singapore market focus smc strategy...ed: th / sa: as, py, cs dbs group research . equity sti :...
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ed: TH / sa: AS, PY, CS
STI : 3,450.69 Analyst Lee Keng LING +65 6682 3703 Carmen Tay +65 6682 3719 [email protected] [email protected]
Key Indices
Current % Chng
FS STI Index 3,450.69 -1.2%
FS Small Cap Index 397.06 -0.3%
SGD Curncy 1.35 2.5%
Daily Volume (m) 2,668
Daily Turnover (S$m) 1,483
Daily Turnover (US$m) 1,100
Source: Bloomberg Finance L.P.
Market Key Data
(%) EPS Gth Div Yield
2017 9.7 4.1
2018F 12.7 3.8
2019F 8.3 3.4
(x) PER EV/EBITDA
2017 17.1 15.7
2018F 15.2 14.9
2019F 14.0 16.8
DBS Group Research . Equity
8 Mar 2018
Singapore Market Focus
SMC strategy Refer to important disclosures at the end of this report
Upside participation, downside
protection
Earnings still key; go for names with clear growth
catalysts – BreadTalk, Cityneon, mm2 Asia, and
Riverstone
Keep a firm eye on growth and another on
downside protection as small-mid caps have yet to
recover from recent selldown
Steady dividends make good safety nets – Chip Eng
Seng, Hong Leong Finance, Riverstone, Sheng
Siong, Sunningdale, and UMS
Trading cheap and ready to shine in 2018 – China
Aviation Oil, Delfi, Riverstone, and Roxy Pacific
Firm eye on earnings growth. Encouraged by the positive earnings growth momentum displayed in 4Q, we seek to identify stocks with clear catalysts to sustain double-digit earnings growth over the next two years.
Our preferred picks to ride the earnings momentum –
Breadtalk, Cityneon, mm2 Asia, Riverstone
Dividends provide shelter amidst volatility. With results
season now over and dividend payments back in focus, we
believe that growth stocks with a dividend sweetener could
outperform over the next one to two months. Historically,
SMCs that have consistent dividend payouts also tend to be
more resilient.
With the FT ST Small Cap Index and FT ST Mid Cap Index
(FSTM) underperforming YTD and still trending near post-
February correction lows, we believe that selected dividend-
paying stocks are worth a relook, as their attractive
dividends could serve as a valuable safety net amidst volatile
markets.
Riverstone and Sunningdale make attractive dividend
growth plays. We also like Chip Eng Seng, Hong Leong
Finance, Sheng Siong and UMS for their stable dividends.
Opportunities to bottom fish companies currently
trading at attractive valuations. We also see opportunities
to bottom fish, as there are a few other companies that are
on the cusp of an earnings turnaround (Delfi, Roxy Pacific),
or trading at deep discounts despite strong growth
prospects (Riverstone, China Aviation Oil).
STOCKS
12-mth
Price Mkt Cap Target Price Performance (%)
S$ US$m S$ 3 mth 12 mth Rating
Earnings Growth BreadTalk Group Ltd
1.79 383 2.05 14.0 38.8 BUY Cityneon Holdings Ltd
1.01 188 1.45 2.0 27.0 BUY mm2 Asia 0.46 403 0.75 (13.3) 0.0 BUY
Riverstone 1.04 587 1.27 0.0 18.2 BUY
Dividend Plays Chip Eng Seng 0.92 432 1.18 2.2 26.2 BUY HL Finance 2.67 906 3.20 (1.8) (0.4) BUY Riverstone Holdings
1.04 587 1.27 0.0 18.2 BUY Sheng Siong Group Ltd
0.95 1,081 1.20 2.2 1.1 BUY Sunningdale Tech Ltd
1.83 263 2.70 (1.6) 28.4 BUY UMS Holdings 1.13 461 1.37 15.9 90.9 BUY Attractive Valuations China Aviation Oil 1.50 987 1.98 (5.7) (0.7) BUY Delfi Ltd 1.52 707 1.80 14.3 (34.5) BUY Riverstone Holdings
1.04 587 1.27 0.0 18.2 BUY Roxy-Pacific Holdings
0.55 499 0.69 1.9 7.8 BUY
Source: DBS Bank, Bloomberg Finance L.P.
Closing price as of 7 Mar 2018
Market Focus
Page 2
Season of Positive Revisions
Results are in. The recent 4Q reporting season concluded with a
positive earnings revision trend of +2% to +3% for FY18F and
FY19F earnings of stocks under our coverage. Within our small-
mid cap (SMC) universe, c.65% reported results which were
within expectations, while c.16% were above.
The upward revisions were led by APAC, Hi-P, Best World,
Riverstone, UMS and Hong Leong Finance. Notably, APAC
delivered impressive first full-year results post IPO, while Best
World, Riverstone and UMS saw record profits in FY17.
Among the sectors, Technology shone the brightest with
earnings upgrades of +15.6% and +19.0% for FY18F and FY19F
respectively, but results for the Oil & Gas sector remained weak.
Post results earnings revision by sector
Source: DBS Bank
Growth stocks with steady yields are more attractive. Encouraged
by the positive earnings growth momentum displayed in 4Q, we
seek to identify stocks with clear catalysts to sustain firm growth
momentum ahead. There are at least 16 SMCs under our
coverage offering >10% earnings growth in FY18F, as detailed
on the following page.
Apart from potential capital gains, small-mid cap stocks can also
pay good dividends – providing investors with both upside
participation and downside protection. With results season now
over and dividend payments back in focus, we believe that
growth stocks with a dividend sweetener could outperform over
the next one to two months. Historically, SMCs that are
consistent dividend payouts also tend to be more resilient.
Additionally, we also see opportunities to bottom fish, as there
are a few other companies that are trading cheap but offer
steady growth and/or on the cusp of an earnings turnaround.
Key Investment Metrics: Riverstone checks all the boxes
Source: DBS Bank
.
Sector F Y18 F Y19
Banking 3.3% 0.8%
Commodities Related -1.8% 10.9%
Consumer Goods -3.8% 3.2%
Consumer Serv ices 7.0% 9.2%
Financials -2.9% -2.0%
Health Care 0.2% -0.7%
Industrials 3.2% 2.9%
Oil & Gas -3.4% -9.5%
Real Estate 7.6% -3.2%
REITS 2.6% 1.2%
Technology 15.6% 19.0%
Telecommunications -0.4% -0.3%
Grand Total 2.5% 1.5%
Current v s Prev . % Chng
Company Ea rnings Growth
Dividend Play Attractive Va luations
BreadTalk √ √
China Aviation Oil √ √
Chip Eng Seng √ √
Cityneon √ √
Delfi √ √
Hong Leong Finance √
mm2 Asia √
Riverstone √ √ √
Roxy Pacific √ √
Sheng Siong √
Sunningdale √ √
UMS Holdings √ √
Market Focus
Page 3
SMC stocks in our BUY list with > 10% earnings growth for FY18F
Source: DBS Bank
Mkt Pric e Ta rge t EPS CAGR
Ca p (S$) Pric e % 17-19
Compa ny FYE (S$m) 5-Ma r-18 (S$) Ups ide Rcmd FY17 FY18F FY19F (%) FY18F FY19F
Roxy-Pacific Dec 661.6 0.56 0.69 24% BUY (80.5) 532.8 66.6 224.7 1.8 1.6
Breadtalk Dec 506.6 1.80 2.05 14% BUY 60.3 57.1 7.0 29.7 3.9 2.2
Spore Medical Group Dec 231.1 0.51 0.73 42% BUY 243.8 46.7 5.8 24.6 - -
Cityneon Dec 254.4 1.04 1.45 39% BUY 165.5 42.6 19.6 30.6 - -
mm2 Asia Mar 523.3 0.45 0.75 67% BUY 21.4 28.4 21.3 24.8 - -
Sunningdale Dec 353.8 1.87 2.70 44% BUY (1.6) 24.3 6.5 15.1 3.7 4.0
Delfi Dec 929.0 1.52 1.80 18% BUY (16.8) 19.8 19.7 19.8 1.8 2.2
Riverstone Dec 763.3 1.03 1.27 23% BUY 7.4 19.5 11.9 15.6 2.3 2.7
iFAST Dec 242.2 0.92 1.26 37% BUY 64.5 16.1 16.4 16.2 3.3 2.5
APAC Dec 433.3 1.22 1.25 2% BUY 63.1 14.3 6.5 10.3 1.6 4.1
Hi-P Dec 2,051.9 2.54 2.48 -3% BUY 131.3 14.0 10.5 12.2 9.8 2.4
Manulife US REIT Dec 1,224.6 0.90 1.00 11% BUY 68.5 14.0 0.4 7.0 6.2 7.0
China Aviation Oil Dec 1,297.3 1.50 1.98 32% BUY (4.0) 12.2 9.1 10.6 3.0 2.9
UMS Dec 611.5 1.14 1.37 20% BUY 84.3 11.6 5.0 8.3 4.9 5.3
CDL Hospitality Trust Dec 1,991.3 1.66 2.00 20% BUY (4.3) 10.3 4.1 7.2 5.6 6.1
Ea rn ings Gth (%) Div Yld (%)
Market Focus
Page 4
Look for Earnings Boosters
Firm eye on earnings growth, which remains key for SMCs. While
the earnings growth trend has been positive, we would favour
companies with strong, specific catalysts to help sustain double-
digit earnings growth over the next two years. Our preferred
picks include BreadTalk, Cityneon, mm2 Asia, and Riverstone.
Riding on growing scale and improving operating leverage to
deliver sustainable growth. Cityneon and mm2 Asia stand out as
young and fast-growing companies, and are still in their
transformative stages of growth. Cityneon has successfully
transformed into a creator of innovative and interactive
exhibitions, while mm2 Asia has established a meaningful
presence across the production value chain - from movie/drama
creation to exhibitions.
Meanwhile, Riverstone – which also features in several other
screens as a dividend growth play and bottom-fishing candidate,
is poised to deliver successive earnings records in the coming
years as the group ramps up on new capacity to meet growing
demand. Driven by new stores and cost management, the
outlook for BreadTalk also remains attractive.
Our preferred picks to ride the earnings momentum:
BreadTalk (BUY; TP: S$2.05)
We remain positive on BreadTalk over continued consolidation
of underperforming outlets that will yield better margins going
forward and sale of stakes in properties such as CHIJMES and
AXA Tower that will unlock shareholder value if they
materialise. Growth drivers remain intact and turnaround in
Bakery division led by store growth and better profitability in
FY18F will drive earnings growth. BreadTalk’s valuation, based
on its core business (ex-property investments), seems
compelling at 18x FY18F PE.
Cityneon (BUY; TP: S$1.45)
Though Cityneon has been listed for over ten years, it was
given a new lease of life when VHE Entertainment (VHE) was
injected into the group in September 2015. Cityneon has since
evolved to become a creator of innovative and interactive
exhibitions, focusing on creating captivating cutting-edge
content, and delivering engaging and interactive exhibitions to
audiences, from its traditional exhibition business.
Since its injection into Cityneon, VHE has secured two more
Intellectual Property (IP) rights – Transformers and Jurassic
World. Together with the first IP – Avengers, Cityneon is now
on a stronger and firmer growth path with a total of three IPs,
to help propel the group to even greater heights. We continue
to expect Cityneon to deliver explosive FY16-19F EPS CAGR
growth of 165%. Trading at a low PE-to-growth ratio of 0.2x
FY18F earnings, Cityneon is attractive to investors seeking
unique ideas in the entertainment industry.
mm2 Asia (BUY; TP: S$0.75)
mm2 Asia was listed on the SGX in December 2014 as a
leading producer of films and TV/online content in Asia. In a
short span of about three years, the group has evolved to
become a full-service provider in the entire value chain of
content creation to distribution, with the acquisition of
cinemas (18 in Malaysia and eight in Singapore), event
production and concert promotion company UnUsUaL, and
post-production company, Vividthree.
Having a strong presence in the entire value chain of content
creation and distribution further cements mm2's status as the
leader in the media/entertainment industry. With a much
larger and stronger scale, mm2 can now enjoy the synergistic
benefits from the entire value chain. We expect strong
earnings CAGR of 28% for FY17-20F, underpinned by growth
in productions, expansion into the China market, and
contribution from UnUsUaL. The cinema arm, on the other
hand, helps the group build a recurring income base.
Riverstone (BUY; TP: S$1.27)
A global market leader in niche cleanroom gloves, Riverstone’s
edge in the high-tech cleanroom segment sets it apart from
the bigger boys. Given intense competition in the healthcare
space, we see value in Riverstone’s growing cleanroom
business – which allows the group to command consistently
higher margins vs peers (16% vs peers’ c.10-15% in FY17).
With new cleanroom facilities set to kick in from 2Q18,
cleanroom capacity is expected to grow by c.33% to at least
2bn gloves p.a. The ramp-up on these new capacities should
help drive higher growth in cleanroom gloves vis-à-vis the
lower-margin healthcare business, allowing Riverstone’s
earnings growth of c.16% to catch up with larger peers’
c.17%.
Market Focus
Page 5
Dividends provide shelter amidst volatility
Small- and mid-cap indices have underperformed YTD. YTD,
the FT ST Small Cap Index (FSTS) is down 2.1%, while the FT
ST Mid Cap Index (FSTM) eased 1.6% vs +2.6% for the ST
Index. Both the FSTS and FSTM have not recovered from the
February selldown and are still trending near the February low.
YTD Performance - FSTS, FSTM and STI
Source: DBS Bank, Bloomberg Finance L.P.
As SMC stocks tend to be more volatile, dividends serve as a
safety net and offer stability amidst volatile markets.
In our screen, we focus on:
1) Dividend sweeteners – Companies that have upped
their dividends recently on higher earnings achieved
in FY17
- APAC Realty, BreadTalk, Hi-P
2) Dividend growth – Companies that could pay
increasing dividends over time
- Riverstone, Sunningdale
3) Steady yields – Companies which have been
consistent in paying and/or growing dividends
- Chip Eng Seng, Hong Leong Finance, Sheng Siong,
UMS
(1) Dividend sweetener on record FY17 earnings
On the back of record results, several companies have upped
their dividends as a sweetener. In the large-cap space, DBS
declared a higher S$1.20 dividend for FY17, to be maintained
going forward – which is nearly 2x that compared to previous
years. CapitaLand also hiked its 2017 dividend payout by 20%
to 12 Scts a share.
In the small-mid cap space, several companies that have also
raised their dividend payout in FY17 include APAC Realty,
BreadTalk and Hi-P:
APAC Realty declared a final dividend of 2 Scts per share in
4Q17. This works out to c. 90% of 4Q17 net profit, as APAC
was only listed at end-September 2017. APAC has guided that
it is committed to pay at least 50% of FY18F profit as
dividend.
Assuming a payout ratio of 60% for FY18F, dividend yield is
attractive at 4.5%. We believe that APAC, which owns one of
Singapore’s largest real estate agency, ERA Realty, is poised to
deliver a robust 10% 2-year CAGR in EPS on the back of a turn
in the Singapore residential market, which is at the cusp of a
multi-year recovery.
BreadTalk declared final and special dividends of 2 Scts and 3
Scts respectively, exceeded our expectations of a total of 4
Scts. Going forward, our positive stance for the stock
continues as BreadTalk's financial performance remains on a
growth trajectory. Higher-than-expected special dividends will
support the share price, while any property sale going forward
could act as a share price catalyst.
For Hi-P, the group has declared a special DPS of 19 Scts,
together with the 2Q17 results announcement. For the full
year FY17, dividend yield, excluding the special payout, works
out to 3% or 6 Scts DPS. Going forward, we expect higher
dividend payout ratio of 35% (up from 20%) in FY18F and
FY19F, which works out to a DPS of about 6 Scts, which is
similar to FY17, excluding special DPS of 19 Scts.
We expect earnings momentum for Hi-P to remain strong, on
the back of the new products in the Wireless and IoT
segments, and also an expanding customer base. We are now
expecting EPS CAGR of 41% for FY16-19F. Hi-P is in a sweet
spot now as more than half of its earnings are derived from
the Wireless (smartphone) and Computer Peripherals (IoT
segment, e.g. smart home) segments, which are expected to
continue to do well.
Market Focus
Page 6
(2) Two companies that have emerged as dividend growth plays
Supported by firm earnings growth and strong cash flow
generation, both Sunningdale and Riverstone have been
paying increasingly higher dividends y-o-y over the past few
years:
DPS FY12 FY13 FY14 FY15 FY16 FY17
Sunningdale
(S cts)
3.0 3.5 4.0 5.0 6.0 7.0
Riverstone
(sen)
3.1 3.1 3.5 6.5 6.5 7.0
Source: Companies, DBS Bank
Since FY12, Sunningdale has been growing dividends by at
least 0.5 Sct to 1 Sct p.a., resulting in a substantially higher
dividend payout of 7 Scts per share in FY17 vs 3 Scts in FY12.
While Riverstone does not have a fixed dividend policy, its past
payouts have averaged 40%. As profits grew, its dividend
payments have also more than doubled from 3.1 sen in FY12
to 7 sen for FY17.
Underpinned by capacity growth and ongoing production
ramps amidst robust demand, their core earnings are projected
to grow at 15-16% CAGR over FY17-19F, which provides
support for expectations of even higher dividends to be paid
going forward.
(3) Consistency is key
Apart from REITs/Trusts, several SMCs have also demonstrated
consistency in paying good dividends. UMS has been paying a
fixed 5-6 Scts of dividends since 2010, and maintained its payout
despite issuing bonus shares in FY17. Chip Eng Seng also stands
out for its fixed 4-Sct dividend (with upside from special
dividends in bumper years), which is rare among small-cap
property developers.
Hong Leong Finance and Sheng Siong, which typically manage
dividends based on a target payout ratio rather than a fixed
amount per share, have also paid consistently good dividends in
past years. With earnings set to grow at 4% and 5.5% over
FY17-19F respectively, we believe the positive dividend growth
trend is likely to be maintained going forward.
Stocks with consistently good dividend payouts
Source: Thomson Reuters, DBS Bank
Mkt Price Target Div EPS CA GR
Cap (S$) Price % Yld (%) 17-19
Company F YE (S$m) 5-Mar-18 (S$) Upside Rcmd F Y14 F Y15 F Y16 F Y17 F Y18F F Y19F F Y18F (%) F Y18F F Y19F
UMS Holdings Dec 611.5 1.14 1.37 20% BUY 6.0 6.0 6.0 5.6 6.0 6.0 5.3 8.3 10.5 10.0
Hong Leong Finance Dec 1,204.2 2.70 3.20 19% BUY 10.0 11.0 9.0 13.0 13.6 14.1 5.0 4.0 13.4 13.0
Chip Eng Seng Dec 571.3 0.92 1.18 29% BUY 6.0 4.0 4.0 4.0 4.0 4.0 4.3 28.1 18.0 9.8
Sheng Siong Dec 1,420.8 0.95 1.20 27% BUY 2.9 3.5 3.8 3.3 3.4 3.6 3.6 5.5 19.7 18.3
P/E (x)DPS (ct s)
Market Focus
Page 7
Upcoming distributions (DPS, payout dates and yields*)
Note: Dividend yield is derived based on upcoming distributions only, does not take into account interim dividends that have already been paid.
Source: DBS Bank, Bloomberg Finance L.P.
Company DPS ($) Price @ 7
Mar 18
Div Y ld
(%)
Ex Date Pay ment Date
BHG RETAIL REIT 0.0273 0.80 3.4% 08-Mar-18 28-Mar-18
DASIN RETAIL TRUST 0.0415 0.89 4.7% 14-Mar-18 27-Mar-18
ASIAN PAY TELEVISION TRUST 0.01625 0.57 2.9% 14-Mar-18 23-Mar-18
STRAITS TRADING CO. LTD 0.06 2.25 2.7% 16-Apr-18 04-May-18
M1 LIMITED 0.062 1.78 3.5% 18-Apr-18 27-Apr-18
UNITED OVERSEAS INSURANCE LTD 0.19 7.60 2.5% 19-Apr-18 03-May-18
LEE METAL GROUP LTD 0.01 0.41 2.4% 20-Apr-18 07-May-18
GREAT EASTERN HLDGS LTD 0.6 30.33 2.0% 20-Apr-18 08-May-18
SINGAPORE TECH ENGINEERING LTD 0.1 3.35 3.0% 24-Apr-18 08-May-18
KEPPEL TELE & TRAN 0.035 1.54 2.3% 25-Apr-18 09-May-18
CEI LIMITED 0.034 1.00 3.4% 26-Apr-18 15-May-18
UNITED OVERSEAS BANK LTD 0.65 27.65 2.4% 26-Apr-18 13-Jun-18
UOB-KAY HIAN HOLDINGS LIMITED 0.048 1.43 3.4% 27-Apr-18 19-Jun-18
SINGAPORE REINSURANCE COR LTD 0.008 0.32 2.5% 27-Apr-18 28-May-18
SINGAPORE O&G LTD. 0.0089 0.37 2.4% 27-Apr-18 18-May-18
TALKMED GROUP LIMITED 0.0137 0.70 2.0% 27-Apr-18 09-May-18
CSE GLOBAL LTD 0.015 0.37 4.1% 30-Apr-18 18-May-18
FRENCKEN GROUP LIMITED 0.0239 0.62 3.9% 30-Apr-18 11-May-18
VICOM LTD 0.2288 6.05 3.8% 30-Apr-18 10-May-18
HWA HONG CORPORATION LIMITED 0.011 0.32 3.4% 30-Apr-18 18-May-18
AVI-TECH ELECTRONICS LIMITED 0.013 0.51 2.6% 30-Apr-18 15-May-18
TELECHOICE INTERNATIONAL LTD 0.016 0.27 5.9% 02-May-18 21-May-18
TREK 2000 INT'L LTD 0.01 0.27 3.8% 02-May-18 16-May-18
MEMTECH INTERNATIONAL LTD 0.055 1.65 3.3% 02-May-18 18-May-18
UMS HOLDINGS LIMITED 0.03 1.13 2.7% 02-May-18 25-May-18
UOL GROUP LIMITED 0.175 8.45 2.1% 02-May-18 11-May-18
OKP HOLDINGS LIMITED 0.02 0.35 5.8% 03-May-18 17-May-18
DYNAMIC COLOURS LIMITED 0.015 0.28 5.4% 03-May-18 15-May-18
CHALLENGER TECHNOLOGIES LTD 0.022 0.49 4.5% 03-May-18 18-May-18
DBS GROUP HOLDINGS LTD 1.1 28.09 3.9% 03-May-18 15-May-18
WHEELOCK PROPERTIES (S) LTD 0.06 1.79 3.4% 03-May-18 14-May-18
COMFORTDELGRO CORPORATION LTD 0.0605 2.00 3.0% 03-May-18 14-May-18
SINGAPURA FINANCE LTD 0.03 1.03 2.9% 03-May-18 14-May-18
WILMAR INTERNATIONAL LIMITED 0.07 3.18 2.2% 03-May-18 16-May-18
AP OIL INTERNATIONAL LIMITED 0.005 0.24 2.1% 03-May-18 25-May-18
OKP HOLDINGS LIMITED 0.007 0.35 2.0% 03-May-18 17-May-18
OVERSEAS EDUCATION LIMITED 0.0275 0.37 7.4% 04-May-18 17-May-18
HL GLOBAL ENTERPRISES LIMITED 0.03 0.52 5.8% 04-May-18 23-May-18
MULTI-CHEM LIMITED 0.044 0.92 4.8% 04-May-18 23-May-18
CHIP ENG SENG CORPORATION LTD 0.04 0.92 4.4% 04-May-18 23-May-18
HOCK LIAN SENG HOLDINGS LTD 0.018 0.47 3.8% 04-May-18 22-May-18
HONG LEONG FINANCE LIMITED 0.09 2.67 3.4% 04-May-18 23-May-18
CENTURION CORPORATION LIMITED 0.015 0.50 3.0% 04-May-18 18-May-18
Market Focus
Page 8
Upcoming distributions (DPS, payout dates and yields*)
Note: Dividend yield is derived based on upcoming distributions only, does not take into account interim dividends that have already been paid.
Source: DBS Bank, Bloomberg
Company DPS ($) Price @ 7
Mar 18
Div Y ld
(%)
Ex Date Pay ment Date
NERATELECOMMUNICATIONS LTD 0.015 0.37 4.1% 07-May-18 25-May-18
MDR LIMITED 7.98E-05 0.00 2.7% 07-May-18 23-May-18
MFG INTEGRATION TECHNOLOGY LTD 0.0075 0.32 2.4% 07-May-18 23-May-18
PAN-UNITED CORPORATION LTD 0.008 0.39 2.1% 07-May-18 18-May-18
FIRST RESOURCES LIMITED 0.0555 1.73 3.2% 08-May-18 17-May-18
UPP HOLDINGS LIMITED 0.005 0.25 2.0% 09-May-18 25-May-18
JARDINE CYCLE & CARRIAGE LTD 0.9248 35.93 2.6% 10-May-18 25-Jun-18
HOSEN GROUP LTD 0.001 0.05 2.2% 11-May-18 25-May-18
FEDERAL INT(2000) LTD 0.02 0.37 5.4% 14-May-18 23-May-18
BBR HOLDINGS (S) LTD 0.006 0.22 2.7% 14-May-18 31-May-18
LHT HOLDINGS LIMITED 0.05 0.81 6.2% 15-May-18 25-May-18
HO BEE LAND LIMITED 0.1 2.55 3.9% 15-May-18 31-May-18
ISDN HOLDINGS LIMITED 0.006 0.22 2.8% 15-May-18 05-Jun-18
KINGSMEN CREATIVES LTD 0.015 0.61 2.5% 15-May-18 31-May-18
BROOK CROMPTON HOLDINGS LTD. 0.05 0.79 6.3% 17-May-18 31-May-18
VENTURE CORPORATION LIMITED 0.6 27.09 2.2% 17-May-18 31-May-18
ENVIRO-HUB HOLDINGS LTD 0.003 0.04 7.9% 22-May-18 08-Jun-18
GLOBAL TESTING CORPORATION LTD 0.09 1.25 7.2% 28-May-18 29-Jun-18
Market Focus
Page 9
Opportunities to bottom fish
Attractive valuations with a chance to shine in 2018. With
positive vibes gathered during the Q4 reporting season and a
handful of companies guiding for stronger operational
prospects in 2018, we would see the February correction as an
opportunity for investors to accumulate selective stocks at
attractive valuations.
In our screen, we favour companies that are: -
1) On the cusp of an earnings turnaround, and/or
i.e. Delfi Ltd, Roxy Pacific
2) Trading at attractive valuations despite strong earnings
growth potential
i.e. Riverstone Holdings, China Aviation Oil (CAO)
Turnaround plays - Delfi and Roxy Pacific may have missed the
mark in their recent Q4 earnings report card compared to a
year ago, but are set for an earnings turnaround in 2018.
Ongoing share buybacks for Roxy signal confidence in future
earnings, providing further support to its share price.
Firm growth but cheap valuations. Trading at relatively cheap
valuations vs peers, the recent pullbacks in Riverstone and CAO
also offer investors a better entry point, ahead of their strong,
anticipated growth in subsequent quarters.
Four stocks to bottom fish in 2018
Company FYE Mkt Price Target Upside Rcmd Core Earnings Gth (%) EPS CAGR
P/E (x) P/BV (%) Net Cash
(Debt) as % of
Mkt Cap
Yield
Cap (S$) Price 17-19
(S$m) 5-Mar-18 (S$) (%) FY17
FY18F
FY19F (%) FY18F FY19F FY18F FY19F (%) Delfi Dec 929.0 1.52 1.80 18% BUY (16.8) 19.8 19.7 19.8 25.0 20.9 3.1 2.9 2.1% 2.2%
Roxy Pacific Dec 661.6 0.56 0.69 24% BUY (80.5) 532.8 66.6 224.7 16.1 9.6 1.2 1.1 (83.0%) 1.6%
Riverstone Dec 763.3 1.03 1.27 23% BUY 7.4 19.5 11.9 15.6 14.7 13.1 3.1 2.7 4.0% 2.7%
China Aviation Oil
Dec 1,297.3 1.50 1.98 32% BUY (4.0) 12.2 9.1 10.6 10.2 9.3 1.2 1.1 18.2% 2.9%
Source: Thomson Reuters, DBS Bank
Delfi (BUY; TP: S$1.80) - Turning the corner
With its share price currently trading near six-year lows, Delfi’s
weak operating environment appears to be priced in and is
worth a relook. 4Q17 performance suggests that weakness
might have bottomed out, and is set to improve from FY18F.
Riding on the low-base effect, improving sentiment, lower raw
materials, and positive production rationalisation effects,
earnings could grow at c.20% CAGR over FY17-19F and drive
a meaningful recovery in share price.
Our TP of S$1.80 is based on regional peer average of 26x,
pegged to blended FY18F/19F earnings.
Roxy Pacific (BUY; TP: S$0.69) – Ready for launch
One of the earliest to land bank in the current market cycle,
Roxy’s investments in small but freehold residential sites gives
the company the flexibility to launch quickly and hit the
market.
Strong take-up rates for The Navian – its first launch in 2018
have been encouraging. With a total of six residential
developments in Singapore ready for launch in 2018 (two to
three of which will be within 1Q18), the group is well poised to
capture the rise in buyer demand ahead of its peers, and grow
earnings quickly at c.53% CAGR over FY17-19F.
Still largely “undiscovered” among institutional funds, we
believe the ability to surprise on the upside is high over the
near term. Roxy currently trades at 1.3x FY18F P/BV, below
historical average. At its peak, Roxy traded at 2.3x P/BV.
Market Focus
Page 10
Riverstone (BUY; TP: $1.27) – Cleanroom edge not priced in yet
Given the competitive nature of the healthcare glove industry (which represents the bulk of peer revenues), we see value in Riverstone’s growing cleanroom glove business, which allows the group to command consistently higher margins vs peers. We believe the market has yet to fully appreciate Riverstone’s unique strengths and leadership in the cleanroom glove arena, as its shares continue to trade cheaply (below its historical average forward PE) vs larger peers, which have re-rated strongly in recent months despite unchanged fundamentals. Based on consensus estimates, Hartalega is currently trading at +1SD of its historical average, while Top Glove and Kossan are at above +2SD. We see the valuation gap of c.55% (vs larger peers’ c.29x) narrowing and Riverstone at least trading at its historical average forward PE of 16x FY19F PE (from c.13x currently) as the group ramps up on its incoming cleanroom glove capacities to deliver higher-quality earnings growth at 16% CAGR over FY17-19F. Better-than-expected execution could spark a further re-rating to 18x PE (+1 SD), in line with peers.
China Aviation Oil (BUY; TP: $1.98) – Firm growth ahead
CAO’s jet fuel import business segment as well as its key associate SPIA, which roughly accounts for over 80% of CAO’s earnings, are set to benefit from the double-digit pace of international travel growth in China over the next few years. In particular, with a fifth runway in Shanghai Pudong soon to start commercial operations, contribution from SPIA is well
poised to enjoy firm growth ahead. The continued expansion in
its jet fuel supply business will also help its trading business to
reap benefits from a greater scale and network.
With over US$300m in cash (net cash of US$180m) and a strengthened management team, the group will step up its efforts on the M&A front to make value-accretive acquisitions, which could act as a further re-rating catalyst for the stock.
ed: TH / sa: YM, PY
BUY Last Traded Price ( 6 Nov 2017): S$1.605 (STI : 3,381.85) Price Target 12-mth: S$2.01 (25% upside) (Prev S$2.04) Analyst Alfie YEO +65 6682 3717 [email protected] Andy SIM CFA +65 6682 3718 [email protected]
What’s New • 3Q17 earnings in line, Restaurants and Food Atrium
offset Bakery’s drag on operating profit
• Interim DPS of 1 Sct declared
• Sale of AXA Tower a potential catalyst
• Maintain BUY and S$2.01 TP
Price Relative
Forecasts and Valuation FY Dec (S$ m) 2016A 2017F 2018F 2019F Revenue 615 603 630 658 EBITDA 80.0 82.3 84.7 89.0 Pre-tax Profit 29.7 44.8 39.1 42.0 Net Profit 11.4 24.4 21.8 23.5 Net Pft (Pre Ex.) 8.63 16.4 21.8 23.5 Net Pft Gth (Pre-ex) (%) (29.2) 89.7 33.3 7.4 EPS (S cts) 4.07 8.67 7.76 8.34 EPS Pre Ex. (S cts) 3.07 5.82 7.76 8.34 EPS Gth Pre Ex (%) (29) 90 33 7 Diluted EPS (S cts) 4.05 8.63 7.73 8.30 Net DPS (S cts) 3.85 5.00 3.00 3.00 BV Per Share (S cts) 46.9 50.6 55.4 60.7 PE (X) 39.5 18.5 20.7 19.3 PE Pre Ex. (X) 52.3 27.6 20.7 19.3 P/Cash Flow (X) 5.1 5.7 6.2 5.8 EV/EBITDA (X) 6.4 6.1 5.7 5.2 Net Div Yield (%) 2.4 3.1 1.9 1.9 P/Book Value (X) 3.4 3.2 2.9 2.6 Net Debt/Equity (X) 0.3 0.1 CASH CASH ROAE (%) 8.8 17.8 14.7 14.4 Earnings Rev (%): (4) (1) (1) Consensus EPS (S cts): 5.5 7.5 8.2 Other Broker Recs: B: 2 S: 0 H: 1
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P
Dough is holding shape Maintain BUY, TP raised to S$2.01. We remain positive on BreadTalk over continued consolidation of underperforming outlets that will yield better margins going forward and sale of stakes in properties such as CHIJMES and AXA Tower that will unlock shareholder value if they materialise. Based on 3Q17 results, growth drivers remain intact and turnaround in Bakery division led by store growth and better profitability in FY18F will drive earnings growth next year. BreadTalk’s valuation, based on its core business (ex-property investments), is compelling at 17x FY18F PE. Where we differ. We believe consensus has yet to factor in the value of BreadTalk’s investment properties into its share price. BreadTalk’s core business is undervalued at 17x FY18F PE after stripping out the value of investment properties from the current share price. Applying a 22x PE valuation to the retail business and adding back the value of its investment properties, our derived a target price is S$2.01, which is above consensus. Potential catalyst. We see potential for special dividends if Perennial sells AXA Tower. BreadTalk could pay c.4.5 Scts in special dividends upon the sale of AXA Tower based on our estimates. Valuation: Our TP of S$2.01 is derived from a sum-of-parts (SOTP) valuation. On a per share basis, we value its retail business at 22x FY18F PE at S$1.71, investment properties at S$0.43 based on market value, net debt at -S$0.13 per share. Key Risks to Our View: Operational risks include food safety and licences as well as negative publicity. In extreme cases, food operating licences can be revoked for lapse in food safety. Negative publicity may also result in weaker demand and poorer marketability when selling its franchises as the public and franchisees shy away from their association with BreadTalk. At A Glance Issued Capital (m shrs) 281 Mkt. Cap (S$m/US$m) 452 / 332 Major Shareholders (%) Meng Tong Quek 34.0 Lih Leng Lee 18.6 Primacy Investment Ltd 14.0
Free Float (%) 3m Avg. Daily Val (US$m) 0.24 ICB Industry : Consumer Services / Food & Drug Retailers
DBS Group Research . Equity
7 Nov 2017
Singapore Company Guide
Breadtalk Group Ltd Version 4 | Bloomberg: BREAD SP | Reuters: BRET.SI Refer to important disclosures at the end of this report
Company Guide
Breadtalk Group Ltd
WHAT’S NEW
3Q17 results
3Q17 within estimates. Headline earnings of S$4m (+22% y-o-y) and revenue of S$154m (-2% y-o-y) were in line with our forecasts. Revenue declined 7.8% y-o-y due to lower sales across all divisions.
Lower revenue dragged by Bakery division. Bakery revenue declined 2% y-o-y to S$77.2m, affected by 1) the termination of underperforming franchisees in China and Shanghai; and 2) lower revenue from directly operated stores in Shanghaiand Beijing. Food Atrium revenue declined by 9.4% y-o-y to S$36.8m on lower number of outlets (decrease of three outlets). Restaurant sales (Din Tai Fung) improved 8.3% y-o-y to S$31.1m.
4orth, a separate segment carved out for F&B new concepts. BreadTalk reported separate segmentals for 4orth, a new F&B business concepts division. The division has the five operating outlets of Sō, a rebranded concept from RamenPlay, and 90%-owned Song Fa Bak Kut Teh in China and Thailand. EBITDA and EBIT for 9M17 were S$0.3m and -S$0.4m respectively. These numbers were carved out from the Restaurant segment which previously consolidated them. This leaves the Restaurant segment with just the Din Tai Fung operations.
Bakery division led to lower margins. Headline gross and operating margins declined to 55.2% (-1.1ppt) and 6.7% (-1.7ppt) on Bakery’s higher raw material costs and lower profitability from directly operated stores in Singapore and Shanghai, and rationalisation of underperforming franchisees. While group margins were lower, Food Atrium’s operating margin improved to 7.6% from an operating loss in 3Q16. Restaurant's operating margins remained at 21%.
Operating profit decline was within expectations. EBITDA was S$20.9m (-19.1% y-o-y) while EBIT was at S$10.4m (-21.2% y-o-y). Lower one-off items such as PPE write-offs and disposals gain/loss helped PBT and PAT to reach S$9m (+8.4% y-o-y) and S$4m (+22.2% y-o-y) respectively. An interim dividend of 1 Sct was declared, in line with expectations.
3Q17 tracking our estimates. We have anticipated lower operating profit led by lower revenue from the Bakery division undergoing store franchisee rationalisation. Therefore, this set of results is largely expected. While headline operating profit declined slightly due to ongoing restructuring of the Bakery Division, Restaurant Division and Food Atrium Division remained positive with revenue and operating profit growth respectively.
Asset sale remains a likely stock catalyst. We remain positive on the stock as 1) continued consolidation of underperforming outlets will contribute to better margins going forward; 2) sale of stake in properties such as CHIJMES and AXA Tower will unlock shareholder value if they materialise; 3) full-year headline earnings may even track slightly ahead due to comparatively lower one-off items.
Maintain BUY, S$2.01 TP. Our earnings remain largely unchanged and outlook continues to track our estimates. BreadTalk’s results are largely led by its Bakery division as seen in this 3Q17 numbers. Post restructuring of Bakery franchisees in China this year, we expect store opening and revenue growth to resume from FY18F onwards. No change to our recommendation since long-term growth drivers remain intact. Maintain BUY on the stock.
Company Guide
Breadtalk Group Ltd
Quarterly / Interim Income Statement (S$m)
FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq
Revenue 157 148 154 (2.0) 4.5
Cost of Goods Sold (68.8) (65.0) (69.2) 0.5 6.4
Gross Profit 88.5 82.6 85.1 (3.9) 3.1
Other Oper. (Exp)/Inc (79.6) (73.4) (74.7) (6.2) 1.8
Operating Profit 13.2 9.16 10.4 (21.2) 13.4
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm
Associates & JV Inc 0.56 (0.2) 0.0 nm (89.4)
Net Interest (Exp)/Inc (1.2) (0.8) (0.7) 40.5 17.8
Exceptional Gain/(Loss) (4.2) (1.3) (0.7) 84.7 (49.7)
Pre-tax Profit 8.32 6.81 9.02 8.4 32.4
Tax (3.0) (2.8) (2.9) (3.8) 1.5
Minority Interest (2.1) (1.9) (2.2) (4.3) 15.8
Net Profit 3.26 2.11 3.98 22.2 88.3
Net profit bef Except. 7.50 3.41 4.63 (38.3) 35.8
EBITDA 25.9 19.4 20.9 (19.1) 7.7
Margins (%)
Gross Margins 56.3 55.9 55.2
Opg Profit Margins 8.4 6.2 6.7
Net Profit Margins 2.1 1.4 2.6
Source of all data: Company, DBS Bank
Company Guide
Breadtalk Group Ltd
CRITICAL DATA POINTS TO WATCH
Critical Factors Less aggressive store expansion to focus on driving higher operating efficiencies and margin improvement. The focus is to raise efficiency of its existing operations, lower operating costs, and expand margins. Store openings till year-end will therefore not be aggressive. We see margins improving at the group level, driven by the swing to profitability at the Food Atrium business, cost-saving initiatives at the Bakery, and improved sales mix from the Restaurant business. We expect store expansion to be more aggressive once cost efficiencies and margin improvements are realised from FY18F.
Driving margin improvement through cost efficiencies. Initiatives such as better demand planning, more efficient human resource planning, and tighter cost controls have helped to benefit operating margins. They have led to lower food wastage, and reduction in unnecessary payroll expenses. Management has also been spending less on capex, leading to some moderation in depreciation expenses going forward.
Non-performing legacy franchisees. We expect to see a stronger franchisee base with less drag from non-performing accounts post restructuring of franchisee accounts. As franchise outlets have higher net margins, and lower direct operational risk, there is potential for Bakery margins to increase as well given that franchise revenue is royalty income, recognised as a percentage of franchisee sales with minimal costs to BreadTalk. We expect margins to increase when a mix of franchise stores improves going forward.
Changes to management personnel, tenant-mix and tenant quality have enabled Food Atrium to turn profitable. Food Atrium division has made a marked turnaround in FY17F. While its Food Atriums in Singapore were profitable in FY16, Food Atrium in tier 2 cities in China were a drag. Changes were made to the China portfolio in FY16 by closing non-performing outlets especially in tier 3 cities. It also replaced China Food Atrium’s management team with new personnel which made changes to tenant quality and tenant mix, which led to improvements in performance and occupancy at its China Food Atriums. Food Atrium openings this year will include Shenzhen, Guangdong and Shanghai.
New outlet in London this year. BreadTalk has already planned for a new outlet in London this year through a JV (BreadTalk is the major shareholder of the JV) with Fairy Rise Development (Din Tai Fung franchise owner), Din Tai Fung Taiwan, a UK partner and a Taiwanese individual. We also see scope for more outlets in Thailand as there are currently only three Din Tai Fung restaurants. As restaurant margins are attractive, better sales mix from Restaurant business would improve overall profitability.
Bakery outlets
Restaurant outlets
Food court outlets
Total
Annual sales per outlet S$m
Source: Company, DBS Bank
Company Guide
Breadtalk Group Ltd
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Appendix 1: A look at Company's listed history – what drives its share price?
Share price has been driven by various factors including earnings, properties and strategic investors
Source: DBS Bank
Earnings turnaround,
potential sale of AXA Tower
Re-rated on new BreadTalk IHQ building and Minor International
taking a stake
Gain in Perennial CHIJMES investment, operating
margin expansion
Sale and earnings growth declined, higher interest costs, lower net margins
Company Guide
Breadtalk Group Ltd
Balance Sheet:
Cash business; balance sheet currently in net debt. As with all food service companies, BreadTalk is a cash business. The business generated S$65-90m of operating cashflows annually and S$28-54m of positive free cashflows in the last three years. Net debt as of end-September 2017 was about S$36m, equivalent to approximately S$0.13 per share, or net debt ratio of 0.25x. BreadTalk was in net cash till FY12 when it built its BreadTalk IHQ. In FY13 when it opened its IHQ, net debt was S$89m. It further issued S$75m of bonds in FY16 due 1 April 2019 at 4.6% coupon for general corporate purposes, including refinancing of existing borrowings, and financing capital expenditure and general working capital.
Share Price Drivers:
Changes to property holdings are likely to drive share price. Valuations for BreadTalk re-rated to an all-time high when it moved into its IHQ in 2013. Similarly, when it sold 112 Katong last year and declared special dividends, its share price re-rated as well. In 4Q16, BreadTalk announced the sale of 111 Somerset, which also lifted BreadTalk’s share price in anticipation of special dividends.
Key Risks:
Food safety and licences. As a restaurant operator, it is important to maintain food safety. Lapses would lead to reputational risks and in extreme cases, food operation licences could be revoked.
Negative publicity affects consumer confidence and the marketability of its franchise. BreadTalk has had some negative publicity, especially in 2015 over food safety and food preparation procedures in Singapore and China. Incidents such as these can generate negative response from the public which can potentially affect sales as well as the marketability of its franchise overseas.
Company Background
BreadTalk Group is a Singapore-based food and beverage (F&B) group engaged in the operations and franchising of bakery/confectionery outlets, food courts and restaurants across the region. BreadTalk’s portfolio currently has six brands – BreadTalk, ToastBox, Food Republic, Ramen Play, San Pou Teiand Din Tai Fung. It operates over 900 outlets across 17 countries.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
Company Guide
Breadtalk Group Ltd
Key Assumptions
FY Dec 2015A 2016A 2017F 2018F 2019F
Bakery outlets 862 862 856 859 864 Restaurant outlets 30.0 32.0 34.0 36.0 38.0 Food court outlets 65.0 57.0 61.0 61.0 61.0 Total 957 951 951 956 963 Annual sales per outlet 0.65 0.65 0.63 0.66 0.68
Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F
Revenues (S$m) Bakery operations 308 306 296 303 311 Restaurant sales 143 150 154 166 179 Food Atrium income 173 159 153 161 169 Others 0.0 0.0 0.0 0.0 0.0
Total 624 615 603 630 658 Operating profit (S$m) Bakery operations 5.15 12.6 9.57 9.39 9.32 Restaurant sales 25.8 23.2 26.5 25.7 27.7 Food Atrium income (2.9) (7.5) 8.57 6.92 7.01 Others 4.51 4.18 (4.8) (0.3) 0.0
Total 32.6 32.5 39.9 41.7 44.0 Operating profit margin (%) Bakery operations 1.7 4.1 3.2 3.1 3.0 Restaurant sales 18.0 15.4 17.3 15.5 15.5 Food Atrium income (1.7) (4.7) 5.6 4.3 4.2 Others N/A N/A N/A N/A N/A Others N/A N/A N/A N/A N/A Total 5.2 5.3 6.6 6.6 6.7
Income Statement (S$m)
FY Dec 2015A 2016A 2017F 2018F 2019F
Revenue 624 615 603 630 658 Cost of Goods Sold (294) (278) (268) (277) (290) Gross Profit 330 337 334 353 369 Other Opng (Exp)/Inc (298) (305) (295) (311) (325) Operating Profit 32.6 32.5 39.9 41.7 44.0 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (1.3) (0.8) 0.13 0.13 0.14 Net Interest (Exp)/Inc (1.3) (4.8) (3.2) (2.8) (2.2) Exceptional Gain/(Loss) (4.6) 2.80 8.01 0.0 0.0 Pre-tax Profit 25.4 29.7 44.8 39.1 42.0 Tax (10.8) (12.1) (11.4) (9.1) (9.7) Minority Interest (7.0) (6.2) (9.0) (8.2) (8.8) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 7.60 11.4 24.4 21.8 23.5 Net Profit before Except. 12.2 8.63 16.4 21.8 23.5 EBITDA 80.9 80.0 82.3 84.7 89.0 Growth Revenue Gth (%) 5.9 (1.5) (2.0) 4.5 4.5 EBITDA Gth (%) 0.6 (1.1) 2.9 2.9 5.1 Opg Profit Gth (%) 30.8 (0.2) 22.6 4.6 5.5 Net Profit Gth (Pre-ex) (%) (45.0) (29.2) 89.7 33.3 7.4 Margins & Ratio Gross Margins (%) 52.9 54.9 55.5 56.0 56.0 Opg Profit Margin (%) 5.2 5.3 6.6 6.6 6.7 Net Profit Margin (%) 1.2 1.9 4.0 3.5 3.6 ROAE (%) 6.0 8.8 17.8 14.7 14.4 ROA (%) 1.4 2.1 4.6 4.0 4.1 ROCE (%) 5.2 5.4 8.6 9.0 8.9 Div Payout Ratio (%) 55.6 94.7 57.7 38.7 36.0 Net Interest Cover (x) 24.7 6.8 12.5 15.1 20.3
Source: Company, DBS Bank
Negative on 1) Higher expenses for corporate services, treasury functions; and 2) EBIT losses at new segment 4orth.
Company Guide
Breadtalk Group Ltd
Quarterly / Interim Income Statement (S$m)
FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017
Revenue 157 153 148 148 154 Cost of Goods Sold (68.8) (67.8) (66.7) (65.0) (69.2) Gross Profit 88.5 85.5 80.9 82.6 85.1 Other Oper. (Exp)/Inc (79.6) (75.8) (75.3) (73.4) (74.7) Operating Profit 13.2 9.71 5.63 9.16 10.4 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.56 (1.0) 0.38 (0.2) 0.0 Net Interest (Exp)/Inc (1.2) (0.9) (1.0) (0.8) (0.7) Exceptional Gain/(Loss) (4.2) 2.40 9.95 (1.3) (0.7) Pre-tax Profit 8.32 10.1 15.0 6.81 9.02 Tax (3.0) (4.7) (2.6) (2.8) (2.9) Minority Interest (2.1) (1.4) (1.7) (1.9) (2.2) Net Profit 3.26 4.02 10.7 2.11 3.98 Net profit bef Except. 7.50 1.63 0.74 3.41 4.63 EBITDA 25.9 20.4 16.8 19.4 20.9
Growth Revenue Gth (%) 5.1 (2.6) (3.7) 0.0 4.5 EBITDA Gth (%) 18.0 (21.2) (17.6) 15.8 7.7 Opg Profit Gth (%) 28.4 (26.3) (42.0) 62.8 13.4 Net Profit Gth (Pre-ex) (%) 54.8 (78.3) (54.6) 361.2 35.8 Margins Gross Margins (%) 56.3 55.8 54.8 55.9 55.2 Opg Profit Margins (%) 8.4 6.3 3.8 6.2 6.7 Net Profit Margins (%) 2.1 2.6 7.2 1.4 2.6
Balance Sheet (S$m) FY Dec 2015A 2016A 2017F 2018F 2019F
Net Fixed Assets 206 181 179 177 172 Invts in Associates & JVs 33.9 35.3 35.4 35.5 35.7 Other LT Assets 126 105 105 104 103 Cash & ST Invts 102 138 140 165 195 Inventory 9.88 9.81 9.70 10.1 10.5 Debtors 60.0 59.2 58.4 61.1 63.8 Other Current Assets 7.28 6.46 6.46 6.46 6.46 Total Assets 545 534 534 559 587
ST Debt 82.0 31.5 45.2 45.2 45.2 Creditor 94.1 86.8 89.2 92.4 96.6 Other Current Liab 86.1 99.8 99.8 99.8 99.8 LT Debt 120 150 114 114 114 Other LT Liabilities 16.8 14.5 14.5 14.5 14.5 Shareholder’s Equity 129 132 142 156 171 Minority Interests 17.2 19.9 28.9 37.1 45.9 Total Cap. & Liab. 545 534 534 559 587
Non-Cash Wkg. Capital (103) (111) (114) (115) (116) Net Cash/(Debt) (99.6) (43.5) (18.7) 5.89 35.4 Debtors Turn (avg days) 33.5 35.4 35.6 34.6 34.6 Creditors Turn (avg days) 143.3 144.1 142.2 141.5 141.0 Inventory Turn (avg days) 15.3 15.7 15.8 15.4 15.3 Asset Turnover (x) 1.2 1.1 1.1 1.2 1.1 Current Ratio (x) 0.7 1.0 0.9 1.0 1.1 Quick Ratio (x) 0.6 0.9 0.8 1.0 1.1 Net Debt/Equity (X) 0.7 0.3 0.1 CASH CASH Net Debt/Equity ex MI (X) 0.8 0.3 0.1 CASH CASH Capex to Debt (%) 18.6 20.2 25.1 25.1 25.1 Z-Score (X) 2.0 2.3 2.3 2.4 2.4
Source: Company, DBS Bank
Company Guide
Breadtalk Group Ltd
Cash Flow Statement (S$m)
FY Dec 2015A 2016A 2017F 2018F 2019F
Pre-Tax Profit 25.4 29.7 44.8 39.1 42.0 Dep. & Amort. 49.6 48.3 42.4 42.9 44.9 Tax Paid (6.9) (9.1) (11.4) (9.1) (9.7) Assoc. & JV Inc/(loss) 1.31 0.83 (0.1) (0.1) (0.1) Chg in Wkg.Cap. 0.42 10.2 3.25 0.29 0.94 Other Operating CF (3.4) 9.20 0.0 0.0 0.0 Net Operating CF 66.5 89.2 78.8 73.0 77.9 Capital Exp.(net) (37.5) (36.7) (40.0) (40.0) (40.0) Other Invts.(net) (20.4) 16.3 0.0 0.0 0.0 Invts in Assoc. & JV (22.9) (2.8) 0.0 0.0 0.0 Div from Assoc & JV 1.19 0.46 0.0 0.0 0.0 Other Investing CF 21.7 (2.3) 0.0 0.0 0.0 Net Investing CF (57.9) (25.0) (40.0) (40.0) (40.0) Div Paid (4.2) (8.0) (14.1) (8.4) (8.4) Chg in Gross Debt 3.60 (20.6) (22.1) 0.0 0.0 Capital Issues (0.7) 0.0 0.0 0.0 0.0 Other Financing CF (8.7) (9.6) 0.0 0.0 0.0 Net Financing CF (10.0) (38.2) (36.2) (8.4) (8.4) Currency Adjustments 0.82 (0.4) 0.0 0.0 0.0 Chg in Cash (0.6) 25.7 2.69 24.6 29.5 Opg CFPS (S cts) 23.5 28.1 26.9 25.9 27.4 Free CFPS (S cts) 10.3 18.7 13.8 11.7 13.5
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Alfie YEO
Andy SIM CFA
Company Guide
Breadtalk Group Ltd
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 7 Nov 2017 07:43:14 (SGT) Dissemination Date: 7 Nov 2017 08:59:27 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
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Company Guide
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ed: DT / sa:YM, PY, CS
BUYLast Traded Price ( 28 Feb 2018): S$1.58 (STI : 3,517.94)
Price Target 12-mth: S$1.98 (25% upside) (Prev S$2.08)
Analyst Paul YONG, CFA +65 6682 3712 [email protected]
What’s New • FY17 net profit of US$85.3mn (-4% YoY) misses our
projections by 5% due to higher than expected taxes
• Outlook remains positive given firm global air travel
demand, led by strong growth in China
• Net cash of US$180mn and strengthened management
team should help M&A ambitions
• Maintain BUY with S$1.98 TP (13x FY18F PE)
Price Relative
Forecasts and Valuation FY Dec (US$ m) 2016A 2017A 2018F 2019F
Revenue 11,703 16,268 19,570 21,765 EBITDA 94.3 95.9 107 116 Pre-tax Profit 91.9 92.2 103 112 Net Profit 88.9 85.3 95.7 104 Net Pft (Pre Ex.) 88.9 85.3 95.7 104 Net Pft Gth (Pre-ex) (%) 45.1 (4.0) 12.2 9.1 EPS (S cts) 13.7 13.1 14.7 16.1 EPS Pre Ex. (S cts) 13.7 13.1 14.7 16.1 EPS Gth Pre Ex (%) 45 (4) 12 9 Diluted EPS (S cts) 13.7 13.1 14.7 16.1 Net DPS (S cts) 4.26 4.46 4.42 4.83 BV Per Share (S cts) 100 111 122 133 PE (X) 11.5 12.0 10.7 9.8 PE Pre Ex. (X) 11.5 12.0 10.7 9.8 P/Cash Flow (X) nm nm nm nm EV/EBITDA (X) 8.9 8.8 7.8 6.9 Net Div Yield (%) 2.7 2.8 2.8 3.1 P/Book Value (X) 1.6 1.4 1.3 1.2 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 14.3 12.4 12.6 12.6
Earnings Rev (%): (2) (2) Consensus EPS (S cts): 13.9 15.9 18.5 Other Broker Recs: B: 4 S: 0 H: 1
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P
Associates continue to shine
Maintain BUY with an adjusted TP of S$1.98, as we still favour
CAO as an aviation growth proxy. We continue to like China
Aviation Oil given its monopolistic position as the sole importer
of bonded jet fuel into China, and for its 33% stake in the
exclusive jet fuel refueller at Shanghai Pudong International
Airport (SPIA). It also has a growing international jet fuel supply
and trading business that will increasingly benefit from CAO’s
greater scale. It is a beneficiary of growing air travel demand
both in China and globally as well.
Net cash of US$180mn or S$0.27 ps to help fund inorganic
growth. CAO had a cash balance of US$300mn, or net cash of
US$180mn, at the end of 2017 and has also recently refreshed
and strengthened its management team with seconded
personnel from parent China National Aviation Fuel Group Ltd
(CNAF). We believe this could help the company deliver on the
M&A front.
Where we differ: We have lower-than-consensus forecasts as
we are more conservative on trading gains in 2018F.
Potential catalysts: CAO’s share price should re-rate as it delivers
steady earnings growth and/or if it can make value accretive
acquisitions using its strong balance sheet position.
Valuation:
Valuations attractive at 8.5x FY18F ex-cash PE. Given that 80%
of its earnings is derived from monopolistic businesses with a
firm growth outlook, we see current valuations at 10.7x
FY18PE, declining to 9.8x FY19F PE, as attractive. Factoring in
net cash per share of S$0.28, valuations are even more
enticing. Our target price is based on 13x FY18F PE, or +1 SD
of its historical average, and has not factored in acquisitions.
Key Risks to Our View:
Weaker demand for air travel and execution risk. A sustained
slowdown in demand for air travel could hit jet fuel demand
and volumes. Further, the group could also face execution risks
in its trading business and on prospective M&As.
At A Glance Issued Capital (m shrs) 865
Mkt. Cap (S$m/US$m) 1,366 / 1,032
Major Shareholders (%)
China National Aviation Fuel Grp 51.0
BP Plc 20.1
Free Float (%) 28.9
3m Avg. Daily Val (US$m) 1.1
ICB Industry : Oil & Gas / Oil & Gas Producers
DBS Group Research . Equity 1 Mar 2018
Sin gapore Company Guide
China Aviation Oil Version 7 | Bloomberg: CAO SP | Reuters: CNAO.SI Refer to important disclosures at the end of this report
Company Guide
China Aviation Oil
WHAT’S NEW
Better associate contributions offset by higher tax expenses and lower trading gains
CAO’s full-year results missed our expectations by 5%, with
net profit declining 4% YoY to US$85.3mn as tax expenses
were higher than we expected. The company maintained its
full-year dividend at 4.5 Scts, which is equal to a c.30%
payout.
Full-year revenues rose 39% YoY to US$16.3bn on higher oil
prices as well as supply and trading volumes, which increased
by 14.6% YoY to 37.31mn tonnes. Gross profit, however, fell
by 12.1% YoY to US$38.7mn on lower gains from trading
and optimisation activities, as “markets reclined to
backwardation in 3Q17 further exacerbated by increase in
supply & operational costs incurred due to various supply
disruptions caused by weather and refinery outages”.
Contributions from associates rose by 7.8% YoY to
US$71.5mn, led by a 5.8% YoY increase in contribution from
SPIA to US$64.2m while all other associates also saw
improved performances. Tax expenses jumped 133% YoY to
US$6.9mn mainly due to the decline in deferred tax assets
following the utilisation of unabsorbed tax losses from prior
years to offset current year’s profits, the increase in
recognition of deferred tax liabilities on the share of
undistributed retained earnings from associates, and tax
expenses incurred on the transfer of shareholding.
Outlook remains positive. Looking ahead, with international
travel expected to grow at a double-digit pace in China for
the next few years, CAO’s jet fuel import business segment as
well as its key associate SPIA, which we estimate together
account for over 80% of CAO’s earnings, are set to benefit.
In particular, with a fifth runway in Shanghai Pudong soon to
start commercial operations, contribution from SPIA is well
poised to enjoy firm growth ahead.
Meanwhile, continued expansion in its international jet fuel
supply business will also help its trading business to reap
benefits from a greater scale and network. CAO has cash of
over US$300mn (net cash of US$180mn) and we believe that
with a refreshed and strengthened management team
(seconded from parent CNAF), the group will step up on its
efforts on the M&A front to make value accretive
acquisitions, which could act as a further re-rating catalyst for
the stock.
We lower our FY18 and FY19 earnings estimates by 2.6%
and 2.4% respectively, factoring in higher associate
contributions offset by lower gross profit and higher tax
expenses. Our TP is now S$1.98, from S$2.08 previously,
mainly due to a weaker USD/SGD rate.
Quarterly / Interim Income Statement (US$m)
FY Dec 4Q2016 3Q2017 4Q2017 % chg yoy % chg qoq
Revenue 3,276 5,223 4,061 24.0 (22.3)
Cost of Goods Sold (3,265) (5,219) (4,052) 24.1 (22.3)
Gross Profit 10.6 4.33 8.34 (21.3) 92.5
Other Oper. (Exp)/Inc (5.4) (2.6) (6.5) 20.5 150.8
Operating Profit 5.21 1.75 1.85 (64.4) 6.1
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - -
Associates & JV Inc 13.3 21.5 16.8 26.2 (21.8)
Net Interest (Exp)/Inc (0.2) (0.4) (1.3) (576.3) (212.4)
Exceptional Gain/(Loss) 0.0 0.0 0.0 - -
Pre-tax Profit 18.3 22.8 17.4 (5.4) (24.0)
Tax (0.4) (1.4) (3.3) 687.5 134.9
Minority Interest 0.0 0.0 0.0 - -
Net Profit 17.9 21.4 14.0 (21.7) (34.5)
Net profit bef Except. 17.9 21.4 14.0 (21.7) (34.5)
EBITDA 18.5 23.3 18.7 0.7 (19.7)
Margins (%)
Gross Margins 0.3 0.1 0.2
Opg Profit Margins 0.2 0.0 0.0
Net Profit Margins 0.5 0.4 0.3
Source of all data: Company, DBS Bank
Company Guide
China Aviation Oil
CRITICAL DATA POINTS TO WATCH
Critical Factors
Sole importer of jet fuel into China with growing international
presence… Leveraging on the network of its parent CNAF, a
state-owned enterprise that is the largest aviation transportation
logistics services provider in China, CAO has a monopoly in the
supply of imported jet fuel (or bonded jet fuel) to 17
international airports in China. With CNAF’s support, CAO has
also expanded its business to the marketing and supply of jet
fuel to airline companies at 48 international airports outside of
the China, spanning the Asia Pacific, North America, Europe
and the Middle East.
Given its monopoly, CAO is poised to benefit from the long-
term growth of China’s international air travel market. Coupled
with its ongoing international expansion, we expect middle
distillates & jet fuel volumes supplied and traded to grow to
20.8mn by FY18F, and 21.8mn tonnes by FY19F, from 19.8mn
tonnes in 2017.
Optimising margins through trading. Given that CAO enjoys
cost-plus pricing for its China jet fuel import business, and after
hedging downside risk, CAO will seek to further optimise
margins when viable trading opportunities arise. While
opportunities to improve margins are available in both
backwardation and contango markets, CAO generally prefers
contango markets as it allows for superior opportunities for
margin optimisation from the storing and trading of fuels
(which also includes gas oil, fuel oil and avgas).
We project that CAO’s average gross profit per tonne (on a
combined and blended basis), which in 2017 was lower than in
2015 and 2016, will rise gradually from 2018F onwards as it
benefits from economies of scale.
Steady growth in contributions from associates, including prized
asset SPIA. CAO’s best-performing asset, the 33% owned
associate SPIA, has always been a significant contributor to
CAO’s bottom line, accounting for over 90% of total associate
contribution. With two new runways added in the last 18
months, which has doubled the capacity of the airport, and an
additional satellite concourse expected to be completed by
2019, capacity at Shanghai Pudong, China’s second largest
airport, is expected to be raised from 60 million to 80 million
passengers a year, which should underpin SPIA’s long-term
growth prospects.
Middle Distillates Volumes (m tonnes)
Other Oil Product Volumes (m tonnes)
Implied Average Middle Distillate Price (USD/bbl)
Gross Profit per Tonne (US$)
Contribution from Associates (US$ m)
Source: Company, DBS Bank
Company Guide
China Aviation Oil
Balance Sheet:
Strong balance sheet with a net cash position of US$180mn as
at end-2017. With net cash of US$180mn as at end-2017, we
believe the group has sufficient firepower with room to gear up
further to finance its M&A opportunities and grow the scale and
reach of its business and profits.
Share Price Drivers:
Progress on the M&A front. While CAO is armed with dry
powder for potential acquisitions and investments, it has yet to
announce significant M&A plans – its last major investment was
in 2013, when the company acquired a 39% stake in refueller
CNAF Hong Kong Refuelling Ltd. Management has shared that
they will be looking at both “asset-light” investments, which
will allow the group to gain access to air spaces, customer
contracts, strategic alliances and further trading synergies, as
well as “asset-backed” investments (or infrastructure assets),
which may include airport refueling stations, pipelines going
into airports and storage facilities. We believe that the
deployment of cash to fund value-accretive opportunities should
lead to a further rerating of the stock.
Key Risks:
Weaker demand for air travel. Given the group’s exposure to
the air passenger market, events that could significantly
dampen traveller sentiment, such as the outbreak of diseases
and acts of terror, could weigh on global demand for jet fuel.
Potential mark-to-market losses. As SPIA and CNAF-HKR hold
inventories of 15 days and seven days respectively, these have
to be marked to market. In a declining oil price environment,
these would result in paper losses for these associates, which
add volatility to CAO’s bottom line.
Trading and execution risks. CAO is exposed to a myriad of
risks that are inherent in the lifecycle of trades, which include
market risk, credit risk, and operational risk.
Company Background
China Aviation Oil (Singapore) Corporation Ltd is principally
engaged in the supply and trading of bonded jet fuel, with a
monopoly in China and a growing international presence. Apart
from jet fuel, the group also trades and/or supplies other
transportation fuels (such as fuel oil, gas oil and aviation gas)
and has varying equity stakes in oil-related assets. These assets
include airport refueling facilities (SPIA and CNAF HKR),
pipelines (China National Aviation Fuel TSN-PEK Pipeline
Transportation Corp Ltd) and storage facilities (China Aviation
Oil Xinyuan Petrochemicals Co Ltd and at Oilhub Korea Yeosu
Co Ltd).
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
Company Guide
China Aviation Oil
Key Assumptions
FY Dec 2015A 2016A 2017A 2018F 2019F
Middle Distillates Volumes (m tonnes)
11.9 18.6 19.8 20.8 21.8
Other Oil Product Volumes (m tonnes)
8.28 14.0 17.5 18.0 18.6 Implied Average Middle Distillate Price (USD/bbl)
74.4 52.7 65.2 75.2 80.2
Gross Profit per Tonne (US$)
1.76 1.35 1.04 1.09 1.14
Contribution from Associates (US$ m)
42.3 66.4 71.5 78.8 84.7
Segmental Breakdown
FY Dec 2015A 2016A 2017A 2018F 2019F
Revenues (US$m)
Middle distillates 7,010 7,754 10,233 12,398 13,886
Other oil products 1,978 3,949 6,034 7,172 7,879
Total 8,987 11,703 16,268 19,570 21,765
Income Statement (US$m)
FY Dec 2015A 2016A 2017A 2018F 2019F
Revenue 8,987 11,703 16,268 19,570 21,765
Cost of Goods Sold (8,952) (11,659) (16,229) (19,527) (21,719)
Gross Profit 35.4 44.1 38.7 42.3 46.2
Other Opng (Exp)/Inc (13.1) (17.3) (15.3) (15.3) (15.8)
Operating Profit 22.3 26.7 23.5 27.0 30.4
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 42.3 66.4 71.5 78.8 84.7
Net Interest (Exp)/Inc (1.0) (1.3) (2.8) (2.8) (2.8)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit 63.6 91.9 92.2 103 112
Tax (2.3) (3.0) (6.9) (7.2) (7.9)
Minority Interest 0.0 0.0 0.0 0.0 0.0
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net Profit 61.3 88.9 85.3 95.7 104
Net Profit before Except. 61.3 88.9 85.3 95.7 104
EBITDA 66.2 94.3 95.9 107 116
Growth
Revenue Gth (%) (47.3) 30.2 39.0 20.3 11.2
EBITDA Gth (%) 19.1 42.5 1.7 11.2 8.8
Opg Profit Gth (%) 104.8 19.7 (12.3) 15.0 12.8
Net Profit Gth (Pre-ex) (%) 24.7 45.1 (4.0) 12.2 9.1
Margins & Ratio
Gross Margins (%) 0.4 0.4 0.2 0.2 0.2
Opg Profit Margin (%) 0.2 0.2 0.1 0.1 0.1
Net Profit Margin (%) 0.7 0.8 0.5 0.5 0.5
ROAE (%) 10.7 14.3 12.4 12.6 12.6
ROA (%) 5.5 8.1 5.2 4.7 4.5
ROCE (%) 3.7 3.8 2.7 2.8 3.0
Div Payout Ratio (%) 29.8 31.1 33.9 30.0 30.0
Net Interest Cover (x) 21.5 21.4 8.4 9.7 10.9
Source: Company, DBS Bank
Company Guide
China Aviation Oil
Quarterly / Interim Income Statement (US$m)
FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017
Revenue 3,276 3,311 3,673 5,223 4,061
Cost of Goods Sold (3,265) (3,296) (3,662) (5,219) (4,052)
Gross Profit 10.6 15.5 10.6 4.33 8.34
Other Oper. (Exp)/Inc (5.4) (3.4) (2.8) (2.6) (6.5)
Operating Profit 5.21 12.1 7.77 1.75 1.85
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 13.3 14.9 18.3 21.5 16.8
Net Interest (Exp)/Inc (0.2) (0.6) (0.4) (0.4) (1.3)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit 18.3 26.4 25.7 22.8 17.4
Tax (0.4) (1.1) (1.1) (1.4) (3.3)
Minority Interest 0.0 0.0 0.0 0.0 0.0
Net Profit 17.9 25.3 24.6 21.4 14.0
Net profit bef Except. 17.9 25.3 24.6 21.4 14.0
EBITDA 18.5 27.0 26.1 23.3 18.7
Growth
Revenue Gth (%) (16.9) 1.1 10.9 42.2 (22.3)
EBITDA Gth (%) (24.6) 45.6 (3.4) (10.8) (19.7)
Opg Profit Gth (%) 2.6 132.0 (35.7) (77.5) 6.1
Net Profit Gth (Pre-ex) (%) (22.8) 41.1 (2.8) (12.9) (34.5)
Margins
Gross Margins (%) 0.3 0.5 0.3 0.1 0.2
Opg Profit Margins (%) 0.2 0.4 0.2 0.0 0.0
Net Profit Margins (%) 0.5 0.8 0.7 0.4 0.3
Balance Sheet (US$m)
FY Dec 2015A 2016A 2017A 2018F 2019F
Net Fixed Assets 6.21 5.65 5.19 4.95 4.70
Invts in Associates & JVs 266 281 321 333 346
Other LT Assets 9.43 9.18 7.53 7.26 7.00
Cash & ST Invts 171 287 300 318 350
Inventory 56.8 171 210 252 281
Debtors 337 591 1,069 1,286 1,430
Other Current Assets 0.0 0.0 0.0 0.0 0.0
Total Assets 846 1,344 1,913 2,201 2,418
ST Debt 0.0 100 120 120 120
Creditor 247 588 1,060 1,276 1,419
Other Current Liab 0.01 0.62 0.95 7.21 7.86
LT Debt 0.0 0.0 0.0 0.0 0.0
Other LT Liabilities 6.16 6.31 7.92 7.92 7.92
Shareholder’s Equity 593 650 724 791 864
Minority Interests 0.0 0.0 0.0 0.0 0.0
Total Cap. & Liab. 846 1,344 1,913 2,201 2,418
Non-Cash Wkg. Capital 147 173 218 255 284
Net Cash/(Debt) 171 187 180 198 230
Debtors Turn (avg days) 26.3 14.5 18.6 22.0 22.8
Creditors Turn (avg days) 21.7 13.1 18.5 21.8 22.6
Inventory Turn (avg days) 1.9 3.6 4.3 4.3 4.5
Asset Turnover (x) 8.1 10.7 10.0 9.5 9.4
Current Ratio (x) 2.3 1.5 1.3 1.3 1.3
Quick Ratio (x) 2.1 1.3 1.2 1.1 1.2
Net Debt/Equity (X) CASH CASH CASH CASH CASH
Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH
Capex to Debt (%) N/A 0.4 0.4 0.4 0.4
Z-Score (X) 14.6 10.7 10.4 10.4 10.1
Source: Company, DBS Bank
Company Guide
China Aviation Oil
Cash Flow Statement (US$m)
FY Dec 2015A 2016A 2017A 2018F 2019F
Pre-Tax Profit 63.6 91.9 92.2 103 112
Dep. & Amort. 1.56 1.21 0.94 0.94 0.94
Tax Paid (2.2) 0.0 (0.7) (1.0) (7.2)
Assoc. & JV Inc/(loss) (42.3) (66.4) (71.5) (78.8) (84.7)
Chg in Wkg.Cap. 33.1 (25.8) (46.1) (44.1) (29.4)
Other Operating CF (1.7) (1.4) (2.1) 0.0 0.0
Net Operating CF 52.1 (0.5) (27.2) (19.9) (8.0)
Capital Exp.(net) (0.3) (0.4) (0.4) (0.4) (0.4)
Other Invts.(net) 0.0 0.0 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 37.2 36.2 45.5 67.1 71.8
Other Investing CF 0.19 1.47 3.60 0.0 0.0
Net Investing CF 37.2 37.3 48.7 66.6 71.3
Div Paid (12.8) (19.3) (27.7) (28.7) (31.3)
Chg in Gross Debt 0.0 100 20.0 0.0 0.0
Capital Issues 0.0 0.0 0.0 0.0 0.0
Other Financing CF (0.3) (0.3) (1.6) 0.0 0.0
Net Financing CF (13.0) 80.4 (9.3) (28.7) (31.3)
Currency Adjustments (0.1) (0.4) 0.62 0.0 0.0
Chg in Cash 76.2 117 12.8 18.0 32.0
Opg CFPS (S cts) 2.92 3.89 2.90 3.72 3.29
Free CFPS (S cts) 7.99 (0.1) (4.3) (3.1) (1.3)
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Paul YONG, CFA
Company Guide
China Aviation Oil
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 1 Mar 2018 12:02:16 (SGT) Dissemination Date: 1 Mar 2018 12:13:57 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
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Company Guide
China Aviation Oil
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1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
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ed: JLC / sa:YM, PY, CS
BUY
Last Traded Price ( 13 Feb 2018): S$0.95 (STI : 3,415.07)
Price Target 12-mth: S$1.18 (24% upside)
Analyst Carmen Tay +65 6682 3719 [email protected] Derek TAN +65 6682 3716 [email protected]
What’s New FY17 revenue and PATMI of S$859.7m and S$35.5m came
in within expectations on higher development sales
Spotlight for 2018 and 2019 remains on upcoming launches at Woodleigh and Changi
Meanwhile, growing recurring income and strong dividend track record (even in 2009) are attractive attributes; Proposes 4 Sct dividend for FY17, representing 4.2% yield
Maintain BUY with TP of S$1.18
Price Relative
Forecasts and Valuation FY Dec (S$ m) 2016A 2017A 2018F 2019F
Revenue 748 860 799 1,228 EBITDA 98.6 102 108 164 Pre-tax Profit 76.1 70.2 67.2 121 Net Profit 35.7 35.5 31.7 58.3 Net Pft (Pre Ex.) 35.7 35.5 31.7 58.3 Net Pft Gth (Pre-ex) (%) (43.3) (0.5) (10.6) 83.7 EPS (S cts) 5.75 5.72 5.11 9.39 EPS Pre Ex. (S cts) 5.75 5.72 5.11 9.39 EPS Gth Pre Ex (%) (43) (1) (11) 84 Diluted EPS (S cts) 5.75 5.72 5.11 9.39 Net DPS (S cts) 4.00 4.00 4.00 4.00 BV Per Share (S cts) 123 125 126 131 PE (X) 16.5 16.6 18.6 10.1 PE Pre Ex. (X) 16.5 16.6 18.6 10.1 P/Cash Flow (X) nm nm 11.0 2.8 EV/EBITDA (X) 13.1 18.6 18.8 12.4 Net Div Yield (%) 4.2 4.2 4.2 4.2 P/Book Value (X) 0.8 0.8 0.8 0.7 Net Debt/Equity (X) 0.9 1.6 1.7 1.5 ROAE (%) 4.7 4.6 4.1 7.3 Earnings Rev (%): 5 27 17 Consensus EPS (S cts): 5.50 4.00 8.00 Other Broker Recs: B: 2 S: 0 H: 0
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P
Attractive Valuations and Yield Integrated real estate developer with strong capability to
leverage upcoming property upturn. Singapore-based Chip Eng
Seng Corporation (CES) has been selectively acquiring projects
in Singapore and overseas which are ripe for the picking. Most
of the group’s residential projects have already been
substantially sold and, together with an estimated construction
order book of S$560m (as at Jan 2018), CES has locked in at
least S$1bn in sales – which will be recognised progressively,
underpinning strong earnings visibility in the coming years.
Meanwhile, plans to launch recently acquired residential sites at
Woodleigh and Changi in 2H18 and 1H19 respectively, should
boost the group’s earnings and NAV in the medium term.
Where we differ: A largely uncovered stock, we like CES for its
strong earnings visibility and the potential to unlock its
undervalued hotel portfolio.
Potential catalysts: Successful pre-sales, landbanking activities
Potential unlocking of undervalued hotel portfolio. The group
has also built up a sizable hotel and commercial portfolio. The
jewel is Park Hotel Alexandra, which is recorded in its book at
an estimated S$210m (S$475k/key) but potential realisable
value, if sold, could be as high as S$376m (S$850k/key), which
means a 27Scts upside to current NAV. While the hotel provides
stable recurring cash flow to the group, substantial value could
be unlocked, given the robust demand for hotel assets in
Singapore. Valuation:
Maintain BUY and SOTP-based TP of S$1.18. Assuming a
conservative 45% discount (vs larger peers’ 10%) to RNAV of
S$1.88 and valuing its construction business at peers’ average
of 8x FY18F PE, we arrive at a SOTP-based TP of S$1.18. A
prospective 4.2% yield is also on offer.
Key Risks to Our View:
(i) Execution risk, (ii) Weaker demand, (iii) Competition, (iv)
Equity fund raising risk
At A Glance Issued Capital (m shrs) 621
Mkt. Cap (S$m/US$m) 590 / 446
Major Shareholders (%)
Tiam Seng Lim 12.5
Tiang Chuan Lim 7.1
Lee Meng Chia 4.1
Free Float (%) 76.3
3m Avg. Daily Val (US$m) 1.3
ICB Industry : Financials / Real Estate
DBS Group Research . Equity
14 Feb 2018
Singapore Company Guide
Chip Eng Seng Version 2 | Bloomberg: CHIP SP | Reuters: CESE.SI Refer to important disclosures at the end of this report
Company Guide
Chip Eng Seng
WHAT’S NEW
Chip Eng Seng’s FY17 results in line; Maintains 4 Sct dividend
FY17 PATMI of S$35.5m; Results in line. In 4Q17, CES delivered PATMI of S$14.5m on revenue of S$256.1m (+22.4% q-o-q), primarily on stronger contributions from the Property Development and Hotel segments, which helped offset weakness in the Construction division.
On a full-year basis, revenue was up 14.9% to S$859.7m, while earnings (PATMI) held relatively steady y-o-y at S$35.5m, in line with our expectations.
The Property Development segment was the key revenue driver for the group this quarter, contributing S$194m (or c.76% of sales) on the progressive recognition of ongoing development projects (High Park Residences and Grandeur Park Residences) and proceeds from the handover of completed townhouses in Doncaster, Melbourne, which should continue to contribute positively to 1Q18 revenue.
The Hospitality division continued to gain traction during the quarter, gaining 31.8% q-o-q to S$13.7m on the back of higher occupancies for its key hotel assets, Park Hotel Alexandra (Singapore) and Grand Park Kodhipparu (Maldives), which only commenced operations in June 2017. Contributions from a newly-added asset, The Sebel Mandurah in Australia, also helped.
Expanding investment portfolio to further boost recurring income. While dwarfed at the top-line (c.6.1% of sales), we estimate that CES’ portfolio of investment assets roughly contributed c.13% of FY17 EBIT.
With the recent addition of a Grade-A office building at 205 Queen Street (Auckland) at end-2017 and the proposed acquisition of its fourth hospitality asset, Mercure & Ibis Styles Grosvenor Hotel in Adelaide, we believe contributions from this segment will be even more meaningful in FY18F.
Proposes 4Sct dividend for FY17, which is expected to be paid on 23 May 2018.
Maintain BUY with TP of S$1.18; Offers attractive 4.2% yield. Apart from the strong earnings visibility from ongoing development projects and the potential unlocking of its undervalued hotel portfolio, we also like CES for its strong dividend payment record.
Notably, the company has consistently paid dividends through the property cycle – even in 2008/2009, and has maintained a fixed dividend of 4 Scts over the last eight years.
Quarterly / Interim Income Statement (S$m)
FY Dec 4Q2016 3Q2017 4Q2017 % chg yoy % chg qoq
Revenue 250 209 256 2.4 22.4
Cost of Goods Sold (204) (174) (204) (0.1) 17.2
Gross Profit 45.7 35.1 52.1 14.0 48.5
Other Oper. (Exp)/Inc (10.4) (4.8) (21.5) 106.9 349.8
Operating Profit 35.3 30.3 30.6 (13.4) 1.0
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - -
Associates & JV Inc 0.0 0.02 0.39 nm nm
Net Interest (Exp)/Inc (4.7) (5.9) (4.8) (1.0) 18.1
Exceptional Gain/(Loss) 0.0 0.0 0.0 - -
Pre-tax Profit 30.6 24.5 26.2 (14.3) 7.1
Tax (7.7) (5.7) (4.5) (41.0) (21.2)
Minority Interest 0.0 (4.7) (7.2) nm 53.9
Net Profit 22.9 14.0 14.5 (36.6) 3.5
Net profit bef Except. 22.9 14.0 14.5 (36.6) 3.5
EBITDA 37.2 32.9 35.5 (4.4) 7.9
Margins (%)
Gross Margins 18.3 16.8 20.4
Opg Profit Margins 14.1 14.5 12.0
Net Profit Margins 9.2 6.7 5.7
Source of all data: Company, DBS Bank
Company Guide
Chip Eng Seng
CRITICAL DATA POINTS TO WATCH
Critical Factors
Substantial proportion of ongoing developments pre-sold ahead
of completion. The progressive sale and revenue recognition
from six available-for-sale development properties provides
earnings visibility over the next few years. Recent launches have
been well received. As at 31 Dec 2017, a substantial proportion
of units at ongoing developments were pre-sold ahead of their
completion – at least 87.5% for Grandeur Park Residences
(which was only launched in March 2017) to 100% for High
Park Residences (a collaboration between CES, Heeton Holdings,
and KSH Holdings).
Growing landbank signals earnings potential beyond 2021. Beyond the existing development projects, we believe that CES’ unutilised landbank is indicative of the group’s longer-term earnings potential and cash flow generation capability. While the majority of CES’ landbank currently lies in Australia, we are comforted by the group’s recent moves to replenish its Singapore landbank.
We believe that both the Woodleigh and Changi land plots, which are slated for launch in 2H18 and 1H19 respectively, could add more than 1,000 new units for sale, with an estimated combined GV of close to S$1.5 bn.
Net construction order book estimated at S$560m. CES’ construction revenues are mainly derived from Singapore public housing, public transport infrastructure, and private residential projects. While local construction outlook still appears favourable at this juncture, the extent to which CES is able to truly benefit from these positive trends hinges upon the success and viability of its tenders. Following its recent S$168m contract win in Jan 2018, we estimate CES’ construction order book to be closer to S$560m (vs S$397.1m at end-4Q17).
Recurring income pool to see further boost on steady expansion in Hotels and Investments portfolio. Over the years, CES has been increasingly active in the management of its hotel and investment portfolio, resulting in a growing asset base (to c.9 properties at end-FY17) and higher recurring income.
With the recent addition of 4.5-star The Sebel Mandurah (purchase includes strata restaurant property) in Nov 2017 and a Grade-A office building at 205 Queen Street, Auckland - through a 50%-joint venture with Roxy-Pacific, we estimate that CES’ recurring income base would see a 20% boost y-o-y to c.S$58.5m in FY18F.
This would represent approximately 6.7% of consolidated revenue, up from 5.1% in FY16. Further acquisitions, including the completion of its proposed acquisition of Mercure & Ibis Styles Grosvenor Hotel in Adelaide, could provide more upside.
FY19F Potentially a Banner Year for Property Development
Recent Acquisitions to Boost Recurring Income
RNAV of S$1.88 and SOTP-based TP of S$1.18
Source: Company, DBS Bank
347.5 411.7
571.7492.5
912.7
0
200
400
600
800
1,000
FY15 FY16 FY17 FY18F FY19F
Reve
nue (
S$ m
)
23.1
38.0
48.7
58.5 62.0
0
10
20
30
40
50
60
70
FY15 FY16 FY17 FY18F FY19F
Reve
nue (
S$ m
)
Bre a kdown of RNAV OMV ($m)
Inve stme nt Prope rtie s
Investment Properties (Revalued) 320
less book value -320
Surplus / Deficit 0
De ve lopme nt Prope rtie s
NPV of Development Profits 230
Hote l Ope ra tions 521
less book value (Hotels + Assoc) -355
Surplus / Deficit 166
Book NAV 770
RNAV 1,166
Total Shares 621
RNAV / Sha re (S$) 1.88
Discount 45%
Disc ounte d RNAV / Sha re (S$) 1.03
SOTP Va lua tion S$
Discounted RNAV / Share (S$) 1.03
Value of Construction Business / Share 0.15
SOTP-ba se d TP (S$): 1 .18
Company Guide
Chip Eng Seng
Appendix 1: A look at Company's listed history – what drives its share price?
Prior to May 2015, CHIP SP’s share price was mainly driven by NAV growth
Source: DBS Bank, Bloomberg Finance L.P.
Strong Historical Correlation with SGXREDO Index
Source: DBS Bank, Bloomberg Finance L.P.
Little Correlation with Quarterly Earnings Performance
Source: DBS Bank, Bloomberg Finance L.P.
0.3
0.7
1.1
1.5
Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17
Last
Pri
ce v
s N
AV
PS (S$
)
CHIP SP Equity NAVPS
Sep 2013: Award of S$103.8m HDB contract
Nov/Dec 2013: Acquired 28,002sqm of landbank in Doncaster and investment property in Melbourne
Aug 2014: JV acquired 178,724sqft of land at Fernvale Road (Singapore)
Jun 2013: Award of S$165m HDB contract
Feb 2016: Acquired 24,394 sqm land parcel at New Upper Changi Road (Singapore)
Oct 2016: JV acquires Maldivianresort
Jan 2017: M&Apotential given cheap valuations
Mar 2017: Sentiment lifted on property curb relaxation measures
0
500
1000
1500
0
0.4
0.8
1.2
Oct-14 Oct-15 Oct-16 Oct-17
CHIP SP Equity (LHS) SGXREDO Index (RHS)
Correlation: +0.732
0
0.1
0.2
0.3
0.4
0.5
0
0.4
0.8
1.2
Oct-14 Oct-15 Oct-16 Oct-17
T12M EPS (RHS) CHIP SP Equity (LHS)
Correlation: + 0.786
Apr - Aug 2015: Sector-wide sell-down on macro weakness
July 2017: JV acquired 210,404 sqft of land at Woodleigh Lane
Company Guide
Chip Eng Seng
Balance Sheet:
Net gearing could rise from 0.9x in FY16 to c.2.2x following
recent en-bloc and land tender wins. While this appears high at
first look, successful sale of the Woodleigh site and Changi
Garden will alleviate any potential concerns from its alleviated
gearing level.
Share Price Drivers:
Acquisition of further landbank and/or a fourth hotel asset at a
reasonable price.
Potential transactions in Singapore hotel space could spark
revaluation of CES’s Park Hotel Alexandra. On the back of
strong transaction velocity in the office sector, investor attention
has been moving to the hotel sector. Given robust demand for
hotel assets in Singapore, we believe the potential realisable
market valuation for Park Hotel Alexandra would be c. S$850 a
key (when pegged to peers’ average) or close to S$376m vs
current book value of c.S$210m.
Key Risks:
Weaker demand for private residential property across CES’ key
markets of Singapore and Australia could impact the success of
its future launches significantly.
Keen competition across Property Development and
Construction segments. Judging by the recent spike in en-bloc
tenders at record sale prices and heightened competition for
landbank, land prices are expected to rise further. This could
impact CES’ ability to replenish its landbank (at a reasonable
price), which is imperative for future profitability and growth.
Meanwhile for the construction business, we note that EBIT
margins have come off over the years and remain watchful of
the competitive landscape in the local construction sphere as
this could lead to more aggressive bidding among contractors
and ultimately, compression of margins.
Possible equity fund-raising to pare down debt. We project that
net gearing will rise to 2.2x over the next two years on the back
of a rise in landbanking activity, which are primarily covered by
loans. We believe that the company could potentially look at
equity fund-raising ahead to pare down gearing to a more
sustainable level.
Company Background
Founded in the 1960s as a construction company, Singapore-
based Chip Eng Seng Corporation (CES) has expanded its scope
and scale over the past five decades, and has gradually
diversified into property development, investments, and
hospitality businesses.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
Company Guide
Chip Eng Seng
Segmental Breakdown
FY Dec 2015A 2016A 2017A 2018F 2019F
Revenues (S$m) Property Development 347 412 572 492 913
Construction 306 298 239 253 258
Hotel Operations 14.1 27.4 38.6 42.9 46.2
Investment Properties 8.97 10.6 10.1 10.4 10.7
Others 0.10 0.06 0.0 0.0 0.0
Total 676 748 860 799 1,228
Income Statement (S$m)
FY Dec 2015A 2016A 2017A 2018F 2019F
Revenue 676 748 860 799 1,228
Cost of Goods Sold (515) (602) (707) (653) (985)
Gross Profit 161 146 153 146 243
Other Opng (Exp)/Inc (81.0) (54.3) (62.0) (54.3) (95.0)
Operating Profit 80.4 92.2 90.5 91.9 147
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 1.02 (0.7) 0.58 5.12 5.12
Net Interest (Exp)/Inc (13.9) (15.4) (20.9) (29.8) (31.6)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit 67.6 76.1 70.2 67.2 121
Tax (10.3) (24.4) (20.3) (21.5) (38.7)
Minority Interest 5.74 (16.0) (14.4) (13.9) (23.9)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net Profit 63.0 35.7 35.5 31.7 58.3
Net Profit before Except. 63.0 35.7 35.5 31.7 58.3
EBITDA 87.5 98.6 102 108 164
Growth Revenue Gth (%) (38.8) 10.6 14.9 (7.1) 53.7
EBITDA Gth (%) (73.6) 12.6 3.6 5.8 51.4
Opg Profit Gth (%) (74.1) 14.6 (1.8) 1.5 60.5
Net Profit Gth (Pre-ex) (%) (77.8) (43.3) (0.5) (10.6) 83.7
Margins & Ratio Gross Margins (%) 23.9 19.6 17.7 18.3 19.8
Opg Profit Margin (%) 11.9 12.3 10.5 11.5 12.0
Net Profit Margin (%) 9.3 4.8 4.1 4.0 4.7
ROAE (%) 8.5 4.7 4.6 4.1 7.3
ROA (%) 3.2 1.7 1.4 1.1 2.0
ROCE (%) 2.8 1.1 0.6 0.1 1.0
Div Payout Ratio (%) 39.6 69.6 70.0 78.2 42.6
Net Interest Cover (x) 5.8 6.0 4.3 3.1 4.7
Source: Company, DBS Bank
Company Guide
Chip Eng Seng
Quarterly / Interim Income Statement (S$m)
FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017
Revenue 250 182 213 209 256
Cost of Goods Sold (204) (153) (176) (174) (204)
Gross Profit 45.7 29.2 36.1 35.1 52.1
Other Oper. (Exp)/Inc (10.4) (11.8) (23.9) (4.8) (21.5)
Operating Profit 35.3 17.4 12.2 30.3 30.6
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.0 0.19 0.02 0.02 0.39
Net Interest (Exp)/Inc (4.7) (4.7) (5.6) (5.9) (4.8)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit 30.6 12.9 6.66 24.5 26.2
Tax (7.7) (2.6) (1.6) (5.7) (4.5)
Minority Interest 0.0 (4.2) (4.2) (4.7) (7.2)
Net Profit 22.9 6.11 0.82 14.0 14.5
Net profit bef Except. 22.9 6.11 0.82 14.0 14.5
EBITDA 37.2 19.4 14.4 32.9 35.5
Growth Revenue Gth (%) 64.7 (27.3) 16.9 (1.6) 22.4
EBITDA Gth (%) 95.3 (47.9) (25.8) 129.1 7.9
Opg Profit Gth (%) 97.2 (50.8) (29.8) 148.6 1.0
Net Profit Gth (Pre-ex) (%) 152.1 (73.4) (86.6) 1,615.0 3.5
Margins Gross Margins (%) 18.3 16.1 17.0 16.8 20.4
Opg Profit Margins (%) 14.1 9.6 5.7 14.5 12.0
Net Profit Margins (%) 9.2 3.4 0.4 6.7 5.7
Balance Sheet (S$m)
FY Dec 2015A 2016A 2017A 2018F 2019F
Net Fixed Assets 225 220 324 463 602
Invts in Associates & JVs 12.1 6.36 6.94 12.1 17.2
Other LT Assets 298 302 341 341 341
Cash & ST Invts 442 482 258 186 269
Inventory 625 1,128 1,689 1,714 1,603
Debtors 249 81.2 89.7 79.4 122
Other Current Assets 54.1 13.7 19.2 19.2 19.2
Total Assets 1,907 2,232 2,728 2,816 2,974
ST Debt 120 234 8.74 8.74 8.74
Creditor 117 86.4 58.5 66.8 101
Other Current Liab 79.6 81.6 95.3 104 121
LT Debt 738 937 1,524 1,574 1,624
Other LT Liabilities 109 117 233 233 233
Shareholder’s Equity 748 766 774 781 815
Minority Interests (5.3) 10.7 34.3 48.2 72.1
Total Cap. & Liab. 1,907 2,232 2,728 2,816 2,974
Non-Cash Wkg. Capital 733 1,055 1,644 1,642 1,522
Net Cash/(Debt) (416) (689) (1,275) (1,396) (1,364)
Debtors Turn (avg days) 125.6 80.6 36.3 38.6 30.0
Creditors Turn (avg days) 81.5 62.3 38.0 35.6 31.4
Inventory Turn (avg days) 555.5 538.2 738.4 968.1 621.6
Asset Turnover (x) 0.3 0.4 0.3 0.3 0.4
Current Ratio (x) 4.3 4.2 12.7 11.1 8.7
Quick Ratio (x) 2.2 1.4 2.1 1.5 1.7
Net Debt/Equity (X) 0.6 0.9 1.6 1.7 1.5
Net Debt/Equity ex MI (X) 0.6 0.9 1.6 1.8 1.7
Capex to Debt (%) 2.3 (0.2) 7.7 9.5 9.2
Z-Score (X) NA NA NA NA NA
Source: Company, DBS Bank
Company Guide
Chip Eng Seng
Cash Flow Statement (S$m)
FY Dec 2015A 2016A 2017A 2018F 2019F
Pre-Tax Profit 67.6 76.1 70.2 67.2 121
Dep. & Amort. 6.09 7.09 11.1 11.1 11.1
Tax Paid (27.2) (34.2) (22.2) (12.8) (21.5)
Assoc. & JV Inc/(loss) (1.0) 0.66 (0.6) (5.1) (5.1)
Chg in Wkg.Cap. 255 (292) (524) (6.8) 102
Other Operating CF (0.4) (14.3) (25.9) 0.0 0.0
Net Operating CF 300 (257) (492) 53.6 208
Capital Exp.(net) (20.0) 2.28 (118) (150) (150)
Other Invts.(net) (1.1) (2.5) 72.0 0.0 0.0
Invts in Assoc. & JV (1.4) 8.20 (28.6) 0.0 0.0
Div from Assoc & JV 4.52 1.07 0.30 0.0 0.0
Other Investing CF 0.0 0.0 (0.1) 0.0 0.0
Net Investing CF (17.9) 9.03 (74.2) (150) (150)
Div Paid (37.4) (24.8) (24.8) (24.8) (24.8)
Chg in Gross Debt (80.8) 312 364 50.0 50.0
Capital Issues (6.3) 0.05 3.29 0.0 0.0
Other Financing CF 0.0 0.0 0.0 0.0 0.0
Net Financing CF (124) 287 342 25.2 25.2
Currency Adjustments (0.2) (0.2) (0.1) (0.1) (0.1)
Chg in Cash 157 39.1 (224) (71.4) 82.9
Opg CFPS (S cts) 7.24 5.68 5.25 9.73 17.0
Free CFPS (S cts) 44.9 (41.0) (98.1) (15.5) 9.31
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Carmen Tay
Derek TAN
Company Guide
Chip Eng Seng
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 14 Feb 2018 09:25:19 (SGT) Dissemination Date: 14 Feb 2018 10:12:29 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
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This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated
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Company Guide
Chip Eng Seng
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
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COMPANY-SPECIFIC / REGULATORY DISCLOSURES
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1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
ed: TH / sa:YM, PY, CS
BUYLast Traded Price ( 28 Feb 2018): S$1.04 (STI : 3,517.94)
Price Target 12-mth: S$1.45 (39% upside)
Analyst Lee Keng LING +65 6682 3703 [email protected]
What’s New • Significant surge in FY17 revenue and net profit, partly
due to acquisition of Jurassic World
• Moving up the value chain for the traditional business
• Explore M&A opportunities; a fourth IP
• Maintain BUY; TP S$1.45
Price Relative
Forecasts and Valuation FY Dec (S$ m) 2016A 2017A 2018F 2019F
Revenue 96.8 117 140 154 EBITDA 12.4 30.1 42.5 48.6 Pre-tax Profit 7.33 20.2 31.2 36.8 Net Profit 6.54 17.4 24.7 29.6 Net Pft (Pre Ex.) 6.54 17.4 24.7 29.6 Net Pft Gth (Pre-ex) (%) 650.6 165.5 42.6 19.6 EPS (S cts) 2.67 7.10 10.1 12.1 EPS Pre Ex. (S cts) 2.67 7.10 10.1 12.1 EPS Gth Pre Ex (%) 577 166 43 20 Diluted EPS (S cts) 2.67 7.10 10.1 12.1 Net DPS (S cts) 0.0 0.0 0.0 0.0 BV Per Share (S cts) 28.3 33.9 44.0 56.1 PE (X) 38.9 14.7 10.3 8.6 PE Pre Ex. (X) 38.9 14.7 10.3 8.6 P/Cash Flow (X) 132.8 nm 6.2 6.8 EV/EBITDA (X) 21.0 10.8 7.1 5.7 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 3.7 3.1 2.4 1.9 Net Debt/Equity (X) 0.1 0.9 0.4 0.2 ROAE (%) 11.0 22.8 26.0 24.2
Earnings Rev (%): - - Consensus EPS (S cts): 6.50 9.40 11.3 Other Broker Recs: B: 4 S: 0 H: 0
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P
At A Glance Issued Capital (m shrs) 245
Mkt. Cap (S$m/US$m) 254 / 192
Major Shareholders (%)
Lucrum1 Investment Limited 69.0
Free Float (%) 31.1
3m Avg. Daily Val (US$m) 0.79
ICB Industry : Consumer Services / Media
DBS Group Research . Equity 28 Feb 2018
Marvelous transformation
FY17 a transformation year. With the acquisition of Jurassic
World in August last year, Cityneon is now on a stronger and
firmer growth path. Together with the two existing Intellectual
Property rights (IPs) – Avengers and Transformers and the
traditional business, Cityneon reported record high revenue that
broke the S$100m mark and 163% jump in net profit to
S$17.4m. We continue to expect Cityneon to deliver explosive
FY16-19F EPS CAGR growth of 165%. Trading at a low PE-to-
growth ratio of 0.2x FY18F earnings, Cityneon is attractive to
investors seeking unique ideas in the entertainment industry.
Where we differ: Assuming more travelling sets. We assume
nine exhibition sets for FY18F and FY19F (five for Avengers, two
each for Transformers and Jurassic World), vs consensus of
seven to eight sets for FY18F and FY19F.
Potential catalyst: M&A, a fourth IP, expanding project pipeline,
focus on higher-margin projects for the traditional business.
Valuation:
Maintain BUY; TP S$1.45. Our earnings forecast is based on
nine exhibition sets in total for FY18F and FY19F. We have
assumed the construction of an additional Jurassic World
travelling set in FY18F. Our target price of S$1.45 is based on
PE valuation peg of 14.4x, which is at a 20% discount to
peers’ average PE of 18x on FY18F earnings.
Key Risks to Our View:
VHE’s limited track record. Victory Hill Exhibitions (VHE) was
formed in 2012 and its first exhibition was held in New York in
2014.
Earnings dependent on number of visitors, especially for the
permanent set in Las Vegas.
Singapore Company Guide
Cityneon Holdings Version 10 | Bloomberg: CITN SP | Reuters: CNHL.SI Refer to important disclosures at the end of this report
80
180
280
380
480
580
680
0.1
0.3
0.5
0.7
0.9
1.1
1.3
Feb-14 Feb-15 Feb-16 Feb-17 Feb-18
Relative IndexS$
Cityneon Holdings (LHS) Relative STI (RHS)
Company Guide
Cityneon Holdings
WHAT’S NEW
FY17 a record-high year
RESULTS HIGHLIGHTS
Significant surge in FY17 revenue and net profit: FY17
revenue broke the S$100m mark, rising 20.7% y-o-y to
S$116.7m, in line with our forecast. Net profit jumped
162.9% to S$17.4m, 6% above our estimates. Part of the
growth is due to the contribution from the newly acquired
third intellectual property rights (IPR), Jurassic World - The
Exhibition in August 2017. Together with the other two IPRs
(Disney’s Marvel’s Avengers S.T.A.T.I.O.N. and Hasbro’s
Transformers), Cityneon had a total of six exhibition sets in
2017.
IPR accounts for 70.5% of total gross profit. Revenue for the
IPR surged 187%, mainly derived from contracts entered
during the year including the opening of Marvel's Avengers
S.T.A.T.I.O.N. Exhibitions in Taipei, Beijing and Russia as well
as the opening of Transformers Exhibition in Chongqing,
China. The IPR segment accounts for 43.5% of the total
revenue for the group but 70.5% of gross profit, due to its
high margin of 88.7%. Hence an improvement was seen in
the aggregate gross profit margins from 36.0% in FY16 to
53.5% in FY17.
Timely release of sequel movies from the franchises in 2018.
There are several movies from the franchises on which
Cityneon has based its exhibits, set to be released in 2018.
There are three Marvel movies planned, and one each from
the Transformers and Jurassic World franchise. The timing of
these movie releases augurs well for the group’s IPR business.
Moving up the value chain for the traditional business.
Cityneon will continue to expand its full suite of “Design &
Build” services, especially for the upcoming 2020 World Expo
in Dubai, to continue its success in the previous World Expos
in Shanghai and Milan.
OUTLOOK
Exploring M&A opportunities; a fourth IP. Cityneon has put in
place its financing needs and will continue to explore new
business development opportunities including M&A activities.
It will continue to align its traditional core business with that
of the IPR business, especially in the area of creative and
design.
For the IPR segment, besides investing in new exhibition
travelling sets for its three existing IPs, Cityneon is also
seeking to secure a fourth IP to take the group to greater
heights.
EARNINGS & RECOMMENDATION
Maintain BUY; TP S$1.45. No changes to our earnings
forecasts based on nine exhibition sets in total for FY18F and
FY19F (five for Avengers, two each for Transformers and
Jurassic World). We have assumed the construction of an
additional Jurassic World travelling set in FY18F. Our target
price of S$1.45 is based on PE valuation peg of 14.4x, which
is at a 20% discount to peers’ average PE of 18x on FY18F
earnings.
Company Guide
Cityneon Holdings
Quarterly / Interim Income Statement (S$m)
FY Dec 2H16 1H17 2H17 % chg yoy % chg qoq
Sales 50.4 49.7 67.0 32.9 34.8
Cost of Goods Sold (33.6) (26.5) (26.4) (21.4) (0.1)
Gross Profit 16.8 23.3 40.6 141.4 74.4
Other Operating Expenses (16.3) (14.5) (27.6) 69.2 90.6
Non-Operating Income 0.0 0.0 0.0 - -
Interest Income 0.0 0.0 0.0 - -
Interest Expense (0.2) (0.5) (1.6) 600.0 215.4
Share of Associates' or JV Income (0.0) (0.1) (0.1) 182.4 4.3
Exceptional Gains/(Losses) 0.0 0.0 0.0 - -
Pretax Profit 1.6 8.6 11.6 622.9 35.6
Tax 0.3 (0.8) (1.9) n.m. 129.3
Minority Interests (0.1) 0.0 (0.0) (62.0) (370.0)
Net Profit 1.8 7.7 9.6 423.8 24.8
Margins
Gross Margins (%) 33.3% 46.8% 60.5%
Pretax Profit Margins (%) 3% 17% 17%
Net Profit Margins (%) 4% 16% 14%
Source of all data: Company, DBS Bank
Company Guide
Cityneon Holdings
CRITICAL DATA POINTS TO WATCH
Critical Factors
Number of IPs secured. To date, Cityneon has secured three IP
rights – with Marvel Entertainment to use Avengers
S.T.A.T.I.O.N. till 2024, with HASBRO Studios for the
Transformers franchise till 2023 and the latest Jurassic World –
The Exhibition from Universal Studios till 2027. With more IP
rights, Cityneon would be able to build various exhibition sets to
cater to different demand.
Scalable business model. The first sets for Avengers and
Transformers had each cost around US$8-9m to build, but
subsequent sets had cost only about one-third of the original
cost per set. Though the cost for Jurassic World is higher,
subsequent sets are also expected to be lower. Thus, Cityneon is
able to achieve operational leverage with every subsequent set
built. We believe that more sets would be needed to fulfil the
overwhelming demand. We assume nine sets for FY18F and
FY19F (five for Avengers, two each for Transformers and
Jurassic World), up from a total of six sets in FY17.
The nine exhibition sets would enable Cityneon to hold
exhibitions in various parts of the world. Only the Las Vegas set
in the US is permanent, while the rest are travelling sets, and
will be moved from one location to another after the exhibition
ends, which usually lasts for a few months. For every location or
project, Cityneon would be able to book revenues that include
licensing fees, minimum guarantees from the operator and also
merchandise sales. Assuming that an exhibition lasts for about
3-4 months, theoretically, a set can be used 2-3 times per year
based on a back-to-back schedule.
Project pipeline. Transformers in China was launched in
December 2017. Besides China, VHE also intends to venture
into Europe, US and the rest of Asia with both the Avengers
and Transformer sets. For the newly acquired Jurassic World set,
the schedule is full till 2019. It is slated to tour another two
cities in the US after Chicago in 2018, before it moves on to
Europe and Asia. Cityneon is planning to build a second
travelling set in 2018.
Manageable execution risk with upfront licensing fees.
Execution risk is minimal for the travelling exhibits as the bulk of
the risk is borne by the operator. There is operating risk for only
the permanent set in Las Vegas.
Avengers S.T.A.T.I.O.N.
Transformers
Jurassic World – The Exhibition
Project pipeline and assumption Avengers S.T.A.T.I.O.N
Transformers Jurassic Park
A1*
• Las Vegas
TF1
• China: Dec 2017 –Dec 2019
JW1
• Chicago: 26 May 2017 – 7 Jan 2018
A2
• China till end2019
TF2
• Asia: 3 years
JW1
• 2 cities in USA
A3
• Russia, Moscow:Nov 17
• Asia
• Europe
JW1
• Europe / Asia
A4
• Australia, Melbourne: Mar18
JW2
• Europe
A5
• Asia: 3 years
Source: Company, DBS Bank
Company Guide
Cityneon Holdings
Appendix 1: A look at Company's listed history – what drives its share price?
Source: DBS Bank; Bloomberg Finance L.P.
Company Guide
Cityneon Holdings
Balance Sheet:
Expansion should increase debt levels, but still below 1x net
debt/equity. Cityneon has secured short-term debt of ~S$66m to
fund the acquisition of Jurassic World, building of new exhibits and
upgrading of existing sets. Another ~S$23m long-term debt is for the
acquisition of the office property in Singapore. Despite this, the
group is expected to remain in a <1x net debt/equity position,
barring other unexpected capex outlays.
Share Price Drivers:
Securing new exhibition locations. There are no limits on locations
for its IP rights. Cityneon can venture into any part of the world with
the three existing franchises. Though it makes more business sense to
target the larger cities first, VHE has vast opportunities as there are
>30 large cities globally, each with a population of >10m.
Moving up the value chain for the traditional business. For the
traditional business, the focus would be on the theme park building
projects, which generally command higher margins. Cityneon has
already established a successful track record with the completion of
the multi-million international theme park project in Shanghai, which
gives it a competitive advantage to secure other theme park-related
projects. It now aims to move up the value chain, instead of just
being a contractor.
Key Risks:
Limited track record for VHE. VHE was formed in 2012 and its first
exhibition was held in New York in 2014.
Earnings dependent on number of visitors. The permanent set in Las
Vegas is dependent on the number of visitors. For the travelling sets,
Cityneon will usually receive upfront payment fees from operators to
use its exhibits, but a higher number of visitors would enable the
group to generate higher royalties in excess of the minimum
guarantees on royalties. Furthermore, ancillary sales like merchandise,
photos, food & beverage are also dependent on the number of
visitors.
Low free float of c.30%. Cityneon shares are tightly held, with a
free float of about 30%. Post the general offer, Lucrum1, which is
majority-owned by Chinese parties and led by Executive Chairman &
Group CEO Mr Ron Tan, holds 69%. Ron Tan has a 15.5% stake in
Lucrum1.
Company Background
Cityneon has evolved to become a creator of innovative and
interactive exhibitions, focusing on creating captivating cutting-edge
content, and delivering engaging and interactive exhibitions to
audiences. To date, it has secured three IP rights – with Marvel
Entertainment to use Avengers S.T.A.T.I.O.N. till 2024, HASBRO
Studios for the Transformers franchise till 2023, and Universal Studios
for Jurassic World – The Exhibition, expiring in 2027.
Capital Expenditure
ROE (%)
Forward PE Band (x)
Business Model
Source: Company, DBS Bank
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
2015A 2016A 2017A 2018F 2019F
Capital Expenditure (-)
S$m
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2015A 2016A 2017A 2018F 2019F
Avg: 15.4x
+1sd: 23.2x
+2sd: 31.1x
-1sd: 7.6x
-0.2
9.8
19.8
29.8
39.8
49.8
Feb-14 Feb-15 Feb-16 Feb-17 Feb-18
(x)
Las Vegas (permanent sets)
Ticket sales (incl. processing charges)
Merchandise sales / Photo ops
Sponsorship revenue
Naming rights
Sources of revenue:
Depreciation of the set
Sources of expenditure:
COGS (merchandise)
Rental expense
SG&A/ other opex
Royalties to Marvel/Hasbro (10% of net ticket sales)
Travelling sets (operated by partners)
20% cut of ticket sales
Upfront license fee from partner for usage of set
Merchandise (sales to partner + cut of final sales to customer)
Sources of revenue:
Depreciation of the set
Sources of expenditure:
COGS (merchandise)
SG&A/ other opex(minimal)
Royalties to Marvel/Hasbro (10% of ticket sales)
Ha
lf of th
e 2
0%
go
es to
Ma
rvel o
r Ha
sbro
Risk-reward profile:No execution risk; partner runs the operations
High margins (DBS estimate 25-35% net margin) but lower nominal take
Risk-reward profile:Cityneon takes on execution risk.
Lower margin (DBS estimate of 25% net margin) but higher nominal take
Minimum guarantees reduce risk
of non-performance
Risk-reward profile Cityneon takes on execution risk.
Lower margin (DBS estimate of mid-teen net margin) but higher nominal take.
Risk-reward profile No execution risk; partner runs the operations.
High margins (DBS estimates 30-40% net margin) but lower nominal take.
Company Guide
Cityneon Holdings
Segmental Breakdown
FY Dec 2015A 2016A 2017A 2018F 2019F
Revenues (S$m)
Old Business 96.5 75.0 79.7 80.7 84.5
Victory Hill Exhibitions (VHE)
0.0 21.7 37.1 59.5 69.6
Total 96.5 96.8 117 140 154
Net Profit (S$m) Old Business 0.87 (0.5) 7.43 5.78 7.25
Victory Hill Exhibitions (VHE)
0.0 7.07 9.93 19.0 22.4
Total 0.87 6.54 17.4 24.7 29.6
Net Profit Margins (%) Old Business 0.9 (0.7) 9.3 7.2 8.6
Victory Hill Exhibitions (VHE)
N/A 32.6 26.8 31.9 32.1
Total 0.9 6.8 14.9 17.6 19.2
Income Statement (S$m)
FY Dec 2015A 2016A 2017A 2018F 2019F
Revenue 96.5 96.8 117 140 154
Cost of Goods Sold (73.2) (62.0) (52.9) (69.3) (73.8)
Gross Profit 23.3 34.8 63.8 70.9 80.3
Other Opng (Exp)/Inc (22.2) (26.7) (41.4) (38.1) (42.0)
Operating Profit 1.15 8.09 22.4 32.7 38.3
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.02 (0.1) (0.2) 0.0 0.0
Net Interest (Exp)/Inc (0.4) (0.6) (2.1) (1.5) (1.5)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit 0.79 7.33 20.2 31.2 36.8
Tax 0.04 (0.7) (2.8) (6.1) (6.8)
Minority Interest 0.04 (0.1) 0.0 (0.4) (0.4)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net Profit 0.87 6.54 17.4 24.7 29.6
Net Profit before Except. 0.87 6.54 17.4 24.7 29.6
EBITDA 2.63 12.4 30.1 42.5 48.6
Growth
Revenue Gth (%) 23.7 0.3 20.7 20.1 9.9
EBITDA Gth (%) (34.4) 371.4 142.5 41.1 14.5
Opg Profit Gth (%) (58.8) 606.2 177.6 45.8 17.0
Net Profit Gth (Pre-ex) (%) (62.9) 650.6 165.5 42.6 19.6
Margins & Ratio
Gross Margins (%) 24.1 36.0 54.7 50.5 52.1
Opg Profit Margin (%) 1.2 8.4 19.2 23.3 24.8
Net Profit Margin (%) 0.9 6.8 14.9 17.6 19.2
ROAE (%) 2.3 11.0 22.8 26.0 24.2
ROA (%) 1.2 6.3 9.7 10.3 11.5
ROCE (%) 1.0 7.3 10.5 11.4 12.1
Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0
Net Interest Cover (x) 3.1 12.6 10.7 22.1 25.9
Source: Company, DBS Bank
Full contribution from Jurassic World
Higher contribution from VHE with the acquisition of the third IP
Company Guide
Cityneon Holdings
Quarterly / Interim Income Statement (S$m)
FY Dec 2H15 1H16 2H16 1H17 2H17
Sales 55.8 46.3 50.4 49.7 67.0
Cost of Goods Sold (42.1) (28.3) (33.6) (26.5) (26.4)
Gross Profit 13.7 18.0 16.8 23.3 40.6
Other Operating Expenses (12.5) (12.2) (16.3) (14.5) (27.6)
Non-Operating Income 0.0 0.0 0.0 0.0 0.0
Interest Income 0.02 0.00 0.00 0.00 0.00
Interest Expense (0.2) (0.4) (0.2) (0.5) (1.6) Share of Associates' or JV Income
0.0 (0.1) (0.0) (0.1) (0.1)
Exceptional Gains/(Losses) 0.0 0.0 0.0 0.0 0.0
Pretax Profit 1.5 5.7 1.6 8.6 11.6
Tax 0.0 (1.0) 0.3 (0.8) (1.9)
Minority Interests 0.0 0.0 (0.1) 0.0 (0.0)
Net Profit 1.6 4.7 1.8 7.7 9.6
Growth (y-o-y)
Revenue Gth (%) 13.8 (9.6) 7.3 32.9
Gross Profit Gth (%) 88.2 22.3 29.5 141.4
Net Profit Gth (%) n.m. 16.2 64.3 423.8
Margins
Gross Margins (%) 38.8% 33.3% 46.8% 60.5%
Pretax Profit Margins (%) 12% 3% 17% 17%
Net Profit Margins (%) 10% 4% 16% 14%
Balance Sheet (S$m)
FY Dec 2015A 2016A 2017A 2018F 2019F
Net Fixed Assets 16.0 43.4 80.2 86.9 93.1
Invts in Associates & JVs 0.38 0.26 0.07 0.0 0.0
Other LT Assets 10.7 10.4 39.3 37.9 36.5
Cash & ST Invts 24.3 22.6 17.9 43.7 65.9
Inventory 0.19 0.73 0.68 0.39 0.42
Debtors 26.0 28.7 75.9 49.9 54.9
Other Current Assets 9.95 13.9 23.6 23.6 23.6
Total Assets 87.6 120 238 242 274
ST Debt 11.7 28.2 66.5 66.5 66.5
Creditor 23.8 19.6 44.6 19.1 20.4
Other Current Liab 0.97 1.72 1.47 6.63 7.31
LT Debt 0.0 0.04 23.0 23.0 23.0
Other LT Liabilities 1.10 0.81 18.9 18.9 18.9
Shareholder’s Equity 49.6 69.3 82.9 108 137
Minority Interests 0.45 0.31 0.30 0.65 1.03
Total Cap. & Liab. 87.6 120 238 242 274
Non-Cash Wkg. Capital 11.4 22.0 54.1 48.2 51.2
Net Cash/(Debt) 12.6 (5.7) (71.6) (45.9) (23.6)
Debtors Turn (avg days) 84.4 103.2 163.5 163.7 124.1
Creditors Turn (avg days) 98.2 137.6 260.3 195.3 113.6
Inventory Turn (avg days) 1.3 2.9 5.7 3.3 2.3
Asset Turnover (x) 1.3 0.9 0.7 0.6 0.6
Current Ratio (x) 1.7 1.3 1.0 1.3 1.5
Quick Ratio (x) 1.4 1.0 0.8 1.0 1.3
Net Debt/Equity (X) CASH 0.1 0.9 0.4 0.2
Net Debt/Equity ex MI (X) CASH 0.1 0.9 0.4 0.2
Capex to Debt (%) 38.8 104.0 47.4 16.8 16.8
Z-Score (X) 5.2 4.4 4.0 4.0 4.0
Source: Company, DBS Bank
Debt to fund acquisition of Jurassic World, building of new exhibits and upgrading of existing sets
Acquisition of office property
Company Guide
Cityneon Holdings
Cash Flow Statement (S$m)
FY Dec 2015A 2016A 2017A 2018F 2019F
Pre-Tax Profit 0.79 7.33 20.2 31.2 36.8
Dep. & Amort. 1.47 4.44 7.84 9.73 10.3
Tax Paid (0.2) (0.4) (1.0) (1.0) (6.1)
Assoc. & JV Inc/(loss) 0.0 0.12 0.19 0.0 0.0
Chg in Wkg.Cap. 0.80 (9.7) (43.4) 0.75 (3.7)
Other Operating CF 0.07 0.18 5.12 0.0 0.0
Net Operating CF 2.89 1.92 (11.0) 40.7 37.2
Capital Exp.(net) (4.5) (29.4) (42.4) (15.0) (15.0)
Other Invts.(net) (1.1) 0.0 0.0 0.0 0.0
Invts in Assoc. & JV (0.4) 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF (10.0) (0.9) 0.15 0.0 0.0
Net Investing CF (16.0) (30.3) (42.3) (15.0) (15.0)
Div Paid (0.9) 0.0 0.0 0.0 0.0
Chg in Gross Debt (3.1) 15.8 39.2 0.0 0.0
Capital Issues 15.7 12.5 0.0 0.0 0.0
Other Financing CF 0.87 (0.6) 11.8 0.0 0.0
Net Financing CF 12.6 27.7 51.0 0.0 0.0
Currency Adjustments 0.85 0.16 (1.0) 0.0 0.0
Chg in Cash 0.39 (0.5) (3.4) 25.7 22.2
Opg CFPS (S cts) 0.95 4.76 13.2 16.3 16.7
Free CFPS (S cts) (0.7) (11.2) (21.9) 10.5 9.09
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Lee Keng LING
S.No.Date of
Report
Closing
Price
12-mth
Target
Price
Rat ing
1: 14 Mar 17 0.80 1.26 BUY
2: 15 May 17 0.90 1.26 BUY
3: 30 May 17 0.94 1.23 BUY
4: 21 Sep 17 1.14 1.45 BUY
Note : Share price and Target price are adjusted for corporate actions.
1
2
3
4
0.74
0.84
0.94
1.04
1.14
1.24
Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18
S$
Assume 9 sets in total for 2018 and 2019
Part finance acquisition of Jurassic World and to build new sets
Company Guide
Cityneon Holdings
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 28 Feb 2018 17:40:47 (SGT) Dissemination Date: 28 Feb 2018 17:49:25 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated
corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)
redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or
warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without
notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific
investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees
only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial
advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit)
arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not
to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons
associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have
positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and
other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may
not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to
update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED
UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.
Company Guide
Cityneon Holdings
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s)
primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the
issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real
estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the
management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or
his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has
procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of
research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment
banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment
banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the
DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates do not
have a proprietary position in the securities recommended in this report as of 31 Jan 2018.
2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research
Report.
Compensation for investment banking services:
3. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past
12 months for investment banking services from Cityneon Holdings as of 31 Jan 2018.
4. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document
should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced:
5. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other
investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
ed: CK / sa:YM, PY
BUY (Upgrade from HOLD)
Last Traded Price ( 14 Dec 2017): S$1.43 (STI : 3,416.94)
Price Target 12-mth: S$1.80 (26% upside) (Prev S$2.26)
Analyst Andy Sim +65 6682 3718 [email protected] Alfie YEO +65 6682 3717 [email protected]
What’s New • Upgrade to BUY; accumulate on hopes of a better 2018
• Project 20% profit growth in FY18F on better
sentiment, post product rationalisation
• Share price at 6-year low and already priced in weak
operating environment
• Despite call upgrade, we cut our TP to S$1.80
Price Relative
Forecasts and Valuation FY Dec (US$ m) 2016A 2017F 2018F 2019F
Revenue 402 385 415 449 EBITDA 54.5 46.6 53.9 63.0 Pre-tax Profit 39.2 34.9 41.3 49.4 Net Profit 26.2 23.4 28.1 33.6 Net Pft (Pre Ex.) 28.2 23.4 28.1 33.6 Net Pft Gth (Pre-ex) (%) 83.5 (16.8) 19.8 19.7 EPS (S cts) 5.77 5.17 6.19 7.41 EPS Pre Ex. (S cts) 6.21 5.17 6.19 7.41 EPS Gth Pre Ex (%) 84 (17) 20 20 Diluted EPS (S cts) 5.77 5.17 6.19 7.41 Net DPS (S cts) 3.12 2.86 3.41 3.70 BV Per Share (S cts) 44.4 46.4 49.8 53.8 PE (X) 24.8 27.7 23.1 19.3 PE Pre Ex. (X) 23.1 27.7 23.1 19.3 P/Cash Flow (X) 10.9 17.1 20.0 16.5 EV/EBITDA (X) 11.7 13.5 11.6 9.8 Net Div Yield (%) 2.2 2.0 2.4 2.6 P/Book Value (X) 3.2 3.1 2.9 2.7 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 11.8 11.4 12.9 14.3 Earnings Rev (%): (32) (30) N/A Consensus EPS (S cts): 5.4 7.5 8.2 Other Broker Recs: B: 1 S: 0 H: 2
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P
Position for a better year ahead
Thesis: Turning the corner; upgrade to BUY. Delfi’s share price is
at 6-year low and has slumped by 36% YTD on the back of its
disappointing performance. This was due to softer sentiment in
Indonesia and product-rationalisation initiatives. Looking ahead,
we believe its share price could have priced in the current
subdued situation and should improve as we move into FY18F.
This is on the back of: (i) low-base effect, coupled with expected
improvement in sentiment in 2018; (ii) nearing end of
production rationalisation efforts; and (iii) lower raw material
costs.
Where we differ: Worth a re-look and accumulate despite
current weak performance. Despite Delfi’s current weak
operating performance, we believe the counter is worth a re-
look. While the upcoming 4Q17 results, expected to be released
in Feb 2018, may not register a significant turnaround, we
believe it should show a bottoming-out trend at worst.
Potential catalyst: Better-than-expected operating performance
could set the stage for a meaningful share price recovery after a
couple of years of dismal performance. We now project
earnings growth of 20% each year in FY18F/19F, marking a
reverse from our previous forecast of profit contraction. Further
upward revision could re-rate share price. Valuation:
Our TP drops to S$1.80 as we slash our forecasts by 32%/
30%, coupled with rolling over our PE valuations to
FY18F/19F, but still based on 26x PE, in line with regional
peers.
Key Risks to Our View:
Slower-than-expected earnings recovery. Our thesis is premised
on expectations of better prospects in 2018. A slower-than-
expected earnings recovery arising from higher raw material
costs, a weaker rupiah, investment costs, or continued erosion
in share price could render our thesis void. At A Glance
Issued Capital (m shrs) 611
Mkt. Cap (S$m/US$m) 874 / 649
Major Shareholders (%)
Berlian Enterprises Ltd 50.5
Commonwealth Bank of Austr 16.5
Standard Life Aberdeen Plc 7.6
Free Float (%) 37.8
3m Avg. Daily Val (US$m) 0.70
ICB Industry : Consumer Goods / Food Producers
DBS Group Research . Equity
18 Dec 2017
Singapore Company Guide
Delfi Ltd Version 7 | Bloomberg: DELFI SP | Reuters: DELF.SI Refer to important disclosures at the end of this report
31
51
71
91
111
131
151
171
191
211
1.2
1.7
2.2
2.7
3.2
3.7
4.2
Dec-13 Dec-14 Dec-15 Dec-16 Dec-17
Relative IndexS$
Delfi Ltd (LHS) Relative STI (RHS)
Company Guide
Delfi Ltd
WHAT’S NEW
Position for a better year ahead
Upgrade to BUY, share price at 6-year low: Despite a dismal
operating performance in 3Q17 and YTD, we believe 2018
should turn out to be a better year ahead for Delfi. As we
move into the finishing months of 2017, we advocate
accumulating the counter and are upgrading it to BUY, with a
revised TP of S$1.80.
Its share price has dipped by 36% YTD on the back of dismal
operating performance due to softer-than-expected
sentiment and the company’s product-rationalisation efforts.
Whilst we slash our forecasts by 30%-32% for FY17F/18F,
we believe operating performance should have bottomed and
looks to be on the recovery path.
We recognise that operating performance may not show a
rapid improvement in the closing quarters of 2017, but its
share price is at a 6.5-year low and with the
underperformance this year, we believe it could be time to
accumulate.
What caused the dismal performance in share price this year?
In general, its operating performance has been weak as seen
from 1Q17 to 3Q17 results. The weak performance was due
to (i) weak consumer environment in Indonesia; and (ii)
impact of the group’s ongoing production-rationalisation
exercise to remove underperforming SKUs (stock keeping
units).Thus, sales slid by 5% y-o-y in for 9M17, while net
profit came in at US$18.2m, down by 19% y-o-y. In fact, if
not for a recognition of US$4.6m gain on the back of the
divestment of 50% stake in PT Ceres Meiji Indotama
Indonesia recognised in 2Q17, 9M17 headline net profit
would have been worse. Also, 1H17 also saw a lower interim
dividend of 1.22 UScts, down from 1.36 UScts in 1H16, due
lower profits.
SKU rationalisation almost done; continued product
development.
Delfi’s share price has declined by c.32% YTD, arising from a
weaker-than-expected operating performance. Going
forward, management has indicated that its strategy to
rationalise its SKUs is almost done and is ready to continue its
trend to launch new products. That said, it will also be
cognisant of changing customer preferences and look
towards relaunching new products, although not at the rate
of 25-30 products a year seen prior to 2014.
Looking forward - improvement in sentiment in 2018.
Consumer F&B companies in Indonesia had a relatively
disappointing 2017 YTD, which possibly was due to various
factors such as a prolonged weak commodity price
environment, higher electricity tariff for households, lower
minimum wage increase, tax reform and slow government
spending. Looking ahead, our Indonesia consumer team
expects a stronger dose of fiscal stimulus that can lead to
more efforts in supporting consumers’ purchasing power
ahead of Indonesia’s presidential election (PE) in 2019. As
such, this could bode well for companies like Delfi which
derives a majority of its revenue from Indonesia.
Softer raw material costs could boost margins. In 2016,
consumer companies, particularly F&B, has benefited from
margin expansion, particularly due to the benign raw material
environment seen back in 2015. There tends to be a lagged
effect for raw material price movements. Looking into 2018,
we expect a repeat of the events in 2016 due again to the
generally subdued prices. As can be seen, the prices of several
soft commodities have decreased YTD (as of time of writing,
such as sugar (-26%), cocoa (-12%) and palm oil (-18%).
Notwithstanding the above, we remain cognisant that
packaging materials prices could chip some shine off the
benefits of soft commodities prices. Overall, we believe the
net impact should still be positive for companies like Delfi.
Upgrade to BUY; TP: S$1.80
Look towards 2018. We revise our forecasts down by 30-
32% to align with the YTD performance and now expect
FY17F EPS to register a contraction of -17% on the back of
lower sales, coupled with higher operating expenses. That
said, we believe the weak performance for 2017 should soon
be a thing of the past and investors should look towards the
performance in FY18F. We are projecting earnings to reverse
and post growth of 20% each year in FY18F and FY19F.
Worth a re-look. Share price at 6-year low, TP: S$1.80.
Having said all that, we believe Delfi is worth a re-look and
accumulating given its share price is at 6-year low, retreating
by 36% YTD. Delfi also has a strong distribution network
within Indonesia, and is still the market leading in chocolate
confectionery despite recent weak operating figures. We
upgrade our recommendation to BUY, from HOLD, with a
revised TP of S$1.80 that implies 26% potential upside.
Risks: Illiquidity in shares; turnaround in operations. Our
positive thesis is on expectations that we are past the worst
for Delfi, and 4Q17 should show a bottoming-out trend and
2018 will turn out better. In the event that this fails to
materialise, its share price could continue to de-rate. Its
shares are relatively illiquid and hence there are days in which
there could be unexplained significant movements.
Company Guide
Delfi Ltd
Sugar: down 26% YTD Cocoa: -11% YTD
Source: ThomsonReuters, DBS Bank Source: ThomsonReuters, DBS Bank
CPO: down 18% YTD Milk Powder: down by 32% YTD
Source: ThomsonReuters, DBS Bank Source: ThomsonReuters, DBS Bank
+69% +26%
Page 4
Company Guide
Delfi Ltd
Peers valuation comparison
Company Trade
currency
Market Cap
(US$m) Px Last PE
(Act) PE (Yr
1) PE(Yr
2) EV/EBITDA
(LTM) P/BV (x)
P/Sales (x)
ROE (%)
Operating Margin
(%)
Net Margin
(%)
Dividend Yield (%)
Net Gearing
(%)
Peers
Delfi Ltd SGD 650 1.43 24.8x 27.7x 23.1x 12.4x 3.1x 1.7x 13% 9.8% 6.5% 2.1% -7%
Unilever Indonesia Tbk PT IDR 29,298 52125 57.9x 54.7x 48.9x 40.0x 61.9x 9.7x 136% 21.7% 16.0% 1.7% 43%
Mayora Indah Tbk PT IDR 4,117 2500 40.4x 40.8x 34.3x 22.2x 8.5x 2.9x 22% 12.6% 7.4% 0.8% 44%
Gudang Garam Tbk PT IDR 11,137 78575 20.2x 20.3x 18.0x 12.3x 3.8x 1.9x 17% 13.3% 8.8% 3.3% 46% Indofood Sukses Makmur Tbk PT IDR 4,819 7450 16.1x 15.0x 13.9x 8.1x 2.1x 0.9x 14% 12.4% 5.7% 3.2% 81% Indofood CBP Sukses Makmur Tbk PT IDR 7,495 8725 26.7x 26.3x 24.2x 16.2x 5.4x 2.9x 20% 14.1% 10.4% 1.8% -31% Nippon Indosari Corpindo Tbk PT IDR 574 1260 36.6x 38.2x 24.3x 20.0x 4.5x 3.1x 20% 17.6% 11.1% 1.1% 31%
Jollibee Foods Corp PHP 5,297 246 39.0x 38.7x 33.9x 22.8x 6.9x 2.1x 18% 5.7% 5.4% 0.9% -14%
Universal Robina Corp PHP 6,606 151 21.8x 29.9x 27.6x 16.2x 4.3x 3.0x 20% 14.9% 13.6% 1.1% 35%
Nestle (Malaysia) Bhd MYR 5,743 100 40.5x 35.7x 32.8x 26.6x 34.8x 4.5x 98% 15.8% 12.6% 2.7% 39%
Avg (total) 33.2x 33.3x 28.7x
Avg (ex-Unilever) 30.2x 30.6x 26.1x
Thai Beverage PCL SGD 18,102 0.97 17.0x 20.1x 19.2x 19.6x 4.6x 3.1x 27% 14.5% 18.2% 2.8% 27%
BreadTalk Group Ltd SGD 344 1.64 21.8x 23.4x 21.9x 5.8x 3.5x 0.8x 9% 4.8% 1.9% 1.5% 48%
JUMBO Group Ltd SGD 281 0.59 26.2x 21.3x 19.9x 14.7x 5.8x 2.6x 22% 12.2% 10.0% 1.7% -74%
21.7x 21.6x 20.3x
Source: ThomsonReuters, DBS Bank (Prices as of 18 Dec 2017)
Company Guide
Delfi Ltd
Company Guide
Delfi Ltd
Quarterly / Interim Income Statement (US$m)
FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq
Revenue 86.6 100 87.9 1.5 (12.3)
Cost of Goods Sold (55.8) (66.9) (57.4) 2.8 (14.2)
Gross Profit 30.7 33.3 30.5 (0.7) (8.4)
Other Oper. (Exp)/Inc (20.4) (19.4) (23.8) 16.7 22.5
Operating Profit 10.4 13.9 6.75 (34.9) (51.5)
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - -
Associates & JV Inc (0.3) 0.0 (0.6) (92.7) nm
Net Interest (Exp)/Inc (1.0) (0.8) (0.7) 31.9 15.4
Exceptional Gain/(Loss) 0.0 0.0 0.0 - -
Pre-tax Profit 9.07 13.1 5.47 (39.7) (58.3)
Tax (3.1) (3.8) (2.2) (31.4) (43.6)
Minority Interest 0.0 0.0 0.0 - -
Net Profit 5.93 9.29 3.32 (44.1) (64.3)
Net profit bef Except. 5.93 9.29 3.32 (44.1) (64.3)
EBITDA 12.2 16.7 9.02 (26.2) (45.8)
Margins (%)
Gross Margins 35.5 33.2 34.7
Opg Profit Margins 12.0 13.9 7.7
Net Profit Margins 6.9 9.3 3.8
Source of all data: Company, DBS Bank
Company Guide
Delfi Ltd
CRITICAL DATA POINTS TO WATCH
Critical Factors Indonesia macro consumption the key driver. Revenue growth is tied to Indonesia’s consumer spending since Indonesia sales accounted for 72% of FY16 revenue. The combination of multiple factors: a prolonged weak commodity price environment, higher electricity tariff for households, lower minimum wage increase, tax reform and slow government spending led to a slowdown in households’ consumption YTD 2017. An improvement in consumer confidence would aid top-line recovery.
Input costs contribute significantly to cost of sales. Key inputs
are cocoa, sugar, milk, palm oil and packaging, all of which
contribute over 75% to cost of sales. We estimate that cocoa,
milk and sugar each makes up 30%, 15% and 15% of total
costs respectively. Commodity inputs are largely imported into
Indonesia and are mainly paid in US dollars, while finished
products are sold mainly in Indonesia in rupiah. About 70% of
the group’s COGS are denominated in US dollars.
Rupiah movements can impact gross margins. The depreciation
of the rupiah against the US dollar has led to significantly higher
input costs in 2015. Average gross margins were over 30%
previously but were below this level in middle of 2015 due to
the weak rupiah. This has, however, recovered in 2016 and
2017 given the stable rupiah and management’s cost-
containment initiatives. Our sensitivity analysis shows that every
5% depreciation of the rupiah against the US dollar would lead
to a 1.1% fall in net profit. However, operating margins have
weakened since 4Q16 (YTD) given investments in its distribution
channels.
Strong market position. Delfi still has a dominant market share
in Indonesia of about 50%. Distribution channels cover both
general and modern trade extensively. Delfi's competitive
advantage is in the general trade, as it has a first-mover
advantage and considerable reach into suburban and rural
areas. Global players have already been competing in the
market but mainly in the modern channels.
Philippines positive but still relatively small. Regional markets,
mainly comprising the Philippines, contribute close to 30% of
sales, but insignificantly to EBITDA. Delfi's market share stands
at about 10% and it is still investing into the market, including
its brand portfolio and its route-to-market/distribution channels.
Improvements in operating efficiencies and profitability will
contribute to earnings growth to some extent.
Rupiah assumption
BC vol growth (%)
BC ASP growth (%)
BC gross margins
Source: Company, DBS Bank
13000 13300 13400 13500 13500
0.0
1947.9
3895.7
5843.6
7791.4
9739.3
11687.1
13635.0
2015A 2016A 2017F 2018F 2019F
-15
-1
-5
76
-16.5
-11.8
-7.0
-2.3
2.4
7.1
2015A 2016A 2017F 2018F 2019F
3
5
0
5 5
0.00
1.02
2.04
3.06
4.08
5.10
2015A 2016A 2017F 2018F 2019F
29.8
34.8 34.7 34.6 34.4
0.0
7.0
14.0
21.1
28.1
35.1
2015A 2016A 2017F 2018F 2019F
Company Guide
Delfi Ltd
Appendix 1: A look at Company's listed history – what drives its share price?
Comments
Delfi’s share price looks to be closely correlated to forward mean EPS. In our view, this in turn is contingent upon sales, gross margins, operating margins.
Source: ThomsonReuters, DBS Bank
Comments
From the chart, we noted that operating margins precede movements in share price by about one to two quarters. In actual terms, the time lead could be shorter as results are announced about a month after the close of the quarter.
That said, we believe operating margins for the group could be a share price driver.
The recent slump in share price could provide an opportunity, as we believe operating margins could be on the mend. We project margins to be 10.8%/ 11.8% in FY18F/19F, up from FY17F’s 10% and a low of 7.7% seen in 3Q17.
Source: ThomsonReuters, DBS Bank
Company Guide
Delfi Ltd
Balance Sheet:
Net cash provides buffer for inorganic opportunities. Post the
sale of its Cocoa Ingredients to Barry Callebaut, Delfi is a pure
consumer goods-focused company. It is in a net cash position,
from a net debt position prior to the disposal. This could serve
as a war chest for Delfi to undertake inorganic growth
opportunities, particularly when economic conditions
deteriorate further, thus providing more options. Even with the
capital reduction of US$60m (completed in June 2016), the
group remains and will still be in a net cash position, barring
any significant investments.
Share Price Drivers:
Potential M&A opportunities. The acquisition of rivals in key
markets such as Indonesia and the Philippines will help the
company defend and gain market share, thereby enhancing its
position in the chocolate confectionery business.
Revenue growth in key market: Indonesia. A sustained top-line
growth, coupled with recovery in operating margins could
provide an upward push to Delfi's stock price as investors
continue to buy into Indonesia's consumption growth story.
Key Risks:
Input costs. Commodity price increases particularly in cocoa,
sugar and crude palm oil may erode margins, if there is
insufficient lead time for the company to increase product
prices.
Slowdown in the Indonesian economy. As over 70% of
revenue originates from Indonesia, a slowdown in Indonesia's
economy will affect sales and consumption. A slower
Indonesian economy, including lower subsidies, wages,
disposable incomes, etc., will give rise to earnings risks.
Currency risk. The company reports its earnings in US dollars
with a significant portion of its input costs also denominated in
US dollars. Revenues are denominated largely in rupiah. The
rupiah’s depreciation will erode margins if ASPs remain
unchanged.
Company Background
Delfi manufactures, markets and distributes confectionery
products. The company has a broad brand portfolio that
extends across multiple product categories and different price
points. Its key markets are Indonesia, the Philippines, Singapore
and Malaysia. Its brands command approximately 50% market
share in Indonesia.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
0.9
1.0
1.0
1.1
1.1
1.2
1.2
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
0.45
2015A 2016A 2017F 2018F 2019F
Gross Debt to Equity (LHS) Asset Turnover (RHS)
0.0
5.0
10.0
15.0
20.0
25.0
2015A 2016A 2017F 2018F 2019F
Capital Expenditure (-)
US$m
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
2015A 2016A 2017F 2018F 2019F
Avg: 51.4x
+1sd: 73.9x
+2sd: 96.5x
-1sd: 28.9x
-2sd: 6.3x5.7
25.7
45.7
65.7
85.7
105.7
Dec-13 Dec-14 Dec-15 Dec-16
(x)
Avg: 5.08x
+1sd: 5.97x
+2sd: 6.87x
-1sd: 4.18x
-2sd: 3.28x
2.4
3.4
4.4
5.4
6.4
7.4
Dec-13 Dec-14 Dec-15 Dec-16
(x)
Company Guide
Delfi Ltd
Key Assumptions
FY Dec 2015A 2016A 2017F 2018F 2019F
Rupiah assumption 13,000 13,300 13,400 13,500 13,500
BC vol growth (%) (15.0) (1.0) (5.0) 7.00 6.00
BC ASP growth (%) 3.00 5.00 0.0 5.00 5.00
BC gross margins 29.8 34.8 34.7 34.6 34.4
Segmental Breakdown
FY Dec 2015A 2016A 2017F 2018F 2019F
Revenues (US$m)
Indonesia 296 296 283 305 330
Regional markets 110 107 102 110 119
Total 406 402 385 415 449
EBITDA (US$m)
Indonesia 39.0 54.2 46.4 53.6 62.8
Regional markets 0.44 0.53 0.51 0.55 0.59
Total 39.5 54.8 46.9 54.2 63.3
EBITDA Margins (%)
Indonesia 13.2 18.4 16.4 17.6 19.0
Regional markets 0.4 0.5 0.5 0.5 0.5
Total 9.7 13.6 12.2 13.0 14.1
Income Statement (US$m)
FY Dec 2015A 2016A 2017F 2018F 2019F
Revenue 406 402 385 415 449
Cost of Goods Sold (285) (262) (251) (272) (294)
Gross Profit 121 140 134 144 154
Other Opng (Exp)/Inc (89.2) (94.1) (95.0) (98.9) (101)
Operating Profit 31.6 45.6 38.6 44.9 53.0
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.06 (0.3) (0.3) (0.3) (0.3)
Net Interest (Exp)/Inc (4.2) (4.1) (3.3) (3.3) (3.3)
Exceptional Gain/(Loss) (20.1) (2.0) 0.0 0.0 0.0
Pre-tax Profit 7.39 39.2 34.9 41.3 49.4
Tax (12.1) (13.1) (11.5) (13.2) (15.8)
Minority Interest 0.01 0.0 0.0 0.0 0.0
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net Profit (4.7) 26.2 23.4 28.1 33.6
Net Profit before Except. 15.3 28.2 23.4 28.1 33.6
EBITDA 39.5 54.5 46.6 53.9 63.0
Growth
Revenue Gth (%) (19.5) (0.9) (4.3) 8.0 8.0
EBITDA Gth (%) (52.1) 37.9 (14.5) 15.6 17.0
Opg Profit Gth (%) (57.4) 44.2 (15.4) 16.4 18.1
Net Profit Gth (Pre-ex) (%) (69.4) 83.5 (16.8) 19.8 19.7
Margins & Ratio
Gross Margins (%) 29.8 34.8 34.7 34.6 34.4
Opg Profit Margin (%) 7.8 11.3 10.0 10.8 11.8
Net Profit Margin (%) (1.2) 6.5 6.1 6.8 7.5
ROAE (%) (1.8) 11.8 11.4 12.9 14.3
ROA (%) (1.1) 7.2 6.8 7.8 8.8
ROCE (%) (5.7) 10.1 9.5 10.7 11.9
Div Payout Ratio (%) N/A 54.0 55.3 55.0 50.0
Net Interest Cover (x) 7.5 11.2 11.6 13.5 15.9
Source: Company, DBS Bank
Company Guide
Delfi Ltd
Quarterly / Interim Income Statement (US$m)
FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017
Revenue 86.6 106 93.1 100 87.9
Cost of Goods Sold (55.8) (65.0) (62.4) (66.9) (57.4)
Gross Profit 30.7 40.6 30.7 33.3 30.5
Other Oper. (Exp)/Inc (20.4) (31.1) (21.5) (19.4) (23.8)
Operating Profit 10.4 9.52 9.22 13.9 6.75
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc (0.3) (0.1) 0.24 0.0 (0.6)
Net Interest (Exp)/Inc (1.0) (1.0) (0.8) (0.8) (0.7)
Exceptional Gain/(Loss) 0.0 (2.0) 0.0 0.0 0.0
Pre-tax Profit 9.07 6.42 8.67 13.1 5.47
Tax (3.1) (2.8) (3.0) (3.8) (2.2)
Minority Interest 0.0 0.0 0.0 0.0 0.0
Net Profit 5.93 3.65 5.63 9.29 3.32
Net profit bef Except. 5.93 5.65 5.63 9.29 3.32
EBITDA 12.2 12.8 12.2 16.7 9.02
Growth
Revenue Gth (%) (18.6) 22.0 (11.8) 7.6 (12.3)
EBITDA Gth (%) (17.0) 4.4 (4.2) 36.3 (45.8)
Opg Profit Gth (%) (19.8) (8.1) (3.1) 50.8 (51.5)
Net Profit Gth (Pre-ex) (%) (27.0) (4.7) (0.5) 65.2 (64.3)
Margins
Gross Margins (%) 35.5 38.4 33.0 33.2 34.7
Opg Profit Margins (%) 12.0 9.0 9.9 13.9 7.7
Net Profit Margins (%) 6.9 3.5 6.0 9.3 3.8
Balance Sheet (US$m)
FY Dec 2015A 2016A 2017F 2018F 2019F
Net Fixed Assets 117 127 135 143 150
Invts in Associates & JVs 2.95 2.77 2.49 2.20 1.89
Other LT Assets 9.36 10.1 10.1 10.1 10.1
Cash & ST Invts 120 67.7 74.6 77.2 84.1
Inventory 59.6 54.7 55.0 59.4 64.1
Debtors 56.3 61.8 55.0 59.4 64.1
Other Current Assets 23.3 18.5 18.5 18.5 18.5
Total Assets 388 342 351 370 393
ST Debt 59.5 44.2 44.2 44.2 44.2
Creditor 25.9 34.7 24.1 26.0 28.1
Other Current Liab 30.7 39.3 49.4 51.1 53.7
LT Debt 15.2 9.58 9.58 9.58 9.58
Other LT Liabilities 14.1 13.3 13.3 13.3 13.3
Shareholder’s Equity 242 201 210 226 244
Minority Interests 0.12 0.11 0.11 0.11 0.11
Total Cap. & Liab. 388 342 351 370 393
Non-Cash Wkg. Capital 82.5 61.0 55.0 60.1 65.0
Net Cash/(Debt) 44.9 14.0 20.9 23.4 30.3
Debtors Turn (avg days) 62.2 53.6 55.4 50.2 50.2
Creditors Turn (avg days) 38.1 43.7 44.1 34.8 34.7
Inventory Turn (avg days) 87.1 82.4 82.4 79.5 79.3
Asset Turnover (x) 0.9 1.1 1.1 1.2 1.2
Current Ratio (x) 2.2 1.7 1.7 1.8 1.8
Quick Ratio (x) 1.5 1.1 1.1 1.1 1.2
Net Debt/Equity (X) CASH CASH CASH CASH CASH
Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH
Capex to Debt (%) 29.4 30.4 31.6 31.6 31.6
Z-Score (X) 4.6 5.0 4.9 4.9 4.9
Source: Company, DBS Bank
Includes gain from divestment of 50% stake in PT Ceres Meiji Indotama Indonesia (US$4.6m) in 2Q17
Company Guide
Delfi Ltd
Cash Flow Statement (US$m)
FY Dec 2015A 2016A 2017F 2018F 2019F
Pre-Tax Profit 7.39 39.2 34.9 41.3 49.4
Dep. & Amort. 7.85 9.18 8.32 9.29 10.3
Tax Paid (19.7) (13.5) (1.4) (11.5) (13.2)
Assoc. & JV Inc/(loss) (0.1) 0.27 0.28 0.29 0.31
Chg in Wkg.Cap. 24.8 18.3 (4.2) (6.8) (7.4)
Other Operating CF 23.0 6.12 0.0 0.0 0.0
Net Operating CF 43.3 59.7 38.0 32.5 39.4
Capital Exp.(net) (22.0) (16.4) (17.0) (17.0) (17.0)
Other Invts.(net) (0.3) (0.7) 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF (38.8) 0.0 0.0 0.0 0.0
Net Investing CF (61.1) (17.1) (17.0) (17.0) (17.0)
Div Paid (34.2) (8.3) (14.1) (13.0) (15.4)
Chg in Gross Debt 5.91 (24.7) 0.0 0.0 0.0
Capital Issues 0.0 (60.0) 0.0 0.0 0.0
Other Financing CF (8.0) (2.2) 0.0 0.0 0.0
Net Financing CF (36.3) (95.2) (14.1) (13.0) (15.4)
Currency Adjustments 1.70 0.81 0.0 0.0 0.0
Chg in Cash (52.4) (51.8) 6.90 2.51 6.95
Opg CFPS (S cts) 4.07 9.12 9.30 8.67 10.3
Free CFPS (S cts) 4.70 9.55 4.64 3.41 4.94
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Andy Sim
Alfie YEO
S.No.Date of
Report
Closing
Price
12-mth
Target
Price
Rat ing
1: 24 Feb 17 2.33 2.26 HOLD
Note : Share price and Target price are adjusted for corporate actions.
1
1.21
1.41
1.61
1.81
2.01
2.21
2.41
Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17
S$
Company Guide
Delfi Ltd
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 18 Dec 2017 18:12:14 (SGT) Dissemination Date: 18 Dec 2017 18:34:19 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated
corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)
redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or
warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without
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associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have
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Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may
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The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
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UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
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assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
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Company Guide
Delfi Ltd
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COMPANY-SPECIFIC / REGULATORY DISCLOSURES
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ed: JS / sa: xxx, PY
BUY Last Traded Price ( 10 Nov 2017): S$2.72 (STI : 3,420.10)
Price Target 12-mth: S$3.20 (18% upside) (Prev S$3.20)
Analyst Singapore Research Team [email protected] Sue Lin LIM +65 8332 6843 [email protected]
What’s New 3Q17 earnings above expectations; at an inflection
point with improved loan yields and loan growth
Raising FY17-19F earnings on higher NIM and loan
growth; potential uplift in dividends to c.5% yield
Beneficiary of rising interest rates and macro
environment, albeit smaller impact vs banks; sustained
improvement in earnings traction should support share
price momentum; M&A possibility is a bonus
Maintain BUY, TP of S$3.20
Price Relative
Forecasts and Valuation FY Dec (S$m) 2016A 2017F 2018F 2019F
Pre-prov. Profit 65.1 97.4 108 109 Net Profit 53.1 80.5 88.5 89.4 Net Pft (Pre Ex.) 53.1 80.5 88.5 89.4 Net Pft Gth (Pre-ex) (%) (27.2) 51.8 9.8 1.1 EPS (S cts) 12.0 18.1 19.8 20.1 EPS Pre Ex. (S cts) 12.0 18.1 19.8 20.1 EPS Gth Pre Ex (%) (27) 51 10 1 Diluted EPS (S cts) 12.0 18.1 19.8 20.1 PE Pre Ex. (X) 22.7 15.0 13.7 13.6 Net DPS (S cts) 9.00 12.1 13.3 13.4 Div Yield (%) 3.3 4.4 4.9 4.9 ROAE Pre Ex. (%) 3.1 4.7 5.1 5.1 ROAE (%) 3.1 4.7 5.1 5.1 ROA (%) 0.4 0.6 0.7 0.4 BV Per Share (S cts) 382 386 393 400 P/Book Value (x) 0.7 0.7 0.7 0.7 Earnings Rev (%): 5 13 9 Consensus EPS (S cts): 17.0 18.0 18.0
Other Broker Recs: B: 1 S: 0 H: 0
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.
Building momentum
Beneficiary of better macroeconomic environment; M&A potential.
Hong Leong Finance (HLF) has a unique role to play in the Small
Medium Enterprises lending scene in Singapore as the largest
financial company (finco) locally. We believe HLF will benefit from the
better macroeconomic environment as we have started to see better
loan growth and loan yields returning in 3Q17, in line with higher
systemic loan growth and better interest rate outlook. The strong
9M17 earnings prompted us to raise FY17F earnings by 5% on higher
NIM and loan growth. On a positive outlook on the macro front and
interest rate environment, we also expect loan growth and NIM to
improve, hence raising FY18-19F earnings by 5-13% p.a. Sustained
improvement in earnings traction should be positive to share price.
Elsewhere, we believe that with the MAS’ rule relaxation on fincos in
mid-Feb 2017, which lifted the limits on uncollateralised loans as a
percentage of capital funds (from 10% to 25% of capital funds) and
liberalised its existing policy to allow a foreign takeover of a finco
(subject to certain conditions), opens new opportunities for HLF.
Where we differ. We are the only broker covering the stock. Post
MAS’ rule relaxation, all three fincos have re-rated on possibility of
M&A. However, we believe HLF’s current share price has yet to price
in this year’s earnings recovery, as well as its strength as the largest
finco in Singapore.
Potential catalyst. Sustained improvement in earnings profile should
support share price momentum. Additional catalysts would include
further relaxation of funding and lending rules, as well as M&A
newsflow. Under a M&A scenario, which is a bonus for the company,
we believe HLF should attract a minimum 1x BV or S$3.80 as current
shareholders are unlikely to sell out at lower valuation given its
prospects under the expected new regulatory regime.
Valuation:
Maintain BUY, TP of S$3.20. Our TP of S$3.20 is derived from the
Gordon Growth Model with 5% ROE, 2% long-term growth and 6%
cost of equity, implying c.0.8x FY17F BV. Despite a 5-13% earnings
revision, we had previously already imputed prospects of HLF reaching
an ROE level of 5%. The 3Q17 results has proven so.
Key Risks to Our View:
As a smaller financial institution, and with exposure to riskier business
lending, HLF may be more prone to asset-quality upsets should the
economic cycle deteriorate. Also, HLF is more sensitive to changes in
fixed deposits rate, in contrast to banks who have a large CASA base.
At A Glance Issued Capital (m shrs) 446
Mkt. Cap (S$m/US$m) 1,212 / 892
Major Shareholders (%)
Hong Leong Investment Holding 22.45
Hong Realty Pte Ltd 5.24
Free Float (%) 69.38
3m Avg. Daily Val (US$m) 0.25
ICB Industry : Financials / General Financial
DBS Group Research . Equity
13 Nov 2017
Singapore Company Guide
Hong Leong Finance Version 3 | Bloomberg: HLF SP | Reuters: HLSF.SI Refer to important disclosures at the end of this report
76
96
116
136
156
176
196
216
1.9
2.1
2.3
2.5
2.7
2.9
3.1
Nov-13 Nov-14 Nov-15 Nov-16 Nov-17
Relative IndexS$
Hong Leong Finance (LHS) Relative STI (RHS)
Company Guide
Hong Leong Finance
WHAT’S NEW
Strong earnings growth continues; results above expectations
Highlights
Strong earnings growth continues; results above our
expectations. HLF continues its strong earnings growth
momentum and recorded S$23.6m net profit in 3Q17 (+84.2%
y-o-y/+12.9% q-o-q), despite recognising a one-off provision of
S$2.8m, as broad-based growth in net interest income across
interest on loans, hiring charges, and other interest income
kicked in, from higher loan yields and loan growth of 2.2%
during the quarter, as well as lower cost of funding partially
offset by a lower average loan base. Fee income also grew
26.3% y-o-y/-6.5% q-o-q in 3Q17 to S$3.8m.
One-off provision of S$2.8m. In 3Q17, HLF topped up
provisions by S$2.8m. Including reversal of provisions in 1H17,
9M17 provisions stood at S$2.5m. We remain confident on
HLF’s asset quality as demonstrated by its low provision and NPL
levels historically. What remains a wildcard is the effect of the
implementation of IFRS9/SFRS109.
Outlook
Loan growth of 2.2% q-o-q encouraging. We believe loan
contraction bottomed out in 1Q17 as loan book saw first
significant tick up in 3Q17 after remaining largely flat in 2Q17
after seeing a contraction through FY2016. We believe that
loan growth is set for recovery against better economic
conditions with encouraging signs of an improving property
market and GDP outlook.
FY17-19F earnings raised by 5-13%; expect higher dividends.
We revised our earnings forecasts upwards by 5%/13%/9% in
FY17F/18F/19F, reflecting better loan yields and loan growth
outlook ahead. As a result, we now expect a minimum12 Scts
dividend per share, a 33% increase from previous year’s
dividend per share of 9 Scts. Stock is currently trading at ~4.4%
dividend yield at current prices
Value and recommendation
Maintain BUY, TP at S$3.20. Our TP of S$3.20 is derived from
the Gordon Growth Model with 5% ROE, 2% long-term
growth and 6% cost of equity, implying c.0.8x FY17F BV.
Despite a 5-9% earnings revision, we had previously already
imputed prospects of it reaching an ROE level of 5%. The 3Q17
results has proven so.
Company Guide
Hong Leong Finance
Quarterly / Interim Income Statement (S$m)
FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq
Net Interest Income 32.0 42.6 47.4 48.0 11.1
Non-Interest Income 35.1 46.8 51.2 46.1 9.6
Operating Income 35.1 46.8 51.2 46.1 9.6
Operating Expenses (20.4) (21.0) (20.1) (1.2) (4.0)
Pre-Provision Profit 14.7 25.8 31.1 111.7 20.6
Provisions 0.75 (0.7) (2.8) nm 307.4
Associates 0.0 0.0 0.0 - -
Exceptionals 0.0 0.0 0.0 - -
Pretax Profit 15.4 25.1 28.3 83.5 12.9
Taxation (2.7) (4.2) (4.8) 80.1 12.8
Minority Interests 0.0 0.0 0.0 - -
Net Profit 12.8 20.9 23.6 84.2 12.9
Growth (%)
Net Interest Income Gth (5.9) 17.5 11.1
Net Profit Gth 15.8 26.8 12.9
Key ratio (%)
NIM N/A N/A N/A
NPL ratio N/A N/A N/A
Loan-to deposit N/A N/A N/A
Cost-to-income 58.1 44.9 39.3
Total CAR N/A N/A N/A
Source of all data: Company, DBS Bank
Company Guide
Hong Leong Finance
CRITICAL DATA POINTS TO WATCH
Critical Factors
Opportunities from MAS’ rule relaxation. HLF was the first finco allowed
to offer business current accounts, subject to various conditions prior to
the MAS’ rule relaxation. Going forward, positive catalysts could also
come from cheaper funding if HLF is able to hold institutional deposits
like the banks, thereby allowing HLF to act as the “go-to-bank” for
various transactions for SMEs. There could also be further opportunities in
unsecured lending, however, we think caution should be exercised on
unsecured lending to smaller-sized SMEs due to risk concerns. We note
that the new MAS rules have not been implemented, and we look
towards its full implementation and more clarity in 2H2017.
NIM set to recover after 2016’s decline. The dip in FY2016’s net interest
margin (NIM) was caused by expensive fixed deposits taken in towards
the end of 2015 due to competition for fixed deposits among banks
alike, in lieu of the impending rate hike. HLF’s cost of deposit was 1.6%
for FY2016. According to our channel checks, fixed deposit rates have
since fallen from the highs at end-2015 to beginning 2016 (some banks
were offering as high as 1.8% - 1.9% for 12-month fixed deposits) to
<1.3% currently. We believe that with expensive deposits now out of its
system, HLF can focus on managing cost of funds going forward. There
may also be a NIM uptick should Fed rate hikes translate into rising SIBOR
yields in 2H2017. We estimate HLF’s NIM for FY2017 to normalise to
levels above FY2015’s.
Better loan growth outlook. With the exception of FY2012 which saw
expansion in balance sheet with loan growth of 19.3% and customer
deposits growth of 29.4%, HLF’s loan growth has been in the mid-single
digit range between 2014 and 2015. The loan book in 2016 shrank due
to lumpy development projects attaining Temporary Occupation Permit
(TOP). We expect loan growth to be in the low single digit range in FY17F
due to the slower overall loan momentum in Singapore. HLF remains
selective in writing loans for private residential properties due to the
unattractive yield, and remains cautious about the commercial property
market.
Highly selective key areas of growth. We remain optimistic about selected
growth industries for HLF, such as medical and equipment financing,
which continued to see high growth rates in the last few years. We also
expect to see vehicle loan growth given the relaxation of rules on loan-to-
value ratios and loan tenure, and unwavering interest in the luxury cars
segment. HDB financing, in contrast to private residential properties,
remains a key focus for HLF. The relaxation of unsecured lending limits
could catalyse further lending.
Margin Trends
Gross Loan& Growth
Customer Deposit & Growth
Loan-to-Deposit Ratio Trend
Cost & Income Structure
Source: Company, DBS Bank
1.0%
1.1%
1.2%
1.3%
1.4%
1.5%
0
20
40
60
80
100
120
140
160
180
200
2015A 2016A 2017F 2018F 2019F
S$ m
Net Interest Income Net Interest Income Margin
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
0
2,000
4,000
6,000
8,000
10,000
2015A 2016A 2017F 2018F 2019F
S$ m
Gross Loan (LHS) Gross Loan Growth (%) (YoY) (RHS)
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
2,000
4,000
6,000
8,000
10,000
12,000
2015A 2016A 2017F 2018F 2019F
S$ m
Customer Deposits (LHS)
Customer Deposits Growth (%) (YoY) (RHS)
76%
81%
86%
91%
96%
101%
8,563
9,563
10,563
11,563
12,563
13,563
2015A 2016A 2017F 2018F 2019F
S$ bn
Loans Deposit Loan-to-Deposit Ratio (RHS)
0%
10%
20%
30%
40%
50%
60%
0
100
200
300
400
500
600
700
800
900
1,000
2015A 2016A 2017F 2018F 2019F
S$ m
Net Interest Income Non-interest Income Cost-to-income Ratio
Company Guide
Hong Leong Finance
Appendix 1: A look at Company's listed history – what drives its share price?
NIM is well sought after, corresponds with share price re-rating
Source: Bloomberg Finance L.P., DBS Bank
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
1.0
1.5
2.0
2.5
3.0
3.5
Jan-1
0
Ap
r-10
Jul-10
Oct
-10
Jan-1
1
Ap
r-11
Jul-11
Oct
-11
Jan-1
2
Ap
r-12
Jul-12
Oct
-12
Jan-1
3
Ap
r-13
Jul-13
Oct
-13
Jan-1
4
Ap
r-14
Jul-14
Oct
-14
Jan-1
5
Ap
r-15
Jul-15
Oct
-15
Jan-1
6
Ap
r-16
Jul-16
Oct
-16
Jan-1
7
S$ %
Share price (LHS) NIM (RHS)
We observe that from 2010 to the beginning of 2012, HLF’s share price was on a downward trend, in line with its full-year NIM. Between 2013 and mid-2015, HLF’s share price was largely range bound due to flattish NIM of 1.3%. Thereafter, HLF’s share price was on a downward trend due to lower full -year NIM.
Going forward, HLF should continue to leverage on its competitive strength as a strong property loans financier and SME bank, as well as potential growth prospects versus its finco peers. Stronger loan growth, higher loan yields and lower cost of funds should contribute to higher net interest income and NIM for HLF.
Higher NIM should bode well for HLF’s share price.
Higher NIM should bode well for HLF’s share price.
Company Guide
Hong Leong Finance
Balance Sheet:
Asset quality is sound. HLF’s non-performing loans (NPL) position is
graded in line with industry standards. HLF’s NPL ratio has been
consistently low and is the lowest among its finco peers, at 0.8% for
FY2016– comprising secured NPL of 0.7% and unsecured NPL of 0.1%.
HLF’s NPL ratio is also considerably lower than local banks’ NPL which are
above 1%, as HLF mostly lends on a secured basis with LTV below 100%.
In the event of a bad loan, HLF is typically able to recover most amounts
outstanding.
Strong capital position. HLF maintains a strong capital position at 16.4%
for FY2016, well above the statutory requirement of 12%, prescribed by
the Finance Companies Act.
Share Price Drivers:
Further relaxation of funding and lending rules. Further to MAS’
announcement in Feb 2017, any further relaxation of rules pertaining to
fincos, for instance, liberalisation of funding sources to allow business
CASA without restrictions, allowing fincos to garner retail CASA, could
catalyse HLF’s share price.
M&A newsflow. We believe that HLF is an extremely attractive takeover
target for foreign banks/entities that are keen to expand their reach in
the Singapore SME lending space. Any M&A-related newsflow would
further catalyse HLF’s share price.
Key Risks:
Risk to asset quality. While HLF applies stringent credit underwriting
procedures, unexpected deterioration in HLF’s loan portfolio could pose
downside risk to earnings. Deterioration in the loan portfolio could be
caused by softening of the economic cycle and/or worsening business
conditions limited to a specific sector.
Sensitive to fixed deposits rate. HLF is more sensitive to changes in S$
fixed deposits rate, in contrast to banks who have large CASA base. High
fixed deposits rate will lead to higher cost of funds, affecting NIM.
Company Background
Hong Leong Finance, the financial services arm of Hong Leong Group
Singapore, is Singapore’s largest finance company with a distribution
network of 28 branches and over 600 employees. HLF has more than 55
years of experience in Small and Medium-sized Enterprise (SME) lending,
offering a wide range of products and services, including deposits and
savings, consumer and corporate loans, government assistance
programmes for SMEs, as well as corporate finance and advisory services.
Asset Quality
Capitalisation (%)
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
-1.0%
-0.8%
-0.6%
-0.4%
-0.2%
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
2015A 2016A 2017F 2018F 2019F
NPL Ratio
Provision Charge-OffRate
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
2015A 2016A 2017F 2018F 2019F
Tier-1 CAR Total CAR
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
2015A 2016A 2017F 2018F 2019F
Avg: 16.3x
+1sd: 18.4x
+2sd: 20.5x
-1sd: 14.1x
-2sd: 12x
10.6
12.6
14.6
16.6
18.6
20.6
22.6
Nov-13 Nov-14 Nov-15 Nov-16
(x)
Avg: 0.66x
+1sd: 0.72x
+2sd: 0.78x
-1sd: 0.61x
-2sd: 0.55x
0.4
0.5
0.5
0.6
0.6
0.7
0.7
0.8
0.8
0.9
0.9
Nov-13 Nov-14 Nov-15 Nov-16
(x)
Company Guide
Hong Leong Finance
Key Assumptions
FY Dec 2015A 2016A 2017F 2018F 2019F
Gross Loans Growth 5.3 (5.7) 2.8 4.0 5.0
Customer Deposits Growth 9.3 (8.8) 5.0 7.0 7.0
Yld. On Earnings Assets 2.4 2.5 2.6 2.6 2.7
Avg Cost Of Funds 1.3 1.6 1.4 1.5 1.5
Income Statement (S$m)
FY Dec 2015A 2016A 2017F 2018F 2019F
Net Interest Income 162 137 170 181 182
Non-Interest Income 12.9 12.8 13.2 13.6 14.4
Operating Income 175 149 183 194 197
Operating Expenses (91.8) (84.3) (85.4) (86.5) (87.6)
Pre-provision Profit 83.1 65.1 97.4 108 109
Provisions 3.64 (1.1) (0.4) (1.0) (1.1)
Associates 0.0 0.0 0.0 0.0 0.0
Exceptionals 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit 86.8 64.0 97.0 107 108
Taxation (13.9) (11.0) (16.5) (18.1) (18.3)
Minority Interests 0.0 0.0 0.0 0.0 0.0
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net Profit 72.9 53.1 80.5 88.5 89.4
Net Profit bef Except 72.9 53.1 80.5 88.5 89.4
Growth (%)
Net Interest Income Gth 8.8 (15.7) 24.1 6.4 0.9
Net Profit Gth 16.0 (27.2) 51.8 9.8 1.1
Margins, Costs & Efficiency (%)
Spread 1.1 0.9 1.2 1.2 1.2
Net Interest Margin 1.3 1.1 1.4 1.4 1.4
Cost-to-Income Ratio 52.5 56.4 46.7 44.6 44.6
Business Mix (%)
Net Int. Inc / Opg Inc. 92.6 91.5 92.8 93.0 92.7
Non-Int. Inc / Opg inc. 7.4 8.5 7.2 7.0 7.3
Fee Inc / Opg Income 7.1 8.4 7.1 6.9 7.2
Oth Non-Int Inc/Opg Inc 0.2 0.1 0.1 0.1 0.1
Profitability (%)
ROAE Pre Ex. 4.4 3.1 4.7 5.1 5.1
ROAE 4.4 3.1 4.7 5.1 5.1
ROA Pre Ex. 0.6 0.4 0.6 0.7 0.4
ROA 0.6 0.4 0.6 0.7 0.4
Source: Company, DBS Bank
Expect NIM expansion beyond FY15 levels
Company Guide
Hong Leong Finance
Quarterly / Interim Income Statement (S$m)
FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017
Net Interest Income 32.0 33.1 36.3 42.6 47.4
Non-Interest Income 35.1 37.4 40.0 46.8 51.2
Operating Income 35.1 37.4 40.0 46.8 51.2
Operating Expenses (20.4) (18.9) (21.1) (21.0) (20.1)
Pre-Provision Profit 14.7 18.5 18.9 25.8 31.1
Provisions 0.75 (0.8) 0.92 (0.7) (2.8)
Associates 0.0 0.0 0.0 0.0 0.0
Exceptionals 0.0 0.0 0.0 0.0 0.0
Pretax Profit 15.4 17.7 19.8 25.1 28.3
Taxation (2.7) (3.0) (3.4) (4.2) (4.8)
Minority Interests 0.0 0.0 0.0 0.0 0.0
Net Profit 12.8 14.7 16.5 20.9 23.6
Growth (%)
Net Interest Income Gth (5.9) 3.5 9.6 17.5 11.1
Net Profit Gth 15.8 15.0 12.0 26.8 12.9
Balance Sheet (S$m)
FY Dec 2015A 2016A 2017F 2018F 2019F
Cash/Bank Balance 1,796 1,485 1,645 1,994 14,686
Government Securities 1,333 1,258 1,271 1,296 1,322
Inter Bank Assets 0.0 0.0 0.0 0.0 0.0
Total Net Loans & Advs. 10,091 9,515 9,785 10,174 10,686
Investment 0.55 0.55 0.55 0.55 0.55
Associates 0.0 0.0 0.0 0.0 0.0
Fixed Assets 27.9 24.5 22.9 21.6 23.6
Goodwill 0.0 0.0 0.0 0.0 0.0
Other Assets 38.4 29.5 30.3 31.5 33.1
Total Assets 13,287 12,313 12,754 13,519 26,752
Customer Deposits 11,444 10,442 10,964 11,731 12,553
Inter Bank Deposits 0.0 0.0 0.0 0.0 0.0
Debts/Borrowings 0.0 0.0 0.0 0.0 0.0
Others 155 174 66.9 34.5 12,417
Minorities 0.0 0.0 0.0 0.0 0.0
Shareholders' Funds 1,688 1,697 1,724 1,753 1,782
Total Liab& S/H’s Funds 13,287 12,313 12,754 13,519 26,752
Source: Company, DBS Bank
Company Guide
Hong Leong Finance
Financial Stability Measures (%)
FY Dec 2015A 2016A 2017F 2018F 2019F
Balance Sheet Structure
Loan-to-Deposit Ratio 88.2 91.1 89.2 86.7 85.1
Net Loans / Total Assets 75.9 77.3 76.7 75.3 39.9
Investment / Total Assets 0.0 0.0 0.0 0.0 0.0
Cust . Dep./Int. Bear. Liab. 100.0 100.0 100.0 100.0 100.0
Interbank Dep / Int. Bear. 0.0 0.0 0.0 0.0 0.0
Asset Quality
NPL / Total Gross Loans 0.7 1.0 0.8 0.8 0.8
NPL / Total Assets 0.6 0.7 0.6 0.6 0.3
Loan Loss Reserve Coverage 147.7 122.5 140.5 145.5 140.0
Provision Charge-Off Rate 0.0 0.0 0.0 0.0 0.0
Capital Strength
Total CAR 15.1 16.4 16.6 15.9 8.2
Tier-1 CAR 0.0 0.0 0.0 0.0 0.0
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Singapore Research Team
Sue Lin LIM
S.No.Date of
Report
Clos ing
Price
12-mth
Target
Price
Rat ing
1: 05 Apr 17 2.83 3.20 BUY
2: 28 Apr 17 2.80 3.20 BUY
3: 10 Aug 17 2.67 3.20 BUY
Note : Share price and Target price are adjusted for corporate actions.
1
2
3
2.02
2.12
2.22
2.32
2.42
2.52
2.62
2.72
2.82
2.92
Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17
S$
Expect lower NPL ratio on better economic outlook
Company Guide
Hong Leong Finance
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 13 Nov 2017 10:19:11 (SGT) Dissemination Date: 13 Nov 2017 10:29:10 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
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Company Guide
Hong Leong Finance
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
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1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
ed: TH / sa:YM, PY, CS
BUY Last Traded Price ( 7 Feb 2018): S$0.495 (STI : 3,383.77)
Price Target 12-mth: S$0.75 (52% upside) (Prev S$0.73)
Analyst Lee Keng LING +65 6682 3703 [email protected]
What’s New • Newly acquired cinemas boosted 3Q18 revenue but
dragged down margins
• Earnings cut by 9-11%, on slightly lower revenue from
cinema and higher interest cost
• Maintain BUY, TP of S$0.75, as we rolled forward
valuation to FY19F
Price Relative
Forecasts and Valuation FY Mar (S$ m) 2017A 2018F 2019F 2020F
Revenue 95.4 163 258 306 EBITDA 41.4 53.2 69.5 77.8 Pre-tax Profit 25.9 36.5 46.2 54.5 Net Profit 18.8 25.3 32.5 39.5 Net Pft (Pre Ex.) 18.8 25.3 32.5 39.5 Net Pft Gth (Pre-ex) (%) 130.1 34.6 28.4 21.3 EPS (S cts) 1.80 2.18 2.80 3.40 EPS Pre Ex. (S cts) 1.80 2.18 2.80 3.40 EPS Gth Pre Ex (%) 98 21 28 21 Diluted EPS (S cts) 1.80 2.18 2.80 3.40 Net DPS (S cts) 0.0 0.0 0.0 0.0 BV Per Share (S cts) 8.25 15.2 18.0 21.4 PE (X) 27.6 22.7 17.7 14.6 PE Pre Ex. (X) 27.6 22.7 17.7 14.6 P/Cash Flow (X) 84.7 25.5 21.1 11.7 EV/EBITDA (X) 12.4 10.3 11.0 9.9 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 6.0 3.3 2.7 2.3 Net Debt/Equity (X) CASH CASH 0.7 0.6 ROAE (%) 30.7 19.2 16.9 17.2 Earnings Rev (%): (9) (11) NEW Consensus EPS (S cts): 2.40 3.20 3.50 Other Broker Recs: B: 2 S: 0 H: 0
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P
Growth intact
Growth path on track. We continue to expect strong earnings
CAGR of 28% for FY17-20F, underpinned by growth in
productions, expansion into the China market, and contribution
from UnUsUaL. The cinema arm, on the other hand, helps the
group build a recurring income base. Having a strong presence
in the entire value chain of content creation and distribution
further cements mm2's status as the leader in the
media/entertainment industry. With a much larger and stronger
scale, especially with the completion of the Cathay cinema
acquisition, mm2 can now enjoy the synergistic benefits from
the entire value chain.
3Q18 results: 3Q18 revenue surged 190% y-o-y to S$52.4m,
boosted by newly acquire cinemas in Malaysia and Singapore.
Net earnings jumped by a smaller 53% to S$6.4m on lower
margins.
Where we differ: Higher valuation peg vs consensus. We value
the production business at 25x PE, in line with peers listed in
Asia, vs consensus’ valuation of about 22x. For UnUsUaL, we
value it at current valuation. For the cinema segment, we use
21x PE valuation peg.
Potential catalyst: Reaping the fruits of labour in North Asia. We
expect North Asia to contribute >70% of production revenue
from FY18F, up from 36% in FY16 and 56% in FY17. Upside to
earnings would come from more projects, especially in China,
where the market is bigger and budgets are much higher. Valuation:
Reiterate BUY, TP of S$0.75. Our sum-of-parts target price is
now S$0.75, after accounting for slightly lower revenue from
the cinema, higher interest costs and rolling forward our
valuation to FY19F earnings on valuation peg of 25x. Key Risks to Our View:
No long-term financing arrangements for productions. The
commencement of each production is dependent on mm2’s
ability to secure funding.
Unavailability of good scripts. Lack of good scripts for
production may lead to less support from stakeholders.
At A Glance Issued Capital (m shrs) 1,163
Mkt. Cap (S$m/US$m) 576 / 434
Major Shareholders (%)
Wee Chye Ang 49.9
StarHub Ltd 9.8
Yeo Khee Seng 8.1
Free Float (%) 43.2
3m Avg. Daily Val (US$m) 0.87
ICB Industry : Consumer Services / Media
DBS Group Research . Equity
8 Feb 2018
Singapore Company Guide
mm2 Asia Version 15 | Bloomberg: MM2 SP | Reuters: MM2A.SI Refer to important disclosures at the end of this report
68
268
468
668
868
1068
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Dec-14 Dec-15 Dec-16 Dec-17
Relative IndexS$
mm2 Asia (LHS) Relative STI (RHS)
Company Guide
mm2 Asia
WHAT’S NEW
3Q18 results boosted by cinema acquisitions
Newly acquired cinemas boosted revenue... Group revenue
surged 190% to S$52.4m, mainly due to the acquisition of
the Lotus cinemas in Malaysia and Cathay cinemas in
Singapore, and also its core production business and
UnUsUaL, the event production and concert promotion arm.
Nine-month revenue accounts for 65% of our FY18F
revenue, roughly in line, as Cathay cinemas only account for
one-month contribution. Gross profit jumped 172% y-o-y to
S$24.2m.
...but dragged down margins: 3Q18 net margin eased to
12.3%, from 14.6% in 2Q18 and 23.3% in 3Q17, partly due
to the increasing contribution from the cinema arm, which
has lower margins, and also the one-off expenses for the
recent cinema acquisitions.
Outlook
Core production
Expect key contribution from North Asia. Going forward,
mm2 will continue to focus on its core business in Singapore
and Malaysia as well as expand it to Hong Kong, Taiwan,
China and also the US. Productions in these markets are
expected to continue to form a bigger part of its revenue into
FY2019, especially from North Asia. We expect North Asia to
contribute about 70% of production revenue from FY18F, up
from 36% in FY16 and 56% in FY17. For 9-month FY18,
revenue from North Asia contributed approximately 76% of
the group's production revenue.
Seeking listing of Vividthree on Catalist. mm2’s subsidiary
Vividthree is seeking listing on the Catalist board of SGX.
mm2 acquired a 51% stake in Vividthree, a 3D animation
company, in early 2015 for S$3.06m or a PE of about 3x.
Incorporated in 2006, Vividthree has grown to become a
leading player and go-to studio in the field of visual effects
(VFX), 3D animation, virtual reality and computer generation
imagery (CGI) in Singapore. Though Vividthree’s contribution
to mm2 is still small now, accounting for 5-6% of the
group’s revenue and gross profit in FY17, a successful listing
should provide more visibility to attract the best talents for its
management, which is crucial for the creative business, and
pave the way for higher growth ahead, while parent mm2
can unlock value.
Platform business
The only cinema operator in both Malaysia and Singapore.
mm2 is now the second largest cinema operator in
Singapore, following the completion of the Cathay cinema
acquisition in November last year. In Malaysia, it is the fourth
biggest player, with ownership of 18 cinemas. The group is
now the only cinema operator in Malaysia and Singapore,
with major presence in both countries, and is in a strategic
position to optimise its capital expenditure and reach out to a
wider audience, thus reaping economies of scale.
UnUsUaL benefitting from rising demand for concerts and
events. With the increase in demand for concerts and events
in the region, UnUsUaL, with its dominant market position, is
set to benefit from this rising trend. It will continue to expand
into the region and also to bring in more western concerts.
Furthermore, the recent signing of the letter of intent to
present 48 “Disney On Ice” shows could open the door for
more Disney projects ahead.
Earnings and Recommendation
FY18F to FY19F earnings cut by 9-11%. We have lowered
FY18F to FY19F earnings by 9-11%, after accounting for
slightly lower revenue from the cinema segment and higher
interest costs. We continue to expect strong earnings growth
CAGR of 28% for FY17-20F, driven by all its core production
and platform businesses. Maintain BUY, new target price of
S$0.75, after rolling forward the sum-of-parts valuation to
FY19F earnings, and also lower valuation peg of 25x (vs 28x
previously), except for event production & concert
promotion, which is based on UnUsUal's current market
value.
Sum of parts valuation
Source: Company, DBS Bank
Se gme nt Sta ke
Va lua tion
(S$m) Assumption
Production & Distribution 100% 478.8 Based on 25x PE, in line with peers
Cinema Operation 100% 180.8 Based on 21x PE, in line with peers
Post-Production 51% 31.9 Based on 25x PE, in line with peers
Event Production &
Concert Promotion 41.91% 180.6 Based on current valuation
Tota l va lue 872.1
Number of shares 1,162.2
Va lue pe r sha re (S$) 0.75
Company Guide
mm2 Asia
Quarterly / Interim Income Statement (S$m)
FY Mar 3Q17 2Q18 3Q18 % chg yoy % chg qoq
Revenue 18.0 60.3 52.4 190.4 -13.2
Cost of Goods Sold (9.2) (34.8) (28.2) 207.9 -19.0
Gross Profit 8.9 25.5 24.2 172.4 -5.2
Other Oper. (Exp)/Inc 0.0 0.0 0.0 - -
Operating Profit 8.9 25.5 24.2 172.4 -5.3
Other Non Opg (Exp)/Inc 1.1 (0.2) 0.5 -56.3 -381.8
Associates & JV Inc 0.0 0.0 0.2 nm nm
Net Interest (Exp)/Inc 0.0 0.0 0.0 - -
Exceptional Gain/(Loss) 0.0 0.0 0.0 - -
Pre-tax Profit 5.8 15.0 10.4 79.6 -31.0
Tax (0.9) (1.8) (1.9) 111.7 2.5
Minority Interest (0.7) (2.2) (2.0) 203.4 -7.6
Net Profit 4.2 11.0 6.4 52.9 -41.4
Net profit bef Except. 4.2 11.0 6.4 52.9 -41.4
EBITDA 8.7 15.2 14.0 61.9 -7.7
Margins
Gross Margins (%) 49.2 42.3 46.1
Opg Profit Margins (%) 49.2 42.3 46.1
Net Profit Margins (%) 23.3 18.2 12.3
Source of all data: Company, DBS Bank
Company Guide
mm2 Asia
CRITICAL DATA POINTS TO WATCH
Critical Factors
Synergistic acquisitions
mm2 has made several acquisitions to maintain its competitive
advantage, and to build synergies across the entire value chain.
For content creation, mm2 has several tie-ups globally to co-
produce films. It has also acquired a 51% stake in Vividthree, a
computer graphic studio, which is planning to go for Catalist
listing on SGX.
For the platform business, mm2 is the number four player in
Malaysia, and owns a total of 18 cinemas with a market share
of about 14% in terms of number of screens. It has also
acquired the entire eight Cathay cinemas in Singapore.
Other than cinemas, mm2 owns a 42% stake in UnUsUaL Ltd, a
market leader in large-scale live events and concerts, and is also
beefing up its OTT (over-the-top) platform.
Healthy production pipeline
The number of production titles has increased steadily over the
last few years; from six productions in FY14, to about 18 in
FY17. mm2 has a robust production pipeline of 35 production
titles, from April 2017 to September 2018. Out of these, 23
titles or 62% are from North Asia. In terms of production
budget, North Asia accounts for almost 80% of the total.
Expansion in North Asia
We expect North Asia to contribute about 70% of production
revenue from FY18F, up from 36% in FY16 and 56% in FY17.
mm2 has a unique presence in all the Chinese markets,
including Singapore, Malaysia, Hong Kong, Taiwan, and China.
This presents ample cross-border collaboration opportunities.
One example is the remaking of existing successful titles in
China, with the adaptation of local settings, which would be
more appealing to the locals there. mm2 is also looking to
expand to non-Chinese speaking markets like Korea, Japan,
Thailand, India, and the US.
UnUsUaL is also leveraging on mm2’s network of contacts in
the media and entertainment industry to expand into North
Asia.
Digital age shift – content is king
The evolution of the media industry, from traditional media (TV,
radio, newspaper) to digital media leads to increasing
opportunities for mm2, which is strong in content creation and
platform businesses.
Business Model – The Film Budget
Business Model – Gross Receipts (Box Office)
Revenue Breakdown by Segment
Profitability Trend
Source: Company, DBS Bank
Prints & Advertising Cost
Producer’s Fee
Team / Crew Fees
Script Rights
Post - Production Cost
Production Cost
Production Team / Crew Fees
Director’s Fee
Income to mm2
Distribution Commission
Marketing Costs
Return to Stakeholders (mm2 may also be a stakeholder)
* only when return is higher than stakeholders’ ROI Net Receipts
Producer Bonus *
Exhibitors’ Cost
Income to mm2
less
less
less
less
Equals
Box Office Receipts
Company Guide
mm2 Asia
Appendix 1:
A look at Company's listed history – what drives its share price?
Source: Company, DBS Bank
Company Guide
mm2 Asia
Balance Sheet:
Net gearing position in FY19F. We expect the group to take on
more debt financing for the acquisition of the Cathay cinemas
in Singapore. Net gearing for FY19F is thus expected to increase
to 0.77x, from net cash in FY18F.
Share Price Drivers:
Cost savings and efficiency from horizontal integration. The full
integration of the content business (production of movies,
Vividthree) and platform business (Cinema, UnUsUaL) would
lead to better efficiency and cost savings for the group. For
example, the ownership of cinemas not only provides a source
of recurring income to the group but also cost savings as mm2
usually has to pay about 50% of its gross box office proceeds
for rental of cinemas. Cinema operations is a profitable
business, and may even be profitable with less than 30% of the
seats occupied. mm2’s multiple platform capabilities would
place the group in a position to better distribute and exhibit
content to reach a wider audience.
Bigger production budget = higher growth
As mm2 adopts a fee-based model, its revenue is directly
correlated to the size of the production budget. We expect
North Asia, especially China, to contribute about 70% of
production revenue from FY18F, up from 36% in FY16 and
56% in FY17. The budget for China tends to be much bigger,
about S$10m on average per production, vs average of S$1-2m
for Singapore and Malaysia projects, and S$3m for Hong Kong
and Taiwan productions.
Key Risks:
No long-term financing arrangements for productions. The
commencement of each production is dependent on mm2’s
ability to secure funding.
Unavailability of good scripts. Lack of good scripts for
production may lead to less support from stakeholders.
Inability to predict the commercial success of movies produced.
The commercial success of its productions is primarily
determined by inherently unpredictable audience reactions.
Company Background
mm2 Asia is a leading producer of films and TV/online content
in Asia. As a producer, mm2 provides services over the entire
film-making process – from financing and production to
marketing and distribution, and thus has diversified revenue
streams. mm2 also owns entertainment company, UnUsUaL,
and cinemas in Malaysia and Singapore.
Number of Titles (Production & Distribution)
Year Number of Titles
(Production) Number of Titles
(Distribution) FY Mar 2012 3 2 FY Mar 2013 6 8 FY Mar 2014 6 18 FY Mar 2015 9 26 FY Mar 2016 14 24 FY Mar 2017 18 26
Apr 17 to Sep 18* 35
* projection
UnUsUal: Number of Events (Production & Concert Promotion)
Year Number of
Events (Production)
Number of Concerts
(Promotion) FY Dec 2013 68 12 FY Dec 2014 46 9 FY Dec 2015 51 10 FY Mar 2017 64 19
Cinemas acquired Name of cinemas Number of cinemas Number of screens Malaysia Cathay 2 22 Mega Cineplex 3 11 Lotus 13 84 Total Malaysia 18 127 Singapore Cathay 8 64 Total Singapore 8 64
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
Avg: 16.5x
+1sd: 22.3x
+2sd: 28.2x
-1sd: 10.6x
-2sd: 4.8x4.3
9.3
14.3
19.3
24.3
29.3
Dec-14 Dec-15 Dec-16 Dec-17
(x)
Avg: 5.2x
+1sd: 6.53x
+2sd: 7.87x
-1sd: 3.87x
-2sd: 2.54x2.0
3.0
4.0
5.0
6.0
7.0
8.0
Dec-14 Dec-15 Dec-16 Dec-17
(x)
Company Guide
mm2 Asia
Segmental Breakdown
FY Mar 2016A 2017A 2018F 2019F 2020F
Revenues (S$m)
Production & Distribution 29.8 55.3 73.7 95.8 124
Cinema Operation 12.6 46.8 108 113
Event Production & Concert Promotion
22.6 37.9 49.2 64.0
Post-Production 4.87 5.00 5.00 5.00
Total 38.3 95.4 163 258 306
Gross profit (S$m) Production & Distribution 13.1 26.5 33.2 43.1 56.0
Cinema Operation 7.56 25.7 59.2 62.1
Event Production & Concert Promotion
15.2 19.7 25.6
Post-Production 2.69 3.50 3.50 3.50
Total 18.4 45.3 77.5 125 147
Gross profit Margins (%) Production & Distribution 44.0 47.9 45.0 45.0 45.0
Cinema Operation nm 60.0 55.0 55.0 55.0
Event Production & Concert Promotion
nm nm 40.0 40.0 40.0
Post-Production nm 55.4 70.0 70.0 70.0
Total 48.0 47.5 47.5 48.7 48.0
Income Statement (S$m)
FY Mar 2016A 2017A 2018F 2019F 2020F
Revenue 38.3 95.4 163 258 306
Cost of Goods Sold (20.0) (50.1) (85.8) (132) (159)
Gross Profit 18.4 45.3 77.5 125 147
Other Opng (Exp)/Inc (8.0) (18.7) (39.2) (70.8) (84.3)
Operating Profit 10.4 26.5 38.3 54.6 63.0
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc (0.4) (0.6) (1.9) (8.4) (8.4)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit 9.99 25.9 36.5 46.2 54.5
Tax (1.1) (3.8) (6.2) (7.9) (9.3)
Minority Interest (0.7) (3.2) (4.9) (5.8) (5.8)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net Profit 8.18 18.8 25.3 32.5 39.5
Net Profit before Except. 8.18 18.8 25.3 32.5 39.5
EBITDA 19.4 41.4 53.2 69.5 77.8
Growth
Revenue Gth (%) 57.9 148.8 71.2 57.7 19.0
EBITDA Gth (%) 95.2 113.6 28.6 30.7 12.0
Opg Profit Gth (%) 56.7 155.5 44.5 42.5 15.3
Net Profit Gth (Pre-ex) (%) 59.4 130.1 34.6 28.4 21.3
Margins & Ratio
Gross Margins (%) 48.0 47.5 47.5 48.7 48.0
Opg Profit Margin (%) 27.1 27.8 23.5 21.2 20.5
Net Profit Margin (%) 21.3 19.7 15.5 12.6 12.9
ROAE (%) 29.5 30.7 19.2 16.9 17.2
ROA (%) 15.3 16.2 9.6 6.6 5.8
ROCE (%) 25.0 24.6 12.4 6.4 5.9
Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0
Net Interest Cover (x) 26.8 43.1 20.6 6.5 7.5
Source: Company, DBS Bank
Partial contributions from Lotus and Cathay
Partial contributions from UnUsUaL
Mainly to finance acquisition of Cathay cinema chain in Singapore
Company Guide
mm2 Asia
Quarterly / Interim Income Statement (S$m)
FY Mar 1Q2018 2Q2018 3Q2018
Revenue 24.6 31.4 52.4
Cost of Goods Sold (9.3) (16.8) (28.2)
Gross Profit 15.4 14.6 24.2
Other Oper. (Exp)/Inc (5.8) (6.9) (14.5)
Operating Profit 9.55 7.71 9.72
Other Non Opg (Exp)/Inc 0.05 0.46 0.50
Associates & JV Inc 0.0 (0.2) 0.16
Net Interest (Exp)/Inc 0.0 0.0 0.0
Exceptional Gain/(Loss) 0.0 0.0 0.0
Pre-tax Profit 9.57 7.99 10.4
Tax (1.8) (1.6) (1.9)
Minority Interest (1.4) (1.8) (2.0)
Net Profit 6.40 4.60 6.43
Net profit bef Except. 6.40 4.60 6.43
EBITDA 11.0 9.81 14.7
Growth
Revenue Gth (%) N/A 27.6 66.9
EBITDA Gth (%) nm (10.4) 49.9
Opg Profit Gth (%) nm (19.3) 26.0
Net Profit Gth (Pre-ex) (%) nm (28.2) 40.0
Margins
Gross Margins (%) 62.4 46.5 46.1
Opg Profit Margins (%) 38.8 24.5 18.5
Net Profit Margins (%) 26.0 14.6 12.3
Balance Sheet (S$m)
FY Mar 2016A 2017A 2018F 2019F 2020F
Net Fixed Assets 3.65 11.2 71.8 306 355
Invts in Associates & JVs 0.0 1.49 0.0 0.0 0.0
Other LT Assets 26.1 54.3 42.0 28.2 14.5
Cash & ST Invts 4.74 25.8 122 85.0 134
Inventory 9.83 23.3 31.4 48.4 58.3
Debtors 24.4 46.4 95.8 151 180
Other Current Assets 0.26 0.58 0.58 0.58 0.58
Total Assets 69.0 163 363 619 742
ST Debt 0.20 11.1 11.1 11.1 11.1
Creditor 23.8 48.4 82.8 128 154
Other Current Liab 4.21 7.56 8.17 9.82 11.2
LT Debt 2.85 0.58 70.6 242 292
Other LT Liabilities 0.75 0.97 0.97 0.97 0.97
Shareholder’s Equity 36.2 86.5 177 209 249
Minority Interests 0.98 7.94 12.9 18.7 24.5
Total Cap. & Liab. 69.0 163 363 619 742
Non-Cash Wkg. Capital 6.49 14.3 36.9 62.8 73.8
Net Cash/(Debt) 1.69 14.1 40.0 (168) (169)
Debtors Turn (avg days) 214.2 135.5 158.9 175.0 197.1
Creditors Turn (avg days) 640.7 373.5 337.4 327.2 355.4
Inventory Turn (avg days) 243.0 171.2 140.6 124.1 134.8
Asset Turnover (x) 0.7 0.8 0.6 0.5 0.5
Current Ratio (x) 1.4 1.4 2.4 1.9 2.1
Quick Ratio (x) 1.0 1.1 2.1 1.6 1.8
Net Debt/Equity (X) CASH CASH CASH 0.7 0.6
Net Debt/Equity ex MI (X) CASH CASH CASH 0.8 0.7
Capex to Debt (%) 279.3 141.0 75.4 93.0 16.5
Z-Score (X) 10.9 6.6 6.6 4.7 4.7
Source: Company, DBS Bank
Mainly to finance acquisition of Cathay cinema chain in Singapore
Company Guide
mm2 Asia
Cash Flow Statement (S$m)
FY Mar 2016A 2017A 2018F 2019F 2020F
Pre-Tax Profit 9.99 25.9 36.5 46.2 54.5
Dep. & Amort. 8.98 14.8 14.8 14.8 14.8
Tax Paid (1.1) (3.8) (5.6) (6.2) (7.9)
Assoc. & JV Inc/(loss) 0.0 0.01 0.0 0.0 0.0
Chg in Wkg.Cap. (22.6) (30.8) (23.2) (27.6) (12.5)
Other Operating CF 0.0 0.0 0.0 0.0 0.0
Net Operating CF (4.7) 6.12 22.5 27.3 49.1
Capital Exp.(net) (8.5) (16.5) (61.6) (235) (50.0)
Other Invts.(net) 0.0 0.0 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF 0.0 0.0 0.0 0.0 0.0
Net Investing CF (8.5) (16.5) (61.6) (235) (50.0)
Div Paid 0.0 0.0 0.0 0.0 0.0
Chg in Gross Debt 2.35 17.8 70.0 171 50.0
Capital Issues 9.10 18.0 65.0 0.0 0.0
Other Financing CF (0.7) 0.0 0.0 0.0 0.0
Net Financing CF 10.7 35.8 135 171 50.0
Currency Adjustments 0.0 0.0 0.0 0.0 0.0
Chg in Cash (2.5) 25.4 96.0 (36.7) 49.1
Opg CFPS (S cts) 1.98 3.52 3.93 4.72 5.29
Free CFPS (S cts) (1.5) (1.0) (3.4) (17.9) (0.1)
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Lee Keng LING
S.No.Date of
Report
Closing
Price
12-mth
Target
Price
Rat ing
1: 13 Apr 17 0.51 0.63 BUY
2: 23 May 17 0.59 0.70 BUY
3: 24 May 17 0.59 0.70 BUY
4: 14 Jun 17 0.60 0.70 BUY
5: 19 Jul 17 0.59 0.75 BUY
6: 24 Jul 17 0.53 0.75 BUY
7: 14 Aug 17 0.48 0.60 BUY
8: 02 Nov 17 0.57 0.73 BUY
9: 03 Nov 17 0.55 0.73 BUY
Note : Share price and Target price are adjusted for corporate actions.
1
234
5
6
7
8
9
0.43
0.48
0.53
0.58
0.63
0.68
Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18
S$
Assume debt financing for future acquisitions
Proceeds from share placement
FY17 and FY18 - Acquisition of cinemas and RINGS.TV
Assume 70% debt financing for Cathay cinema acquisition
Company Guide
mm2 Asia
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 8 Feb 2018 12:08:40 (SGT) Dissemination Date: 8 Feb 2018 14:52:29 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
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Company Guide
mm2 Asia
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
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ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
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COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates do not
have a proprietary position in the securities recommended in this report as of 29 Dec 2017.
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Report.
Compensation for investment banking services:
3. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past
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ed: TH / sa: JC, PY, CS
BUY (Upgrade from HOLD)
Last Traded Price ( 23 Feb 2018): S$1.04 (STI : 3,533.22)
Price Target 12-mth: S$1.27 (22% upside) (Prev S$1.09)
Analyst Carmen Tay +65 6682 3719 [email protected]
What’s New • Riverstone delivers record earnings in FY17 despite
unfavourable forex; headline profits up 7.4% y-o-y to
RM129.3m
• Core earnings outpaced output growth slightly (+17.1% vs
16.9% y-o-y), implying its strategy to grow the higher-
margin cleanroom segment is paying off
• Riverstone can outperform peers amid industry headwinds
as it ramps up on cleanroom glove capacity
• Upgrade to BUY with a higher TP of S$1.26
Price Relative
Forecasts and Valuation FY Dec (RM m) 2016A 2017A 2018F 2019F
Revenue 655 817 934 1,055 EBITDA 169 186 230 260 Pre-tax Profit 139 151 178 199 Net Profit 120 129 154 173 Net Pft (Pre Ex.) 120 129 154 173 Net Pft Gth (Pre-ex) (%) (4.9) 7.4 19.5 11.9 EPS (S cts) 5.46 5.86 7.01 7.84 EPS Pre Ex. (S cts) 5.46 5.86 7.01 7.84 EPS Gth Pre Ex (%) (5) 7 19 12 Diluted EPS (S cts) 5.46 5.86 7.01 7.84 Net DPS (S cts) 2.19 2.36 2.82 3.15 BV Per Share (S cts) 25.1 28.8 33.0 37.6 PE (X) 19.1 17.7 14.8 13.3 PE Pre Ex. (X) 19.1 17.7 14.8 13.3 P/Cash Flow (X) 19.3 15.7 16.7 11.1 EV/EBITDA (X) 13.0 11.8 9.6 8.2 Net Div Yield (%) 2.1 2.3 2.7 3.0 P/Book Value (X) 4.1 3.6 3.2 2.8 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 23.2 21.8 22.7 22.2
Earnings Rev (%): 0 6 Consensus EPS (S cts): 6.90 7.50 Other Broker Recs: B: 1 S: 0 H: 2
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P
Lifted by the semiconductor upcycle
Upgrade to BUY with TP of S$1.27 as we see earnings growing on
strong cleanroom ramp-up. A global market leader in niche Class 10
and Class 100 cleanroom gloves, Riverstone’s edge in the high-tech
cleanroom segment sets it apart from the bigger boys. Given intense
competition in the healthcare space, we see value in Riverstone’s
growing cleanroom business – which allows the group to command
consistently higher margins vs peers (16% vs peers’ c.10-15% in FY17).
With new cleanroom facilities set to kick in from 2Q18, cleanroom
capacity is expected to grow by c.33% to at least 2bn gloves p.a. The
ramp-up on these new capacities should help drive higher growth in
cleanroom gloves vis-à-vis the lower-margin healthcare business,
allowing Riverstone’s earnings growth of c.16% to catch up with larger
peers’ c.17%.
Where we differ: We are more bullish vs consensus as we expect the
improved output mix to help sustain margins and drive bottom line.
Potential catalysts: Further capacity expansion, sustained increase in
cleanroom glove mix (and thus margins), and inorganic growth.
Capacity expansion and improving mix to underpin long-term growth.
In anticipation of strong demand for both its cleanroom and healthcare
gloves, Riverstone is now in the process of accelerating its expansion
plans. Under its revised three-year expansion plan, we expect total
glove production capacity to grow to 9bn pieces by end-2018 (vs 8.2bn
previously) and 10.4bn pieces p.a. by end-2019.
Backed by robust demand and expectations of a higher cleanroom mix,
we project earnings to grow at a c.16% CAGR from RM129m in FY17
to RM173m by FY19F.
Valuation:
Upgrade to BUY with TP of S$1.27, based on 16x FY19F PE.
Underpinned by double-digit capacity growth and higher-quality
earnings growth supported by more stable cleanroom margins, we
believe that Riverstone deserves to at least trade at its historical average
valuation of 16x FY19F PE, which represents a c.45% discount to larger
peers’ 29x.
Key Risks to Our View:
Global economic slowdown. While margins for cleanroom gloves tend
to be resilient, demand for these gloves could be threatened in the
event of a slowdown in the global economy.
At A Glance Issued Capital (m shrs) 741
Mkt. Cap (S$m/US$m) 771 / 584
Major Shareholders (%)
Ringlet Investment Limited 50.8
Wai Keong Lee 10.9
Free Float (%) 33.5
3m Avg. Daily Val (US$m) 0.28
ICB Industry : Health Care / Health Care Equipment & Services
DBS Group Research . Equity 26 Feb 2018
Singapore Company Guide
Riverstone Holdings Version 10 | Bloomberg: RSTON SP | Reuters: RVHL.SI Refer to important disclosures at the end of this report
90
140
190
240
290
340
390
0.3
0.5
0.7
0.9
1.1
1.3
Feb-14 Feb-15 Feb-16 Feb-17 Feb-18
Relative IndexS$
Riverstone Holdings (LHS) Relative STI (RHS)
Company Guide
Riverstone Holdings
WHAT’S NEW
Riverstone rises above persistent headwinds to deliver record-breaking FY17
Record RM129.3m profit in FY17. Riverstone delivered a
decent set of 4Q17 results despite challenging operating
conditions. Sales grew 12.2% q-o-q to c.RM210.7m on the
back of capacity growth, but the unfavourable mix shift
towards a higher proportion of lower-margin healthcare
gloves resulted in relatively flat earnings of c.RM34.2m (vs
RM34.3m in 3Q17).
On a full-year basis, the record sales and earnings of
RM817.4m and RM129.3m were largely in line.
Higher dividend of 7 Scts for FY17 as Riverstone maintains a
40% payout, up 8% from 6.49 Scts in FY16.
Forex volatility a drag on strong core growth momentum.
Volatility in the USD/MYR rate has weighed heavily on the
sector’s performance, Riverstone was not spared. In FY17,
the group incurred net foreign exchange losses of c.RM13m,
partly offset by hedging gains of c.RM6.8m as the company
typically hedges c.50% of contracted sales.
Apart from the forex drag, Riverstone’s core growth was
otherwise strong, growing c.17.1% y-o-y to c.RM135.5m (vs
c.RM115.8m in FY16):
(RM$ m) FY16 FY17 %Chg
(yoy)
Net Profit 120.4 129.3 +7.4%
Adjustments:
Forex Loss
(Gain)
(9.3) 13.0
Fair Value Loss
(Gain) on
Derivatives
4.7 (6.7)
Adjusted Net
Profit
115.8 135.5 +17.1%
Source: Company, DBS Bank
Plans to further cultivate cleanroom business starting to pay
off. Taking into account Riverstone’s temporary operational
hiccup in 3Q which affected its production ramp, we
observe that core earnings momentum has in fact outpaced
output growth at 17.1% vs 16.9% respectively, implying
that plans to further grow cleanroom sales are starting to
bear fruit.
While dipping lines can be used interchangeably between
healthcare and cleanroom gloves, the latter typically
undergo additional secondary processes in specialised
cleanroom facilities. Discussions during the 3Q17 and 4Q17
results briefing revealed that utilisation for these facilities
have improved by >20% q-o-q to nearly 100% currently,
which further supports our view that the cleanroom
segment is starting to see stronger growth vs the healthcare
segment.
Anticipate weaker 1Q18 as headwinds persist, but stronger
growth to kick in from 2Q18. With operating conditions
little changed, we expect industry headwinds – fluctuations
in USD/MYR, volatile raw material prices and operating costs
– to remain a bane for the glove industry at large. Further,
with the revised foreign worker levy policy and gas price
hike coming into force in January 2018, we anticipate 1Q18
results to be weak across the industry.
All else equal, underpinned by a c.33% increase in
cleanroom capacity to at least 2bn by end-2Q18, Riverstone
is set to see stronger growth ahead. Full contribution from
these incoming cleanroom capacities will likely only come in
from FY19 as the group ramps up on production
progressively.
Riverstone due for a re-rating. While shares of larger peers –
Kossan, Hartalega and Top Glove have re-rated strongly in
recent months, Riverstone’s strengths remain
underappreciated. Based on consensus estimates, Hartalega
currently trades at +1SD of its historical forward PE
valuations, Top Glove and Kossan above +2SD. Meanwhile,
Riverstone continues to trade below its historical average
forward PE. As a result, Riverstone’s discount gap has
widened significantly vs peers, from c.28% to 49%
currently.
Underpinned by capacity growth at c.17% CAGR (vs larger
peers’ average of c.15.2%) over FY17-19 and higher-quality
earnings growth supported by more defensible margins, we
believe that Riverstone deserves to at least trade at its
historical average valuation of 16x FY19F PE (c.45%
discount to larger peers’ 29x) as earnings growth catches
up. Better-than-expected execution on these incoming
capacities could spark a further re-rating to 18x FY19F PE
(+1SD), in line with peers.
Upgrade to BUY with a higher TP of S$1.27, based on 16x
FY19F PE. Post 4Q17, we assume higher margins on a more
favourable product mix, and partly offset by lower ASPs
resulting from the recent forex weakness, we raise our
FY19F earnings projections by c.6% to RM172.8m.
After rolling forward our earnings base to FY19F to better
capture the strong growth potential from the roll-out of
incoming cleanroom capacities, and pegging to historical
average forward valuation of 16x, we arrive at a higher TP of
S$1.27 (vs S$1.09 previously). Upgrade to BUY.
Company Guide
Riverstone Holdings
Quarterly / Interim Income Statement (RMm)
FY Dec 4Q2016 3Q2017 4Q2017 % chg yoy % chg qoq
Revenue 183 188 211 15.1 12.2
Cost of Goods Sold (135) (137) (159) 18.1 16.2
Gross Profit 48.2 50.8 51.5 6.8 1.3
Other Oper. (Exp)/Inc (6.8) (10.9) (11.0) 61.7 0.8
Operating Profit 41.4 40.0 40.5 (2.2) 1.4
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - -
Associates & JV Inc 0.0 0.0 0.0 - -
Net Interest (Exp)/Inc 0.0 (0.3) (0.3) nm 6.7
Exceptional Gain/(Loss) 0.0 0.0 0.0 - -
Pre-tax Profit 41.4 39.7 40.3 (2.8) 1.5
Tax (5.4) (5.3) (6.0) 11.8 13.3
Minority Interest 0.0 0.0 0.0 - -
Net Profit 36.0 34.3 34.2 (5.0) (0.3)
Net profit bef Except. 36.0 34.3 34.2 (5.0) (0.3)
EBITDA 49.7 48.3 48.9 (1.7) 1.2
Margins (%)
Gross Margins 26.3 27.1 24.4
Opg Profit Margins 22.6 21.3 19.2
Net Profit Margins 19.7 18.3 16.2
Source of all data: Company, DBS Bank
Company Guide
Riverstone Holdings
CRITICAL DATA POINTS TO WATCH
Critical Factors
Growth in global demand for healthcare gloves, at least in near
to medium term. The Malaysian Rubber Glove Manufacturers
Association (MARGMA) estimates that demand for healthcare
gloves is likely to grow at 8-12% p.a. between 2014 and 2020.
As a relatively new entrant in the healthcare glove industry and
with ambitions to grow revenue from this segment quickly to
drive its earnings, we project a ramp-up in Riverstone’s
healthcare glove production at a 17.5% CAGR over FY17-19F.
Long-term trends also indicate favourable demand prospects.
According to MARGMA, the global demand ratio of natural
rubber and synthetic (nitrile) rubber gloves shifted from 74:26 in
2009 to 53:47 in 2014. On the back of rising awareness of latex
allergies in emerging economies and the synthetic variety's low
cost, we expect the ratio to shift away from natural rubber
gloves in the long run.
Riverstone could be a beneficiary of the long-run substitution of
rubber gloves and PVC gloves (especially for the cleanroom
segment) by nitrile gloves as it is principally engaged in the
production of the latter.
Capacity expansion to underpin growth. To capitalise on the
favourable demand growth outlook in both the short and long
term, Riverstone guided that it now expects to expand its
manufacturing capacity to a minimum of 7.6bn gloves by end-
2017, 9bn gloves by end-2018 and 10.4bn gloves by end-2019,
as compared to 8.2bn gloves by 2018 previously.
We expect new production capacities to propel top-line growth
at a CAGR of 13.6% between FY17 and FY19F, as they
gradually come on stream.
Higher proportion of cleanroom gloves. As Riverstone’s glove
production lines can be used interchangeably for both
healthcare and higher-margin cleanroom glove production,
priority is typically given to cleanroom glove orders.
With demand in the niche cleanroom segment mainly stemming
from the semiconductor and mobile tablet sectors, we see
Riverstone as an indirect beneficiary of the current
semiconductor upcycle. Given the current competitive landscape
within the healthcare glove space, a higher sustained proportion
of cleanroom glove production could help Riverstone better
defend margins vs peers (which are predominantly focused in
the production of healthcare gloves).
Greater efficiency from higher automation and larger scale
should help to maintain margins. Despite competition and
pressure on ASPs, we expect automation efforts and
Riverstone’s growing economies of scale to help shore up and
sustain operating margins above 19%, to support stable growth
in net profit ahead.
Capital Expenditure (RM$m)
Production Capacity (m gloves)
Cleanroom Gloves (m gloves)
Healthcare Gloves (m gloves)
Operating Margins (%)
Source: Company, DBS Bank
54.2
94.3
110
75 75
0.0
15.9
31.8
47.7
63.6
79.6
95.5
111.4
2015A 2016A 2017A 2018F 2019F
3942
5252
6371
7590
8924
0.0
1820.5
3641.0
5461.5
7282.0
9102.5
2015A 2016A 2017A 2018F 2019F
985 1014
1274
1609
1892
0.00
385.95
771.89
1157.84
1543.78
1929.73
2015A 2016A 2017A 2018F 2019F
2956
4238
5097
5981
7032
0.0
1420.5
2841.0
4261.5
5681.9
7102.4
2015A 2016A 2017A 2018F 2019F
25.8
21.2
18.6 19.3 19.2
0.0
5.2
10.4
15.6
20.8
26.0
2015A 2016A 2017A 2018F 2019F
Company Guide
Riverstone Holdings
Balance Sheet:
Healthy balance sheet. In 1Q17, the company took on debt for
the first time in five years to fund its upcoming expansion plans.
Despite this, we note that Riverstone remained in a net cash
position of RM89.3m as at end 4Q17.
Forecast net fixed asset growth at a CAGR of 10% between
2015 and 2019. As capacity is expected to double in 2019 from
2015 levels, we project the group’s net fixed assets to jump by
nearly 50% from RM286m in 2015 to RM419m in 2018.
Share Price Drivers:
Opportunities for inorganic growth. Due to the stringent
requirements for the establishment of cleanroom facilities,
Riverstone does not rule out the possibility of acquiring quality
cleanroom glove manufacturing companies in the future.
Cultivation of new markets for cleanroom products. As
cleanroom products are manufactured in controlled
environments and are subject to stringent requirements, they
are able to deliver much higher margins relative to healthcare
gloves. The ability to cultivate new markets for cleanroom
products, similar to what Riverstone recently achieved with its
diversification into the consumer electronics sector, should help
to boost earnings.
An acceleration of capacity expansion plans beyond the current
guidance of 10.4bn gloves by end-2019 could drive a further re-
rating of share price.
Key Risks:
Global economic slowdown could impact cleanroom sales. A
slowdown in the general economy could lead to declines in
discretionary spending and manufacturing activity in the HDD
industry. Although Riverstone has been gradually reducing its
exposure to HDDs, down from historical highs of up to 70%,
they still make up less than 50% of the company's cleanroom
portfolio today.
Intensifying competition could erode profitability. We believe
that oversupply over the next few years is unlikely given the
more balanced demand-supply outlook for healthcare gloves
among Malaysian peers compared to a year ago. However,
rising competition from budding glove manufacturing regions
such as Thailand and China could threaten Riverstone’s market
share and pricing power later on if it fails to advance on the
technological front.
Company Background
Riverstone Holdings (RSTON SP) is a natural rubber and nitrile
(synthetic rubber) glove manufacturer specialising in cleanroom
and healthcare gloves. It is also engaged in the manufacture
and distribution of other ancillary products such as finger cots,
packaging bags and face masks.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
1.0
1.1
1.1
1.2
1.2
0.00
0.05
0.10
0.15
0.20
0.25
2015A 2016A 2017A 2018F 2019F
Gross Debt to Equity (LHS) Asset Turnover (RHS)
0.0
20.0
40.0
60.0
80.0
100.0
120.0
2015A 2016A 2017A 2018F 2019F
Capital Expenditure (-)
RMm
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2015A 2016A 2017A 2018F 2019F
Avg: 14x
+1sd: 18x
+2sd: 21.9x
-1sd: 10.1x
-2sd: 6.2x5.5
10.5
15.5
20.5
25.5
Feb-14 Feb-15 Feb-16 Feb-17
(x)
Avg: 3.61x
+1sd: 4.42x
+2sd: 5.23x
-1sd: 2.8x
-2sd: 1.98x1.7
2.7
3.7
4.7
5.7
6.7
Feb-14 Feb-15 Feb-16 Feb-17
(x)
Company Guide
Riverstone Holdings
Key Assumptions
FY Dec 2015A 2016A 2017A 2018F 2019F
Capital Expenditure (RM$m)
54.2 94.3 110 75.0 75.0
Production Capacity (m gloves)
3,942 5,252 6,371 7,590 8,924 Cleanroom Gloves (m gloves)
985 1,014 1,274 1,609 1,892
Healthcare Gloves (m gloves)
2,956 4,238 5,097 5,981 7,032
Operating Margins (%) 25.8 21.2 18.6 19.3 19.2
Income Statement (RMm)
FY Dec 2015A 2016A 2017A 2018F 2019F
Revenue 560 655 817 934 1,055
Cost of Goods Sold (385) (482) (620) (702) (795)
Gross Profit 175 173 198 233 260
Other Opng (Exp)/Inc (30.5) (34.3) (45.9) (52.8) (57.2)
Operating Profit 144 139 152 180 202
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc 0.0 0.0 (1.0) (1.8) (3.0)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit 144 139 151 178 199
Tax (17.8) (18.5) (21.5) (23.7) (26.6)
Minority Interest 0.0 0.0 0.0 0.0 0.0
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net Profit 127 120 129 154 173
Net Profit before Except. 127 120 129 154 173
EBITDA 169 169 186 230 260
Growth
Revenue Gth (%) 40.3 16.9 24.8 14.3 12.9
EBITDA Gth (%) 68.4 (0.3) 10.5 23.6 12.8
Opg Profit Gth (%) 78.0 (3.8) 9.4 18.5 12.4
Net Profit Gth (Pre-ex) (%) 78.4 (4.9) 7.4 19.5 11.9
Margins & Ratio
Gross Margins (%) 31.2 26.4 24.2 24.9 24.6
Opg Profit Margin (%) 25.8 21.2 18.6 19.3 19.2
Net Profit Margin (%) 22.6 18.4 15.8 16.5 16.4
ROAE (%) 29.7 23.2 21.8 22.7 22.2
ROA (%) 24.7 19.2 17.9 18.4 17.6
ROCE (%) 28.8 22.7 20.7 20.6 19.1
Div Payout Ratio (%) 37.8 40.0 40.2 40.2 40.2
Net Interest Cover (x) NM 138,849.0 148.4 100.0 67.4
Source: Company, DBS Bank
Company Guide
Riverstone Holdings
Quarterly / Interim Income Statement (RMm)
FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017
Revenue 183 206 213 188 211
Cost of Goods Sold (135) (154) (170) (137) (159)
Gross Profit 48.2 51.8 43.7 50.8 51.5
Other Oper. (Exp)/Inc (6.8) (12.4) (11.7) (10.9) (11.0)
Operating Profit 41.4 39.4 32.0 40.0 40.5
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc 0.0 (0.2) (0.3) (0.3) (0.3)
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit 41.4 39.2 31.7 39.7 40.3
Tax (5.4) (5.6) (4.6) (5.3) (6.0)
Minority Interest 0.0 0.0 0.0 0.0 0.0
Net Profit 36.0 33.6 27.1 34.3 34.2
Net profit bef Except. 36.0 33.6 27.1 34.3 34.2
EBITDA 49.7 47.6 40.3 48.3 48.9
Growth
Revenue Gth (%) 9.6 12.4 3.7 (11.9) 12.2
EBITDA Gth (%) 19.4 (4.2) (15.3) 19.8 1.2
Opg Profit Gth (%) 21.7 (5.0) (18.8) 25.0 1.4
Net Profit Gth (Pre-ex) (%) 20.8 (6.7) (19.5) 26.8 (0.3)
Margins
Gross Margins (%) 26.3 25.2 20.5 27.1 24.4
Opg Profit Margins (%) 22.6 19.1 15.0 21.3 19.2
Net Profit Margins (%) 19.7 16.3 12.7 18.3 16.2
Balance Sheet (RMm)
FY Dec 2015A 2016A 2017A 2018F 2019F
Net Fixed Assets 277 337 420 444 462
Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0
Other LT Assets 9.61 8.62 9.74 9.74 9.74
Cash & ST Invts 129 103 114 165 277
Inventory 61.2 67.0 71.1 71.4 80.8
Debtors 103 140 145 187 211
Other Current Assets 6.06 11.9 20.9 20.9 20.9
Total Assets 585 668 781 898 1,062
ST Debt 0.0 0.0 6.00 6.00 6.00
Creditor 84.4 90.5 102 76.7 86.9
Other Current Liab 7.65 9.92 8.45 8.45 8.45
LT Debt 0.0 0.0 19.0 69.0 119
Other LT Liabilities 11.7 12.7 11.2 11.2 11.2
Shareholder’s Equity 482 555 634 727 830
Minority Interests 0.0 0.0 0.01 0.01 0.01
Total Cap. & Liab. 585 668 781 898 1,062
Non-Cash Wkg. Capital 78.2 119 127 194 217
Net Cash/(Debt) 129 103 89.3 89.8 152
Debtors Turn (avg days) 61.8 67.8 63.7 64.8 68.8
Creditors Turn (avg days) 68.3 70.7 60.0 50.0 40.5
Inventory Turn (avg days) 52.3 51.8 43.1 39.9 37.7
Asset Turnover (x) 1.1 1.0 1.1 1.1 1.1
Current Ratio (x) 3.2 3.2 3.0 4.9 5.8
Quick Ratio (x) 2.5 2.4 2.2 3.9 4.8
Net Debt/Equity (X) CASH CASH CASH CASH CASH
Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH
Capex to Debt (%) N/A N/A 441.1 100.0 60.0
Z-Score (X) 16.6 15.4 14.7 14.7 10.9
Source: Company, DBS Bank
Company Guide
Riverstone Holdings
Cash Flow Statement (RMm)
FY Dec 2015A 2016A 2017A 2018F 2019F
Pre-Tax Profit 144 139 151 178 199
Dep. & Amort. 24.8 29.9 34.5 50.4 57.7
Tax Paid (18.5) (22.6) (21.3) (23.7) (26.6)
Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0
Chg in Wkg.Cap. (26.3) (31.8) (11.6) (67.3) (23.4)
Other Operating CF (2.3) 4.65 (6.8) 0.0 0.0
Net Operating CF 122 119 146 138 207
Capital Exp.(net) (54.2) (94.3) (110) (75.0) (75.0)
Other Invts.(net) 0.0 (2.3) 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF 0.0 0.0 0.0 0.0 0.0
Net Investing CF (54.2) (96.6) (110) (75.0) (75.0)
Div Paid (25.8) (48.5) (48.1) (62.1) (69.5)
Chg in Gross Debt 0.0 0.0 25.0 50.0 50.0
Capital Issues 0.0 0.0 0.0 0.0 0.0
Other Financing CF 0.0 0.0 0.0 0.0 0.0
Net Financing CF (25.8) (48.5) (23.1) (12.1) (19.5)
Currency Adjustments 7.07 0.65 (1.3) 0.0 0.0
Chg in Cash 49.2 (25.5) 11.1 50.5 113
Opg CFPS (S cts) 6.73 6.84 7.13 9.29 10.5
Free CFPS (S cts) 3.08 1.12 1.61 2.84 5.99
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Carmen Tay
S.No.Date of
Report
Closing
Price
12-mth
Target
Price
Rat ing
1: 24 Feb 17 0.92 0.92 HOLD
2: 05 May 17 0.97 1.07 BUY
3: 17 Jul 17 1.05 1.07 BUY
4: 04 Aug 17 1.05 1.07 BUY
5: 07 Aug 17 1.06 1.09 HOLD
6: 08 Nov 17 1.07 1.09 HOLD
Note : Share price and Target price are adjusted for corporate actions.
1
23
4
5
6
0.79
0.84
0.89
0.94
0.99
1.04
1.09
1.14
1.19
1.24
Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18
S$
Company Guide
Riverstone Holdings
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 26 Feb 2018 08:01:40 (SGT) Dissemination Date: 26 Feb 2018 08:56:54 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
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Company Guide
Riverstone Holdings
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ed: JLC / sa:YM, PY, CS
BUY Last Traded Price ( 14 Feb 2018): S$0.56 (STI : 3,402.86)
Price Target 12-mth: S$0.69 (23% upside)
Analyst Rachel TAN +65 6682 3713 [email protected] Derek TAN +65 6682 3716 [email protected]
What’s New FY17 net profit -41% y-o-y; lower development profits
and income from investment properties (divestment)
Unrecognised sales stood at S$459m; largely in
Australia with expected completion in FY18/FY19
First launch in FY18 saw 50% take-up
Declared final div of 0.771 Scents; maintain 40%
payout
Price Relative
Forecasts and Valuation FY Dec (S$ m) 2016A 2017A 2018F 2019F
Revenue 385 247 190 406 EBITDA 67.6 41.6 77.4 120 Pre-tax Profit 65.6 46.7 54.1 94.8 Net Profit 49.8 29.4 41.2 68.7 Net Pft (Pre Ex.) 33.4 6.51 41.2 68.7 Net Pft Gth (Pre-ex) (%) (57.4) (80.5) 532.8 66.6 EPS (S cts) 4.17 2.47 3.46 5.76 EPS Pre Ex. (S cts) 2.80 0.55 3.46 5.76 EPS Gth Pre Ex (%) (57) (80) 533 67 Diluted EPS (S cts) 4.17 2.47 3.46 5.76 Net DPS (S cts) 1.67 0.98 0.86 1.44 BV Per Share (S cts) 41.2 42.2 44.6 49.5 PE (X) 13.4 22.7 16.2 9.7 PE Pre Ex. (X) 20.0 102.5 16.2 9.7 P/Cash Flow (X) 88.6 nm nm 34.4 EV/EBITDA (X) 17.5 29.4 20.3 13.5 Net Div Yield (%) 3.0 1.8 1.5 2.6 P/Book Value (X) 1.4 1.3 1.3 1.1 Net Debt/Equity (X) 1.0 1.1 1.7 1.6 ROAE (%) 10.5 5.9 8.0 12.2 Earnings Rev (%): - - Consensus EPS (S cts): 3.60 19.2 57.0 Other Broker Recs: B: 2 S: 0 H: 0
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P
Ready, set, go!
Maintain BUY; TP of S$0.69. We are maintaining our BUY rating
and TP of S$0.69 (based on 30% discount to RNAV) on Roxy-
Pacific Holdings (Roxy). Benefitting from being early in the current
en-bloc cycle, Roxy is one of the few “undiscovered” mid-cap
developer proxies to ride the recovery of the Singapore property
market. BUY!
Where we differ. Poised to hit an upbeat Singapore property
market with six freehold residential developments. We are one of
the first few brokerages to have initiated coverage on Roxy. While
the market may have overlooked Roxy for its size, we believe “best
things come in small packages”. We believe Roxy, being one of
the earliest to landbank in the current market cycle, has six
freehold residential developments in Singapore which will be ready
to launch in 2018, two to three of which will be launched within
1Q18. We see this as a window for the group to capture the rise
in buyer demand before its peers.
Potential catalysts: Strong sales take-up, more landbanking,
acquisitions of good-quality investment properties.
Lower FY17 results but all eyes on FY18. FY17 net profit fell 41%
y-o-y largely from lower contributions from development
properties and investment properties (post-divestment). Despite a
weak FY17 results, management is upbeat on FY18, anticipating
better property sales, contributions from newly-acquired
investment properties, and a better outlook on Singapore’s
hospitality sector. Declared 0.771 Scents final dividend.
Valuation:
Our TP of S$0.69 is based on 30% discount to RNAV of S$0.98.
The stock currently trades at 1.2x FY18F P/BV, below historical
average. At its peak, Roxy trades at 2.3x P/BV.
Key Risks to Our View:
i) Slower take-up rates, ii) Government regulates more to manage
the Singapore property market, iii) AUD / NZD / JPY forex
fluctuations, and iv) acquisitions of less-desirable investment
properties.
At A Glance Issued Capital (m shrs) 1,192
Mkt. Cap (S$m/US$m) 668 / 508
Major Shareholders (%)
Kian Lim Investment Pte Ltd 38%
Teo Hong Lim 12%
Sen Lee Development Pte Ltd 11%
Free Float (%) 22%
3m Avg. Daily Val (US$m) 0.13
ICB Industry : Financials / Real Estate
DBS Group Research . Equity
15 Feb 2018
Singapore Company Guide
Roxy-Pacific Holdings Version 1 | Bloomberg: ROXY SP | Reuters: RXYP.SI Refer to important disclosures at the end of this report
Company Guide
Roxy-Pacific Holdings
WHAT’S NEW
Ready, set, go!
FY17 net profit fell 41% y-o-y largely from lower
development profits and lower contributions from investment
properties: Roxy’s FY17 net profit fell 41% y-o-y to S$29m,
mainly due to lower revenue (-36% y-o-y) and lower share of
results from associates (-30% y-o-y) on the back of lower
recognition of Eon Shenton, partially offset by higher fair
value gains from investment properties (+40% y-o-y).
Lower revenue was recorded in all segments but mainly in
development properties (-41% y-o-y) and investment
properties (-14% y-o-y).
The decrease in revenue from development properties was
largely due to lower revenue recognised from projects
completed or nearing completion in FY17 such as Jade
Residences, Whitehaven, and LIV on Wilkie. In addition, there
was an absence of revenue recognised from LIV on Sophie
which was completed in FY16.
The fall in investment properties was mainly due to the loss of
rental income following the divestment of 59 Goulburn
Street.
Revenue from hotel properties fell 4% y-o-y mainly due to
lower RevPar of Grand Mercure Roxy Hotel, following more
subdued corporate activity in FY17 and pricing competition
from new hotel supply.
Gross profit margin improved to 24% from 21% in FY16,
largely led by better margins of 15% recorded from its
development properties (vs 14% in FY16).
Roxy has declared a final dividend of 0.771 Scents. This brings
total FY17 dividend to 0.985 Scents vs 1.667 Scents in FY16.
The dividend payout ratio remains stable at 40%.
Unrecognised sales stood at S$459m as at FY17: As at FY17,
unrecognised sales stood at S$459m largely from its Australia
properties (89%) which are expected to be completed in
2018 / 2019.
First launch in FY18 (The Navian) recorded 50% sales take-up
in one month; targets to launch six properties (including The
Navian) in FY18. Roxy officially launched its first property in
FY18, The Navian in Jan18. As at 5 Feb 18, it has sold 23
units, 50% of total units, which is an encouraging sign, in our
view. Conservatively, management targets to launch six
properties (including The Navian) in FY18 with a total of 440
units. However, management hopes to launch another 1 or 2
more properties in FY18, if ready, to capture the demand as
soon as possible. Next in line to be launched are Harbour
View Gardens (after Chinese New Year) and Grange Road site
(expected in Apr18) while the Upper Bukit Timah site, the
River Valley site, and the Guillemard Lane site are expected to
be launched in 2Q18 / 3Q18.
Acquired three more land sites in Dec17 / Jan18. Roxy
remains active in its landbanking activities and has
accumulated another three more sites in Dec17 / Jan18 and
now owns 10 development sites, as a mean to replenish its
landbank and to capture good opportunities. The sites are
located mainly in the RCR. Management expects to launch
these properties in FY19.
Received interest to acquire its 117 Clarence Street.
According to media reports, we understand that Roxy has
received encouraging interest to acquire its 117 Clarence
Street office building in Sydney. The building was jointly
acquired with Tong Eng Group in Feb16. Management may
consider a divestment if the offer price is attractive. We have
yet to include the new landbank in the numbers.
Expect to see better RevPar in 2H18. While FY17 was a
challenging year for its hotel property in Singapore, Grand
Mercure Singapore Roxy, management expects to see some
improvement in RevPar in 2H18 as supply starts to taper off,
reducing pricing competition. In addition, management is
upbeat on the major events to be held in FY18, following
encouraging signs seen in the beginning of the year with the
Singapore Airshow 2018.
The newly acquired hotel in Osaka (Oct17) has been
successfully rebranded to Noku Roxy in Jan18 which will be
self-managed.
Noku Maldives started operations in Dec17 and expected to
be fully open soon while its hotel in Phuket is expected to be
completed and begin operations in FY19.
Maintain BUY; TP of S$0.69. We maintain our BUY rating and
target price of S$0.69. We believe Roxy is a good small- to
mid-cap proxy to Singapore property and is poised to benefit
from upbeat sentiment in the sector from the launch of six
freehold residential properties before its peers. In addition,
Roxy, being small and nimble, has been selective in small but
freehold land sites. This gives them the flexibility i) to launch
quickly and hit the market before its peers; ii) to adopt the
quick-turnaround model; and iii) to change according to
market sentiment. Key potential catalysts are i) strong sales
take-up rates upon launch; ii) ability to landbank continually;
and iii) acquisition of good-quality investment properties.
Roxy currently trades at 1.3x FY18F P/BV, below historical
average. At its peak, Roxy traded at 2.3x P/BV.
Company Guide
Roxy-Pacific Holdings
Quarterly / Interim Income Statement (S$m)
FY Dec 4Q2016 3Q2017 4Q2017 % chg yoy % chg qoq
Revenue 93.1 60.3 43.3 (53.5) (28.1)
Cost of Goods Sold (73.0) (42.7) (31.4) (57.0) (26.5)
Gross Profit 20.2 17.5 11.9 (40.8) (32.0)
Other Oper. (Exp)/Inc (11.4) (11.4) (5.7) (50.2) (50.3)
Operating Profit 8.73 6.10 6.24 (28.6) 2.2
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - -
Associates & JV Inc 8.13 0.51 5.22 (35.8) nm
Net Interest (Exp)/Inc (3.7) (3.2) (2.7) 27.0 15.6
Exceptional Gain/(Loss) 0.17 0.0 0.0 - -
Pre-tax Profit 13.3 3.39 8.75 (34.3) 158.1
Tax (1.4) (1.1) (1.4) 1.3 23.8
Minority Interest (0.7) (0.8) (0.1) nm nm
Net Profit 11.3 1.50 7.27 (35.5) 385.3
Net profit bef Except. 11.1 1.51 7.27 (34.5) 383.3
EBITDA 19.1 7.12 13.1 (31.3) 84.6
Margins (%)
Gross Margins 21.6 29.1 27.5
Opg Profit Margins 9.4 10.1 14.4
Net Profit Margins 12.1 2.5 16.8
Source of all data: Company, DBS Bank
Company Guide
Roxy-Pacific Holdings
CRITICAL DATA POINTS TO WATCH
Critical Factors
Launching six freehold residential projects in Singapore in 2018.
As developers now rush to landbank, Roxy can reap the benefits
of being one of the earliest to landbank among the mid- to
small-cap developers and successfully acquire seven plots of
land to be launched in 2018. As such, Roxy has a total of c.476
residential units to be launched in 2018 that could potentially
generate more than S$0.5bn in total GDV. Assuming 100%
take-up rates, sales volume could potentially grow 8x y-o-y on
annualised sales volume for FY17.
Beefing up its recurring-income portfolio. Since the slowdown
of the Singapore property market in 2013, Roxy has started to
venture out of Singapore and expanded its horizon to build its
portfolio of assets to improve recurring income and provide
stability in earnings. In FY17, Roxy acquired four commercial
buildings, two in Australia, and two in New Zealand, adding to
its portfolio of one commercial building (excluding the
divestment of 59 Goulburn commercial building).
In addition, the Group continues to build its hospitality
segment, which will add to its recurring income. In FY17, the
Group acquired Tenmabashi Grand Hotel Osaka for JPY3bn.
These properties will start to contribute from FY18 onwards.
Realisation of development projects in Australia upon
completion. Roxy’s investments in development projects in
Australia in 2015 will soon pay off when five projects are
completed by 2018. The projects have all been substantially sold
(>95% sold) except the last project launched in 3Q17; Art
House at West End Glebe. The units sold have a total sales value
of approximately S$300mn and could potentially contribute
21% to 44% of FY18F – FY19F earnings.
Replenishing landbank for sustainability. As Roxy adopts a
quick-turnaround model and launches all its landbank in FY18,
the ability to replenish its landbank promptly would be crucial in
ensuring sustainability of its Singapore residential business if it
continues strengthening for a longer period of time. So far, it
has historically proven its ability to source for strategic land sites
and possibly faces less competition as it typically targets smaller
plots of land which may not be attractive to larger developers.
Revenue (FY15 – FY19F)
Gross profit (FY15 – FY19F)
Gross profit margin (%)
RNAV (S$’mn)
OMV (S$'mn)
Surplus / deficit of assets:
Development properties 105.9
Landbank 18.5
Hotel properties 447.2
Investment properties 97.6
669.2
NAV 504.0
RNAV 1,173.2
No of shares 1,193.5
RNAV per share (S$) 0.98
Discount 30%
Price Target (S$) 0.69
Source: Company, DBS Bank
461
385
233
502
213
-
100
200
300
400
500
600
2015 2016 2017F 2018F 2019F
Reven
ue (S$
'mn)
Development Properties Hotel Ownership Investment Properties
129.7
81.2
59.2
147.3
69.2
-
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
200.0
2015 2016 2017F 2018F 2019F
Reven
ue (S$
'mn)
Development Properties Hotel Ownership Investment Properties
28%
21%
25%
29%
32%
15%
17%
19%
21%
23%
25%
27%
29%
31%
33%
35%
2015 2016 2017F 2018F 2019F
Gro
ss p
rofit m
arg
in (%
)
Company Guide
Roxy-Pacific Holdings
Appendix 1:
Roxy’s absolute performance vs Singapore property industry sales volume Remarks
Share price performance is
positively correlated with
sales volume in the
Singapore property
industry, especially in the
initial stages of an upcycle
seen in 2017, when
sentiment in the property
sector turned positive,
supported by an increase in
sales volume.
Source: DBS Bank, Thomson Analytics, Company
Roxy’s absolute performance vs its property sales volume Remarks
The market did not
reward Roxy despite the
strong sales
performance in 2016. As
the strong sales volume
was led by sales in
Australia and Malaysia,
share price performance
seemed to be more
correlated with its sales
volume in Singapore.
Source: DBS Bank, Thomson Analytics, Company
Roxy’s absolute performance vs PPI changes Remarks
We do not see much
correlation between
share price performance
and property price
changes.
Source: DBS Bank, Thomson Analytics, Company, SGX
60
160
260
360
460
560
660
Dec-
08
May
-09
Oct
-09
Mar
-10
Aug-
10
Jan-
11
Jun-
11
Nov-
11
Apr-1
2
Sep-
12
Feb-
13
Jul-1
3
Dec-
13
May
-14
Oct
-14
Mar
-15
Aug-
15
Jan-
16
Jun-
16
Nov-
16
Apr-1
7
Sep-
17
-
2,000
4,000
6,000
8,000
10,000
12,000
14,000
Shar
e pr
ice a
bs p
erf (
INde
x)
Sale
s vol
ume
(uni
ts)
Sale volume (units) - RHS Abs Price Perf - LHS
Led by a change in Singapore property's sentiment as seen in a pick-up in sales volume
60
160
260
360
460
560
660
Dec-
08
May
-09
Oct
-09
Mar
-10
Aug-
10
Jan-
11
Jun-
11
Nov-
11
Apr-1
2
Sep-
12
Feb-
13
Jul-1
3
Dec-
13
May
-14
Oct
-14
Mar
-15
Aug-
15
Jan-
16
Jun-
16
Nov-
16
Apr-1
7
Sep-
17
-20
-15
-10
-5
0
5
10
15
20
Shar
e pr
ice a
bs p
erf (
INde
x)
% c
hang
e in
PPI
(%)
% change in PPI - RHS Abs Price Perf - LHS
60
110
160
210
260
310
2011 2012 2013 2014 2015 2016 9M2017 FY2018E-
100
200
300
400
500
600
700
800
900
Sale
s vo
lum
e (u
nits
)
Shar
e pr
ice
abs
perf
(Ind
ex)
% change in PPI - RHS Abs Price Perf - LHS
St rong sales led by property sales in Australia / Malaysia
Led by strong sales volume in 2012
Company Guide
Roxy-Pacific Holdings
Balance Sheet:
Undervalued Net Asset Value (NAV). The group’s NAV is
conservative largely because the carrying values of its hospitality
portfolio is at historical cost. In addition, development
properties comprise close to 60% of its total assets, which
typically offer more upside upon the realisation of these
development properties. Its RNAV is more than double its
current NAV.
Net debt to equity stands at 1x in FY17. Roxy’s net debt to
equity stood at 1x as at FY17. We expect the ratio could
increase to 1.7x following the landbanking / development and
acquisition of investment properties activities in FY16/FY17.
While it may seem high, its NAV could be conservative as
mentioned above. The Group’s net debt to adjusted NAV
(ANAV) stood at 0.6x as at FY17.
Share Price Drivers:
Strong sales take-up rates. Strong sales take-up rates upon
launch would boost confidence and ensure sustainable
profitability in its development properties. Depending on the
prices, it is also a testament that the market is receptive of
higher property prices. In addition, share price performance is
positively correlated to sales volume, especially the group’s sales
in Singapore.
Replenishing landbank is key to income sustainability. As Roxy
adopts a quick-turnaround model and plans to launch all its
landbank ahead of its peers, its ability to replenish landbank is
key to income sustainability in the longer term.
Key Risks:
Slower take-up rates. With six developments expected to be
launched in FY18, slower take-up rates for its properties would
impact the needs for more financing, thus, increasing its costs.
In addition, Roxy has the five-year timeline to complete its sales
before the ABSD and QC charges kick in.
Government regulates more to manage Singapore property.
Despite the multiple ‘warnings’ by the government to be
cautious of excessive exuberance in the property market, the
land bids and the property market remain robust and bullish.
We remain cautious that the government may decide to
implement some measures to ensure that the Singapore
property market remains sustainable in the medium term and
that it doesn’t become a “runaway train”. Depending on the
measures implemented, it could impact both the demand for
its projects or its future landbanking opportunities.
Company Background
Roxy-Pacific Holdings (Roxy) has a long track record in the
property and hospitality space since it was established in May
1967. Listed in March 2008, Roxy is one of the reputable
small- to mid-cap developers and has established its brand in
small- to medium-sized residential developments targeting
middle-to-upper-middle-income segments.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
Company Guide
Roxy-Pacific Holdings
Segmental Breakdown
FY Dec 2015A 2016A 2017A 2018F 2019F
Revenues (S$m)
Development Properties 404 327 192 122 338
Hotel Ownership 44.5 46.3 44.3 43.0 43.0
Investment Properties 12.2 12.5 10.8 24.9 24.9
Total 461 385 247 190 406
Gross Profit (S$m) Development Properties 93.3 45.3 28.0 20.3 62.8
Hotel Ownership 27.8 26.9 24.0 23.2 23.2
Investment Properties 8.58 9.00 7.59 17.8 17.8
Total 130 81.2 59.5 61.3 104
Gross Profit Margins (%) Development Properties 23.1 13.9 14.6 16.6 18.6
Hotel Ownership 62.4 58.1 54.2 54.0 54.0
Investment Properties 70.6 71.9 70.5 71.5 71.5
Total 28.1 21.1 24.1 32.3 25.6
Income Statement (S$m)
FY Dec 2015A 2016A 2017A 2018F 2019F
Revenue 461 385 247 190 406
Cost of Goods Sold (331) (304) (187) (128) (302)
Gross Profit 130 81.2 59.5 61.3 104
Other Opng (Exp)/Inc (35.9) (38.7) (36.8) (37.4) (38.6)
Operating Profit 93.8 42.5 22.8 33.1 74.4
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 11.1 18.6 13.0 38.5 38.5
Net Interest (Exp)/Inc (10.6) (11.9) (12.0) (17.5) (18.1)
Exceptional Gain/(Loss) 6.75 16.4 22.9 0.0 0.0
Pre-tax Profit 101 65.6 46.7 54.1 94.8
Tax (15.9) (12.7) (15.4) (10.3) (18.0)
Minority Interest (0.1) (3.1) (1.9) (2.6) (8.1)
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net Profit 85.1 49.8 29.4 41.2 68.7
Net Profit before Except. 78.3 33.4 6.51 41.2 68.7
EBITDA 110 67.6 41.6 77.4 120
Growth
Revenue Gth (%) 45.0 (16.4) (36.0) (23.1) 113.8
EBITDA Gth (%) (3.6) (38.5) (38.5) 86.1 55.0
Opg Profit Gth (%) 69.7 (54.7) (46.3) 45.2 124.7
Net Profit Gth (Pre-ex) (%) (12.9) (57.4) (80.5) 532.8 66.6
Margins & Ratio
Gross Margins (%) 28.1 21.1 24.1 32.3 25.6
Opg Profit Margin (%) 20.4 11.0 9.2 17.4 18.3
Net Profit Margin (%) 18.5 12.9 11.9 21.7 16.9
ROAE (%) 19.8 10.5 5.9 8.0 12.2
ROA (%) 6.0 3.5 2.0 2.6 4.1
ROCE (%) 6.0 2.6 1.1 1.8 3.6
Div Payout Ratio (%) 26.8 39.9 39.9 25.0 25.0
Net Interest Cover (x) 8.8 3.6 1.9 1.9 4.1
Source: Company, DBS Bank
Contributions from development properties in Australia, expected to be completed in FY18, recognised on a completed basis
Higher contributions from newly acquired investment properties
Company Guide
Roxy-Pacific Holdings
Quarterly / Interim Income Statement (S$m)
FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017
Revenue 93.1 65.4 77.8 60.3 43.3
Cost of Goods Sold (73.0) (49.1) (64.1) (42.7) (31.4)
Gross Profit 20.2 16.3 13.8 17.5 11.9
Other Oper. (Exp)/Inc (11.4) (7.6) (7.7) (11.4) (5.7)
Operating Profit 8.73 8.75 6.07 6.10 6.24
Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0
Associates & JV Inc 8.13 2.62 4.67 0.51 5.22
Net Interest (Exp)/Inc (3.7) (3.8) (4.0) (3.2) (2.7)
Exceptional Gain/(Loss) 0.17 1.55 18.7 0.0 0.0
Pre-tax Profit 13.3 9.17 25.4 3.39 8.75
Tax (1.4) (2.9) (10.1) (1.1) (1.4)
Minority Interest (0.7) (0.4) (0.6) (0.8) (0.1)
Net Profit 11.3 5.91 14.7 1.50 7.27
Net profit bef Except. 11.1 4.36 (4.0) 1.51 7.27
EBITDA 19.1 13.1 12.5 7.12 13.1
Growth
Revenue Gth (%) 2.4 (29.7) 18.9 (22.6) (28.1)
EBITDA Gth (%) 20.7 (31.4) (4.5) (43.2) 84.6
Opg Profit Gth (%) (15.8) 0.2 (30.6) 0.6 2.2
Net Profit Gth (Pre-ex) (%) 49.2 (60.7) (190.8) (138.0) 383.3
Margins
Gross Margins (%) 21.6 24.9 17.7 29.1 27.5
Opg Profit Margins (%) 9.4 13.4 7.8 10.1 14.4
Net Profit Margins (%) 12.1 9.0 18.9 2.5 16.8
Balance Sheet (S$m)
FY Dec 2015A 2016A 2017A 2018F 2019F
Net Fixed Assets 130 176 216 263 309
Invts in Associates & JVs 127 158 198 237 275
Other LT Assets 181 200 127 161 161
Cash & ST Invts 395 325 322 175 131
Inventory 0.13 0.78 1.07 1.07 1.07
Debtors 28.9 93.2 53.3 39.2 83.9
Other Current Assets 547 509 598 772 772
Total Assets 1,409 1,462 1,516 1,648 1,733
ST Debt 485 562 554 554 554
Creditor 11.8 15.6 88.9 9.69 20.7
Other Current Liab 110 85.3 30.9 10.3 18.0
LT Debt 323 271 318 518 518
Other LT Liabilities 21.3 33.1 16.5 16.5 16.5
Shareholder’s Equity 458 491 503 532 591
Minority Interests 0.63 3.75 5.07 7.69 15.8
Total Cap. & Liab. 1,409 1,462 1,516 1,648 1,733
Non-Cash Wkg. Capital 454 502 533 793 819
Net Cash/(Debt) (413) (507) (549) (897) (941)
Debtors Turn (avg days) 40.5 57.8 108.3 89.0 55.4
Creditors Turn (avg days) 13.7 16.7 105.0 146.6 18.8
Inventory Turn (avg days) 0.1 0.6 1.9 3.2 1.3
Asset Turnover (x) 0.3 0.3 0.2 0.1 0.2
Current Ratio (x) 1.6 1.4 1.4 1.7 1.7
Quick Ratio (x) 0.7 0.6 0.6 0.4 0.4
Net Debt/Equity (X) 0.9 1.0 1.1 1.7 1.6
Net Debt/Equity ex MI (X) 0.9 1.0 1.1 1.7 1.6
Capex to Debt (%) 1.7 5.8 6.1 4.9 4.9
Z-Score (X) 0.0 NA NA NA NA
Source: Company, DBS Bank
Higher gearing from investments made in FY16 / FY17
Company Guide
Roxy-Pacific Holdings
Cash Flow Statement (S$m)
FY Dec 2015A 2016A 2017A 2018F 2019F
Pre-Tax Profit 101 65.6 46.7 54.1 94.8
Dep. & Amort. 4.90 6.48 5.75 5.75 7.00
Tax Paid (8.6) (24.6) (2.1) (30.9) (10.3)
Assoc. & JV Inc/(loss) (1.1) (18.6) (13.0) (38.5) (38.5)
Chg in Wkg.Cap. 62.5 (16.7) (5.6) (65.1) (33.6)
Other Operating CF (6.2) (4.6) (51.5) 0.0 0.0
Net Operating CF 153 7.54 (19.7) (74.7) 19.4
Capital Exp.(net) (13.7) (48.3) (53.1) (53.1) (53.1)
Other Invts.(net) 0.0 0.0 99.2 (33.7) 0.0
Invts in Assoc. & JV (24.2) (17.1) (38.5) 0.0 0.0
Div from Assoc & JV 3.68 13.3 3.34 0.0 0.0
Other Investing CF 1.31 2.36 3.20 (174) 0.0
Net Investing CF (32.9) (49.7) 14.2 (261) (53.1)
Div Paid (22.8) (21.5) (16.4) (11.7) (10.3)
Chg in Gross Debt (97.0) 19.0 41.9 200 0.0
Capital Issues 0.0 0.0 0.0 0.0 0.0
Other Financing CF (102) (32.4) (22.6) 0.0 0.0
Net Financing CF (222) (34.8) 2.85 188 (10.3)
Currency Adjustments 0.24 1.28 (0.2) 0.0 0.0
Chg in Cash (102) (75.7) (2.9) (147) (44.0)
Opg CFPS (S cts) 7.55 2.03 (1.2) (0.8) 4.44
Free CFPS (S cts) 11.6 (3.4) (6.1) (10.7) (2.8)
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Rachel TAN
Derek TAN
Company Guide
Roxy-Pacific Holdings
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 15 Feb 2018 10:02:44 (SGT) Dissemination Date: 15 Feb 2018 10:14:22 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
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associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have
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Company Guide
Roxy-Pacific Holdings
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ed: JLC / sa:JC, YM, PY
BUYLast Traded Price ( 27 Jul 2017): S$0.95 (STI : 3,354.71) Price Target 12-mth: S$1.20 (26% upside)
Analyst Alfie YEO +65 6682 3717 [email protected] Andy SIM CFA +65 6682 3718 [email protected]
What’s New 2Q17 earnings in line, gross margin expansion
continues
DPS of 1.55 Scts declared
Amazon’s entry not a serious threat for now
Maintain BUY, TP S$1.20
Price Relative
Forecasts and Valuation FY Dec (S$ m) 2016A 2017F 2018F 2019F Revenue 797 807 828 878 EBITDA 80.0 85.4 92.2 101 Pre-tax Profit 76.2 80.4 86.8 92.2 Net Profit 62.7 66.8 72.0 76.5 Net Pft (Pre Ex.) 62.7 66.8 72.0 76.5 Net Pft Gth (Pre-ex) (%) 10.4 6.5 7.8 6.2 EPS (S cts) 4.17 4.44 4.79 5.08 EPS Pre Ex. (S cts) 4.17 4.44 4.79 5.08 EPS Gth Pre Ex (%) 10 6 8 6 Diluted EPS (S cts) 4.17 4.44 4.79 5.08 Net DPS (S cts) 3.75 3.99 4.31 4.57 BV Per Share (S cts) 16.8 17.2 17.7 18.2 PE (X) 22.8 21.4 19.8 18.7 PE Pre Ex. (X) 22.8 21.4 19.8 18.7 P/Cash Flow (X) 18.3 20.0 13.2 14.7 EV/EBITDA (X) 17.1 16.1 14.7 13.3 Net Div Yield (%) 3.9 4.2 4.5 4.8 P/Book Value (X) 5.7 5.5 5.4 5.2 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 25.3 26.1 27.4 28.3
Earnings Rev (%): (3) 0 0 Consensus EPS (S cts): 4.50 4.70 4.90 Other Broker Recs: B: 6 S: 1 H: 2
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P
CONTINUES DELIVERING
Maintain BUY TP S$ 1.20, margin expansion to drive earnings growth. We remain positive on Sheng Siong as we see growth led by improving margins. We believe expansion of its distribution centre will continue and the company will sustain gross margins going forward. Margins remain on the uptrend – supported by the increase in direct sourcing, bulk handling, and fresh mix – contributing to earnings growth. Stock is trading attractively at 19.8x FY18F PE, compared to its historical average of 23x since listing. Yield is attractive at 4.5%.
Where we differ. We do not think Amazon’s entry will pose a serious threat to Sheng Siong for now for six reasons. The online pie remains small; Sheng Siong’s target customers are not the millennials who are open to online grocery shopping; Amazon’s warehouse is relatively small; Amazon will pose a more direct threat to Redmart; its pricing is not exactly cheap to attract offline buyers online; and the online market will take time to gain share from brick-and-mortar stores rather than ramp up rapidly.
Potential catalyst. We believe that Sheng Siong, with its decent store network and logistics chain, could possibly be a takeover target by online players eventually. Online players such as Alibaba’s 盒马鲜生 and Amazon (Wholefoods) are taking the online-to-offline route, operating physical stores.
Valuation:
Our target price for Sheng Siong is S$ 1.20, based on 25x FY18F PE. The valuation is pegged at +1SD of its historical mean since listing and below regional peers' average of 30x PE.
Key Risks to Our View:
Store openings, price competition. Revenue growth will be led by new store openings. Excessive discounts and promotions in the market by competitors will ultimately result in lower margins.
At A Glance Issued Capital (m shrs) 1,504 Mkt. Cap (S$m/US$m) 1,428 / 1,052 Major Shareholders (%) SS Holdings 29.85 Lim Family 33.99
Free Float (%) 36.16 3m Avg. Daily Val (US$m) 1.5 ICB Industry : Consumer Services / Food & Drug Retailers
DBS Group Research . Equity 28 Jul 2017
Singapore Company Guide
Sheng Siong Group Version 10 | Bloomberg: SSG SP | Reuters: SHEN.SI Refer to important disclosures at the end of this report
75
95
115
135
155
175
195
215
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
Jul-13 Jul-14 Jul-15 Jul-16 Jul-17
Relative IndexS$
Sheng Siong Group (LHS) Relative STI (RHS)
Page 2
Company Guide
Sheng Siong Group
WHAT’S NEW
2Q17 results
2Q17 in line: Earnings of S$$16m (+6% y-o-y) were in line with our expectations. Revenue of S$202m (+7% y-o-y) was driven by 0.9% SSSG and 5.2% from new stores. Better consumer sentiment was offset by footfall decline at stores affected by the slowdown in the oil and gas industry, Woodlands store, as well as Tampines renovation. An interim DPS of 1.55 Scts was declared, amounting to 70% payout in 1H17.
Gross margins all-time high: Gross margins hit an all-time high of 26.6% due to lower input costs, better supplier rebates, and better fresh food mix.
Record high operating profit margin at 8.9%. Operating profit was S$17.9m (+11.8% y-o-y), and flat Q-o-Q. Operating expenses increased by (+6.8% y-o-y), led by admin expenses which grew 6% to S$33.6m. Operating profit margin was at a record high as gross margins expanded while operating expenses were kept at 17.7% of sales.
Other income fell. Other income dropped to S$1.8m and this was due to 1) lower rental income as the property floor area of its Tampines site was increased to 25,000 sqft; and 2) a decline in government grants on lower wage credits as well as temporary and special employment schemes.
Expect gross margins to improve further. As expected, Sheng Siong continued in its margin improvement with record gross and operating margins. We have held the view that margin expansion will continue on the back of better input prices as it expands its distribution centre going forward. Completion of new warehouse space going forward will drive the growth of gross margins further with bulk and volume discounts. Correlation between the stock price and gross margin is strong at 0.9. The Verge store has closed but the Woodlands store’s lease has been extended to October 2017. Two new stores will open in 3Q17 - the 4,300-sqft Fajar Road store and
the 12,000-sqft Woodlands St 12 store. The Kunming store is expected to open in September 2017.
Amazon opens this week, not a real threat for now. Amazon has started operations in Singapore with Amazon Prime Now, sending jitters through Sheng Siong’s stock investors. The entry of Amazon should not affect Sheng Siong for now as 1) Singapore’s online grocery retail market remains small at<2% (S$96m) of modern grocery retail sales of S$6b; 2) Amazon’s scale is relatively small; its 100,000-sqftwarehouse is comparable to Redmart’s but far smaller than DFI’s 260,000-sqft, SSG’s 500,000-sqft and NTUC Fairprice’s 730,000-sqft warehouses; 3) Amazon would pose a direct threat to Redmart as theyboth target the same customers in the online grocery space; 4) we do not see the market size swelling just becauseAmazon is coming in, as the growth of the grocery market is still largely based on population size and inflation, which requires a real shift from store to online for Sheng Siong to be affected; 5) our initial price comparison showed that Amazon’s pricingis not exactly cheap at the moment, making it difficult to take share off the physical stores at current prices; 6) Sheng Siong’s target customers are largely not the tech-savvy millennials who are open to buying from online channels.
Maintain BUY, S$1.20 TP. Our forecasts remain largely unchanged. We maintain BUY with S$1.20 TP, based on 25x FY18F PE. Even though we do not see fundamentals playing out immediately on Amazon’s entry, we are mindful that the market may be cautious on long-term implications to Sheng Siong and hence would like to highlight that negativity could weigh on the stock over the short term, based on market sentiment.
Company Guide
Sheng Siong Group
Quarterly / Interim Income Statement (S$m)
FY Dec 2Q2016 1Q2017 2Q2017 % chg yoy % chg qoq
Revenue 189 217 202 6.8 (7.2)
Cost of Goods Sold (139) (163) (148) 6.2 (9.1)
Gross Profit 49.4 54.3 53.5 8.4 (1.5)
Other Oper. (Exp)/Inc (33.3) (36.3) (35.6) 6.8 (1.9)
Operating Profit 16.0 18.0 17.9 11.8 (0.6)
Other Non Opg (Exp)/Inc 2.14 2.53 1.80 (16.0) (28.7)
Associates & JV Inc 0.0 0.0 0.0 - -
Net Interest (Exp)/Inc 0.20 0.02 0.03 (83.8) 37.5
Exceptional Gain/(Loss) 0.0 0.0 0.0 - -
Pre-tax Profit 18.4 20.6 19.8 7.5 (4.0)
Tax (3.2) (3.5) (3.7) 14.1 5.9
Minority Interest 0.0 0.01 0.0 - -
Net Profit 15.2 17.1 16.1 6.1 (6.1)
Net profit bef Except. 15.2 17.1 16.1 6.1 (6.1)
EBITDA 22.1 24.3 23.4 6.0 (3.6)
Margins (%)
Gross Margins 26.1 25.0 26.6
Opg Profit Margins 8.5 8.3 8.9
Net Profit Margins 8.0 7.9 8.0
Source of all data: Company, DBS Bank
Page 4
Company Guide
Sheng Siong Group
CRITICAL DATA POINTS TO WATCH
Critical Factors
Store expansion. Sheng Siong currently operates 43 stores (including at Loyang Point which is under renovation). Compared to the other local operators, it has scope to expand its store network, particularly in areas such as Serangoon, Hougang and Sengkang, where it has a small presence. Management targets to ultimately operate 50 stores island-wide. In the past six years, 0-8 stores were opened annually, largely a function of supply of HDB shop space available for tender and Sheng Siong’s ability to win the tenders. Sheng Siong mainly operates in HDB estates.
Gross margin expansion through better sales mix. The gross margin for fresh products is estimated to be >30%, and close to 20% for non-fresh grocery items. Sheng Siong’s product mix stands at approximately 40% fresh vs 60% non-fresh. We see headroom for its sales mix to improve to 50% for each as it skews its store offerings towards fresh products.
Mandai Distribution Centre to expand. The Mandai Distribution Centre allows Sheng Siong to perform direct sourcing and bulk handling. This effectively drives down input costs, resulting in cost savings and better margins. We estimate that the facility is currently running at only 90% of capacity and a new warehouse adjacent to the current one is expected to start construction in FY17F. It will be able to secure more suppliers and products to trade through the distribution centre to effectively enjoy more bulk handling and higher supplier rebates. Margins are expected to trend up as utilisation increases towards full capacity.
Margin expansion through direct sourcing. Sheng Siong is increasingly sourcing directly from suppliers such as farms instead of from middlemen. The company has the resources to place large orders, which is welcomed by producers.
Generating more same-store-sales growth (SSSG) to increase revenue. Sheng Siong has been able to maintain positive SSSG since 4Q13 (excluding 4Q15, 1Q16) through longer operating hours and renovation of older stores, offering the correct products and effective marketing. SSSG has been affected partly by the renovation of the Loyang store from 3Q16 to 1Q17. The SSSG would have been positive had the Loyang store performed similarly to the previous year and was not shut down for renovation. Maintaining positive SSSG will support earnings growth.
Kunming store in China to open in 2017. Its first store in Kunming (40,000 sqft) is expected to commence operations in 2017. Downside for the JV is limited to its US$6m paid-up capital, which is sufficient to open 2-3 new stores.
Rev per sqft
Operation Area (sqft)
Number of stores
SSSG (%)
Gross Margins (%)
Source: Company, DBS Bank
1892 1848 1850 1816 1808
0.0
273.0
546.0
819.0
1092.0
1365.1
1638.1
1911.1
2015A 2016A 2017F 2018F 2019F
431000450000 455664
485664515664
0.0
105195.5
210390.9
315586.4
420781.8
525977.3
2015A 2016A 2017F 2018F 2019F
3942
4548
51
0.00
10.40
20.81
31.21
41.62
52.02
2015A 2016A 2017F 2018F 2019F
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17
Affected by SG50 promotion and discounting
Weak demand conditions, store renovations
3Q & 4Q would be negative 1.2% & 2.7% if include Loyang store renovation
22.0
22.5
23.0
23.5
24.0
24.5
25.0
25.5
26.0
26.5
27.0
1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17
Company Guide
Sheng Siong Group
Appendix 1: A look at Company's listed history – what drives its share price?
Correlation of stock price to gross margin improvement is strong at 0.9
Source: DBS Bank
18
20
23
25
28
30
0.20
0.40
0.60
0.80
1.00
1.20
Aug
-11
Feb
-12
Aug
-12
Feb
-13
Aug
-13
Feb
-14
Aug
-14
Feb
-15
Aug
-15
Feb
-16
Aug
-16
Feb
-17
Gross margins (RHS) Share price (LHS)S$ %
Gross margins expanded from
20.8% to 23.2%
Gross margins expanded from
23.8% to 25.2%
Gross margins at all time high
of c.26%
Page 6
Company Guide
Sheng Siong Group
Balance Sheet:
Net cash of over S$70m or c.4 Scts per share. The excess cash allows for strategic store acquisitions if suitable real estate arises for it to expand its store presence in the future. The business generates positive working capital. Inventory is purchased on credit, and quickly turned into cash. Over the past seven years, the business has generated between S$20-75m of operating cashflow each year. Dividend payout is attractive at 90%. We expect this to be maintained as long as there is no significant requirement for cash funding.
Share Price Drivers:
Strong earnings growth performance. Sheng Siong’s financial performance has consistently met our expectations, delivering earnings growth (5-year CAGR of 18.1% since FY11) through a combination of margin expansion, store growth and SSSG. We believe continued delivery of consistent performance and profit growth will support a strong share price.
China to be a wildcard. We believe Sheng Siong’s JV in China is a wildcard. If operations prove to be successful, in time to come, China can provide an alternate source of growth. There is scope for the number of stores to increase should Sheng Siong’s business model work. Downside remains limited to US$6m for now should the JV fail.
Key Risks:
Revenue growth limited by store openings. Store expansion in Singapore is largely dependent on the supply of new supermarket retail space released by HDB and its ability to secure the tenders.
Excessive discounts and promotions may erode margins. Heavier discounts and promotions vis-a-vis competitors would drive sales revenue, but this could be gained at the expense of margins.
Company Background
Sheng Siong is the third-largest supermarket operator in Singapore, behind NTUC Fairprice and Dairy Farm International.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
2.0
2.1
2.1
2.2
2.2
0.00
0.01
0.01
0.02
0.02
0.03
0.03
0.04
0.04
0.05
0.05
2015A 2016A 2017F 2018F 2019F
Gross Debt to Equity (LHS) Asset Turnover (RHS)
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
2015A 2016A 2017F 2018F 2019F
Capital Expenditure (-)
S$m
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2015A 2016A 2017F 2018F 2019F
Avg: 20.5x
+1sd: 22.2x
+2sd: 23.8x
‐1sd: 18.8x
‐2sd: 17.2x
15.4
17.4
19.4
21.4
23.4
25.4
27.4
Jul-13 Jul-14 Jul-15 Jul-16
(x)
Avg: 5.36x
+1sd: 5.88x
+2sd: 6.41x
‐1sd: 4.83x
‐2sd: 4.31x
3.8
4.3
4.8
5.3
5.8
6.3
6.8
7.3
Jul-13 Jul-14 Jul-15 Jul-16
(x)
Company Guide
Sheng Siong Group
Key Assumptions
FY Dec 2015A 2016A 2017F 2018F 2019F
Rev per sqft 1,892 1,848 1,850 1,816 1,808 Operation Area (sqft) 431,000 450,000 455,664 485,664 515,664 Number of stores 39.0 42.0 45.0 48.0 51.0
Segmental Breakdown
FY Dec 2015A 2016A 2017F 2018F 2019F
Revenues (S$m)
Singapore 764 797 807 828 878
Total 764 797 807 828 878Operating profit (S$m) Singapore 57.2 65.1 70.3 76.7 84.3
Total 57.2 65.1 70.3 76.7 84.3Operating profit Margins
Singapore 7.5 8.2 8.7 9.3 9.6
Total 7.5 8.2 8.7 9.3 9.6
Income Statement (S$m)
FY Dec 2015A 2016A 2017F 2018F 2019F
Revenue 764 797 807 828 878 Cost of Goods Sold (576) (592) (597) (610) (645) Gross Profit 189 205 210 218 233Other Opng (Exp)/Inc (132) (140) (140) (141) (148) Operating Profit 57.2 65.1 70.3 76.7 84.3Other Non Opg (Exp)/Inc 9.26 10.5 9.53 9.60 7.20 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 1.22 0.57 0.64 0.58 0.78 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 67.7 76.2 80.4 86.8 92.2Tax (10.9) (13.5) (13.7) (14.8) (15.7) Minority Interest 0.0 0.0 0.0 (0.1) (0.1) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 56.8 62.7 66.8 72.0 76.5Net Profit before Except. 56.8 62.7 66.8 72.0 76.5 EBITDA 70.6 80.0 85.4 92.2 101 Growth
Revenue Gth (%) 5.3 4.2 1.3 2.5 6.1EBITDA Gth (%) 12.1 13.3 6.7 7.9 9.3Opg Profit Gth (%) 9.7 13.7 8.0 9.1 9.9 Net Profit Gth (Pre-ex) (%) 20.8 10.4 6.5 7.8 6.2 Margins & Ratio
Gross Margins (%) 24.7 25.7 26.0 26.3 26.5Opg Profit Margin (%) 7.5 8.2 8.7 9.3 9.6Net Profit Margin (%) 7.4 7.9 8.3 8.7 8.7ROAE (%) 23.6 25.3 26.1 27.4 28.3ROA (%) 15.9 16.6 17.3 18.0 18.1ROCE (%) 19.8 21.3 22.4 23.8 25.4Div Payout Ratio (%) 92.7 89.9 89.9 89.9 89.9Net Interest Cover (x) NM NM NM NM NM
Source: Company, DBS Bank
Page 8
Company Guide
Sheng Siong Group
Quarterly / Interim Income Statement (S$m)
FY Dec 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017
Revenue 189 202 197 217 202Cost of Goods Sold (139) (150) (145) (163) (148)Gross Profit 49.4 52.5 51.8 54.3 53.5Other Oper. (Exp)/Inc (33.3) (35.6) (35.3) (36.3) (35.6)Operating Profit 16.0 16.9 16.5 18.0 17.9Other Non Opg (Exp)/Inc 2.14 2.21 2.37 2.53 1.80Associates & JV Inc 0.0 0.0 0.0 0.0 0.0Net Interest (Exp)/Inc 0.20 0.02 0.01 0.02 0.03Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0Pre-tax Profit 18.4 19.1 18.9 20.6 19.8Tax (3.2) (3.4) (3.5) (3.5) (3.7)Minority Interest 0.0 0.0 0.0 0.01 0.0Net Profit 15.2 15.7 15.4 17.1 16.1Net profit bef Except. 15.2 15.7 15.4 17.1 16.1EBITDA 22.1 22.8 22.6 24.3 23.4
Growth
Revenue Gth (%) (9.5) 7.2 (2.7) 10.2 (7.2)EBITDA Gth (%) (4.0) 3.3 (1.1) 7.7 (3.6) Opg Profit Gth (%) 2.5 5.2 (1.9) 9.0 (0.6) Net Profit Gth (Pre-ex) (%) (7.6) 3.3 (1.5) 11.0 (6.1) Margins
Gross Margins (%) 26.1 25.9 26.3 25.0 26.6Opg Profit Margins (%) 8.5 8.3 8.4 8.3 8.9Net Profit Margins (%) 8.0 7.7 7.8 7.9 8.0
Balance Sheet (S$m) FY Dec 2015A 2016A 2017F 2018F 2019F
Net Fixed Assets 178 252 254 262 256 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 0.0 0.0 0.0 0.0 0.0 Cash & ST Invts 126 63.5 57.5 77.5 95.6 Inventory 52.5 61.9 61.3 62.6 66.2 Debtors 11.8 10.4 12.1 11.0 11.6 Other Current Assets 0.0 0.0 0.0 0.0 0.0 Total Assets 368 388 385 413 430
ST Debt 0.0 0.0 0.0 0.0 0.0 Creditor 109 118 108 127 135 Other Current Liab 12.6 13.0 13.7 14.8 15.7 LT Debt 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 2.24 2.45 2.45 2.45 2.45 Shareholder’s Equity 244 252 259 266 274 Minority Interests 0.0 2.79 2.79 2.89 2.99 Total Cap. & Liab. 368 388 385 413 430
Non-Cash Wkg. Capital (57.1) (58.3) (47.9) (68.5) (72.9)Net Cash/(Debt) 126 63.5 57.5 77.5 95.6Debtors Turn (avg days) 5.4 5.1 5.1 5.1 4.7 Creditors Turn (avg days) 66.4 71.5 70.6 72.1 76.1 Inventory Turn (avg days) 31.0 36.2 38.6 38.0 37.4 Asset Turnover (x) 2.1 2.1 2.1 2.1 2.1 Current Ratio (x) 1.6 1.0 1.1 1.1 1.2 Quick Ratio (x) 1.1 0.6 0.6 0.6 0.7 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) N/A N/A N/A N/A N/AZ-Score (X) 10.0 9.3 9.9 8.8 8.8
Source: Company, DBS Bank
Company Guide
Sheng Siong Group
Cash Flow Statement (S$m)
FY Dec 2015A 2016A 2017F 2018F 2019F
Pre-Tax Profit 67.7 76.2 80.4 86.8 92.2Dep. & Amort. 13.4 14.9 15.1 15.5 16.4Tax Paid (10.7) (12.6) (13.0) (13.7) (14.8) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0Chg in Wkg.Cap. 2.54 0.77 (11.0) 19.5 3.50Other Operating CF 0.52 (1.2) 0.0 0.0 0.0Net Operating CF 73.5 78.1 71.5 108 97.4Capital Exp.(net) (30.4) (89.3) (17.5) (23.5) (10.5) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0Other Investing CF 1.22 0.57 0.0 0.0 0.0Net Investing CF (29.2) (88.7) (17.5) (23.5) (10.5) Div Paid (48.9) (54.8) (60.0) (64.7) (68.7) Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0Other Financing CF 0.0 2.59 0.0 0.0 0.0Net Financing CF (48.9) (52.2) (60.0) (64.7) (68.7) Currency Adjustments 0.04 0.40 0.0 0.0 0.0Chg in Cash (4.5) (62.4) (6.0) 20.0 18.2Opg CFPS (S cts) 4.72 5.14 5.49 5.90 6.25Free CFPS (S cts) 2.86 (0.7) 3.59 5.63 5.78
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Alfie YEO
Andy SIM CFA
S.No.Date of Report
Closing Price
12-mth Target Price
Rat ing
1: 27 Jul 16 0.99 1.09 BUY
2: 29 Aug 16 1.05 1.09 BUY
3: 26 Sep 16 1.08 1.09 BUY
4: 29 Sep 16 1.07 1.18 BUY
5: 04 Oct 16 1.08 1.18 BUY
6: 27 Oct 16 1.07 1.19 BUY
7: 24 Feb 17 0.96 1.13 BUY
8: 17 Mar 17 0.94 1.13 BUY
9: 10 Apr 17 0.98 1.13 BUY
10: 02 May 17 0.98 1.14 BUY
11: 20 Jun 17 0.98 1.20 BUY12: 03 Jul 17 1.00 1.20 BUY13: 10 Jul 17 0.99 1.20 BUY14: 18 Jul 17 0.99 1.20 BUY
Note : Share price and Target price are adjusted for corporate actions.
1
2 3
4
5
6
7
8 9
10
11
12
13
14
0.86
0.91
0.96
1.01
1.06
1.11
1.16
Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17
S$
Page 10
Company Guide
Sheng Siong Group
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 28 Jul 2017 08:58:33 (SGT) Dissemination Date: 28 Jul 2017 09:16:22 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
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Company Guide
Sheng Siong Group
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ed: TH / sa:DT, PY, CS
BUY Last Traded Price ( 22 Feb 2018): S$1.93 (STI : 3,488.46) Price Target 12-mth: S$2.70 (40% upside) Analyst Carmen Tay +65 6682 3719 [email protected]
What’s New • 4Q17 earnings of c.S$7.7m impacted by forex but core
growth momentum (+32.9% to S$10.6m) remains firm
• YTD declines in USD/MYR and USD/CNY imply that forex headwinds may extend into 1Q18
• Ahead of the ramp-up in Penang, the promise of a higher dividend for FY17 (and potentially higher payout in FY18F) should provide some support for the stock
• Maintain BUY with TP of S$2.70
Price Relative
Forecasts and Valuation FY Dec (S$ m) 2016A 2017A 2018F 2019F Revenue 684 725 758 787 EBITDA 73.6 72.4 85.3 89.9 Pre-tax Profit 47.2 39.4 49.3 52.4 Net Profit 39.1 31.4 39.2 41.8 Net Pft (Pre Ex.) 31.7 31.4 39.2 41.8 Net Pft Gth (Pre-ex) (%) 34.2 (1.0) 25.1 6.5 EPS (S cts) 20.9 16.7 20.7 22.1 EPS Pre Ex. (S cts) 16.9 16.7 20.7 22.1 EPS Gth Pre Ex (%) 33 (2) 24 6 Diluted EPS (S cts) 20.5 16.4 20.6 21.9 Net DPS (S cts) 6.00 7.00 7.50 7.50 BV Per Share (S cts) 188 195 207 221 PE (X) 9.2 11.6 9.3 8.7 PE Pre Ex. (X) 11.4 11.6 9.3 8.7 P/Cash Flow (X) 6.8 10.0 4.0 5.2 EV/EBITDA (X) 4.7 5.0 3.8 3.3 Net Div Yield (%) 3.1 3.6 3.9 3.9 P/Book Value (X) 1.0 1.0 0.9 0.9 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 11.5 8.7 10.4 10.3 Earnings Rev (%): - - Consensus EPS (S cts): 21.3 23.5 Other Broker Recs: B: 3 S: 0 H: 0
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P
A dividend growth play
4Q17 performance trends broadly similar to 3Q; dividends raised for FY17. Broad trends observed in 3Q17 extended into 4Q. Notwithstanding ongoing currency headwinds, Sunningdale’s top- and bottom-line performance held relatively steady q-o-q, in line with our expectations. Notably, the group saw record Automotive sales of c.S$67.7m. Contributions from Mould Fabrication were also sustained at higher levels, which may have positive implications for the group as some of these projects could be converted into commercial contracts for the group later on.
Overall, we like Sunningdale for its strong business fundamentals and as a dividend growth play. Sunningdale has paid increasing dividends over the last six years, from 3 Scts in FY12 to 7 Scts for FY17. Backed by strong core growth, operating cash flows and lower capex needs, we believe dividends could further rise to 7.5 Scts (or higher) in FY18F.
Where we differ: We believe that Sunningdale’s world-class engineering capabilities, global presence and diversification are underappreciated, and the stock deserves to at least trade at the global average valuation of 13x FY18F PE vs consensus’ average of 11x.
Potential catalysts: Sunningdale’s share price should re-rate as it delivers steady earnings growth or value-accretive acquisitions.
Positive underlying trends and strong fundamentals underpin steady growth outlook. Sunningdale has delivered consistent margin improvements and growth over the last few years. Ahead, several underlying trends such as (1) the broad-based substitution of metallic with plastic components in a wide range of industrial applications, and (2) favourable demand outlook across the group’s three key end-sectors, indicate longer-term potential.
As the group grows capacity, ramps up production and strengthens business development efforts to ride these positive trends and unlock greater economies of scale, we project core earnings to grow at an 15% CAGR over FY16-18F.
Valuation: Maintain BUY with a TP of S$2.70, based on 13x FY18F PE. Offering a lower risk-reward profile vs local peers and higher growth vs the bigger boys in the US, our TP at S$2.70, which is based on global average of 13x FY18F PE, is fair.
Key Risks to Our View: Global economic slowdown could pose significant challenges to Sunningdale, especially in Consumer/IT and Automotive.
At A Glance Issued Capital (m shrs) 189 Mkt. Cap (S$m/US$m) 365 / 276 Major Shareholders (%) Boon Hwee Koh 15.9 Yarwood Engineering And Trading 8.1 Goi Seng Hui 8.1
Free Float (%) 64.3 3m Avg. Daily Val (US$m) 0.93 ICB Industry : Industrials / Electronic & Electrical Equipment
DBS Group Research . Equity
22 Feb 2018
Singapore Company Guide
Sunningdale Tech Ltd Version 3 | Bloomberg: SUNN SP | Reuters: SUND.SI Refer to important disclosures at the end of this report
Company Guide
Sunningdale Tech Ltd
WHAT’S NEW
4Q17 impacted by currency volatility but core growth momentum remains strong
4Q17 results in line. Sunningdale’s sales momentum was sustained in 4Q17, with top line coming in at c.S$187m (vs S$188.1m delivered in 3Q17). Notably, the company saw a record contribution of c.S$67.7m from the Automotive segment, which represented c.36% of consolidated revenues. Notwithstanding lower q-o-q contributions in 4Q17, mainly due to the advancement of orders to earlier quarters, Consumer/IT remained the key source of revenues of the group at c.38% of sales.
Earnings also held steady at c.S$7.7m (essentially flat q-o-q) despite volatile foreign exchange environments for the USD/MYR and USD/CNY, which resulted in foreign exchange losses of c.S$2.8m. Over the quarter, we observe that the USD/MYR and USD/CNY fell by 3.7% and 2.3% respectively.
Barring the currency impact, core growth momentum was otherwise strong, and we estimate that core earnings would have been c.38% higher, closer to S$10.6m:
4Q16 3Q17 4Q17 %Chg
(QoQ)
%Chg
(YoY)
Sales 184.1 188.1 187.0 (0.6%) 1.6%
Net Profit 21.5 7.7 7.7 0.4% (64%)
% Net Margin 11.7% 4.1% 4.1%
Forex Loss (Gain) (8.4) 3.1 2.8
Disposal Loss
(Gain) (5.1)
Adj. Net Profit 7.9 10.8 10.6 (2.4%) 32.9%
% Net Margin 4.3% 5.7% 5.6%
Source: Company, DBS Bank
Brace for further forex weakness in upcoming 1Q18 as declines in main currency pairs imply that forex headwinds may extend into 1Q18.
Stronger growth to kick in from 2Q18 onwards. With the Penang plant set to kick in from 2Q18, we anticipate a gradual ramp-up in new projects and sales. We also view the high, sustained contributions from Mould Fabrication (for the second consecutive quarter since 3Q17) positively as history suggests that some of these projects could be converted into commercial contracts for the group later on.
Ahead of the ramp-up in Penang, the promise of a higher dividend for FY17 should provide support for the stock. Subsequent to the group’s inaugural 2.5-Sct dividend for 1H17, a final 4.5-Sct dividend has also been proposed, bringing payout for FY17 to 7 Scts per share.
Supported by steady operating cash flows, Sunningdale’s dividend payout has been on a rising trend, and compared to local small-cap peers, stands out as a dividend growth play:
FY12 FY13 FY14 FY15 FY16 FY17
DPS
(S cts)
3.0 3.5 4.0 5.0 6.0 7.0
Source: Company, DBS Bank
Maintain BUY with TP of S$2.70. Our earnings projections and recommendation remain largely unchanged as expectations of higher growth in FY18F are largely offset by higher assumed tax rates of c.20% vs c.17% previously.
Company Guide
Sunningdale Tech Ltd
Quarterly / Interim Income Statement (S$m)
FY Dec 4Q2016 3Q2017 4Q2017 % chg yoy % chg qoq
Revenue 184 188 187 1.6 (0.6)
Cost of Goods Sold (159) (161) (162) 1.9 0.5
Gross Profit 25.1 27.0 25.0 (0.2) (7.1)
Other Oper. (Exp)/Inc (16.8) (17.4) (17.8) 5.9 2.2
Operating Profit 8.29 9.55 7.26 (12.4) (24.0)
Other Non Opg (Exp)/Inc 15.8 1.03 1.69 (89.3) 63.9
Associates & JV Inc 0.22 0.31 0.53 144.0 74.4
Net Interest (Exp)/Inc (0.6) (0.8) (0.8) (31.8) 3.9
Exceptional Gain/(Loss) 0.0 0.0 0.0 - -
Pre-tax Profit 23.8 10.1 8.70 (63.4) (13.7)
Tax (2.3) (2.4) (1.0) (57.7) (59.6)
Minority Interest 0.0 0.0 0.0 - -
Net Profit 21.5 7.72 7.75 (64.0) 0.4
Net profit bef Except. 21.5 7.72 7.75 (64.0) 0.4
EBITDA 31.5 17.9 16.5 (47.7) (7.9)
Margins (%)
Gross Margins 13.6 14.3 13.4
Opg Profit Margins 4.5 5.1 3.9
Net Profit Margins 11.7 4.1 4.1
Source of all data: Company, DBS Bank
Company Guide
Sunningdale Tech Ltd
Critical Factors Beneficiary of the broad-based substitution for functional plastics in the Automotive, Consumer/IT and Healthcare sectors. Owing to improved plastic material properties (i.e. strength and durability) and higher cost efficiency, precision plastic components are increasingly replacing their metal counterparts in a wide range of industrial applications – particularly in the automotive, consumer goods and healthcare sectors.
Factors Driving Adoption of Plastic (vs Metal) Components End-use Industries
Drivers
Automotive Government regulations to reduce the weight of vehicles to reduce harmful emissions
Consumer Goods
Popularity of consumer wearables with the emergence of cloud computing and Internet of Things (IoT) technologies, thus stimulating demand for plastics in electronic components
Replacement of metal with plastic (which are cheaper) components to boost profit margins
Healthcare New technologies (i.e. antimicrobial plastic) are purportedly able to repel bacteria on surfaces
Plastic devices are cheaper to use and easier to replace
Source: DBS Bank
Additionally, the underlying demand outlook across the above end-sectors is also positive and industry experts have forecast these to grow at high single-digit to low double-digit levels per annum into 2020. Riding on these trends, we project Sunningdale’s top line to grow at a steady 4.2% CAGR over FY17-19F.
Raising capacity. While most of the industry players are focused on managing costs amid the challenging business climate, Sunningdale is one of few precision engineering companies that continues to actively invest in future growth.
In anticipation of the group’s medium- to longer-term capacity requirements, Sunningdale is constructing a new facility in Penang (Malaysia), which is near the operations of a number of Fortune 500 companies and on track for completion by end-1Q18 and ramp-up from 2Q18. As plant utilisation at newer facilities (i.e. Chuzhou and Thailand) remains low, there is room for Sunningdale to add capacity at these sites progressively alongside order growth.
Steady margin expansion to drive sustainable growth. Apart from its global presence and manufacturing strengths, we also like Sunningdale for its proven ability to consistently deliver and its steadily improving margins. Strategies the group can employ to deliver sustainable growth include:
(i) Development or acquisition of new engineering capabilities, (ii) Higher-margin sales mix, (iii) Productivity improvements and cost advantages on growing scale, through resource optimisation and automation
Automotive Sales
Consumer/IT Sales
Healthcare Sales
Operating Margins (%)
Effective Tax Rate (%)
Source: Company, DBS Bank
Company Guide
Sunningdale Tech Ltd
Appendix 1: A look at Company's listed history – what drives its share price?
Historical Relationship Between Earnings Growth and Sunningdale’s Share Price
Source: DBS Bank, ThomsonReuters
-0.15
-0.1
-0.05
0
0.05
0.1
0.15
0.2
0.25
0.3
0
0.5
1
1.5
2
2.5
1/2/2012 1/2/2013 1/2/2014 1/2/2015 1/2/2016 1/2/2017 1/2/2018
Last Price (LHS) T12M EPS (RHS)
Issues profit guidance due to impairment of
goodwill
Raised S$25m via private placement of 20% new shares to Yarwood Engineering and Mr Sam Goi, to finance potential organic and inorganic growth opportunities
that may arise in future
Proposed acquisition of precision plastic manufacturer, First
Engineering Limited
Proposed acquisition of Europe-based SKAN -tooling
Saw a 52.1% surge in earnings to
S$42.1m for FY15
Achieves core net profit growth of 34.1% for FY16; Share price also surges on
takeover potential
Correlation: +0.775
Company Guide
Sunningdale Tech Ltd
Balance Sheet: Low gearing. Still on growth mode, Sunningdale’s net cash position of S$1.6m (<1% of current market cap) as at end-4Q17 is much lower than local peers’ average of c.30%. Further, given low gearing of 0.28x as at end-4Q17, there remains room for Sunningdale to gear up for acquisitions if attractive opportunities arise.
Share Price Drivers: Growing on acquisitions. Sunningdale has made three acquisitions since 2010 – UFE in 2011, First Engineering in 2014 and SKAN-tooling in 2015. With cash of S$111m as at end-3Q17 and restructuring of its South China plant now complete, Sunningdale could be looking to acquire.
Judging from its earlier acquisitions, we believe that the group’s criteria for future M&As would likely include precision plastic players which provide access to (1) new geographies, (2) wider product offerings or capabilities within existing Automotive, Consumer/IT and Healthcare verticals, and (3) new clientele.
Takeover potential in the longer term. Sunningdale’s proven record of strong cash flow generation, healthy balance sheet with slight net cash of S$1.6m, and inexpensive valuations – the stock currently trades at undemanding valuations of c.1x P/BV and 9.5x FY18F PE (vs local peer average of 1.3x and 11x respectively) – could lead to a takeover offer.
Given the group’s advanced manufacturing capabilities, global manufacturing footprint and diversified MNC customer base, we see Sunningdale as an attractive takeover target for private equity (PE) funds or larger top-tier players in the precision plastic field looking to (1) acquire advanced manufacturing capabilities, (2) have global manufacturing facilities, or (3) gain immediate access to a diversified MNC customer base.
Key Risks: Global economic slowdown. With exposure across some of the world’s main manufacturing regions, a global economic slowdown could pose significant challenges to Sunningdale as several of its industry segments such as Consumer/IT and Automotive are sensitive to fluctuations in the global economy.
Fluctuations in raw material costs. Key raw materials for Sunningdale are resin and engineering plastics, which typically represent c.50% of COGS. Despite cost-plus arrangements, volatility in raw material prices can still weigh on earnings.
Managing currency exposures. Due to its wide geographical presence and broad client base, Sunningdale transacts in various currencies such as USD, RMB, and MYR but reports in SGD. The largest currency exposure is to the USD, which we estimate represents approximately 40% of the group’s revenue.
Company Background Sunningdale (SUNN SP) provides one-stop turnkey plastic solutions, with capabilities ranging from product and mould designs, fabrication, injection moulding, micro-precision engineering, finishings, through to the precision assembly of complete products. The group is mainly focused on three sectors - Automotive, Consumer/IT and Healthcare.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
Company Guide
Sunningdale Tech Ltd
Key Assumptions
FY Dec 2015A 2016A 2017A 2018F 2019F
Automotive Sales 219 245 264 282 299 Consumer/IT Sales 269 273 285 293 299 Healthcare Sales 49.8 48.5 51.7 55.8 60.8 Operating Margins (%) 4.15 4.40 4.96 5.95 6.15 Effective Tax Rate (%) 1.70 17.3 20.3 20.3 20.3
Income Statement (S$m)
FY Dec 2015A 2016A 2017A 2018F 2019F
Revenue 674 684 725 758 787 Cost of Goods Sold (584) (590) (619) (644) (668) Gross Profit 90.8 94.3 106 114 119 Other Opng (Exp)/Inc (62.8) (64.2) (69.6) (69.4) (70.5) Operating Profit 28.0 30.1 36.0 45.1 48.4 Other Non Opg (Exp)/Inc (1.2) 11.8 5.18 5.18 5.18 Associates & JV Inc 0.90 0.94 1.22 1.41 1.48 Net Interest (Exp)/Inc (3.4) (3.0) (3.0) (2.4) (2.6) Exceptional Gain/(Loss) 18.5 7.40 0.0 0.0 0.0 Pre-tax Profit 42.8 47.2 39.4 49.3 52.4 Tax (0.7) (8.2) (8.0) (10.0) (10.7) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 42.1 39.1 31.4 39.2 41.8 Net Profit before Except. 23.6 31.7 31.4 39.2 41.8 EBITDA 61.1 73.6 72.4 85.3 89.9 Growth Revenue Gth (%) 41.8 1.5 5.9 4.6 3.8 EBITDA Gth (%) 21.1 20.4 (1.6) 17.7 5.4 Opg Profit Gth (%) 86.3 7.6 19.3 25.5 7.3 Net Profit Gth (Pre-ex) (%) (2.1) 34.2 (1.0) 25.1 6.5 Margins & Ratio Gross Margins (%) 13.5 13.8 14.6 15.1 15.1 Opg Profit Margin (%) 4.2 4.4 5.0 6.0 6.2 Net Profit Margin (%) 6.2 5.7 4.3 5.2 5.3 ROAE (%) 13.2 11.5 8.7 10.4 10.3 ROA (%) 7.0 6.2 4.7 5.7 5.8 ROCE (%) 4.4 6.2 6.0 7.5 7.6 Div Payout Ratio (%) 22.0 28.7 42.0 36.2 34.0 Net Interest Cover (x) 8.3 10.0 12.1 18.5 18.4
Source: Company, DBS Bank
Company Guide
Sunningdale Tech Ltd
Quarterly / Interim Income Statement (S$m)
FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017
Revenue 184 172 178 188 187 Cost of Goods Sold (159) (146) (150) (161) (162) Gross Profit 25.1 25.9 27.7 27.0 25.0 Other Oper. (Exp)/Inc (16.8) (17.1) (17.3) (17.4) (17.8) Operating Profit 8.29 8.71 10.4 9.55 7.26 Other Non Opg (Exp)/Inc 15.8 1.60 0.86 1.03 1.69 Associates & JV Inc 0.22 0.18 0.21 0.31 0.53 Net Interest (Exp)/Inc (0.6) (0.7) (0.7) (0.8) (0.8) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 23.8 9.83 10.8 10.1 8.70 Tax (2.3) (2.1) (2.6) (2.4) (1.0) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Profit 21.5 7.70 8.20 7.72 7.75 Net profit bef Except. 21.5 7.70 8.20 7.72 7.75 EBITDA 31.5 17.6 18.5 17.9 16.5
Growth Revenue Gth (%) 6.7 (6.7) 3.4 6.0 (0.6) EBITDA Gth (%) 50.1 (44.1) 5.0 (3.2) (7.9) Opg Profit Gth (%) (19.3) 5.1 19.6 (8.3) (24.0) Net Profit Gth (Pre-ex) (%) 111.1 (64.2) 6.5 (5.9) 0.4 Margins Gross Margins (%) 13.6 15.0 15.6 14.3 13.4 Opg Profit Margins (%) 4.5 5.1 5.9 5.1 3.9 Net Profit Margins (%) 11.7 4.5 4.6 4.1 4.1
Balance Sheet (S$m) FY Dec 2015A 2016A 2017A 2018F 2019F
Net Fixed Assets 187 192 194 196 197 Invts in Associates & JVs 5.54 5.27 6.08 7.34 8.68 Other LT Assets 20.8 19.4 19.7 18.7 17.7 Cash & ST Invts 121 115 105 148 169 Inventory 106 115 146 121 125 Debtors 168 194 212 201 208 Other Current Assets 4.36 7.68 5.48 5.48 5.48 Total Assets 613 649 688 697 732
ST Debt 74.0 67.6 60.8 60.8 60.8 Creditor 150 184 206 182 189 Other Current Liab 2.25 3.93 2.69 10.0 10.7 LT Debt 46.0 32.2 42.9 42.9 42.9 Other LT Liabilities 9.58 9.63 9.74 9.74 9.74 Shareholder’s Equity 331 351 366 391 419 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 613 649 688 697 732
Non-Cash Wkg. Capital 126 129 155 134 139 Net Cash/(Debt) 1.11 15.5 1.60 44.1 65.5 Debtors Turn (avg days) 88.3 96.6 102.3 99.3 94.9 Creditors Turn (avg days) 75.7 109.1 120.8 116.2 107.1 Inventory Turn (avg days) 71.5 72.2 80.9 79.8 70.8 Asset Turnover (x) 1.1 1.1 1.1 1.1 1.1 Current Ratio (x) 1.8 1.7 1.7 1.9 1.9 Quick Ratio (x) 1.3 1.2 1.2 1.4 1.4 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 20.0 28.8 29.9 33.8 33.8
Source: Company, DBS Bank
Barring forex losses of c.S$2.8m, we estimate core earnings would have been closer to S$10.6m.
Company Guide
Sunningdale Tech Ltd
Cash Flow Statement (S$m)
FY Dec 2015A 2016A 2017A 2018F 2019F
Pre-Tax Profit 42.8 47.2 39.4 49.3 52.4 Dep. & Amort. 33.5 30.8 30.1 33.6 34.9 Tax Paid (2.5) (6.2) (9.7) (2.7) (10.0) Assoc. & JV Inc/(loss) (0.9) (0.9) (1.2) (1.4) (1.5) Chg in Wkg.Cap. (3.1) (10.8) (27.1) 12.8 (5.3) Other Operating CF (2.3) (7.3) 4.87 0.0 0.0 Net Operating CF 67.4 52.8 36.3 91.5 70.5 Capital Exp.(net) (24.0) (28.8) (31.0) (35.0) (35.0) Other Invts.(net) 0.0 0.0 (1.4) 0.0 0.0 Invts in Assoc. & JV (1.2) 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.76 1.08 0.14 0.14 0.14 Other Investing CF 0.0 0.0 0.0 0.0 0.0 Net Investing CF (24.4) (27.7) (32.3) (34.9) (34.9) Div Paid (7.4) (9.3) (16.0) (14.2) (14.2) Chg in Gross Debt (18.3) (21.2) 5.15 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 0.71 (0.5) (3.2) 0.0 0.0 Net Financing CF (25.0) (31.0) (14.0) (14.2) (14.2) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 18.0 (5.9) (10.0) 42.5 21.4 Opg CFPS (S cts) 38.0 34.1 33.7 41.6 40.1 Free CFPS (S cts) 23.4 12.9 2.82 29.9 18.7
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank Analyst: Carmen Tay
Company Guide
Sunningdale Tech Ltd
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 22 Feb 2018 18:15:36 (SGT) Dissemination Date: 22 Feb 2018 18:57:38 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
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Company Guide
Sunningdale Tech Ltd
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ed: TH / sa: SM, PY, CS
BUYLast Traded Price ( 27 Feb 2018): S$1.14 (STI : 3,540.39)
Price Target 12-mth: S$1.37 (20% upside) (Prev S$1.21)
Analyst Carmen Tay +65 6682 3719 [email protected]
What’s New • UMS delivers record 4Q17 profits of S$15.8m on firm
growth momentum and positive one-off effects
• Enlarged Penang facility ready for the ramp; plans to
bring on additional capacity signals optimism over
longer-term growth prospects
• Cost savings should more than offset ASP reduction to
drive earnings growth over FY17-19F
• Maintain BUY with higher TP of S$1.37; attractive
5.3% yield also on offer
Price Relative
Forecasts and Valuation FY Dec (S$ m) 2016A 2017A 2018F 2019F
Revenue 104 162 179 188 EBITDA 30.0 59.6 68.9 72.2 Pre-tax Profit 24.7 55.2 61.9 65.0 Net Profit 22.6 52.0 58.1 61.0 Net Pft (Pre Ex.) 22.6 52.0 58.1 61.0 Net Pft Gth (Pre-ex) (%) (34.1) 130.3 11.6 5.0 EPS (S cts) 5.26 9.70 10.8 11.4 EPS Pre Ex. (S cts) 5.26 9.70 10.8 11.4 EPS Gth Pre Ex (%) (34) 84 12 5 Diluted EPS (S cts) 5.26 9.70 10.8 11.4 Net DPS (S cts) 6.00 5.60 6.00 6.00 BV Per Share (S cts) 44.2 40.1 44.9 50.3 PE (X) 21.7 11.8 10.5 10.0 PE Pre Ex. (X) 21.7 11.8 10.5 10.0 P/Cash Flow (X) 14.4 15.6 8.1 8.6 EV/EBITDA (X) 14.9 9.6 7.8 7.0 Net Div Yield (%) 5.3 4.9 5.3 5.3 P/Book Value (X) 2.6 2.8 2.5 2.3 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 11.8 25.7 25.5 23.9
Earnings Rev (%): 8 6 Consensus EPS (S cts): 9.80 9.90 Other Broker Recs: B: 2 S: 0 H: 0
Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P
Beneficiary of Applied Materials’s strong growth
Maintain BUY with higher TP of S$1.35; front-end semiconductor
equipment play offering growth and attractive c.6% yield. UMS
Holdings (UMS) has partnered closely with Applied Materials for more
than a decade. Notably, despite its exposure to a cyclical industry,
UMS’s earnings have been less volatile since it was awarded the Endura
contract in 2010. The company also stands out for its strong cash flow
(even after paying dividends) generation capabilities and consistent
dividends, thus offering both yield and growth.
Firm momentum and one-off gains/writebacks took UMS’s 4Q17
earnings to a record S$15.8m. Entering into 2018, growth will mainly
be supported by a ramp-up in its higher-margin Components business
and cost benefits arising from its shift to Penang. With imminent cost
savings set to offset the impact of lower ASPs, we raise our earnings
projections slightly by 6-8% for FY18-19F and roll forward our earnings
base to FY19F to arrive at a higher TP of S$1.37. Maintain BUY.
Where we differ: We have assumed a larger discount to larger peers’
15x FY18F PE compared to consensus given its higher customer
concentration risk vs peers.
Potential catalysts: Higher demand for semiconductor equipment,
diversification away from key client, earnings-accretive M&As
Positive outlook for key client Applied Materials augurs well for UMS.
SEMI predicts that global fab equipment spending could reach industry
all-time highs of over US$60.1bn in 2018. Reports by Applied Materials
also imply robust demand and a CAGR of c.10% into FY20F. This
augurs well for UMS given its primary role in the manufacture of
components for various semiconductor equipment and that it handles
c.70% of manufacturing and assembly for Applied Materials’s Endura
deposition system – especially given the successful extension of the
Endura contract.
Valuation:
Maintain BUY with higher TP of S$1.37, which is based on 12x (or 11x
ex-cash PE) FY18F PE, at a discount to larger peers’ 15x. An attractive
prospective yield of over 5% is on offer.
Key Risks to Our View:
Key client risk. Historically, c.90% of UMS’s revenues on average can be
attributed to Applied Materials. Disruptions to the relationship or
weakness in Applied Materials’s end demand could significantly weigh
on UMS’s performance.
At A Glance Issued Capital (m shrs) 536
Mkt. Cap (S$m/US$m) 612 / 462
Major Shareholders (%)
Andy Luong 20.1
Free Float (%) 79.9
3m Avg. Daily Val (US$m) 2.5
ICB Industry : Industrials / Electronic & Electrical Equipment
DBS Group Research . Equity 28 Feb 2018
Singapore Company Guide
UMS Holdings Version 10 | Bloomberg: UMSH SP | Reuters: UMSH.SI Refer to important disclosures at the end of this report
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124
174
224
274
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
Feb-14 Feb-15 Feb-16 Feb-17 Feb-18
Relative IndexS$
UMS Holdings (LHS) Relative STI (RHS)
Company Guide
UMS Holdings
WHAT’S NEW
FY17 a record year for UMS
New earnings record; 4Q17 slightly above on several one-
offs . UMS’s strong 3Q17 momentum was sustained into
4Q. Sales remained stable at c.S$38.7m (vs S$39.3 in 3Q), as
the sequential decline in contributions from Semiconductor
Integrated Systems (-10.3% q-o-q to S$18.2m on the back
of lower Endura shipments) were partly offset by stronger
contributions (+1.4% to c.S$19.3m) from the higher-margin
Components business. With contributions from the two key
segments holding relatively steady q-o-q, gross material
margins were thus maintained at c.58.3% in 4Q17, similar
to c.58.8% in 3Q.
Meanwhile, earnings came in slightly above as one-off
disposal gains and writebacks more than offset the impact
of forex losses and higher personnel costs to provide an
added boost to earnings. Stripping out nearly c.S$3.4m in
one-offs, FY17 PATMI would otherwise have been in line at
c.S$48.6m vs our forecast of S$47.9m (+1.1%):
FY17 S$ m
PATMI 52.0
Loss (Gain) on Disposal of
Old Equipment
(1.8)
Inventory Provision Write
Back (Down)
(1.1)
Tax Overprovision Write
Back (Down)
(0.5)
Adjusted PATMI 48.6
UMS could benefit from Applied Materials’s double-digit
growth in 2018. SEMI recently raised its projections for
global semiconductor manufacturing equipment sales in
2018, which it believes will grow by 7.5% to a record
US$60.1bn, compared to US$58bn previously. Separately,
SEMI also highlighted vast potential in China’s growing chip
market and predicts that the planned/ongoing construction
of 24 new fab projects across China alone could prompt
over US$11bn of investments in new wafer fab equipment
in 2018, and potentially surpass US$18bn by 2020.
Applied Materials also maintained its positive guidance
during its 4Q17 results in November, reiterating expectations
of double-digit revenue and profit growth in 2018.
Underlying demand trends also support Applied Materials’
rosy outlook, particularly (i) ongoing capacity additions to
meet growing demand for sensors and IoT devices, and (ii)
demand shifts from lithography to materials deposition and
removal arising from the transition to 3D memory.
Cost savings to more than offset ASP reduction, driving
earnings CAGR of 8.8% over FY17-19F; upside from further
order wins. Capacity utilisation for UMS’s Semiconductor
Integrated Systems (Endura) and Components businesses
currently stands at >90% and c.65% respectively. UMS is
also in the midst of bringing in new machines, which would
effectively raise capacity for Endura by c.30% by mid-2018,
which signals the company’s optimism over long-term
growth prospects.
Guiding for strong order flow with its key customer,
utilisation should improve as UMS ramps up progressively in
subsequent quarters. Following the completion of its shift to
Penang, UMS is also poised to reap substantial cost benefits,
which should kick in from FY18F.
While ASPs could trend lower as some of its operating cost
and tax savings are passed through to its key client, we
would argue that the improved pricing competitiveness
bodes well for further order wins as it signals UMS’s
willingness to sacrifice some margins in favour of volume
growth.
Proposed 3-Sct final dividend. UMS also proposed a 3-Sct
interim dividend to be paid on 25 May 2018, bringing total
dividends paid up c.17% from 6 Scts (pre bonus issue)/4.8
Scts (post bonus issue) per share in FY16 to 7 Scts/5.6 Scts in
FY17.
Similar to previous years, UMS is likely to maintain a 6-Sct
payout in FY18F, which represents an attractive prospective
yield of at least 5.3%.
Maintain BUY with higher TP of S$1.37 as we raise our
earnings projections slightly by 6-8% for FY18-19F to factor
in higher cost savings, and roll forward our earnings base to
FY19F.
Company Guide
UMS Holdings
Quarterly / Interim Income Statement (S$m)
FY Dec 4Q2016 3Q2017 4Q2017 % chg yoy % chg qoq
Revenue 34.2 39.3 38.7 13.2 (1.7)
Cost of Goods Sold (18.5) (16.2) (16.1) (13.0) (0.5)
Gross Profit 15.6 23.1 22.5 44.4 (2.5)
Other Oper. (Exp)/Inc (6.9) (7.9) (9.3) 33.7 17.7
Operating Profit 8.67 15.2 13.3 52.9 (13.0)
Other Non Opg (Exp)/Inc (2.5) (0.4) 2.18 nm (703.3)
Associates & JV Inc 0.0 0.0 0.0 - -
Net Interest (Exp)/Inc 0.06 0.0 0.0 nm nm
Exceptional Gain/(Loss) 0.0 0.0 0.0 - -
Pre-tax Profit 6.23 14.9 15.4 147.2 3.6
Tax (0.3) (1.5) 0.46 (268.0) (131.3)
Minority Interest 0.0 0.16 0.0 nm nm
Net Profit 5.96 13.6 15.8 165.7 16.7
Net profit bef Except. 5.96 13.6 15.8 165.8 16.8
EBITDA 7.32 15.9 16.5 124.7 3.6
Margins (%)
Gross Margins 45.7 58.8 58.3
Opg Profit Margins 25.4 38.7 34.3
Net Profit Margins 17.4 34.5 40.9
Source of all data: Company, DBS Bank
Company Guide
UMS Holdings
CRITICAL DATA POINTS TO WATCH
Critical Factors
Higher fab equipment spending. As procurement of semiconductor
equipment tends to lag construction of new fabs/facilities by
chipmakers and foundries by 12-18 months, we believe that the new
construction of new 300mm fabs in 2015 and 2016 provides support
for more robust growth in equipment spending in 2017 and 2018.
The pick-up in key client Applied Materials’s and UMS’s orders in
recent quarters also confirm this.
Similarly, SEMI also predicts that fab equipment spending will reach
an industry all-time record of US$60.1bn in 2018.
Riding on Applied Materials’s positive outlook; following firm
recovery, earnings could further grow at 8.3% CAGR over FY17-19F.
As a long-standing manufacturing partner to Applied Materials in the
manufacture of components for various semiconductor equipment,
and as the main manufacturer and sub-assembler of Applied
Materials’s flagship Endura deposition system, UMS naturally benefits
from the uplift in demand for Applied Materials’s higher-tech wafer
fabrication equipment.
Benefitting from the current semiconductor upcycle and recovering
strongly from the trough in FY16, UMS’s earnings grew c.30% y-o-y
to S$52m in FY17, and is set to grow further as it ramps up on its
higher-margin components business, and as cost and tax savings
arising from its Penang shift kicks in.
Strong cash flow generation underpins expectations of dividend of 6
Scts per share for FY17F. Despite operating in a highly cyclical
industry, the group’s strengths lie in its stable cash flow (even after
paying dividends) generation. Coupled with the current uptick in
orders and strong net cash position of c.8 Scts per share, allows the
group to finance upcoming capex needs internally, while providing
support for a 6-Sct dividend to be paid.
In the longer term, UMS’s diversification into other businesses could
also bear fruit. In 2017, UMS acquired a 51% stake in water and
chemical engineering solutions company, Kalf Engineering. Kalf has
secured seven projects worth approximately S$13m, which is
expected to contribute to the group’s performance in FY18F.
In 2016, the group also diversified into the aerospace components
via a 10% stake in All Star Fortress Sdn Bhd (ASF). While we think
that ASF is unlikely to be profitable within the next 2-3 years, risks
inherent in this diversification remains low given the small initial
investment. These investments should provide the group with
alternate growth opportunities in the medium-to-long term, and
provide diversification away from the cyclical semiconductor business.
Gross Profit (S$ m)
Revenue Growth (%)
Operating Profit Margin (%)
Effective Tax Rate (%)
Capex (S$ m)
Source: Company, DBS Bank
66.9
56.4
88.9
97.4102
0.0
14.8
29.5
44.3
59.0
73.8
88.6
103.3
2015A 2016A 2017A 2018F 2019F
1.16
-6.2
55.9
10
5
-6.8
6.0
18.7
31.5
44.3
57.1
2015A 2016A 2017A 2018F 2019F
30.728.2
34.3 34.6 34.6
0.00
7.06
14.12
21.18
28.23
35.29
2015A 2016A 2017A 2018F 2019F
6.71
8.68
6.386.7 6.7
0.0
1.8
3.5
5.3
7.0
8.8
2015A 2016A 2017A 2018F 2019F
4.46
2.68
8.76
11
10
0.0
2.2
4.4
6.7
8.9
11.1
2015A 2016A 2017A 2018F 2019F
Company Guide
UMS Holdings
Appendix 1: A look at Company's listed history – what drives its share price?
Strong historical share price correlation between UMS and key client, Applied Materials
Source: Company, Thomson Reuters, DBS Bank
Meanwhile, Applied Materials’ share price is largely driven by order book and earnings projections
Source: Company, Thomson Reuters, DBS Bank
Company Guide
UMS Holdings
Balance Sheet:
Healthy balance sheet. UMS’s net cash position has
strengthened significantly, and has more than doubled from
S$15.3m at end-FY12 to S$40.6m in 4Q17. All else constant,
our projections show that UMS should be able to fund margin-
accretive M&A opportunities, if any.
Share Price Drivers:
Acquisition of new clients. As part of its strategy, UMS has also
embarked on new customer acquisition efforts and is actively
seeking sustainable, margin-accretive opportunities outside of
the cyclical semiconductor industry.
If successful, this could accelerate earnings growth going
forward.
M&A opportunities. Following its recent 10% stake acquisition
in aerospace component manufacturer ASF, UMS continues to
be on the lookout for diversification opportunities (outside of
the semiconductor industry) with good long-term growth
potential. If successful, these new avenues of growth could
help drive further re-rating of the share price.
Potential takeover target. UMS only has one large shareholder
with a 20% stake. With the renewal of the Endura contract
providing good earnings visibility, consistently strong cash flows
and net cash of S$40.8m (and growing), we see UMS as an
attractive takeover target.
Key Risks:
Key client risk – Applied Materials. UMS's performance is
closely tied to that of Applied Materials. Management
estimates that between 80% and 90% of UMS’s revenues are
attributable to Applied Materials.
Disruptions to the relationship (i.e. loss of market share) or
weakness in Applied Materials’s end demand could
significantly weigh on UMS’s performance.
Underlying demand for semiconductor manufacturing
equipment. As demand for semiconductor manufacturing
equipment is largely driven by capex cycles of chipmakers and
foundries, an extension of the life cycle of existing systems or
slowdown in global economy could result in deferments in
their planned capital investments.
Company Background
UMS Holdings (UMSH SP) is an integrated OEM for front-end
semiconductor equipment manufacturing, providing both
component manufacturing and sub-assembly services, primarily
to key client, Applied Materials.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBS Bank
0.4
0.5
0.5
0.6
0.6
0.7
0.7
0.00
0.02
0.04
0.06
0.08
0.10
0.12
0.14
2015A 2016A 2017A 2018F 2019F
Gross Debt to Equity (LHS) Asset Turnover (RHS)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2015A 2016A 2017A 2018F 2019F
Capital Expenditure (-)
S$m
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2015A 2016A 2017A 2018F 2019F
Avg: 6.8x
+1sd: 8.2x
+2sd: 9.5x
-1sd: 5.5x
-2sd: 4.1x3.7
4.7
5.7
6.7
7.7
8.7
9.7
10.7
11.7
Feb-14 Feb-15 Feb-16 Feb-17 Feb-18
(x)
Avg: 1.26x
+1sd: 1.8x
+2sd: 2.34x
-1sd: 0.72x
-2sd: 0.17x0.1
0.6
1.1
1.6
2.1
2.6
3.1
Feb-14 Feb-15 Feb-16 Feb-17 Feb-18
(x)
Company Guide
UMS Holdings
Key Assumptions
FY Dec 2015A 2016A 2017A 2018F 2019F
Gross Profit (S$ m) 66.9 56.4 88.9 97.4 102
Revenue Growth (%) 1.16 (6.2) 55.9 10.0 5.00 Operating Profit Margin (%)
30.7 28.2 34.3 34.6 34.6
Effective Tax Rate (%) 6.71 8.68 6.38 6.70 6.70
Capex (S$ m) 4.46 2.68 8.76 11.0 10.0
Income Statement (S$m)
FY Dec 2015A 2016A 2017A 2018F 2019F
Revenue 111 104 162 179 188
Cost of Goods Sold (44.2) (47.8) (73.6) (81.3) (85.4)
Gross Profit 66.9 56.4 88.9 97.4 102
Other Opng (Exp)/Inc (32.8) (27.0) (33.2) (35.6) (37.3)
Operating Profit 34.1 29.4 55.7 61.8 64.9
Other Non Opg (Exp)/Inc 2.51 (4.7) (0.4) (0.4) (0.4)
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc 0.13 0.15 0.0 0.48 0.52
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit 36.8 24.7 55.2 61.9 65.0
Tax (2.5) (2.1) (3.5) (4.1) (4.4)
Minority Interest 0.0 0.0 0.32 0.32 0.33
Preference Dividend 0.0 0.0 0.0 0.0 0.0
Net Profit 34.3 22.6 52.0 58.1 61.0
Net Profit before Except. 34.3 22.6 52.0 58.1 61.0
EBITDA 44.1 30.0 59.6 68.9 72.2
Growth
Revenue Gth (%) 1.2 (6.2) 55.9 10.0 5.0
EBITDA Gth (%) 24.5 (31.9) 98.4 15.7 4.8
Opg Profit Gth (%) 24.8 (14.0) 89.7 11.0 5.0
Net Profit Gth (Pre-ex) (%) 37.6 (34.1) 130.3 11.6 5.0
Margins & Ratio
Gross Margins (%) 60.2 54.1 54.7 54.5 54.5
Opg Profit Margin (%) 30.7 28.2 34.3 34.6 34.6
Net Profit Margin (%) 30.9 21.7 32.0 32.5 32.5
ROAE (%) 17.8 11.8 25.7 25.5 23.9
ROA (%) 16.6 10.8 22.2 21.3 20.2
ROCE (%) 17.7 11.7 24.2 23.4 22.2
Div Payout Ratio (%) 75.1 114.0 57.7 55.4 52.7
Net Interest Cover (x) NM NM 55,695.0 NM NM
Source: Company, DBS Bank
Company Guide
UMS Holdings
Quarterly / Interim Income Statement (S$m)
FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017
Revenue 34.2 41.8 42.7 39.3 38.7
Cost of Goods Sold (18.5) (20.3) (20.9) (16.2) (16.1)
Gross Profit 15.6 21.4 21.8 23.1 22.5
Other Oper. (Exp)/Inc (6.9) (8.1) (8.1) (7.9) (9.3)
Operating Profit 8.67 13.4 13.8 15.2 13.3
Other Non Opg (Exp)/Inc (2.5) (1.0) (1.2) (0.4) 2.18
Associates & JV Inc 0.0 0.0 0.0 0.0 0.0
Net Interest (Exp)/Inc 0.06 0.07 0.0 0.0 0.0
Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0
Pre-tax Profit 6.23 12.4 12.6 14.9 15.4
Tax (0.3) (1.3) (1.3) (1.5) 0.46
Minority Interest 0.0 0.0 0.19 0.16 0.0
Net Profit 5.96 11.2 11.5 13.6 15.8
Net profit bef Except. 5.96 11.2 11.5 13.6 15.8
EBITDA 7.32 13.6 13.6 15.9 16.5
Growth
Revenue Gth (%) 30.9 22.3 2.3 (7.9) (1.7)
EBITDA Gth (%) (16.9) 85.9 0.2 16.4 3.6
Opg Profit Gth (%) 10.1 54.5 2.9 10.6 (13.0)
Net Profit Gth (Pre-ex) (%) (12.2) 87.5 2.8 18.1 16.8
Margins
Gross Margins (%) 45.7 51.4 51.1 58.8 58.3
Opg Profit Margins (%) 25.4 32.1 32.2 38.7 34.3
Net Profit Margins (%) 17.4 26.7 26.9 34.5 40.9
Balance Sheet (S$m)
FY Dec 2015A 2016A 2017A 2018F 2019F
Net Fixed Assets 34.8 31.7 38.8 42.3 44.6
Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0
Other LT Assets 84.1 83.2 87.7 87.7 87.7
Cash & ST Invts 38.9 42.6 59.6 92.1 121
Inventory 37.4 31.7 49.6 40.1 37.4
Debtors 12.4 20.9 23.4 24.4 25.6
Other Current Assets 0.0 0.0 0.0 0.0 0.0
Total Assets 208 210 259 287 316
ST Debt 0.0 0.25 19.0 19.0 19.0
Creditor 9.76 16.6 18.1 19.1 20.1
Other Current Liab 1.98 2.21 3.29 4.15 4.36
LT Debt 0.0 0.0 0.0 0.0 0.0
Other LT Liabilities 1.42 1.68 4.99 4.99 4.99
Shareholder’s Equity 194 189 215 241 270
Minority Interests 0.0 0.0 (1.3) (1.6) (2.0)
Total Cap. & Liab. 208 210 259 287 316
Non-Cash Wkg. Capital 38.0 33.9 51.7 41.2 38.6
Net Cash/(Debt) 38.9 42.4 40.6 73.1 102
Debtors Turn (avg days) 41.5 58.4 49.8 48.8 48.7
Creditors Turn (avg days) 103.4 113.4 91.3 92.0 92.2
Inventory Turn (avg days) 351.0 297.5 214.4 221.8 182.1
Asset Turnover (x) 0.5 0.5 0.7 0.7 0.6
Current Ratio (x) 7.6 5.0 3.3 3.7 4.2
Quick Ratio (x) 4.4 3.3 2.1 2.8 3.4
Net Debt/Equity (X) CASH CASH CASH CASH CASH
Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH
Capex to Debt (%) N/A 1,077.5 46.1 57.9 52.6
Z-Score (X) 22.7 14.9 15.2 15.2 14.4
Source: Company, DBS Bank
Company Guide
UMS Holdings
Cash Flow Statement (S$m)
FY Dec 2015A 2016A 2017A 2018F 2019F
Pre-Tax Profit 36.8 24.7 55.2 61.9 65.0
Dep. & Amort. 7.43 5.43 4.32 7.48 7.69
Tax Paid (2.8) (2.7) (2.1) (3.3) (4.1)
Assoc. & JV Inc/(loss) 0.0 0.05 0.04 0.0 0.0
Chg in Wkg.Cap. (4.9) 0.53 (18.4) 9.62 2.41
Other Operating CF (0.7) 5.79 0.02 0.0 0.0
Net Operating CF 35.8 33.9 39.2 75.7 71.0
Capital Exp.(net) (4.5) (2.7) (8.8) (11.0) (10.0)
Other Invts.(net) 0.0 0.0 0.0 0.0 0.0
Invts in Assoc. & JV 0.0 (0.9) (0.1) 0.0 0.0
Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0
Other Investing CF 0.12 0.14 (2.1) 0.0 0.0
Net Investing CF (4.3) (3.4) (11.0) (11.0) (10.0)
Div Paid (25.7) (25.7) (26.8) (32.2) (32.2)
Chg in Gross Debt 0.0 0.25 18.8 0.0 0.0
Capital Issues 0.0 0.0 0.0 0.0 0.0
Other Financing CF 0.25 0.0 (0.4) 0.0 0.0
Net Financing CF (25.5) (25.5) (8.5) (32.2) (32.2)
Currency Adjustments (0.5) (1.3) (2.8) 0.0 0.0
Chg in Cash 5.39 3.69 17.0 32.5 28.8
Opg CFPS (S cts) 9.48 7.77 10.7 12.3 12.8
Free CFPS (S cts) 7.30 7.27 5.67 12.1 11.4
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Carmen Tay
S.No.Date of
Report
Closing
Price
12-mth
Target
Price
Rat ing
1: 01 Mar 17 0.54 0.58 BUY
2: 15 May 17 0.78 0.86 BUY
3: 23 May 17 0.90 1.07 BUY
4: 14 Aug 17 0.90 0.90 HOLD
5: 13 Nov 17 1.04 1.21 BUY
Note : Share price and Target price are adjusted for corporate actions.
1
2 3
45
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18
S$
Company Guide
UMS Holdings
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 28 Feb 2018 16:25:34 (SGT) Dissemination Date: 28 Feb 2018 16:31:04 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated
corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)
redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or
warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without
notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific
investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees
only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial
advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit)
arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not
to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons
associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have
positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and
other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may
not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to
update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED
UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.
Company Guide
UMS Holdings
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s)
primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the
issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real
estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the
management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or
his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has
procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of
research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment
banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment
banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the
DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates do not
have a proprietary position in the securities recommended in this report as of 31 Jan 2018.
2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research
Report.
Compensation for investment banking services:
3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document
should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced:
4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other
investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Market Focus
Page 11
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 8 Mar 2018 17:20:04 (SGT) Dissemination Date: 8 Mar 2018 18:52:08 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated
corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)
redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or
warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without
notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific
investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees
only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial
advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit)
arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not
to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons
associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have
positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and
other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may
not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to
update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED
UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
Market Focus
Page 12
(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s)
primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the
issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real
estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the
management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or
his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has
procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of
research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment
banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment
banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the
DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), DBSV HK or their subsidiaries and/or other affiliates have
proprietary positions in Sheng Siong, Manulife US Real Estate Inv, CDL Hospitality Trusts, CapitaLand recommended in this report as of 31 Jan
2018.
2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research
Report.
3. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued
share capital in Manulife US Real Estate Inv, CDL Hospitality Trusts, recommended in this report as of 31 Jan 2018.
4. DBS Bank Ltd, DBS HK, DBSVS, DBSVUSA, DBSV HK, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of
common equity securities of Manulife US Real Estate Inv, CDL Hospitality Trusts, as of 31 Jan 2018.
Compensation for investment banking services:
5. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past
12 months for investment banking services from Cityneon Holdings, mm2 Asia, Chip Eng Seng Corporation, APAC Realty Limited, Manulife
US Real Estate Inv, CDL Hospitality Trusts, CapitaLand as of 31 Jan 2018.
6. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of
securities for, mm2 Asia, Chip Eng Seng Corporation, APAC Realty Limited, Manulife US Real Estate Inv, CDL Hospitality Trusts, CapitaLand in
the past 12 months, as of 31 Jan 2018.
7. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document
should contact DBSVUSA exclusively.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of
which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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Directorship/trustee interests
8. Euleen Goh Yiu Kiang, a member of DBS Group Holdings Board of Directors, is a Non-Exec Director of CapitaLand as of 31 Dec 2017.
Disclosure of previous investment recommendation produced
9. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other
investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
RESTRICTIONS ON DISTRIBUTION
General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”). DBS holds Australian Financial Services Licence no. 475946.
DBSVS is exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. DBSVS is regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws.
Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong This report has been prepared by a person(s) who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Vickers Hong Kong Limited, a licensed corporation licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).
For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].
Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.
Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR
Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.
Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd.
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United Kingdom
This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore.
This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.
In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.
Dubai International Financial Centre
This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.
United Arab Emirates
This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent.
United States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.
Other jurisdictions
In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
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DBS Regional Research Offices
HONG KONG DBS Vickers (Hong Kong) Ltd Contact: Paul Yong 18th Floor Man Yee Building 68 Des Voeux Road Central Central, Hong Kong Tel: 65 6878 8888 Fax: 65 65353 418 e-mail: [email protected] Participant of the Stock Exchange of Hong Kong
MALAYSIA AllianceDBS Research Sdn Bhd Contact: Wong Ming Tek (128540 U) 19th Floor, Menara Multi-Purpose, Capital Square, 8 Jalan Munshi Abdullah 50100 Kuala Lumpur, Malaysia. Tel.: 603 2604 3333 Fax: 603 2604 3921 e-mail: [email protected]
SINGAPORE DBS Bank Ltd Contact: Janice Chua 12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel: 65 6878 8888 Fax: 65 65353 418 e-mail: [email protected] Company Regn. No. 196800306E
INDONESIA PT DBS Vickers Sekuritas (Indonesia) Contact: Maynard Priajaya Arif DBS Bank Tower Ciputra World 1, 32/F Jl. Prof. Dr. Satrio Kav. 3-5 Jakarta 12940, Indonesia Tel: 62 21 3003 4900 Fax: 6221 3003 4943 e-mail: [email protected]
THAILAND DBS Vickers Securities (Thailand) Co Ltd Contact: Chanpen Sirithanarattanakul 989 Siam Piwat Tower Building, 9th, 14th-15th Floor Rama 1 Road, Pathumwan, Bangkok Thailand 10330 Tel. 66 2 857 7831 Fax: 66 2 658 1269 e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand