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941 Brokers' Digest

The Edge Singapore
The Edge Singapore • 13 min read
941 Brokers' Digest
Here are some stocks to check out this week.
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Genting Singapore
Price target:
UOB Kay Hian “hold” 80 cents

Slow recovery even with reopening Genting Singapore, which runs the integrated resort and casino Resorts World Sentosa (RWS), is headed for a slow recovery after shutting for two months in a “wash-out year”, according to analysts from UOB Kay Hian, who have downgraded their call on this stock to “hold” with an unchanged target price of 80 cents.

“We gauge that 2020 will be a wash-out year as 1H2020 earnings will take a heavy toll from plunging hotel occupancy rates and gaming revenues before the lockdowns, and zero revenue during the temporary closures in the lockdown periods.

“A slow recovery is expected, with impediments on international travel into Singapore and reduced gaming capacity,” say analysts Vincent Khoo and Jack Goh in their July 2 report.

RWS was shut from Apr 7 to July 1, owing to the “circuit breaker” measures introduced to curb a sharp rise in the number of Covid-19 infections in Singapore. For the 1QFY20 ended March, Genting Singapore reported earnings of $148.9 million, some 55% lower y-o-y.

Despite the reopening, entry to casinos is currently limited to Genting Reward members and annual levy holders only. The slow recovery is limited by RWS’ heavy reliance on foreign tourists and Singapore’s safe distancing rules, which force the RWS casino to operate at just a quarter of its capacity.

See also: UOBKH lowers MINT’s TP to $2.93 after its data centre JV’s all-in cost of debt to increase after January expiry

For FY2020–2021, UOB Kay Hian has cut its earnings forecast by 49% and 9% respectively “as the duration of the lockdowns in Singapore have stretched beyond initial expectation[s]”. The reduced capacity is also expected to contribute to lingering uncertainty in 2H2020, with the region’s airline and tourism restrictions still up in the air.

Gamble in Japan

Analysts are also wary of the company’s pursuit of integrated resort (IR) bids in Japan, noting the high capex commitment involved and the withdrawal of large US bidders such as Las Vegas Sands, citing nonviable regulatory framework like an entrance fee for locals and a limit on gaming floor space to not more than 3% of the total area.

See also: SAC Capital highlights Kim Heng’s recent wins in an unrated report

Japan legalised plans to build three IRs back in July 2018. Now touted as a way to restart its ecocomy after lockdowns due to Covid-19, the prefectures of Osaka, Yokohama, Nagasaki, Wakayama and Tokyo are vying to land one of three multibillion-dollar complexes on their turf.

Yokohama’s Request for Proposal (RFP) process will start in August after the federal government’s basic policy is finalised and the results will be known at the year-end. Genting Singapore will also participate in Tokyo’s bid when it is rolled out, said UOB Kay Hian.

Selected operators will submit their proposals to the federal government in 2H2021, with openings slated for 2026. Analysts noted that Japan’s current IR window term of five years is difficult for operators to realise return on investments as the payback period for large IRs is seven to nine years.

“Should [Genting Singapore] win the Japan bid, we may have to review our post-2020 dividend assumptions, given the deteriorating near-term cashflow outlook, hefty RWS 2.0 capex and capital commitment for the Japan IR,” note the UOB Kay Hian analysts. Within this year and the next, there are hopes for better arrival numbers following the reopening of borders to neighbouring countries with relatively lower Covid-19 cases, such as Malaysia, Brunei, Australia, New Zealand, Macau, Taiwan and Vietnam.

“Successful lifting of travel restrictions would drive up RWS’ earnings, given its high dependency on foreign visitors. This could signify a potential recovery of up to 80% of pre-Covid-19 tourist arrivals.” —Jovi Ho

iFast Corp
Price target:
CGS-CIMB “add” $1.65

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Upbeat on digital banking license prospects

CGS-CIMB Securities is reiterating its “add” call and target price on iFast Corp at $1.65, say analysts Andrea Choong and Caleb Pang in a July 1 note.

Their price target is based on the sum of parts 26x price-to-earnings forecast for FY21F and a $100 million minimum paid-up capital for its digital wholesale banking (DWB) license.

iFast confirmed on June 18 that it has proceeded to the next stage of assessment for a DWB licence. It is the only DWB applicant listed on the Singapore Exchange (SGX).

It is joined by eight other DWB applicants and five digital full bank (DFB) applicants, the Monetary Authority of Singapore (MAS) announced. These companies comprise Chinese players looking to break into Singapore’s banking scene.

iFast believes it has “more than a 1-in-3 probability” of being awarded the licence for its status as a homegrown player and operating track record in handling cash through its wealth business.

The company intends to reach out to SMEs with good credit ratings, upon commencement of its lending operations.

For this, it plans to extend lower-quantum loans to smaller SMEs — a segment it says is presently underserved by banks, due to its perceived riskiness and limited operating track record.

Meanwhile, it is looking to raise $80 million in capital through internal sources, borrowings and equity raisings, to fund the 65% stake in its consortium with China-based Yillion Group and Hande Group.

Yillion Group operates one of four digital banks in China while Hande Group is dubbed the superpower’s fastest growing and leading FinTech company.

For now, iFast is seeing revenue growth from stock broking, particularly in US equities, which has mitigated the 7% q-o-q decline securities daily average value traded on SGX.

Meanwhile, the digitalisation push from Covid-19 has boosted its net assets under administration (AUA) inflows by 224% y-o-y in 1Q20 to $590 million. Account openings have also increased in this time.

“We remain positive on [iFast] as it is a profitable FinTech player, has a proven track record of growing its AUA, and has strong levels of recurring revenue (>80% of income),” say Choong and Pang. — Amala Balakrishner

Singapore O&G
Price target:
KGI Securities “neutral” 32 cents

“Neutral” call on Covid-19 impact and falling birth rates

KGI Securities has initiated coverage on the specialist healthcare group for women and children, Singapore O&G (SOG), with a “neutral” recommendation, and a 12-month target price of 32 cents.

“We highlight the key risks as a basis for our ‘neutral’ rating despite the inherent upside, and will re-evaluate our forecasts after 1H20 results,” say analysts Amirah Yusoff and Joel Ng in a July 3 report.

“[We are] using a very conservative 16.0x P/E as compared to its five-year average of 26.0x P/E, as we recognise that 2020’s earnings will inevitably be affected by the Covid-19 situation in Singapore. This represents a total upside of 27.6%, including FY20’s dividend yield of 3.8%,” they add.

Yusoff and Ng have forecasted SOG’s Patmi for FY2020F to be at $7.9 million, and earnings per share (EPS) of 1.66 cents.

Some of the key risks identified by Yusoff and Ng include a $11.9 million impairment from Joyce Lim’s dermatology practice in FY19, which reflects close to 50% of the total goodwill on SOG’s balance sheet as at end-2018.

Lim is one of 15 specialists practicing at SOG. Of the 15 specialists, five are senior doctors who contribute more than 50% of the group’s revenues.

Her practice is likely to be further impacted, along with the risk of impairment, by the closure of Singapore’s borders to non-essential medical tourism due to the Covid-19 outbreak.

The analysts also note that the falling birth rates in Singapore are “unlikely to increase significantly” in the short to medium term. They attribute this to societal issues that are challenging to address and resolve.

“While the Singapore government has been directing a great deal of effort and resources toward encouraging couples to start families, from grants to increasingly generous parental leave, it has yet to see meaningful change or improvements in the last few years,” they say.

“In the larger scheme of things, we note that this could threaten SOG’s core business strategy should it be unable to diversify and adapt to the changing medical landscape,” they add.

SOG’s obstetrics and gynaecology (O&G), paediatrics, and cancer-related segments continue to outperform y-o-y.

Notably, the paediatrics segment has quintupled its profits despite the team just doubling in FY2019.

Yusoff and Ng attribute the performance of these segments to being categorised under essential services and therefore having been less affected by Covid-19.

“We expect even greater results as intersegment referrals climb, and as more parents choose private hospitals and specialists,” they note.

Where possible, SOG has also encouraged tele-consultations with specialists, in an effort to provide as comprehensive a service as possible to its patients.

The analysts note that the group also has a competitive advantage with accomplished veterans in their team of senior specialists.

“Some of SOG’s doctors are also shareholders of the company, with five making up the 20 largest shareholders of the company, ensuring their alignment of interests,” they say. — Felicia Tan

Avi-Tech Electronics
Price target:
RHB “buy” 50 cents

Strong 2H expected, top pick within semiconductor sector

RHB Group Research is keeping its “buy” recommendation on Avi-Tech Electronics with an unchanged target price of 50 cents. The stock is also one of the research house’s top “buy” picks within the semiconductor sector.

In a July 7 report, lead analyst Jarick Seet says: “The semiconductor sector’s slowdown has likely bottomed out, and the company’s quarterly performance should improve going ahead.”

Avi-Tech earlier this year reported a strong 2Q20, with Patmi increasing by 46.7% y-o-y to $1.4 million. Seet expects growth to continue for the company with a strong 2H20, while overall estimate for FY20 will be a much better year, as earnings likely bottomed out in FY19.

“With the sector slowdown in effect since 2018, we believe the correction has bottomed, and from here on, the outlook should improve, especially with China and the US having struck a Phase One trade deal,” adds Seet.

Avi-Tech’s 2H20 should continue to see a pick-up in performance with strong growth from burn-in services, which have much higher gross margins. This, coupled with previously implemented cost-cutting measures, should help improve margins as well. For 2Q20, the company’s gross margins increased significantly to 39.7% from 27.9% in 1Q19.

On the other hand, Avi-Tech is staying alive in this critical industry with a strong net cash position. This along with its strong operating free cash flow (FCF), the management should be able to continue rewarding shareholders with attractive dividends despite a drop in profits in the previous year.

Avi-Tech operates in the burn-in and testing segment of the semiconductor industry and focuses mainly on the automotive sector. The company plays a crucial part in the supply chain, which would see its demand for its services still growing despite a worldwide pandemic still ongoing.

For FY19, a total of 2.3 cents in dividend per share (DPS) were declared, translating into a Patmi payout ratio of 84.7%. Due to its strong performance, a higher interim DPS of 1 cent was paid in 2Q20, compared to 0.8 cents a year ago.

“We expect management to reward shareholders with at least the same amount going forward, despite a special dividend given in FY19,” says Seet.

Attractive yield aside, the company’s management is actively exploring M&A opportunities and hopes to close a deal in the near future. And the analyst believes that any potential earnings-accretive M&A should be a positive.

“With a net cash balance sheet and good dividends, we are positive on the stock. Investors have been well rewarded with dividends even when earnings were at the bottom of the cycle,” Seet adds. — Samantha Chiew

Grand Venture Technology
Price target:
CGS-CIMB “buy” 26.2 cents

Capability differentiation makes this a “buy”

CGS-CIMB Research has initiated coverage on Grand Venture Technology (GVT) with an “add” or “buy” call and target price of 26.2 cents.

GVT is an established manufacturing component solutions provider with over six years of experience. Its chairman, Ricky Lee, has been involved in the precision engineering industry for more than 37 years.

The company was listed on Jan 23, 2019, at an IPO price of 27.5 cents.

According to analysts William Tng and Darren Ong, most of the proceeds from the IPO have been spent on capacity expansion and acquiring more advanced machineries.

The analysts also believe the company, being one of the few manufacturers in Southeast Asia with ceramic and quartz machining know-how, helps differentiate it from the rest of its competitors.

GVT is exploring the possibility of expanding its ceramic and quartz machining capabilities with Sico Technology and its Singapore subsidiary, Sico Asia Quartz.

It is also developing sub-micron machining capabilities to cater to customers in the analytical life sciences industry, and investing in robotics and software for transformation into a smart factory.

Tng and Ong have forecasted GVT to rake in a net profit of $3.4 million for FY20F, up from FY19’s actual earnings of $3.1 million, and a core earnings per share of 1.5 cents for the same year.

“Downside risks include a deterioration in customer demand due to escalation of the Covid-19 outbreak. Re-rating catalysts are earnings-accretive M&A and better-than-expected customer demand,” they add. — Felicia Tan

Price target:
CGS-CIMB “Add” $1.10
Maybank Kim Eng “Hold” 80 cents

DPU and target price trimmed on lower shopper traffic Following

SPH REIT’s business update for 3Q on July 1, CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee have cut their forecasts for its FY20–22F distribution per unit (DPU) by 3%–29%.

Eing and Lock have also reduced SPH REIT’s target price to $1.10 from $1.13 previously, while keeping their “add” call. The reduced DPU reflects an additional 0.3-month rental waiver for FY20F, lower dividend payout and weaker rental reversion, say the analysts.

However, the analysts say they continue to like SPH REIT’s niche and quality assets. They also believe the REIT has retained some income for further rental assistance in addition to the mandatory rental waiver imposed by the government.

Despite the circuit breaker measures imposed, which has led to reduced customer traffic across all retail malls, SPH REIT managed to retain a high occupancy rate of 98.8% in 3Q20.

As such, Eing and Lock have maintained their “add” call for the REIT.

“In Singapore, Paragon has only 1% of lease (down from 3% last quarter) by GRI [gross rental income] due to be renewed in FY20, while Clementi’s leases due in FY20 have all been renewed, thanks to its advance negotiation policy. As at FY19, Clementi had 55% of leases due in FY20. The fast renewal rate is a testament of the quality of Clementi Mall,” they say.

“In Australia, the REIT renewed some leases with Figtree Grove’s expiring leases declining from 13% to 8% by GRI and Marion’s from 30% to 28%,” they add.

However, Eing and Lock believe the REIT may not be as able to secure renewals in FY21F as easily given the current environment.

Maybank Kim Eng analyst Chua Su Tye has also revised FY20F’s DPU to –15% for the REIT due to the additional tenant support measures. Chua believes shopper traffic recovery and tenant sales are likely to be slow for SPH REIT’s luxury mall, Paragon.

He has maintained his “hold” call and an unchanged target price of 80 cents for the REIT. “Its balance sheet remains sound, although we see low near-term deal catalysts, as tenant retention gets prioritised,” he says. — Felicia Tan

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