The Singapore research team at UOB Kay Hian has added SIA Engineering (SIAEC), Singapore Telecommunications Z74 (Singtel), Food Empire Holdings F03 , Frencken Group E28 Limited and Far East Hospitality Trust Q5T (FEHT) to its November 2023 Alpha Picks portfolio.
SIAEC was added as the analysts expect to see higher earnings and a dividend recovery from the company while Singtel was included for its defensive and improving business fundamentals. The team expects to see improvements in Food Empire’s valuation from its upcoming dual listing on the Hong Kong exchange (HKEX) while Frencken’s earnings, which bottomed out in the 1HFY2023 ended June 30, is expected to improve sequentially. Finally, the team has included FEHT as it is a beneficiary of the upcoming tourist arrivals in Singapore.
At the same time, the team has removed Sea Limited, Keppel Corporation BN4 and Capitaland Ascott Trust (CLAS). Sea was removed as the team is expecting the company to post quarterly losses from its upcoming results while Keppel and CLAS were removed due to their respective lack of share price catalysts.
In October, the team’s alpha picks fell by 4.6% m-o-m due to poor investor sentiment although it still outperformed the benchmark Straits Times Index (STI) by 0.1 percentage points (ppts) on a market cap-weighted basis. That said, the drag was offset by their “defensive picks” such as ComfortDelGro C52 (CDG), Bumitama Agri P8Z and Oversea-Chinese Banking Corporation (OCBC). Shares in CDG rose by 1.5% m-o-m while Bumitama’s shares stood stable. Shares in OCBC fell by 1.0% m-o-m.
“CDG’s performance was driven by higher earnings expectations for the upcoming 3QFY2023 results while Bumitama benefitted from stronger crude palm oil (CPO) prices. We witnessed profit taking in the industrials sector, eg Seatrium (-16.4% m-o-m) and CSE Global 544 (-9.9% m-o-m), while RH PetroGas (-17.8% m-o-m) suffered from a poor exploration result,” the team writes.
On an equal-weighted basis, however, the team’s alpha picks underperformed -6.3% m-o-m, losing out to the STI by 1.6 ppts. Overall, the team’s portfolio still outperformed the STI for 18 out of the past 20 months.
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In October, the analysts note that the already-fragile global investor sentiment deteriorated during the middle of the month as strong US economic and job data, coupled with sticky inflation, reaffirmed the likelihood for “higher-for-longer” interest rates, driving 10-year US Treasury yields to multi-year highs.
They add: “Also, a few high-profile disappointments from the US earnings season along with heightened geopolitical tensions in the Middle East has further dented investor sentiment, resulting in the STI falling 4.7% m-o-m in October.”
‘Buy’ SIAEC with recovery in regional flight activities
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Analyst Roy Chen has kept his “buy” call on SIAEC as aircraft movements at Changi Airport have recovered to close to 90% of the pre-pandemic levels in September and are expected to increase further as the regional air traffic continues to recover.
“SIAEC is a key beneficiary of this trend given its 80% market share of Changi Airport’s line maintenance service volume. Its maintenance, repair and overhaul (MRO) businesses for airframe, engine and component are also set to improve as regional flight activities pick up further,” notes Chen.
The analyst also writes that SIAEC has a strong balance sheet and net cash of over $600 million as at end 1QFY2024, which is equivalent to 24% of its current market cap.
He adds: “This sizable net cash position earns SIAEC decent interest income (over $20 million by our estimate) in the high interest rate environment and allows the company to eye for potential acquisition opportunities to expand its regional network.”
Chen expects the company to recover its dividend to 9 cents in FY2024 and 12 cents in FY2025, leading to a dividend yield of 3.9% and 5.2% respectively.
Singtel to double down on revenue drivers, keep ‘buy’
Analysts Chong Lee Len and Llelleythan Tan have kept their “buy” call on Singtel with an unchanged discounted cash flow (DCF) based target price of $3.15.
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“At our target price, the stock will trade at 15x FY2024 enterprise value (EV)/ earnings before interest, taxes, depreciation and amortization (ebitda),” they write. “In our view, Singtel remains an attractive play against elevated market volatility, underpinned by improving business fundamentals.”
Chong and Tan note that the telco has maintained its strategic aim to grow overall group return on invested capital (ROIC) from 8% in FY2023 to low double-digits in FY2026, driven by its growth engines of its regional data centres (RDC) and NCS.
They also understand that Singtel has about $4 billion of capital recycling after the stake sale of its RDC business, which the analysts understand will “likely come from” paring down its stakes in its regional associates, which are valued at around $49 billion as of end-1QFY2024.
The analysts add: “Singtel currently has $2 billion to $3 billion of excess cash which we reckon may lead to a special dividend and/or larger dividends towards the higher end of the group’s 60% to 80% of underlying profit after tax and minority interests (patmi) dividend policy in 1HFY2024.”
‘Buy’ Food Empire for potentially improved valuation from dual listing
Analyst John Cheong has kept his “buy” call on Food Empire with a target price of $1.36. Cheong’s target price is based on the company’s 10x FY2024 earnings per share (EPS).
The analyst notes that Food Empire will have more avenues to raise its capital and increase its exposure to a broader investor base should its dual primary listing in Hong Kong go through.
He adds: “If successful, we believe that it could mean better valuations for the stock. Trading at 8x FY2024 price to earnings ratio (PE) against Singapore peers’ average of 11x and regional peers’ average of 14x, its valuation is due for a re-rating, in our view.”
Given the consumer-staple nature of Food Empire’s products, demand is relatively price-inelastic. Food Empire’s products in the coffee segment, such as the MacCoffee brand, continue to be affordable with mass appeal, leading to stronger demand in 2023.
“Food Empire’s 1HFY2023 net profit of US$26.6 million ($36.3 million) which is lower 1.6% y-o-y is in line with expectations, forming 54% of our full-year estimate. 1HFY2023 revenue from its core markets recorded impressive double-digit growth due to higher volumes and pricing,” writes Cheong.
UOBKH sees stable outlook for Frencken’s 2HFY2023 earnings; keeps ‘buy’ call
Cheong has also kept his “buy” call on Frencken with a target price of $1.23, pegged to the company’s 12.6x FY2024 PE, based on 1 standard deviation (s.d.) above the mean PE.
He explains: “The +1 s.d. in our PE multiple peg is to capture Frencken’s earnings cycle, which is approaching a trough, and improvement in earnings quality where the medical and analytical and life sciences segments could see more contributions. Also, we note that Frencken has a diverse stream of revenue sources, which could help the company remain resilient amid a volatile macro environment.”
The stable outlook for 2HFY2023 also indicates that earnings have already bottomed in 1HFY2023 for Frencken, and there is potential for more new business in Asia. The group’s outlook for its various segments for 2HFY2023 against the previous half includes higher revenue for its semiconductor segment, increasing revenue for its analytical and life sciences segment, stable revenue for both its medical and automotive segments and lastly decreasing revenue for its industrial automation segment. Frencken is also seeing more new business opportunities in Asia than in Europe, especially in Malaysia.
‘Buy’ into FEHT’s pure-play on Singapore’s hospitality sector
Analyst Jonathan Koh has kept his “buy” call on FEHT with a dividend discount model (DDM)-based target price of 76 cents.
Koh writes that the group has benefited from the rising increase of 44.6% y-o-y in visitor arrivals in September, and that revenue per available room (RevPAR) for hotels has increased 43.6% y-o-y to $150 in 3QFY2023, which is the same as the REIT’s pre-pandemic levels.
He adds: “Occupancy improved 10.6 ppts y-o-y to 86.7% while average daily rate (ADR) jumped 26.0% y-o-y to $173.”
The analyst also notes that FEHT intends to utilise the incentive fee of $18 million from the divestment of Central Square to cushion the negative impact from higher interest rates.
On the group’s balance sheet, its aggregate leverage has remained low at 32.2% as of Sep, and FRKN provides an attractive FY2024 distribution yield of 7.6%.
As at 1.23 pm, the STI is trading 4.81 points higher or 0.16% up at 3,081.58 points.
