asia are different compared to North America,” he says.

Food Empire
Price target:
RHB “buy” $1.23

Attractive target for privatisation or acquisition

RHB Group Research analyst Jarick Seet has kept “buy” on Food Empire with the same target price of $1.23.

In his report dated Oct 5, Seet sees the company’s share buybacks as a “strong vote of confidence” from its management.

On Sept 28, 29 and 30, Food Empire’s management purchased a total of 340,000 shares, at 77.26 cents, 77.89 cents and 78.78 cents each respectively.

The company has also marked revenue growth of 12.5% y-o-y in the 1HFY2021 ended June, which is a “strong showing” by historical standards.

Sales to its core market in Russia grew 12.8% y-o-y while sales to other markets in Southeast Asia and South Asia grew by 13.2% y-o-y and 91% y-o-y.

To this end, Seet also expects Food Empire’s market share in Vietnam, India and Malaysia as well as its market share in Russia and Ukraine to continue to grow, as the group introduces more new products into these regions.

That said, the company’s margins in 1HFY2021 were mainly impacted by the surge in freight rates and raw material prices, which should be a “temporary blip”, according to Seet.

“Management will likely raise average selling prices (ASPs) to mitigate the rise in margins — it aims to raise ASPs by 10% each time in two batches, from end-3QFY2021 onwards,” says Seet.

“The group has also begun sourcing from other local supply chains for raw materials, which should save on freight costs and pare down overall cost of goods sold (COGS). As a result, we think the increase in costs is only temporary, and margins should normalise once global vaccination rates increase and Covid-19 becomes endemic,” he adds.

On the back of the temporary surge in COGS, Seet has cut his FY2021 patmi estimates by 14%.

However, his target price remains at $1.23, which is pegged at 15 times FY2022 P/E to reflect a “more accurate patmi on a normalised basis”.

“We remain confident on Food Empire Holdings’ prospects, and believe that it remains an attractive target for privatisation or acquisition, due to its attractive valuation,” he says.

China Aviation Oil
Price target:
RHB Group Research “buy” $1.08

Material recovery seen in 2022

RHB Group Research analyst Shekhar Jaiswal has lowered his target price on China Aviation Oil (CAO) as the jet fuel crack remained below his expectations of US$4 ($5.42) per barrel.

“We have marked to market jet fuel prices, and adjusted our estimates to reflect the 9MFY2021 aviation traffic in China and Shanghai Pudong International Airport (SPA),” writes Jaiswal, who has maintained his “buy” call on CAO.

We expected the jet fuel crack to gradually rise in 2021 amid higher demand for jet fuel, as aviation traffic grows in key countries with large domestic aviation markets,” he adds.

The jet fuel crack refers to the difference between Brent crude oil price and jet fuel price

As at Jaiswal’s report dated Oct 1, the jet fuel crack expanded to US$2 per barrel in 3QFY2021 ended September, from the 80 US cents a barrel in the 2QFY2021.

“Implied annualised flight traffic at SPA, based on the first eight months of data, is tracking 5% below estimates. We also incorporated our revised Brent crude oil price forecast of US$71.00–69.00/barrel for FY2021–2022,” he says.

Due to China’s aviation year-to-date traffic and with the spread between jet fuel and Brent crude prices tracking below his estimates, Jaiswal has lowered his estimates for the FY2021 to FY2022 by 2% to 4%.

That said, as China’s domestic aviation traffic is recovering from the lows seen in August, Jaiswal is also optimistic that its international aviation traffic will likely see a material recovery in 2022.

“We expect FY2022 profit to surge by 49% y-o-y, while a return to pre-pandemic earnings levels could take two to three years, in line with the anticipated recovery in global aviation traffic,” he writes.

According to Jaiswal’s estimates, CAO’s FY2022 P/E is at 8.1 times, implying a “compelling” 0.17 times FY2022 price/earnings-to-growth (PEG).

“The stock is trading at a compelling 4.2 times FY2022 P/E on an ex-cash basis (cash is at [around] 48% of its market cap). Based on our in-house proprietary methodology, we derived an ESG score of 2.7. Accordingly, we applied a 6% discount to our blended fair value of $1.15 to arrive at a $1.08 target price.”

Hutchison Port Holdings Trust
Price target:
DBS Group Research “buy” 33 US cents

Strong volume and resilient earnings seen

DBS Group Research has kept “buy” on Hutchison Port Holdings Trust (HPH Trust) with a higher target price of 33 US cents (45 cents) from 32 US cents previously.

The higher target price, which assumes a weighted average cost of capital (WACC) of 8.0%, comes on the back of strong throughput growth and resilient earnings, says analyst Paul Yong.

Furthermore, now would be a good time to accumulate units in the trust due to undemanding valuations.

“HPH Trust is currently trading at 0.6 times P/B, which is [around] 0.5 standard deviation above its five-year mean, against a ROE of 4.3%. It is an attractive yield play, with the highest FY2021 dividend yield of 8.2% among the three port companies under our coverage,” writes Yong.

In a Sept 29 report, Yong says he has raised his FY2021 ending December throughput growth assumptions from 3% to 4% for Yantian and 1% to 2% for Kwai Tsing due to year-to-date (ytd) volumes at both Yantian and Kwai Tsing above his expectations.

To be sure, Yantian has seen a 9.0% y-o-y increase in volumes ytd, while Kwai Tsing has seen a 3.4% y-o-y growth so far.

“We also lift our FY2021/FY2022 earnings by 33%/10% as 1HFY2021 earnings outperformed significantly. We continue to like HPH Trust as we believe that earnings have bottomed and investors can look forward to a sustained period of recovery,” he says.

In addition, Yong is positive on the trust as its dividend payout for the FY2021 has seen its highest level in three years. As it is, the trust’s DPU guidance stood at the high end of HK$0.11– HK$0.13, with the potential to be higher at HK$0.14 if earnings remain firm.

The trust declared an interim dividend of HK$0.065 on the back of robust 1HFY2021 results, which represents an increase of over 50% y-o-y from the 1HFY2020.

“We believe that higher dividends in the medium term are also on the cards, powered by high operating leverage and lower finance costs,” says Yong.

That said, Yong admits that his forecasts for the FY2021 are on the lower end, compared to estimates from the consensus.

“We remain conservative, leaving upside risk to our throughput volume forecasts for FY2021.”

To this end, a global recession would materially impact trade and throughput numbers for the trust, which would then have an impact on its earnings, cash flows and dividends.