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UOB Kay Hian cites BRC Asia, Food Empire, Frencken and InnoTek as small-mid cap picks

Felicia Tan
Felicia Tan • 6 min read
UOB Kay Hian cites BRC Asia, Food Empire, Frencken and InnoTek as small-mid cap picks
UOB Kay Hian analyst John Cheong has given all three “buy” calls with target prices of $1.88, 88 cents and 82 cents respectively.
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UOB Kay Hian analyst John Cheong and the Singapore research team have highlighted BRC Asia, Food Empire, Frencken and InnoTek as its top buy picks among the small-mid cap sector.

He has given all three “buy” calls with target prices of $1.88, 88 cents and 82 cents respectively.

The brokerage has highlighted stocks based on laggards that are backed by solid earnings and a healthy balance sheet, along with stocks that have benefitted from China’s recovery. It has also highlighted stocks with the ability to recover quickly post-Covid-19, says Cheong.

For stocks such as Food Empire, Frencken and InnoTek, which are categorized as stocks that are of “laggard quality small-mid cap backed by solid earnings”, the companies have reported decent 9MFY2020 core net profit.

The way Cheong sees it, Food Empire is trading at an undemanding valuation of 8.5x 2021F price-to-earnings (P/E), which is a “significant discount to peers’ average of approximately 20x 2021F P/E despite its growing presence in the Vietnam market and leading position in its core markets in Eastern Europe”.

“In spite of the challenges in 2020 including the Ruble depreciation and the lockdown in key markets in 2QFY2020, the group has reported decent 9MFY2020 core net profit (excluding forex losses) of $23 million,” he adds.

“This represents an 11.2% y-o-y growth on the back of better cost control and higher ASPs which mitigated the decline in revenue (-5.6% y-o-y).”

Frencken’s 3QFY2020 earnings of $13.3 million brought its 9MFY2020 net profit to 83% of the brokerage’s full-year estimates.

“The business update reflected earlier- and stronger-than expected operating leverage, buoyed mainly by a better sales mix and greater cost control efforts. We expect the semiconductor segment to continue driving growth going forward, driven by the accelerating development of 5G technology,” notes Cheong.

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InnoTek looks set to benefit from China’s recovery in auto sales and the social distancing measures arising from Covid-19, which have boosted demand for large screen TVs.

“We expect [InnoTek’s] earnings per share (EPS) to grow by 229% h-o-h in 2H20 and 19.4% y-o-y in 2021. InnoTek has a net cash position of $73 million. At current prices, the stock trades at an undemanding valuation of 6.4x 2021F P/E, a discount to peers’ average mean of 11.0x,” he says.

Jiutian Chemical, China Sunsine and Sunpower are those that will be able to leverage off China’s recovery, says Cheong.

For Jiutian Chemical, China’s recovery has led to enhanced demand for raw materials used to manufacture consumer end products, including fine chemicals produced by Jiutian Chemical.

“These factors were apparent in 3QFY2020 results which beat our expectations due to higher-than-expected average selling prices (ASPs). We expect better demand to drive further earnings growth. The recent retracement in share price (- 41% from its recent high of 12 cents) presents a buying opportunity as the stock trades at an attractive valuation of 3.8x 2020F P/E and 2.2x 2021F P/E,” he says.

“Current dimethylformamide (DMF) ASP of around Rmb8,000/tonne is still way above our expectation of Rmb7,200/tonne for 2021. Also, earnings surprise could come from higher volume of dimethylamine (DMA), which is the feedstock of DMF,” he adds.

On the back of a rise in automobile sales in China as the domestic economy recovers, selling prices of rubber accelerators – the main earnings for China Sunsine – are showing signs of recovery.

“In 2021, we expect net profit to grow by 46% y-o-y on the back of China Sunsine’s expanded production capacity. Furthermore, higher vehicle sales in China are expected to drive increased demand for tyres, hence leading to a potential 10% rise in the ASP of rubber accelerators from a low base in 2020,” notes Cheong.

Sunpower’s plants have resumed full work amid China’s economic recovery, which, according to Cheong, was apparent in its robust set of results for 3QFY2020.

“The green investment (GI) segment is on track to post a double-digit y-o-y growth for 2020 while the manufacturing and services (M&S) orderbook maintained its record-high orderbook of RMB2.8 billion as of end 3QFY2020. Management has earmarked the GI segment as the key driver for the group,” he says.

“We expect: a) full-year contributions from newly-acquired GI plants; b) anticipated additional contributions from Phase 2 of the Shantou Project and the new Xintai Zhengda plant; c) continuous acquisition of new customers following mandatory closures of “small dirty boilers” and/or mandatory relocations into industrial parks; d) organic growth from existing customers and industrial parks served by the group’s GI plants; and e) record-high M&S orderbook of Rmb2.8b to help drive earnings for the rest of 2020 and beyond,” he adds.


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Stocks that are expected to benefit from a normalised recovery post Covid-19, include names in the construction and F&B services sectors such as BRC Asia, Kimly and Koufu.

For BRC Asia, build-to-order (BTO) projects continue to be favourable for the company with recent new HDB project launches in Tengah, Bishan and Toa Payoh being oversubscribed.

“We opine that the construction industry is still a laggard and new construction contracts awarded will likely recover off the low seen in Aug 2020, with Sep 2020 contracts awarded amounting to $840 million (+102% m-o-m),” says Cheong.

“With the gradual normalisation of construction activities and sustained margins, we are optimistic of BRC Asia’s recovery and expect earnings to rebound strongly in FY21 at 88% y-o-y. BRC Asia currently trades at 8.8x FY21F earnings, below its long-term average (excluding outliers).”

Kimly, which is the largest coffeeshop operator in Singapore, should benefit from Covid-19, as consumers become increasingly price-sensitive.

The group has a high net cash balance of $43.9 million, a higher dividend yield compared to its peers and strong future earnings growth from its newly-acquired and refurbished coffee shops.

“We expect a strong net profit compound annual growth rate (CAGR) of 9.3% for FY21-23. At current valuations, Kimly is trading at 12.5x FY21F P/E, well below its average 3-year mean P/E of 15.0x, and Singapore peers’ 2021F P/E of 22.5x.”

While same-store sales have declined by 20% y-o-y in July to October 2020, sales at outlets in the heartlands and full-service restaurants have improved significantly, says Cheong.

“We expect a gradual recovery for outlets located at tertiary education and downtown area (where sales have been hampered by work-from-home measures) in 2021 as Covid-19 cases come under control in Singapore… Apart from gradual resumption of activities, future growth drivers are contributions from Deli Asia (which has resilient earnings), new outlets, and its new Integrated Facility. Key share price catalyst for the stock is the opening of Singapore and Macau borders,” he adds.

Shares in BRC Asia, Food Empire, Frencken and InnoTek closed $1.46, 60 cents, $1.25 and 55 cents respectively on Dec 21.

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