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Broker's Digest: Del Monte, Cordlife, ComfortDelGro, Megachem, Rex International

The Edge Singapore
The Edge Singapore3/17/2022 10:7 PM GMT+08  • 10 min read
Broker's Digest: Del Monte, Cordlife, ComfortDelGro, Megachem, Rex International
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Del Monte
Price target:
PhillipCapital “buy” 63 cents

Price upgrade on higher earnings expectations

PhillipCapital analyst Vivian Ye has maintained her “buy” recommendation on Del Monte Pacific with a higher target price of 63 cents from 62 cents previously.

Ye’s recommendation on March 15 comes as the dual-listed F&B company saw earnings of US$25.9 million ($35.3 million) for the 3QFY2022 ended January, which exceeded her expectations at 29% of her full-year forecasts.

The quarter’s gross profit, however, came in lower than expected due to inflationary pressures, writes Ye.

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On this, Ye has upped her patmi estimates for the FY2022 by 7.5% as she lowers her forecasts for operating and interest expenses in line with the trend seen in Del Monte’s 9MFY2022 results.

Her revised target price is now pegged to 12x FY2022 P/E, down from 13x.

Looking ahead, Ye expects margins for Del Monte Foods (DMFI), the US subsidiary of Del Monte to recover in the 4QFY2022.

“DMFI has continued to increase its market share in the US in various categories, through expanding distribution channels, and building the Del Monte brand”, writes Ye in her report.

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“This ensures its pricing power, which protects the bottomline, especially in the current inflationary environment ... DMFI would also continue its emphasis on innovation, with items launched in the past three years on track to reach 8.5% of DMFI’s total sales in FY2023,” she adds.

In addition, Ye is also positive on Del Monte Philippines (DMPI) as remains market leaders in key categories such as canned vegetable, canned fruit, canned tomato and fruit cup snack.

“DMPI is continuing to strengthen its competitive position of the brands and drive core category growth in key channels and segments,” she continues. — Felicia Tan

Price target:
Soochow CSSD Capital Markets “buy” 47 cents

“Interesting target to be privatised”

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Soochow CSSD Capital Markets analyst Simeon Ang is maintaining his “buy” recommendation on Cordlife Group with an unchanged target price of 47 cents after its FY2021 results surpassed Ang’s lowered expectations.

For the FY2021 ended December 2021, Cordlife’s revenue and NPAT stood at 103% and 132% of Ang’s trimmed expectations on the back of a h-o-h growth in its overall performance.

During the 2HFY2021, Cordlife’s revenue grew 3.3% y-o-y to $29.4 million as contributions from its banking and diagnostics segments increased.

“While we believe that FY2022 may continue to be a start-stop year for Cordlife, [its] FY2022 revenue [and] earnings per share (EPS) should continue its recovery with 15% [and] 1% growth [respectively],” writes Ang in his March 15 report.

In his report, Ang posits Cordlife as an interesting target to be privatised given the low net-investment outlay of less than $40 million, which includes a takeover premium of around 20% at its current prices.

“While management continues to explore strategic opportunities with other cord blood banks, we believe that mergers and acquisition (M&A) activities may focus on diagnostics, which would be in-line with management’s organic expansion plans,” writes Ang.

He adds that it would make sense for the group to list in Hong Kong instead, following the inclusion of Yiu Ming Yiu, who took up a board seat in Cordlife after TransGlobal’s acquisition of 71.5 million shares at 52 cents apiece.

Yiu is the son of TransGlobal’s principals.

Ang’s current target price values the group at an undemanding FY2022 ex-cash P/E of 5.5x.

“Our valuation takes into consideration the lifetime value of $118.15 per client, derived from implied average selling prices (ASPs) and expected acquisition costs/client,” he explains.

“Our FY2022 forecasted cash and near-cash assets amounts to $89.6 million or [around] 95% of [Cordlife’s] current market cap,” he adds.

Potential catalysts, according to Ang, include potential mergers and acquisitions (M&A) and, or the possibility of privatisation.

“A key risk to our forecasts would be further lockdowns across key markets, affecting both parents’ willingness to have babies and reducing marketing channels,” says Ang. — Felicia Tan

Price target:
Maybank Securities “buy” $1.76

FY2021 marks beginning of stronger recovery

Maybank Securities analyst Eric Ong has kept “buy” on ComfortDelGro (CDG) as he sees the transport operator of buses, trains and taxis, remaining as a good proxy to the reopening of borders and the rising economic activity.

“In our view, FY2021 marks the beginning of a stronger recovery as [CDG’s] public transport services continue its sequential improvement, while its taxi business has also turned around in 4QFY2021,” Ong writes in his March 10 report. The company has a December year-end.

“The group has a rock-solid balance sheet with a net cash position of $519.8 million at end December 2021. The group just declared a final DPS of 2.1 cents, taking FY2021 DPS to 4.2 cents (from FY2020’s 1.43 cents), which translates into a sustainable payout ratio of 70%.”

Ong also believes CDG’s position will improve further as rail ridership in Singapore, as well as its bus charter services in Australia and coach services in the UK, continue to recover in tandem with the higher social mobility. “The taxi segment should also perform better on lower rental rebates as driver incomes are likely to improve on easing Covid-19 restrictions and resumption of international travel.”

On Feb 8, CDG announced that it would be raising its taxi fares in Singapore from March 1. Flagdown fares across its fleet of taxis will increase by 20 cents, while distance-timed rates will see a two-cent increase for every 400m, or 350m after 10km. There will also be a two-cent increase for every 45 seconds of waiting time for normal taxis.

However, Ong’s target price has been lowered to $1.76 from $1.88 previously on the back of lowered EPS estimates for the FY2022 to FY2024. Following the fare hike, the analyst has also lowered his EPS estimates to factor in the increments, from 11.2 cents for the FY2022 as at Maybank’s last report on Aug 15, 2021, to 8.6 cents in this report.

The updated EPS estimates will also take into consideration the tapering of government reliefs as well as more conservative Ebit margins due to higher energy and staff costs, says Ong. He also says that a quicker-than-expected stabilisation in the taxi industry is an upside for CDG. An overseas acquisition that is accretive to the transport operator’s earnings, as well as higher-than-expected passenger numbers for Singapore rails on the North-East Line and Downtown Line or new bids for railway lines under contract model are also upside factors.

Meanwhile, one downside identified include the higher-than-expected operating cost given the current inflationary pressures. “A decline in taxi utilisation or heightened competition (fares and for drivers) from ride-hailing players [and] slower-than-expected recovery in ridership for its public transport services [are also downsides to CDG].” — Felicia Tan

Price target:
SAC Capital “buy” 58 cents

Higher target price on better sales

SAC Capital analyst Lam Wang Kwan remains positive on Megachem with a “buy” call after the chemicals company saw a record year.

For its FY2021 ended December, Megachem’s revenue increased by 32% y-o-y to $140.3 million, while its bottom line was up 52% y-o-y to $8 million, surpassing Lam’s full-year forecasts by 5.4% and 25% respectively.

Going into FY2022, Lam has raised his topline estimates for the year by 4.4% as he expects sales to remain elevated, driven by demand. Lam also expects the chemicals company’s growth momentum to sustain into 2HFY2022 driven by backlog as customers are restocking their inventories that were depleted during the pandemic. The surge in demand for chemicals as economic activities pick up across the world are another growth factor, he writes in his March 11 report. The analyst has also upped his target price estimate to 58 cents from 55 cents previously, as he expects Megachem’s growth momentum to sustain albeit at lower margins.

“Global economic growth is estimated to be at [around] 4.4% and growth in emerging and developing Asia is at [around] 5.9% for 2022. However, we expect the exceptional operating margins to moderate to [an estimated] 5.7% in FY2022 and normalise further to 5.1% in FY2023,” writes the analyst in his March 11 report.

“Overall, our FY2022 bottom line estimates still increased by 23%,” he adds. Lam’s higher target price translates into an FY2022 10.3x P/E and 1.2x P/B.

In addition to the continuous tailwinds, Lam sees Megachem as being adaptable to changing demand. “Megachem supplies a wide range of specialty chemicals used in many industries, and this insulates it from the vagaries of any single sector.”

The chemicals company benefitted from a surge in demand for specialty chemicals driven by cleaning and disinfection, technology and healthcare sectors in the FY2020.

In FY2021, Megachem saw growth coming from the flavours, fragrance, construction and electronics sectors, says Lam. “Through its diversified sector and geographical coverage, Megachem has demonstrated that it is able to make quick adjustments to meet changing demand and supply to industries that are experiencing growth. The new Malaysia warehouse, which is near completion, will further expand Megachem’s capability. We believe the new warehouse can ride on the semiconductor sector growth in Malaysia.” — Felicia Tan

Rex International
Price target:
KGI Securities “outperform” 54 cents

‘Rolling like the good old times’

Analysts from KGI Securities are maintaining their “outperform” stand on oil explorer and producer Rex International with a significantly higher target price of 54 cents from 40 cents earlier, analysts Joel Ng and Chen Guangzhi write in a research note.

Their move comes as Rex International is seen to be “rolling like the good old times,” as oil prices tend upwards. For FY2021 ended Dec 31, Rex reported earnings of US$78.9 million ($107.6 million), with oil prices averaging at US$67 per barrel. In contrast, Rex was US$15.2 million in the red for FY2020, when oil averaged at US$34 per barrel.

Rex International is in the business of oil production and exploration and has concessions in Norway and Oman. “Brent is now trading at the levels when oil & gas companies were partying like there was no tomorrow, in 2012 and 2014,” observe Ng and Chen, referring to recent prices of as high as US$130.

While the price of oil when demand destruction starts to set in is quite varied, market estimates put it between US$120 to US$150. Ng and Chen reckon that US$90 to US$110 per barrel is “the sweet spot to maintain healthy dynamics in the sector”.

Meanwhile, Rex International is set to enjoy higher production soon once upgrading works at its site in Yumna are complete. The site was shut for 24 days in Feb and Mar for the changing of the floating storage tanker.

While the replacement is only likely to increase production from 2HFY2022, Ng and Chen say it will have some impact on the company’s revenue and earnings in the ongoing 1HFY2022.

The analysts add that any impact from the downtime during the upgrading works will be offset by higher average oil sales prices, revenue and profits from the Barge field in FY2022 ending in December.

Additionally, contributions are also expected to come from the company’s acquisition of a 33.84% stake in the oil producing Barge Field in Norway.

“Beginning January 2022, revenue and profits will be fully recognised by Rex in its profit and loss statement, which we have factored into our FY2022 to 2024 forecast,” the analysts write.

Going forward, the company will have two production sharing contracts in offshore Malaysia. This will be its maiden oil field project in Asia and will provide a great opportunity for the company to expand its oil reserves and diversify its source of cash flows, say Ng and Chen.

For now, the duo have not factored in the Malaysian production sharing contracts into their valuation for they are awaiting more visibility on Rex International’s exploration plans. — Amala Balakrishner

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