Yangzijiang Shipbuilding (Holdings)
Price target:
Citi Research “buy” $1.98
DBS Group Research “buy” $2.15
Share price ‘will re-rate’ upon successful spin-off
Analysts from Citi Research and DBS Group Research have kept their “buy” calls on Yangzijiang Shipbuilding (Holdings) (YZJ) after the component stock of the Straits Times Index announced that it had increased the share capital of its proposed fund management and investment business to $4.3 billion. The analysts also believe that YZJ’s share price will re-rate following the successful completion of the proposed spin-off.
On March 25, YZJ said that it had increased the share capital of Yangzijiang Financial Holding (YZJFH), the entity that will soon be spun off from YZJ, to $4.3 billion comprising 3.95 billion shares, or $1.08 per share. YZJFH will be headed by Ren Yuanlin, former executive chairman of YZJ and father of current chairman and CEO Ren Letian.
The amount is exactly the same as guided by YZJ’s management during the recent FY2021 ended December results and does not come as a surprise, notes Citi analyst Jame Osman. “More importantly, we believe the move is an affirmation of YZJ’s intent to crystallise value via the spin-off, given that its core shipbuilding business is currently trading at a deep valuation discount, in our view,” the analyst writes in his report on March 27.
“As we previously flagged, at YZJ’s current valuation, the market is essentially assigning almost zero residual value for YZJ’s core shipbuilding business versus its past 10-year through-the-cycle mean of 5.4x P/E.”
“Even if we ascribe a more conservative value of 0.5x P/B multiple to its financial assets, it would yield an implied FY2022 P/E of 7x for its shipbuilding business,” he adds. “We continue to believe that a successful spin- off of its investment arm could drive a potential re-rating of YZJ on the basis of improved earnings quality and attract investors seeking more direct exposure to the company’s core shipbuilding business.”
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So far, the valuation of the proposed entity has been the main concern for investors with the distribution of the shares of the new entity in specie to existing YZJ shareholders, in which some investors are concerned of a potential sell-off and valuation de-rating.
“We think these concerns may be overdone, considering that 90% of YZJ’s financial assets currently are liquid; classified under current assets. Management had flagged that it is targeting a potential valuation of 1x P/B. Ultimately, the shares of YZJFH could trade on a yield basis,” says Osman.
“Little is known at this stage in terms of [its] potential income distribution, although management has outlined broad plans for the asset management business and its structure,” he adds.
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To Osman, YZJ has strong medium-term earnings visibility and momentum, with its record order book and delivery slots filled till 2024. The group also has a positive near-term industry outlook; the potential spin-off of its debt business is a key catalyst to its share price re-rating.
Osman has given YZJ a target price estimate of $1.98 based on a sum of the parts (SOTP) valuation methodology.
“Debt investments currently account for about 30% of the group’s total assets. We have accorded a 13x P/E multiple, a slight discount to +1 standard deviation historical mean, to YZJ’s shipyard operations given lower expected earnings volatility going forward as the shipping industry recovers; and also taking into account that: we expect the group to remain profitable, with respectable ROEs or return on equities (in excess of its peers); and to recognize significant strides the group has made in market share gains,” he writes.
“We value the group’s debt investments at 0.5x book, a slight discount to trading valuations of Chinese banks (0.7x) taking into account YZJ’s less developed credit controls when compared to banks,” he continues.
In his report, Osman sees weaker-than-expected margins from orders secured during the downturn disappointing contract-win quantum/or significant number of order cancellations; and the execution risk of projects as key downside risks to YZJ’s share price performance.
In a note dated March 27, DBS Group Research has given YZJ a target price estimate of $2.15, which values YZJFH at 0.7x P/B of 77 cents. The remaining shipbuilding-related business is valued at $1.38.
“Assuming fair value of YZJFH at 77 cents, Yangzijiang’s current share price of $1.46, only value shipbuilding-related business at 69 cents per share, implying unwarrantedly low valuation of 0.8x P/B and [an estimated] 6x P/E despite 13% ROE and potential upside to 4% dividend yield,” says the brokerage.
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In its note, the brokerage believes that YZJ is set to re-rate closer to its target price of $2.15 following the completion of the spin-off.
If all goes to plan, the listing of YZJFH could be completed by end-April or early May this year, says the brokerage.
As at 4.53pm, shares in YZJ are trading 3 cents higher or 2.055% up at $1.49. — Felicia Tan
Grab Holdings
Price target:
Maybank Securities “buy” US$4.32
Grab’s risk reward deemed ‘attractive’
Maybank Securities analyst Lai Gene Lih has initiated a “buy” call on Grab Holdings with a target price of US$4.32 ($5.88). The target price offers a potential upside of 30% to Grab’s last-closed share price of US$3.32 as at March 25.
Lai’s report on March 28 comes after the NASDAQ-listed counter saw its shares fall some 70% since its Spac merger in December 2021.
According to the analyst, Grab’s risk-reward is deemed “attractive” in the next 24 months as it strives for profitability.
On Dec 2, 2021, shares in Grab made its debut on the Nasdaq, opening at US$13.06. The counter ended the day with its shares trading at US$8.75, down more than 20%. Lai sees Grab as a beneficiary of the economic digitisation and rising affluence in Southeast Asia and that its superapp model drives strong retention among its users. He also says that the one-year retention of users who use over three offerings stands at a retention rate of 86% compared to the 37% of users who use just one offering. “This makes Grab more efficient with incentives, which we see as key to its ability to achieve profitability over time,” writes Lai.
Grab has given a total of US$80 in incentives per monthly transacting users in 2019; US$74 in 2021 and is expected to give US$65 in 2025. Its strong hyperlocal executive across Southeast Asia’s diverse countries, which allows it to scale its user base, is another positive. “Grab has localised ‘boots-on-the ground’/ app-features/ transport modes, and even has its own proprietary maps and mapping technology to boost transit efficiency,” adds Lai.
In addition, Grab’s mobility offerings reduce travel time for its users compared to public transportation. For instance, it has reduced travel time for 20% of its users in Thailand and 70% in the Philippines. Lai expects the region’s economic reopening to drive the recovery of Grab’s mobility segment.
He continues: “Despite loosening restrictions, Grab observes deliveries becoming integral to daily life (average order value +41%/ transactions per monthly transaction user or MTU +28% versus pre-Covid-19).” Lai has also projected a mobility gross merchandise value (GMV) CAGR of 27% for the FY2021 ended December 2021 to FY2025, and has an estimated normalised deliveries GMV CAGR of 28% for the same period. Normalised deliveries in FY2021 saw a 56% y-o-y increase, he adds.
However, any price wars from Grab’s competitors or higher-than-estimated incentives may hurt Grab’s profitability, warns Lai. “Rising inflation and/or regulatory changes that require pension contributions by Grab to driver-partners could
also hurt its path to profitability.” Furthermore, a resurgence of Covid-19 related lockdowns is a risk for mobility. Finally, co-founder Anthony Tan has 63% of voting rights (and owns 6%), which may create risks for minority shareholders who may find it difficult to exercise control over the company’s direction, says Lai. He has forecast GMV and net revenue CAGR of 27% and 31% over FY2021 to FY2025 respectively. “We are projecting Grab to deliver adjusted Ebitda/Patmi break-even by FY2024 and FY2025, respectively,” he says. “As regional economies reopen, stronger than expected mobility segment recovery may be a catalyst.” — Felicia Tan
SIA Engineering
Price target:
UOB Kay Hian “buy” $2.80
Preferred proxy to ride Singapore’s aviation recovery
UOB Kay Hian analyst Roy Chen has re-initiated a “buy” recommendation on SIA Engineering with a target price of $2.80 as the industry’s recovery is “well on track” and SIA Engineering is positioned in a faster lane of recovery compared to peers whose financial performances are more geared to the relatively laggard passenger volume growth.
Chen adds that SIA Engineering is set to be first among the local aviation-related companies to report positive core earnings, with an earnings estimate of $92 million for the FY2023 ending March 2023, which will be equivalent to 57% of FY2019, the full year before the pandemic hit.
The company is also well positioned to resume dividend payment in as early as FY2023. This is considering its earnings recovery and strong balance sheet carrying some $679 million in net cash. “We do not rule out the possibility of a special payout by FY2024, given its major shareholder Singapore Airlines’ (SIA) cash needs for mandatory convertible bond (MCB) redemption,” Chen adds.
Moreover, SIA Engineering’s various joint ventures across the region are set for recovery too, as airlines contract out more work before the impending pick up heightened demand with full recovery of the aviation industry. This has been made possible with SIA Engineering’s strong business development foundation and ties with the major engine makers, says Chen. Some risks the analyst notes include events that disrupt the sector’s recovery and increase competition for SIA Engineering’s maintenance, repair and overhaul (MRO) business. — Chloe Lim
Singapore Exchange
Price target:
RHB Group Research “neutral” $10
SGX’s ‘volatile times’ could imply short-term benefit
RHB Group Research Shekhar Jaiswal has kept a “neutral” rating on Singapore Exchange (SGX) with an increased target price of $10, from $9.80.
“While we are positive on SGX’s long-term growth prospects from its latest acquisitions and potential pipeline of new listings, we remain concerned about the lack of near-term re-rating catalysts,” he writes. The analyst notes that continued global macroeconomic uncertainty could in fact lead to better-than-expected trading volume in the near term.
With the continuing Russia-Ukraine crisis causing elevated geopolitical tensions, this has in turn created heightened price volatility in global equity markets, with SGX seeing increased trading activity in February.
The securities daily average value (SDAV) increased 21% y-o-y to $1.6 billion, bringing the YTD SDAV to $1.2 billion for FY2022 ending June, in line with the analyst’s FY2022 SDAV estimates of $1.2 billion. SGX’s derivatives segment also saw an uptick in trading activity, with the average daily trading volume (DDAV) of 1.03 million.
In addition, the US Federal Reserve has started the cycle for higher interest rates with a 25 basis points (bps) interest rate hike in the Federal Funds Rate in March. Jaiswal expects another five to six interest rate hikes this year that could create scope for higher treasury income for SGX.
However, Jaiswal has some concerns as the exchange’s cost is “elevated”. Meanwhile, revenue contribution from its recent acquisitions could take time to scale up. There also appears to be stiffer competition from Hong Kong Exchange’s bid to grow its derivatives business which risks taking away trading volume from SGX.
Finally, with the full induction of New York-listed Sea into MSCI Singapore, securities market turnover could remain soft as some trading volume could move away from SGX-listed stocks to Sea.
On the other hand, Jaiswal foresees a number of upside risks that include higher-than-estimated trading volume from the potential pipeline of ETFs, REITs and spac listings. Overall, the analyst views the stock’s valuation as “reasonable” amid modest earnings growth, as it is trading at an FY2022 P/E of 23.4x, above its historical average, while offering a modest yield of 3.3% that is lower than the Straits Times Index’s yield of 4%. — Chloe Lim
