China Aviation Oil Price target: RHB “buy” $1.26

China air traffic to improve

China’s aviation traffic is expected to improve over the next 12 to 24 months, and earnings for China Aviation Oil (CAO) is expected to recover, says RHB Group Research analyst Shekhar Jaiswal.

In a June 28 note, Jaiswal is maintaining his “buy” call on the Chinese jet fuel supplier, with a lower target price of $1.26 from $1.30 earlier, which represents a 20% upside.

“We have marked to market jet fuel prices and have adjusted our estimates to reflect the 1HF2021 aviation traffic in China and at Shanghai Pudong International Airport (SPA),” writes Jaiswal.

That said, Jaiswal is lowering 2021–2023 estimates by 4%–5% as traffic and jet fuel prices track below estimates.

CAO supplies jet fuel to foreign and domestic airlines flying through Chinese and international airports. The company also trades in other oil products, such as fuel oil and gas oil. Its state-owned parent is the Asia Pacific’s largest physical jet fuel trader and sole supplier of imported jet fuel for China’s civil aviation market.

Jaiswal had expected the jet fuel crack (difference between Brent crude oil price and the jet fuel price) to gradually rise in 2021 amid higher demand for jet fuel as aviation traffic not only recovers but grows in key countries with a large domestic aviation market.

“While the jet fuel crack expanded in 1H2021 to US$1.10/barrel vs US$0.90/barrel in 2H2020, it remained well below the US$4.60/barrel jet fuel crack seen in 1H2020,” he writes. “Implied annualised flight traffic at SPA, based on the first five months of data, is tracking 9% below our estimate.”

However, China’s domestic aviation traffic remains strong. According to the flight-tracking website, RadarBox.com, China is seeing more than 10,000 domestic flights a day. Across the week of June 18 to 25, the 7-day average was 10,443 daily flights. In the same week last year, the 7-day average was 8,062 daily flights. In 2019, the 7-day average was 9,828 daily flights.

Thus, Jaiswal remains confident of recovery in aviation traffic growth. “While the slow and uneven vaccination across the world and especially in Asia could delay the recovery in China’s international aviation traffic, we remain optimistic on a sustained air traffic recovery in China during the next 12–24 months. We have lowered the growth in China’s jet fuel supply and trading volumes in 2021 to 15% from 20%.”

Despite the lowering of growth estimates, CAO’s 10.3x 2021F price-to-earnings ratio (P/E) is below peers’ and implies only 0.6x 2021F price/earnings-to-growth ratio (PEG). The company’s net cash position stands at US$269 million, accounting for approximately 40% of its market cap. On an ex-cash basis, the stock is trading at a compelling 6.1x 2021F P/E. — Jovi Ho

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Hyphens Pharma Price target: KGI “outperform” 43 cents

Profits of pharmaceutical distributor Hyphens Pharma looks promising for 1QFY2021 ended March following its highest ever quarterly sales.

This translated to a profit margin of 6.3% which comes amid a recovery in demand for its products in Vietnam, analysts from KGI Securities said in a June 28 note.

On a y-o-y basis, Hyphens Pharma’s revenue rose by 7.5% while its gross profit was up by 11.2%. Its overall bottom line correspondingly grew by 0.6%.

1QFY2021’s stronger performance comes despite the 5.6% dip in net profit registered in FY2020. This was “weaker than our expectations,” note analysts Megan Choo and Tan Jiunn Chyuan.

Even so, the analysts have upgraded their call on the group from “neutral” to “outperform”, at a revised target price of 43 cents. This is up 7 cents from its previous 36 cent call and based on rolling forward estimates to base its valuation off its forecasts for FY2022.

Choo and Tan add that they see potential upside for the stock’s base case price-to-earnings (P/E) ratio of 17 times.

For comparison, its mature competitors are maintaining a P/E average and forward P/E average of 19.9 times and 25.5 times respectively, the analysts note.

Looking ahead, Choo and Tan reckon that “we might not see the results of 1HFY2021 being replicated as Covid-19 cases started surging in end May 2021”.

“Hyphens may also face operational difficulty in 2HFY2021/1HFY2022 as their inventory in Vietnam runs low and distribution agreement renewals continue to be delayed,” they cautioned.

Even so, the duo like the company for its growing portfolio of high-margin proprietary brands.

This segment recorded a 26% jump between FY2019 and FY2020 — making this its most significant increase in the last four years.

This follows a higher take up for products under its Ocean Health brand as people turned to supplements to boost their immunity during the pandemic.

Other opportunities such as the attainment of an e-pharmacy license by its subsidiary — Pan-Malayan Pharmaceuticals — to provide telemedicine services as well as partnerships with online business-to-consumer (B2C) platforms for the sale of its proprietary products also bodes well for the company, say Choo and Tan.

The analysts expect the growth in e-commerce will generate consistent income from B2C sales as Hyphens taps on platforms such as Shopee, Lazada, Qoo10 and Amazon to sell its products. — Amala Balakrishner

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UG Healthcare Price target: RHB “buy” 61 cents

Downgrades on extended production restriction

The Singapore research team from RHB Research Group has downgraded UG Healthcare to “neutral” from “buy” with a lower DCF derived target price of 61 cents, from 75 cents previously.

The downgrade comes as Malaysia announced the extension of Phase One of the National Recovery Plan (NRP1).

Due to the extension of the NRP1, UG Healthcare’s manufacturing plants in Seremban and Negeri Sembilan — located to the south of the Malaysian capital of Kuala Lumpur — will have to comply with the current restrictions. This may have a negative impact on UG Healthcare’s near-term earnings.

Under the NRP1, manufacturers like UG Healthcare are only allowed to work at 60% workforce capacity. As such, glove production capabilities will be lowered by an estimated 20% to 30%.

With this information in hand, the research team has lowered its earnings estimates for the FY2021 ending June by 11% to $106 million due to a lower utilisation rate assumption.

They have also kept UG Healthcare’s earnings estimates for the FY2022 to FY2023 unchanged as they expect the current phase to “eventually be over”.

The heightened long-term consumption of gloves is expected to remain due to higher sanitation and health awareness due to the recent pandemic.

While this has helped UG Healthcare, the average selling prices (ASPs) for gloves are likely to drop.

“We believe ASPs peaked in 1QFY2021 due to rising competition from new gloves supply in the market,” writes the team.

The lower target price estimate has factored in the team’s lower earnings estimates and higher long-term environmental social and governance (ESG) costs. — Kayden Whang

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BHG Retail Price target: DBS Group Research “buy” 60 cents

Reversal of three-year declining trend

DBS Group Research has started BHG Retail REIT at “buy” with a target price of 60 cents, representing a 10% upside to the REIT’s lastclosed price of 55 cents as at June 30.

Analysts Woon Bing Yong and Derek Tan say the worst is over for the REIT as it is expected to recover from its three-year declining trend in the FY2021.

The REIT’s DPU has been on the decline since FY2018 as units that were previously waived from distributions have regained their entitlement to distributions.

FY2020 is said to be the year where the REIT sees the bottom of its declining DPU trend as there are now no more distribution waiver units remaining. The Covid-19 pandemic also looks set to recover, contributing to a higher distributable income for the REIT.

In addition, the REIT is exposed to cities that could see high rental growth, note Woon and Yong in a June 30 report.

The REIT is also supported by an established sponsor with a right of first refusal (ROFR) over 12 assets, and could acquire more assets outside of the ROFR.

“Using the proposed acquisition of Badaling Outlets as a basis, we estimate that BHG REIT has an acquisition firepower of between $300 million and $500 million when combined with a rights issue,” the analysts add.

As such, Woon and Yong have projected that the REIT will see a 34.4% y-o-y growth in DPU to 3.01 cents for the FY2021.

“Just [around] 25 million units are expected to regain their entitlement to distributions in FY2021 and its impact will be more than offset by BHG REIT’s rebound from the Covid-19 pandemic,” they write.

They have also estimated that FY2022 DPU could increase 8% y-o-y to 3.25 cents and “rise steadily from here on” due to the lack of remaining distribution waiver units.

They say BHG Retail REIT has high growth potential with its exposure to key cities such as Hefei and Chengdu in China.

Both cities saw urban disposable income grow by a five-year compound annual growth rate (CAGR) of 8.5% and 7.9% in Hefei and Chengdu compared to Beijing’s 7.2%.

In the same vein, retail spending in Hefei and Chengdu grew faster at a five-year CAGR of 16.6% and 7.3% respectively compared to the 5.7% seen in Beijing.

“Arguably, BHG REIT’s assets in Hefei and Chengdu may potentially enjoy higher rental growth even as its Beijing Wanliu mall provides a stable foundation,” write Woon and Tan.

Woon and Tan’s target price estimate is based on a weighted average cost of capital (WACC) of 8.0%, a terminal growth rate of 2.5%, and implies a target yield of 5.4% for FY2022.

“Overall, while BHG REIT trades at a premium with a FY2022 yield of 5.8%, we think that investors are paying for higher growth potential and a visible pipeline by buying the REIT,” they write. — Felicia Tan

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Broker's Digest: China Aviation Oil, Hyphens Pharma, UG Healthcare, BHG Retail

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