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Brokers' Digest 923

The Edge Singapore
The Edge Singapore • 11 min read
Brokers' Digest 923
Here are six stocks to watch for the week: UOL Group, Yangzijiang Shipbuilding, IREIT Global and more.
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UOL Group

Price targets:

$9.50 BUY (DBS Group Research)

$8.73 ADD (CGS-CIMB Research)

$10.10 OUTPERFORM (Macquarie Research)

$8.40 EQUAL (Credit Suisse Research)

$9.40 OUTPERFORM (Morgan Stanley Research)

$8.55 OVERWEIGHT (JPMorgan Research)

Already reeling from the impact of property cooling measures in Singapore, UOL Group’s commercial, retail and hospitality assets face rising challenges exacerbated by the Covid-19 outbreak.

Although the group saw its earnings fall below consensus estimates for FY2019 ended December, analysts remain optimistic that the property giant can weather the storms.

On the surface, UOL had a stellar FY2019, with full-year earnings jumping 14% y-o-y to $478.8 million. However, a closer scrutiny of its bottom-line reveals a different story.

“If we strip out fair value gains on investment properties and other gains/losses, core PATMI came in at $313.7 million. This represented a decline of 5.8% and was 12.7% below our forecast,” says OCBC Investment Research in a March 2 report.

FY2019 revenue dipped 5% to $2.28 million, led by a 14% drop in revenue from property development to $847.1 million. The decline was largely attributable to lower progressive recognition of revenue from three development projects — Principal Garden, The Clement Canopy and Botanique at Bartley — which have obtained their temporary occupation permits (TOP).

“Although UOL Group’s Singapore residential portfolio has been impacted by the property cooling measures, we believe its high quality projects and prudent land acquisition costs will allow it to weather the uncertainties,” OCBC says.

“UOL also has a diversified investment properties portfolio with a strong presence in the commercial and hotel industries, thus allowing the group to generate strong recurring income streams,” OCBC adds.

CGS-CIMB Research analyst Lock Mun Yee notes that UOL has locked in $1.34 billion worth of residential sales in Singapore in FY2019, which will be progressively recognised going forward.

“We continue to like UOL for its diversified business model with a high proportion of recurring income,” says Lock.

Over at DBS Group Research, lead analyst Rachel Tan agrees that UOL is well positioned to gain from asset enhancement initiatives (AEI) and redevelopment potential.

“UOL has been quick to undertake upgrades at the newly rebranded ParkRoyal Collection Marina Bay (previously Marina Mandarin) to tap on the government’s rejuvenation plans. We await confirmation of the redevelopment plans for Marina Square which could include a residential component,” she says in a March 2 report.

At the same time, she notes that UOL’s balance sheet remains strong.

“Debt-to-equity ratio stood at 0.3x as at December 2019. This leaves UOL with sufficient headroom to acquire projects/new sites when opportunities arise,” Tan adds. — By Stanislaus Jude Chan

Sunningdale Tech

Price targets:

$1.10 UPGRADE HOLD (CGS-CIMB Research)

$1.06 HOLD (UOB Kay Hian Research)

CGS-CIMB Research is upgrading Sunningdale Tech to “hold” — from “reduce” previously — despite an expected negative impact on the precision plastic components manufacturer’s performance in 1QFY2020 ending March on the back of the Covid-19 outbreak.

“On top of the seasonally weaker first quarter due to the Lunar New Year holidays in China, we think movement restrictions and quarantine requirements due to the Covid-19 outbreak in China lowered Sunningdale’s output at its China factories,” says analyst William Tng in a March 2 report.

In China, the group has manufacturing facilities in Chuzhou, Guangzhou, Shanghai, Suzhou, Tianjin and Zhongshan.

Already, Sunningdale’s automotive segment has been suffering from poor end-consumer demand. For FY2019 ended December, the group reported a 9.2% drop in revenue from its automotive segment to $245.1 million, from $269.9 million a year ago.

This brought total group revenue to $673.8 million for FY2019, some 7.3% lower than a year ago.

FY2019 earnings plunged 73.2% to $8.0 million, on the back of the weaker top-line performance as well as the absence of a one-off gain of $13.1 million recorded in FY2018 on the disposal of a property.

However, CGS-CIMB’s Tng notes that the FY2019 net profit was in line with the brokerage’s expectation. “Excluding foreign exchange losses of $1.1 million and retrenchment costs of $1.3 million, core net profit was $11.9 million,” he adds.

The market, though, has been jittery on Sunningdale’s prospects. Year-to-date, the counter has slipped 9.8% to close at $1.20 on March 4.

It is also trading some 15.5% lower than a peak of $1.42 in March last year.

For now, Tng believes that the downside from the automotive segment slowdown has been priced in. Meanwhile, he forecasts a dividend yield of 6.6% for FY2020, which should provide some share price support.

Tng also notes that Sunningdale has net gearing of 0.1 times as at end December, which “could throw up acquisition opportunities” amid the current market conditions. — By Stanislaus Jude Chan

Golden Agri Resources

Price targets:

21 cents UPGRADE HOLD (CGS-CIMB Research)

25 cents BUY (RHB Group Research)

22 cents HOLD (UOB Kay Hian Research)

33 cents OVERWEIGHT (JPMorgan Research)

Analysts expect better times ahead for Golden Agri-Resources, after the Indonesia-based palm oil plantation company posted strong growth in 4QFY2019 ended December.

Golden Agri saw its 4QFY2019 earnings treble to US$239.6 million ($333.0 million), bringing full-year earnings out of the red.

Earnings for FY2019 came in at US$194.0 million, compared to losses of US$1.8 million in FY2018.

While supported by strengthening palm oil prices during the latest quarter, the stellar 4QFY2019 was mainly boosted by a net fair value gain of financial assets of US$214 million.

Excluding the one-offs, Golden Agri recorded a core net profit of US$21.6 million for 4QFY2019 — reversing from six straight quarters of core net losses.

The improved quarterly performance came on the back of higher crude palm oil (CPO) price, reduction of palm inventory and better downstream contribution.

“We see share price support from its net book value per share of 49 cents as at end-2019,” says CGS-CIMB Research lead analyst Ivy Ng Lee Fang in a March 2 report, noting that its share price has declined 21.5% over the past 12 months.

Meanwhile, RHB Group Research expects Golden Agri to remain in the black from here on, on the back of better CPO prices. However, the brokerage also notes that Golden Agri’s core earnings turnaround in 4QFY2019, while better than its own expectations, was below consensus estimates. — By Stanislaus Jude Chan

IREIT Global

Price targets:

92 cents INITIATE BUY (RHB Group Research)

IREIT Global, a Europe-focused REIT has garnered a “buy” call from RHB Group Research due to its exposure to the resilient German economy and good quality stable tenant profile.

The REIT’s office portfolio comprises nine office assets — five in Germany and four in Spain — worth about EUR650 million ($1.0 billion).

In a March 3 report, analyst Vijay Natarajan says: “With German and Spanish office market rentals on the uptrend, and backed by favourable demand supply dynamics, we see good medium-term growth potential.” IREIT enjoys income stability amid macroeconomic uncertainties from its two key tenants — Deutsche Telekom and Europe’s largest pension fund Deutsche Rentenversicherung (DRV). RHB notes that the two account for some 77% of IREIT’s rental income.

For 4QFY2019 ended December, IREIT recorded a 4.9% fall in DPU to 1.36 cents from 1.43 cents a year ago, while net property income (NPI) was a marginal 0.1% higher at €7.5 million.

IREIT is also expected to see minimal impact from the Covid-19 outbreak, as its tenants are mainly domestic and only 2% of leases are due for renewals in the next two years.

“We see value at current share price levels which is close to strategic investors’ entry price of 76 cents per share, offering downside support,” adds Natarajan.

Overseas S-REITs are also offered tax advantages for institutional investors, as dividends are not taxable.

Before the end of 2020, Natarajan expects IREIT to acquire the remaining 60% stake in its Spanish assets from its sponsor. The acquisition is not only expected to be accretive to unitholders, but will offer occupancy and rent growth potential.

The REIT is expected to fund the acquisition with a combination of debt and equity fund raising. With borrowing costs for the euro remaining low at less than 2%, the potential acquisition is expected to be accretive to unitholders. — By Samantha Chiew

Yangzijiang Shipbuilding

Price targets:

$1.50 BUY (DBS Group Research)

$1.40 BUY (UOB Kay Hian Research)

$1.70 OVERWEIGHT (Morgan Stanley Research)

$1.12 OVERWEIGHT (JPMorgan Research)

$1.00 NEUTRAL (Credit Suisse Research)

$1.37 ADD (CGS-CIMB Research)

Mainboard-listed Yangzijiang Shipbuilding (YZJ) has been battered by waves of negative news recently, including the ‘disappearance’ of its executive chairman and a set of FY2019 results that missed consensus estimates.

But analysts remain buoyant on the counter: Eight of the 11 research houses covering YZJ have “buy” ratings on the stock.

To be sure, more choppy waters lie ahead for YZJ: Analysts forecast that the group’s 1QFY2020 earnings will be hit even harder as its shipyard activity has plunged to 20-30% as a result of China’s lockdown to curb the spread of the Covid-19 outbreak.

“YZJ needs at least 80% of its workforce to return by March to be able to hit its target delivery of 51 vessels in 2020,” notes CGS-CIMB Research analyst Lim Siew Khee in a Feb 28 report.

As it stands, Lim expects YZJ’s shipbuilding revenue to drop 60% quarter-on-quarter in 1QFY2020.

However, the brokerage is maintaining its “add” call on YZJ, albeit with a lower target price of $1.37, down from $1.45 previously.

Among the positives, Lim says, is the impending sale of its completed jack-up rig which has a book value of US$72 million ($100 million).

The analyst estimates that YZJ could sell this new rig at around US$100 million to US$120 million, which would translate to a gain of US$28 million to US$48 million.

Further, DBS Group Research analyst Ho Pei Hwa believes the positives from the return of YZJ’s chairman Ren Yuanlin has yet to be priced in.

The stock was trading at around $1.50 prior to the negative news relating to the chairman’s assistance with an investigation involving former government officials, which has now been completed,” Ho says. “The stock is [currently] unjustifiably trading below its net cash position of around $1.05 per share.”

Ho notes that Ren was present at the company’s 4QFY2019 results briefing — marking his first appearance at such an event in two years.

At the same time, the analysts also express confidence in YZJ logging a healthy order book moving forward.

“YZJ is currently targeting US$2 billion in new orders for 2020 (versus our expectation of US$1.5 billion),” says UOB Kay Hian analyst Adrian Loh in a March 2 report. “The company commented that it had a few contracts in hand that it is close to announcing, and it has also received new enquiries from old clients who are looking to place orders.”

“Importantly, YZJ believes that its current order book as of Feb 29, totaling US$3.02 billion will not experience cancellations as their clients are not speculators but instead have business strategies to open new lines/shipping routes or renew their vessels,” he adds. — By Amala Balakrishner

MindChamps Preschool

Price targets:

37 cents DOWNGRADE NEUTRAL (RHB Group Research)

MindChamps Preschool’s latest acquisitions of preschool centres have proven to be a double-edged sword. Despite the group booking a 60% increase in earnings to $5.9 million for 4QFY2019 ended December on the back of increased revenue, cost of sales for the quarter surged 34% to $8.0 million due to higher academic staff costs.

RHB Group Research has downgraded MindChamps to a “neutral” from the previous “buy”, and has slashed its target price by 55% to 37 cents as the group continues to grapple with a rising cost environment.

“Costs of running have increased much more starkly than revenue,” says RHB analyst Juliana Cai in a March 2 report. “This has resulted in poor earnings performance for FY2019. The lack of new master franchisees signed this year also contributed to lower income.”

Cai notes that MindChamps had booked a gain from corporate transactions of $6.2 million due to the divestment of its subsidiary corporations in 4QFY2019 to franchisees on a turnkey basis. Excluding this, the group would have booked a loss of $0.3 million in the quarter that has seasonally been its strongest.

Although Cai was previously optimistic on MindChamps’ venture into Australia due to the country’s higher average school fees compared to Singapore, she now notes that the group’s student occupancy in Australia has yet to reach optimal levels.

“We are less optimistic on the outlook given the likelihood of further costs escalation amidst these expansion plans, as revenue could take a longer time to catch up,”adds Cai.

However, Cai says that either the signing of a new master franchisee, or a divestment of the group’s COCO schools to a franchisee could rake in one-off gains for the group, which would in turn contribute positively to its earnings. — By Uma Devi

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