SINGAPORE (May 29): As Singapore’s “circuit breaker” measures restricting non-essential operations ends on June 1, market watchers say it may well be an opportune time to make judicious investments. The Straits Times Index (STI) seems to have responded to this: From the March 23 low, the STI has reclaimed some 286 points to 2,519.48points on May 27. This is down 21% from the start of the year.
“Covid-19 has posed a key challenge to global economies as it brought on a reluctance to travel and reduced consumer spending,” Jarick Seet, head of small and mid-caps at RHB Securities tells The Edge Singapore. “Singapore is particularly vulnerable because of its open economy that is dependent on external trade. And with reduced trade and spending globally, counters here have had a drop in performance,” he adds.
Chips for the win
Seet says the market, at this current level, presents an “exceptional buying opportunity.” To this end, RHB Securities recently published its annual 20 Jewels 2020 pick of 20 small caps. Out of these, five are from the broader technology and manufacturing sector: Avi-Tech Electronics, CSE Global, Frencken Group, Fu Yu Corp and UMS Holdings. Three out of these five companies have a focus on the semiconductor industry, which Seet likes holistically for its good prospect. “We are bullish on the semiconductor sector for 2020 as globally, we have seen semicon players reporting good earnings thus far, [giving them] a good outlook,” he explains.
Interestingly, the sector had also featured prominently in RHB’s 2019 picks, following expectations of good performance after taking a hit in 2018. This was on the back of expectations of a trade truce between superpowers US and China. However, the delays in arriving at the so-called Phase One agreement saw the sector underperforming throughout 2019. The driver this year is that supply chains of the industry will be streamlined, and that the likes of UMS, Frencken and Avi-Tech stand to capture a bigger market share with this consolidation.
Things are looking up for precision engineering group UMS as it booked earnings of $10.7 million for 1Q2020 ended March, up some 53% y-o-y from the $7.0 million recorded in the previous year. This comes from a 22% y-o-y increase in its revenue to $34.9 million, with growth driven significantly by higher sales to its semiconductor customers, the company noted in a May 12 results announcement.
Meanwhile, Frencken Group announced a 10.5% y-o-y increase in net profit for 1Q2020 ended March to $9.5 million, even as revenue for the quarter fell 4.8% to $151.4 million. This is due to lower sales from its automotive, industrial automation and analytical segments. However, this was partially mitigated by gains from the US dollar appreciation against the Singapore dollar, the company reported in its business update on May 14.
Finally, burn-in tester Avi-Tech is well poised to go places amid rising demand for its services from emerging technologies such as autonomous vehicles. On Feb 13, Avi-Tech reported revenue for 2QFY2020 ended December 2019 dipped by 2.1% y-o-y to $7.5 million. However, earnings in the same period rose by 46.7% y-o-y to $1.4 million, as the company vastly improved its efficiency. Gross margin also increased from 27.9% in 2QFY2019 to 39.7% in 2QFY2020. The company has declared an interim dividend of a cent per share — a payout ratio of 55% — up from 0.8 cents in the year earlier period.
Given the growth prospects of the semiconductor sector, Seet is not the only one appreciating these companies. And with the sector deemed ‘critical’ or ‘essential’ during this circuit breaker period, other analysts agree that this is a sector to watch. For instance, Maybank Kim Eng Research’s analyst Lai Gene Lih notes that the odds of the sector facing virus-induced disruptions are unlikely.
Others such as KGI’s Kenny Tan call semiconductors the “backbone” of all things tech. The wider technology sector, he says, will emerge as the “ultimate winner” as the world economy makes its way out of the Covid-19 debris.
But more than the long-term growth prospects, RHB’s Seet also says the five ‘jewels’ featured have strong cash balances and attractive yields. “We feel that especially in such tough economic conditions coupled with a potential further second wave of the virus spreading, a net cash balance sheet will help the company to tide through tough times,” he notes.
Industrial demand
Another prominently featured sector in RHB’s jewels are industrial companies, with four firms on the brokerage’s radar. These companies come from the construction sector and include — BRC Asia and Yongnam Holdings (both prominent steel part makers), leading concrete supplier Pan-United Corp and warehouse operator GKE Corp, which also runs ready-mixed cement plants in China.
The brokerage’s appreciation for the sector stems from an expectation of growth in the construction industry. Data from Singapore’s Building and Construction Authority (BCA) shows that activity hit a five-year high in 2019, with some $33.4 billion in projects awarded to public and private-sector developments. This is 9.5% more than in 2018 and surpasses the upper end of the $27–$32 billion forecast range. This growth was slated to extend into 2020 on the back of anchor developments to projects such as Changi Airport and the Cross Island Line. This translated to a projected increase in total nominal construction output to $32 billion in 2020, BCA said in an early January release.
However, as construction activity has dropped to only 5% during the circuit breaker months — with a marginal increase to 10% from June 2 — the sector is looking at major contractions for the ongoing quarter. The sector had already taken a hit prior to the lockdown measures, with a 4.3% contraction in 1Q2020. “Unfortunately, the construction sector will take a big hit in 2Q2020 from the Covid-19 pandemic — from the one-month circuit breaker and the rising infections/quarantines at foreign worker dormitories,” observes Selena Ling, who heads the research and strategy division at the Oversea-Chinese Banking Corporation (OCBC). The decline is further exacerbated by a possible drag to private-sector real estate from weak business and consumer sentiments, she warns.
Still, she says there may be a revival of the sector later this year, through a pump-priming to stimulate the ailing economy. Once this kicks off, RHB’s few industrial gems are in for a heightened increase in projects and operations to meet existing deadlines as well as to serve pent-up demand.
Other gems
RHB’s 2020 picks saw other interesting features such as Alliance Healthcare, a first time entry into the list. The managed healthcare business operates 16 clinics under the “My Family Clinic’’ umbrella and five specialist clinics focused on colorectal, orthopaedic and ear-nose-throat care. It has in recent months ventured into tele-medicine to provide patients access to quality healthcare in their own homes, without being exposed to patients in other clinics. Seet sees the company as “one of the market leaders in managed healthcare solutions’’. This, he adds, gives the company good prospects.
In 1HFY2020 ended December, Alliance Healthcare’s reported earnings more than doubled to $1.6 million from $0.5 million the previous year. This translates to earnings per share of 0.78 cent from 0.26 cent previously, on a fully diluted basis. For the half year, revenue increased 22.3% to $20.8 million following higher sales contribution across all its business segments. Segmentally, income from its specialist care services surged 88.6% to $4.9 million, after its orthopaedic clinic opened for business in December 2018. Meanwhile, revenue from its managed healthcare solutions was up 12% to $2.9 million on higher value of claims processed. Income from GP clinics rose 3.7% to $8.6 million while that from pharmaceutical services rose 25% to $4.4 million from higher sales in Singapore.
Within the depressed marine sector, Seet has found another gem: Marco Polo Marine. Included in RHB’s list for the first time, the company is principally engaged in shipping and shipyard activities comprising the chartering of offshore service vessels, tugboats and barges.
Having gone through the 2016 oil and gas crash and a restructuring exercise the following year, the company is seen to be in better shape to ride out the ongoing doldrums in oil prices. This is seen in its sharply narrowed losses for its 1H2020 ended March. Marco Polo Marine, with the backing of a group of white knights who put in some $60 million, lowered its losses to $708,000 — down 85% from S$4.82 million in the year before. This translates to losses per share of two cents, compared to 14 cents in 1H2019.
While it was dragged into the red on finance costs and a share of joint-venture losses, it recorded an operating profit amid a 49.5% jump in revenue to $18.6 million. This comes from an improved utilisation of its offshore vessels and ship-repair projects which gave a lift to its ship-chartering and shipyard business segments.
For now, the board has warned that Marco Polo Marine’s earnings and ability to charter contracts could take a hit “in the next few months” from the health-turned-economic crisis and the plunge in global oil prices. To reduce its dependence on the oil and gas industry, it has been actively diversifying its activities to include the support of submarine cable installations and offshore wind farm projects.
Seet, however, takes a contrarian view: He expects Marco Polo Marine to survive this storm with a “strong net cash position” of $127.2 million at the end March. “With a net cash balance sheet, we feel that Marco Polo Marine will be able to tide through this oil price plunge and come back stronger as their weaker peers will likely be forced to shut down,” he says.
On May 27, Marco Polo Marine closed at 1.4 cents, which is a huge discount off its net asset value of 3.1 cents as of end March. At this level, the market is also valuing the company lower than the 2.8 cents the new investors paid for their stakes.
