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Brokers' Digest 961

The Edge Singapore
The Edge Singapore • 10 min read
Brokers' Digest 961
See these six stocks this week, including OCBC, StarHub and SATS.
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Price target:
DBS “buy” $11

Upgrades on inexpensive valuation
DBS Group Research analyst Lim Rui Wen has upgraded her call on Oversea-Chinese Banking Corporation from “hold” to “buy”, as she sees further upside for the bank on economic recovery and a gradual pick-up in long-end yields.

Lim also sees several upsides to the bank including its strong non-performing asset (NPA) coverage of 109% in 3QFY2020 ended September, which is higher than the 101% in 2QFY2020, and ongoing provisioning of $1.8 billion, as well as its strength in non-interest income franchise. Great Eastern Holdings, its closely-held insurance subsidiary, should continue to provide some income support for FY2021 de-spite the potential net interest margin (NIM) headwinds go- ing into the 4QFY2020.

Lim now expects OCBC to report net profit of $3.27 billion and $4 billion for FY2020 and FY2021 respectively, on better contributions from non-interest income. “We believe the market has priced in lower net interest income impact into FY2021. As we expect some asset quality deterioration into 2HFY2020 and 1HFY2021, especially when the various moratoriums and reliefs expire, we believe the upside is capped at around P/B of 1.0,” states Lim, who has a new target price of $11, from $9.50 previously.

While she sees the bank’s sustained business momentum and the macroeconomic recovery as catalysts to OCBC’s share price, Lim says she remains “conservative” over its income outlook into FY2021–FY2022, as management is “likely to continue adopting strict cost discipline to manage its bottom line”. — Felicia Tan

Price target:
UOB Kay Hian “buy” $1.40
RHB “neutral” $1.30

Near-term outlook is looking hazy
Analysts have rather opposing views on StarHub following its recent Investor Day 2020. UOB KayHian’s Chong Lee Len, who has a “buy” call and $1.40 target price on the stock, likes StarHub for its focus on good customer experience and network quality to drive near-term profitability. This will be complemented by cost discipline and ongoing IT transformation to support high customer satisfaction over 2021–2023.

In addition, StarHub’s GIGA mobile brand has seen good response and customer experience has been bolstered by its fully digitalised and simplified distribution platform, which will help stabilise average revenue per user (ARPU) and create customer stickiness in the longer run.

StarHub, which is trying to cut costs by $210 million, may channel the savings to remain relevant and agile as operating parameters remain competitive.

Citing channel checks, Chong believes that going into 1QFY2021, the competitive landscape should be “fairly benign” and thus let incumbents sustain market share as customers shift to telcos with nationwide 5G access, better network quality and wider coverage.

Conversely, RHB’s research team is less rosy on the near-term outlook as it continues to see near-term challenges for StarHub, mainly in the mobile segment, from competition and border closures. This would be partly mitigated by cost efficiencies from its digitalisation agenda. RHB has a “neutral” call and $1.30 price target.

“Broadly, the key takeaways from the sessions do not alter our view of 5G monetisation challenges for the group, with near-term weakness in the mobile segment stemming from competition and travel restrictions,” says RHB.

As for its dividends, Temasek’s call option for the 20% assigned shares of Ensign, which StarHub acquired in 2018, is exercisable in 3QFY2021. This could see the return of some proceeds to shareholders. StarHub has maintained its 80% dividend payout guidance, excluding one-off transactions such as job support scheme (JSS) credits and asset disposals/gains. — Samantha Chiew

See also: CGS International keeps ‘hold’ call on Paragon REIT with lowered TP following divestment of Rail Mall

Frencken Group
Price target:
Maybank Kim Eng “buy” $1.39 UOB Kay Hian “buy” $1.42

Proxy to growth in 5G and AI

Maybank KimEng is calling a “buy” on Frencken Group as it is a proxy to growth trends in 5G, AI, health and wellness and population ageing through its blue-chip customers, says analyst Lai Gene Lih, who has a target price of $1.39.

He sees short-term “cyclical resilience” from Frencken’s customers in the semiconductor equipment, analytical and automotive markets. Combined, they form 70% of its sales. “Longer term, we are excited by margin growth potential from deepening value-add with customers as Frencken launches a breadth of products in coming years,” says Lai.

Frencken manufactures components and modules for various industries including semiconductor, life sciences, automotive and industrial automation. The group provides Original Equipment Manufacturing (OEM) and Original Design Manufacturing (ODM) services.

Lai notes that Frencken’s mechatronics segment, which contributes 80% of revenues, boasts market-leading customers such as ASML, Seagate, Thermo Fisher and Phillips. “Mechatronics products tend to be critical, have demanding requirements, and Frencken is usually the sole source.”

“Frencken is currently involved in a breadth of new products across semiconductor, analytical, medical and others slated for launch in coming years. As it provides greater design value-add, we believe margin expansion potential is currently underappreciated,” Lai adds.

He is forecasting earnings growth of 21% for FY2021, underpinned by semiconductor equipment, analytical and automotive end-markets, estimated to account for around 70% of revenues. “These segments are currently in various degrees of upswing/recovery. Balance sheet is clean with net cash to equity of around 8%.” To UOB KayHian analyst Clement Ho, Frencken’s 3QFY2020 earnings took 9MFY2020 net profit to 83% of his full-year estimate.

In his Nov 17 note, Ho maintained “buy” on the company with a raised target price of $1.42 from $1.37. “The business update reflected earlier and stronger-than-expected operating leverage, buoyed mainly by a better sales mix and greater cost control efforts. We expect the semiconductor segment to continue driving growth going forward, driven by the accelerating development of 5G technology,” says Ho.

Frencken posted earnings despite a 2.8% y-o-y slip in revenue to $165.5 million, as a result of lower sales from the industrial automation (–32%), analytical (–4.8%) and automotive (–4.4%) segments, says Ho.

The relatively more profitable semiconductor (+49.5%) segment was the clear driver for Frencken, as well as tighter cost control measures, which result- ed in a 1.7ppt y-o-y expansion in gross profit margin to a record 17.6%.

That said, demand for semiconductor components remains strong. According to Ho, the semiconductor segment is estimated to contribute 32% and 35% of overall sales for Frencken in 2020 and 2021, respectively, compared to 18% in 2019.

“This will mainly be driven by the huge demand stemming from the accelerating development of 5G technology, reflected in the record capex spending by major foundries, the Taiwan Semiconductor Manufacturing Company and Samsung Electronics, in 2020–21. Pricing environment for the components manufactured by Frencken is understood to be healthy, and indicative demand from clients outstrips production capacity,” he adds. Ho has raised FY2020 and FY2021 EPS forecasts by 7.7% and 3.6% respectively. — Jovi Ho

Singapore Exchange
Price target:
Maybank Kim Eng “buy” $10.77

See also: RHB likes ST Engineering for its contract wins and record order book, keeps ‘buy’ and TP

Evolving into a ‘pan-Asian, multi-asset’ exchange
As the Singapore Exchange (SGX) continues to implement its multi-asset strategy, Maybank KimEng’s head of research Thilan Wickramasinghe has initiated coverage on the bourse operator with a “buy” rating and target price of $10.77.

He believes that SGX’s evolution into a “pan- Asian, multi-asset” platform offering derivatives, fixed income and alternative products provides an opportunity to investors.

He notes that SGX is well positioned to benefit from multiple structural trends that are driving de- mand for risk-management products.

For more stories about where the money flows, click here for our Capital section

As a result, Wickramasinghe expects SGX’s revenue contribution from its non-cash equities businesses to rise to 74% of total revenue in FY2023 from 62% currently. He says this will be driven by rising demand for risk management because of increased market volatility, stricter regulations, digitisation of over-the-counter trades, expanding passive investing and reconfiguration of supply chains.

Moreover, SGX’s balance sheet has the capacity to gear up offering significant dry-powder for accretive, bolt-on acquisitions in growth segments, adds the brokerage.

“Deep liquidity in its products and a strong execution track record should provide SGX with a competitive advantage [versus] rivals regionally, we believe,” writes Wickramasinghe. —Jeffrey Tan

Price target:
PhillipCapital “neutral” $4.40
DBS Group Research “buy” $4.50

Load up ahead of air travel recovery
As the worst appears to be over for regional air travel, DBS Group Research has selected in-flight caterer SATS as one of its top picks.

Analysts Alfie Yeo and Andy Sim write in a Nov 17 note that the commercialisation of at least two Covid-19 vaccines in 2021 should help air travel recover to pre-Covid-19 levels at an earlier date compared to the International Air Transport Association’s forecast range.

Moreover, passenger throughputs have bottomed and are recovering albeit at a gradual pace, they say.

This comes as countries in the region have inked international travel arrangements to facilitate necessary travel along with a pick-up in domestic travel demand.

This is despite the postponement of the air travel bubble between Singapore and Hong Kong that was initially scheduled to begin on Nov 22.

“We see SATS as a candidate for vaccine recovery play,” the DBS analysts note. The stock, which is trading around 21 times its FY2023 earnings forecast, is seen to gradually re-rate back to pre-Covid-19 levels.

“We advocate accumulating and staying vested ahead of the recovery even though near-term valuations look high,” the analysts say.

DBS has a “buy” rating for the stock with a target price of $4.50, up from $4.02 earlier.

Similarly, PhillipCapital’s Paul Chew has upgraded his call on SATS too, to “neutral” from “sell”, along with a much higher revised target price of $4.40 from $1.95 earlier.

“We last pegged our target price at its Global Financial Crisis average of 1.35 times P/B. We now believe this is too bearish as operations have likely bottomed and vaccine-discovery newsflow turns positive,” he writes in his Nov 18 note.

However, Chew views SATS’s operating conditions as “still sluggish” due to weakness in revenue and the overall decline in the number of flights handled during the 1HFY2021. — Jeffrey Tan and Felicia Tan

For more stories about where money flows, click here for Capital Section

OUE Commercial REIT
Price target:
OCBC Investment Research “buy” 39 cents

Office recovery but retail remains weak
OCBC Investment Research’s Chu Peng has given OUE Commercial REIT (OUECT) a “buy” rating and a fair value price of 39 cents.

OUECT’s 3QFY2020 revenue and net property income (NPI) rose 12% and 11.4% y-o-y to $70.9 million and $55.8 million respectively, primarily driven by its merger with OUE Hospitality Trust (OUEHT), but partially offset by rental re- bates of $5 million to retail tenants.

Meanwhile, committed occupancy of its commercial portfolio was down 2.9 percentage points y-o-y to 92.3% in 3QFY2020.

OUECT’s largest retail property, the Mandarin Gallery, has seen shopper traffic and sales rebound to about 80% and 70% of pre-Covid-19 levels, respectively. However, leasing momentum remains weak.

Separately, its office occupancy in Singapore recovered 0.8 percentage points q-o-q to 94.5%, with positive rental reversions of 2.9% to 22.1% as leasing activities resumed after the circuit breaker.

For its hospitality segment, 3QFY2020 revenue per available room (RevPAR) declined 60.8% y-o-y but improved 60.5% q-o-q.

SEE:MAS launches world's first grant scheme to support green and sustainability-linked loans

Chu forecasts that while demand from government booking is likely to cease in Dec 2020 or early 2021 for Mandarin Orchard Singapore (MOS), she expects demand from air crew at Crowne Plaza Changi Airport to continue in 2021, and at higher rates than government bookings.

Renovation at MOS will commence in early 2021 in phases, with the new Hilton Singapore Orchard expected to open in 2022 to capture the recovery in the Singapore hospitality sector.

Citing the management, Chu notes that staycation demand only contributes less than 10% of overall business, and is unlikely to go up to more than 15%.

Potential catalysts for the stock include stronger-than-expected growth in leisure demand for hotels and DPU-accretive acquisitions. — Lim Hui Jie

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