SINGAPORE (Feb 28): Stock markets around the world have shown signs of distress amid the outbreak of the novel coronavirus which has caused the temporary closure of companies in China and, consequently, the disruption of global supply chains and business operations elsewhere.
While Singapore seems to have kept the outbreak somewhat within control, the stock market here is feeling the chill. Following initial news of the outbreak, the Straits Times Index opened 2.25% or 73 points lower at 3,167.02 on Jan 26. Since then, the benchmark has fallen further to 3,122.44 points on Feb 26.
“Covid-19 poses a key challenge to global economies as it has 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.
While it will take time for Singapore’s economy and stock market to recover, Seet says there are a few gems that investors can consider.
Fu Yu Corporation
Plastics component manufacturer Fu Yu is one company with substantial investment merits, Seet says. On Feb 24, the company posted earnings of $3.7 million for 4QFY2019 ended December, up 27.4% from the $2.9 million a year ago. This is despite a 4.1% y-o-y decline in its revenue to $46.1 million. This was because gross margins improved from 17.8% in FY2018 to 19.7% in FY2019. For the full year, earnings was up 6.8% to $12.7 million despite a 1.8% drop in revenue to $194.1 million from a year ago.
Fu Yu plans to pay a final dividend of 1 cent for FY2019, bringing the full year total to 1.6 cents, the same as FY2018. Seet notes that the company has been consistent in its dividend payouts and has maintained a relatively generous dividend yield of around 6%. He expects this to pick up in FY2020, given the group’s upcoming plans.
For one, Fu Yu is re-developing its Singapore facility in Tuas, by demolishing its existing building to construct a larger facility that can house a factory, warehouse and office space. This is estimated to have a gross floor area of 9,000 sq m, over three times the size of the current building.
In addition, management is also looking to invest in new manufacturing equipment to expand its production capacity and deepen its ability to produce higher precision and better-quality products. The revamped facility is expected to improve Fu Yu’s productivity and operational efficiency. “This $15.4 million move is a good one which will improve [Fu Yu’s] supply chain and manufacturing line,” says Seet. And with cash and cash equivalents of nearly $88.5 million as of December 2019, he is confident that the group has ample funds for its plans.
Seet expects Fu Yu to reap economies of scale in its China operations, following the closure of its Shanghai site and consolidation at its loss-making Suzhou site which has lower operating costs. “We believe this will reduce the longer-term operational cost for the group, and help it beef up its China operations that were hit in FY2019,” he adds. For now, the group is ready to resume operations after closing in end January due to the outbreak.
“With the ramp-up in its existing projects to continue in the subsequent quarters, coupled with new projects in the medical, consumer and automotive fronts, we expect positive growth momentum to continue, barring a further trade war escalation and Covid-19 outbreak,” says Seet, who has a “buy” call at a target price of 29 cents. DBS analyst Ling Lee Keng is similarly positive and has a target price of 35 cents. Shares in Fu Yu closed at 25 cents on Feb 26. At this level, the stock is trading at a P/E of 14.8 times, valuing the company at $188.2 million.
Oxley Holdings
This high-profile and prolific developer is another company on Seet’s radar. For the 2QFY2020 ended December 2019, Oxley’s earnings plummeted 90% to $3.6 million, from $35.1 million in the same period a year ago. Revenue in the same period was down 12% y-o-y to $311.2 million. During the quarter, Oxley booked lower revenue from a development project in the UK, but for its other projects in Singapore and Ireland, higher revenue was recognised. The company also incurred higher administrative expenses during the quarter such as consultancy fees.
Oxley warns that real estate sales this year “will be weighed down by oncoming supply and build-up of unsold inventory” amid the uncertainty of the outbreak. It also faces currency exposure as many of its projects are overseas.
However, changes in the quarterly earnings of a development-focused property player like Oxley does not tell the full story. For one, its NAV as at Dec 31, 2019, was 34.1 cents per share, up from 33.9 cents as at June 30, 2019.
For investors, a key reason to invest in Oxley is the track record of the company in making astute investments. In November 2017, it bought Chevron House at Raffles Place for $660 million and after extensive renovation, sold it for just over $1 billion. Seet estimates that upon full completion of this sale, expected by March, Oxley will be able to book a gain of some $100 million. Oxley’s hotel at Stevens Road is another development the company is believed to be keen to sell.
Oxley says the proceeds will be used to pare down debt that’s maturing. However, analysts are betting that the company will have other uses from the gains as well. For this most recent 2QFY2020, Oxley declared an interim dividend of 0.32 cents, unchanged from the year before. Shareholders might be in for a treat when the company, which is celebrating its 25th anniversary, reports its full-year earnings, with a payout equivalent to a yield of 8–9% seen, says Seet.
Seet has a “buy” call and a target price of 42 cents for Oxley. Shares at Oxley closed at 33 cents on Feb 26. At this level, shares are trading at a historical P/E of 13.1 times, valuing the company at $1.37 billion.
Avi-Tech Electronics
Market watchers believe Avi-Tech Electronics is set to go places as the burn-in tester rides on rising demand for its services from emerging technologies such as autonomous driving. “The stock is backed by an attractive FY2020F yield of 6.2%, and management is actively exploring M&A opportunities – on which it hopes to close a deal by 1HFY2020,” says Seet.
UOB analyst Clement Ho agrees, noting that the company has been a beneficiary of the structural growth of automotive electronic components. “This is due to the increased adoption of safety-related vehicular electronics systems, as well as stronger penetration rates of electric and hybrid autos and the large market potential for autonomous vehicles, which require almost twice the semiconductor content of conventional cars,” says Ho in an initiation report on Feb 20.
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 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 cent in the year earlier period.
Lim Eng Hong, CEO of Avi-Tech, is looking to rev up the group’s performance as the semiconductor industry turns around and trade tensions between the US and China abate. It is already seeing a pickup in orders from the manufacturing and engineering segment which - together with its previous cost-cutting measures – is expected to widen margins.
And with cash and cash equivalents of $7.2 million, Seet believes “shareholders will be rewarded with attractive dividends despite the drag in profits”. On Feb 17, he upgraded his target price on Avi-Tech from 44 cents to 50 cents. Avi-Tech shares closed at 40 cents on Feb 26. At this level, shares are trading at historical P/E of 11.5 times, valuing the company at $68.4 million.
