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927 Brokers' Digest

The Edge Singapore
The Edge Singapore • 7 min read
927 Brokers' Digest
Here are three stocks to watch: Singapore Airlines, ComfortDelGro and Valuetronics Holdings.
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Singapore Airlines
Price targets:
$6.27 HOLD (CGS-CIMB Research)
$5.54 DOWNGRADE HOLD (Daiwa Securities Research)
$4.00 DOWNGRADE UNDERWEIGHT (JPMorgan Research)
$5.80 HOLD (UOB Kay Hian Research)
$4.34 REDUCE (Nomura Research)
$6.60 DOWNGRADE HOLD (DBS Group Research)

While the capital raising move backed by Temasek Holdings should strengthen Singapore Airlines (SIA) for the long haul, the flag carrier’s earnings will likely nosedive ahead, according to CGS-CIMB Research.

This comes on the back of expected fuel hedging losses as the airline has hedged Brent crude and jet fuel at a strike price of US$58 ($83.04) a barrel and US$74 a barrel.

This is on top of more extensive global travel restrictions than previously anticipated and a deduction for imputed convertible bond yields.

“Given that the hedges are forward contracts, SIA will be obligated to pay its hedging counterparties for the hedging losses on the hedged barrels even though its fuel consumption requirements have declined significantly,” analyst Raymond Yap writes in a March 27 note. “Therefore, we have reflected full hedging losses on all of its forward contracts into our earnings forecasts.”

As such, CGS-CIMB has forecast SIA’s core earnings per share (EPS) to plunge to a loss of 8 cents.

It has also forecast the airline’s FY2022 core EPS to fall 67% to 17 cents for largely the same reasons, but including the higher postrights share base.

However, CGS-CIMB maintained its forecast for SIA’s core EPS this year of 17 cents.

SIA on March 26 announced its proposal to undertake a rights issue by issuing new shares worth $5.3 billion and 10 year mandatory convertible bonds (MCBs) worth $3.5 billion.

Temasek, which is SIA’s largest shareholder, says it will vote in favour of the resolutions and procure a subscription for its full entitlement and the remaining balance of both issuances.

CGS-CIMB says the rights issue is the “most efficient” way to raise cash quickly.

It notes that SIA cannot sell and leaseback more than $4 billion in aircraft value due to certain negative covenants. Even if that were possible, appetite among lessors for such deals is poor, which may allow SIA to raise only $1 billion at the very most, it points out.

CGS-CIMB says the proceeds from the rights issue will cover SIA’s fixed operating costs for the year. The proceeds will also cover the airline’s debt and lease liabilities payments, interest expenses and capital expenditure. — By Jeffrey Tan

ComfortDelGro Corp
Price targets:

$1.55 HOLD (DBS Group Research)
$1.55 HOLD (CGS-CIMB Research)
$2.40 OUTPERFORM (Credit Suisse Research)
$2.22 OUTPERFORM (Macquarie Research)

Analysts are slashing their forecasts for ComfortDelGro Corp amid the

worsening Covid-19 pandemic. Already, shares in ComfortDelGro have plunged 38% so far this year but market watchers believe the worst is far from over.

For FY2020 ending December, its taxi subsidiary ComfortDelgro Taxi warned it will book full-year losses — the first time ever. This comes as the group’s decision to extend its daily rental relief measures for taxi hirers till end-September is expected to set it back by $80 million.

However, CGS-CIMB Research analyst Ong Khang Chuen describes the relief measures as a “crucial” move for the group, as it fights to retain its taxi fleet — Singapore’s largest — through the Covid-19 crisis.

“Taxi drivers are suffering from lower income due to fewer tourist arrivals and an increase in the number of people working from home,” Ong says in a March 31 report. “With the recent enhanced advisories by the government to encourage people to work from home and avoid non-essential travel, we believe that the taxi idle rates could further increase in the near term.” ComfortDelGro has noted that taxi drivers have suffered as much as a 42% plunge in net income since the outbreak hit Singapore in end-January. Even after accounting for rental rebates, the figure amounts to a 22% drop.

DBS Group Research analyst Andy Sim says the taxi segment alone accounted for some 25% of the group’s operating profit in FY2019, of which 70% was attributable to Singapore operations.

He expects that the group’s taxi fleet of 10,700 taxis could have shrunk in tandem with the challenging situation. This could in turn shave some 4% off the group’s operating profit in FY2020, Sim adds.

DBS has slashed its FY2020F and FY2021F earnings forecasts by 19% and 11% respectively, which are at the low end of consensus.

“We believe consensus has yet to factor in the rental rebates and the impact from the pandemic,” says Sim. “We project earnings to dip by 16% y-o-y in FY2020F, to $224 million before rebounding 15% in FY2021F.”

Although the counter’s low price could beckon to investors, Sim says that there are too many uncertainties for the share price to re-rate as the Covid-19 outbreak worsens.

CGS-CIMB has also slashed its FY20202022F earnings per share (EPS) forecasts by 13.4%-38.6% to account for higher taxi rebates and idle rates, as well as lower earnings contributions from the group’s overseas businesses.

“For the taxi segment, we currently forecast a taxi idle rate of 20% and a 15% y-o-y average decline in taxi rental income for FY2020F,” says Ong. “Specifically, we forecast ComfortDelGro’s daily taxi rental rebate to stay at $36.50 until June, before declining to $20 in August and $10 in September.” — By Uma Devi

Valuetronics Holdings
Price targets:
82 cents BUY (Maybank Kim Eng Research)
62 cents HOLD (CGS-CIMB Research)
85 cents BUY (UOB Kay Hian Research)
76 cents NEUTRAL (RHB Group Research)

Year-to-date, Valuetronics’ share price has plunged some 41% in light of the escalating Covid-19 situation which has affected business sentiment adversely. But this might be a blessing in disguise for investors, says Maybank Kim Eng Research.

The brokerage argues that most risks appear to be already priced in for the stock, suggesting a limited downside barring any further escalations or complications.

In a March 30 report, analyst Lai Gene Lih notes that the counter is trading at only 1.2 times its FY2020E ex-cash price-to-earnings (P/E) — not far from crisis valuations during the global financial crisis and an especially difficult year in 2013. Those were the only two times the group had negative valuations to its name.

While Lai says this poses an attractive buying opportunity, the brokerage has slashed its FY2020-FY2022E earnings by some 2%-23% to factor in additional supply chain issues and demand uncertainty.

“Valuetronics expects business sentiment to be uncertain in major markets such as the US, Europe and China,” says Lai. “Valuetronics noted that since last week, some suppliers and end-customers in various countries have temporarily shut down to halt the spread of Covid-19.”

“We note that customers are beginning to turn cautious. For instance, its automotive customer has withdrawn its guidance amid increasing supply-chain and end-demand uncertainties on Mar 20,” he adds.

He acknowledges that the current uncertain outlook will impact the group’s products in the smart lighting, consumer electronics, automotive and various industrial value chains.

Yet, the group’s robust balance sheet could offer some comfort to investors. With a cash position of HK$1 billion ($183 million) and no debt, Lai says Valuetronics has the means to maintain a distribution per share (DPS) of 25 HK cents for the next two years.

“Valuetronics expects its Vietnam expansion plans to be fully funded via cash. Customers’ liquidity, leverage and coverage ratios also appear healthy,” says Lai. He adds that the group has a strong track record of generating respectable cash flows on the back of consistent profitability and solid working capital management. — By Uma Devi

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