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Broker's Digest: Food Empire, Uni-Asia Group, OCBC, ST Engineering, Japfa

The Edge Singapore
The Edge Singapore7/9/2021 06:30 AM GMT+08  • 12 min read
Broker's Digest: Food Empire, Uni-Asia Group, OCBC, ST Engineering, Japfa
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Food Empire
Price target:
RHB ‘buy” $1.27

Weakest quarter behind, improving prospects

RHB Group Research analyst Jarick Seet has kept his “buy” call for Food Empire Holdings with an unchanged target price of $1.27 as he sees stronger quarters ahead for the company.

“We believe that the worst is over for Food Empire in 2020, with 1Q2021 likely to be the weakest quarter for FY2021,” he says in a July 7 research note.

Seet’s sanguine outlook for Food Empire’s FY2021 ending December is underpinned by the “strong sequential improvement” the company has shown from 2Q2020 on the back of stable demand for instant coffee products. “We expect demand to remain resilient, and increase in FY2021, especially in 2Q2021–3Q2021,” Seet says.

Given the low revenue base in 2020 due to the lockdowns, Seet expects Food Empire to report strong revenue growth in the coming quarters.

See also: DBS cuts Yanlord target price from $1.43 to $1.06

He also anticipates margins to improve and contribute to higher earnings for the FY2021. “With the higher freight and raw material costs impacting margins in 1Q2021, management has taken several initiatives such as further cost reduction and a targeted marketing approach amid a series of measures to mitigate the increase from these areas,” he explains. Freight costs and raw material prices are also expected to stabilise toward the end of 3Q2021.

A further increase in average selling prices (ASPs) in Food Empire’s strong markets like Russia and Ukraine is also possible, Seet notes, based on management guidance. “The company will raise prices in 3Q2021, if deemed necessary or if competitors also raise prices,” he says.

Seet believes that the increase of a long-term shareholder’s stake in Food Empire in May shows a vote of confidence in the company. Additionally, he notes that management has been on an “aggressive” share buyback streak. “We believe that management will likely continue its share buyback programme, providing further support to the stock,” he says.

See also: KGI recommends shareholders take the better offer from GEAR

He keeps his “buy” call on the counter, noting that at 10 times FY2021 P/E, the group is among the cheapest consumer staples with a “proven track record”, while its peers are trading between 20–30 times P/E. He also reiterates that privatisation may be a possibility, given its undervalued status. — Atiqah Mokhtar

Uni-Asia Group
Price target:
KGI “outperform” $1.42

Stronger-than-expected dry bulk shipping

KGI Securities analyst Joel Ng has upped his target price for Uni-Asia Group to $1.42 from 91 cents previously in view of “favourable supply-demand dynamics” for handysize dry bulk carriers.

He has maintained his “outperform” rating for the counter, with the higher target price predominantly underpinned by a higher FY2021 P/B multiple of 0.8 times used to value Uni-Asia’s shipping business, up from 0.5 times previously.

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Ng notes that record demand for consumer goods and commodities, together with supply-chain disruptions, are driving charter rates for container liners and dry bulk carriers to their highest in more than ten years.

According to Ng, three main commodities are driving the surge - iron ore, coal, as well as soybeans.

For iron ore, Ng points to increased demand from China, the world’s largest importer of seaborne iron ore. For the first five months of 2021, iron ore imports from China rose 6% . “The resumption of Brazilian iron ore exports after two challenging years is likely to provide further tailwinds for dry bulk charter rates since they have longer haul lengths,” Ng adds.

For coal, Ng cites data from Clarksons Research showing that demand for coking and thermal coal will rise by 6% and 4% respectively in 2021. “Ironically, the resilience in seaborne coal tonnage was partially driven by China’s ban on Australian coal, which has caused China to increase its coal imports from Indonesia, Russia, South Africa, the US and Canada,” Ng comments.

For soybeans, China again has driven grain and soybean exports from the US and Brazil. “China has brought in 38.2 million tonnes of soybeans in the Jan–May period, up 13% from the same period in 2020, as the country worked to rebuild its hog population,” Ng explains.

Given the favourable market conditions, Ng expects Uni-Asia to report a solid performance for its 1HFY2021 ended June, which will be announced on Aug 13. “We expect the group’s fleet of 18 bulk carriers (10 wholly-owned and 8 under joint venture entities) to drive financial performance,” he says.

Ng also views that Uni-Asia’s asset management and properties segment remains “resilient”. Given the ongoing travel restrictions, he notes that sales of its five Hong Kong commercial buildings currently under construction are delayed to at least 2H2021.

Nonetheless, he also points out that for Uni-Asia’s Japan residential business, projects under the Alero brand name are progressing as planned as rents have largely held up in Tokyo while property sale prices have remained stable.

Ng notes that Uni-Asia’s valuations remain attractive amid the upcycle. “Our new target price implies a 0.68 times FY2021 P/B, which is still a conservative 30% discount to international peers who are trading above one time P/B,” he comments. — Atiqah Mokhtar

Price target:
CGS-CIMB “add” $13.75

Eyeing dividend cap lift and better 2QFY2021 earnings

CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee have maintained “add” on Oversea-Chinese Banking Corp (OCBC) with an unchanged target price of $13.75, before the bank announces its results for the 2QFY2021 ended June on August 4.

In their report dated July 5, Choong and Lim say they expect some “normalisation” in OCBC’s earnings following the exceptional trends seen in the 1QFY2021.

The 1QFY2021 for OCBC saw strong treasury income from large customer flow volumes amid a steepening yield curve. Earnings were also boosted by elevated wealth management income on the back of a risk-on sentiment, rebound in loan growth, and stabilisation in asset quality.

“We think it would be a feat to repeat another record quarter given tamer financial markets and pencil in more modest earnings,” write the analysts.

“Furthermore, the extension of movement restriction orders in Singapore and the rest of the region in 2QFY2021 could see management turning more cautious on asset quality ahead,” they add.

To this end, the analysts have postponed their expectations on impairment writebacks of around $400 million in management overlays to FY2022.

That said, Choong and Lim say they expect OCBC to post a net profit of $1.15 billion in the 2QFY2021, representing a 46% increase y-o-y and a 23% decline q-o-q.

Net interest margins (NIMs) may be sustained at 1.56% in the 2QFY2021, supported by continued optimisation in OCBC’s balance sheets and steady benchmark rates.

The analysts also expect q-o-q growth of 1.1% in terms of corporate loans growth. The growth, they add, should be more apparent in the 2HFY2021.

On the other hand, the bank is estimated to post an 18% decline q-o-q in non-interest income, which accounts for Choong and Lim’s expectations of a q-o-q drop in net profit.

“We think broad-based fee income could dip 11% q-o-q (+18% y-o-y) on the back of lower business volumes due to the regional movement restrictions,” they write.

“At the same time, we expect some normalisation in wealth management and treasury income in 2QFY2021 on the back of risk-off sentiment (albeit a structural improvement in assets under management or AUM base built over previous quarters), and lower customer flows given tamer financial market movements.”

Due to the regional movement restrictions, Choong and Lim have pencilled in some 30 basis points of credit costs in the 2QFY2021 to account for the perceived higher risks.

The analysts have estimated dividends of 25 cents per share in the 1HFY2021 on the basis that the Monetary Authority of Singapore (MAS) would have lifted its dividend cap on banks by then.

Downside risks to the counter, according to the analysts, are weaker repayments from loans post-moratoriums. — Felicia Tan

ST Engineering
Price target:
CGS-CIMB “add” $4.41
OB Kay Hian “buy” $4.26

Target price upgrades on US air travel recovery

Analysts are upbeat on ST Engineering as US domestic airline travel recovers back to pre-Covid-19 levels.

CGS-CIMB Research and UOB Kay Hian have kept their respective “add” and “buy” calls while also raising target prices. CGS-CIMB now has a target price of $4.41 from $4.00 previously while UOB Kay Hian has a target price of $4.26 from $4.07 previously.

UOB Kay Hian analyst K Ajith cites data from air travel intelligence company OAG, pointing out that US airlines seat capacity as at June 28 was only 10% lower than pre-pandemic levels. He expects this to grow further as the US had eased travel warnings to 110 countries on June 1, which should boost international capacity.

Given ST Engineering’s aircraft maintenance presence in the US, Ajith sees this as a positive sign. “This should benefit ST Engineering’s airframe maintenance business as well as their component and engine repair businesses,” he writes in a July 6 research note.

CGS-CIMB’s Lim Siew Khee supports this view, highlighting that the US Transportation Security Administration (TSA) expects summer travel volumes to rise, with passenger travel volumes at some popular destination airports already exceeding 2019 levels.

Besides rising maintenance and repair demand, Lim also highlights that ST Engineering’s aerospace division will benefit from the planned ramp-up in production by Airbus. In May, Airbus told its global suppliers that it intends to increase A320 production to 45 units per month by 4Q2021 and 64 units per month by 2Q2023. In her view, this bodes well for ST Engineering, which supplies engine nacelle and floor paneling via its subsidiaries.

Correspondingly, Lim has raised her FY2021– FY2023 ending December EPS forecasts by 5–6% to reflect stronger revenue and margins for the aerospace division, underpinning her higher target price.

She is bullish that ST Engineering will gain stronger contract wins from 2Q2021 onwards as economies gradually reopen. “We expect ST Engineering’s order book to breach $16.5 billion by end-2021 on sustainably firm order momentum,” she says.

Meanwhile, Ajith believes that ST Engineering is also making progress on the electronics front, with a contract secured from AXESS Networks to provide hub systems in Mexicos, as well as a partnership with Intelstat to expand broadband services in the Philippines.

In addition, Ajith points to ST Engineering’s recent share buybacks and insider purchases as an indication of management’s growing optimism of recovery. “ST Engineering is likely to maintain a dividend payout of 15 cents. At the current price of $3.90, that translates into a yield of 3.85%,” he adds.

ST Engineering remains UOB Kay Hian’s only “buy” in the Singapore aviation sector. “Given ST Engineering’s exposure to a recovery in the US aviation market, ST Engineering will register faster recovery than Asian airlines. We are also encouraged by the fact that orderbook is now higher than pre-pandemic levels,” Ajith says.

His higher target price follows an increase in his sustainable growth rate assumption from 13.1% to 13.2%. — Atiqah Mokhtar

Price target:
CGS-CIMB “add” $1.22

Expanded milk production capacity

CGS-CIMB Research analyst Tay Wee Kuang is upbeat on Japfa following its announcement of the acquisition of two dairy farms located in Shandong, China for US$123.4 million ($166.10 million) on June 28.

Japfa’s 75%-owned subsidiary AusAsia Investment Holdings will acquire the entire issued capital for Falcon Dairy Holdings (Falcon) for US$123.4 million ($165.5 million). Falcon holds 100% interest in Pure Source Farm Company, which in turn owns the two dairy farms.

“We like Japfa’s (JAP) acquisition of Falcon which could see expansion of its cattle capacity by 19%,” Tay said in a July 1 report. The acquisition could add up to 16,000 cattle to Japfa’s existing cattle capacity of 84,000 from its eight existing cattle farms across Shandong and Mongolia.

Tay highlights that the acquisition price of US$123.4 million represents 1.88 times of the assets’ book value as of March 31 and is at a slight discount to the 2 times book value off AustAsia when Japfa divested a 25% stake in its China dairy business to Meiji Co in July 2020 for US$254 million.

“The valuation is also within the group’s capex expectation of US$90-95 million to build a dairy farm with 10,000 cattle capacity. The acquisition will be fully funded through a debt facility, which could bring Japfa’s FY2021 net gearing to 0.44 times (from 0.37 times); we expect the interest on debt to be similar to the existing debt profile, at c.8.3%,” he adds.

Japfa says the acquisition will enable quicker expansion of AustAsia’s production capacity, allowing it to take advantage of the “favourable raw milk price environment” given the current supply shortage in the Chinese market, a view which Tay supports. He points out that raw milk prices remain elevated at RMB4.26 (89 cents) per kg in June, compared to the 10-year average of RMB3.59 per kg.

“Although the industry has raced to increase capacity since 2020, we expect raw milk prices to remain elevated over the next two years, as it typically takes 3–5 years to bring new capacity online,” he adds.

However, he also points out that Japfa’s nearterm earnings could take a hit as the new farms recorded net losses of US$4.6 million in 1Q2021. Nonetheless, Tay is sure that Japfa will be able to optimise operations at the farms and turn things around. “We are confident that Japfa will be able to turn the business around, given its history of operating profitable dairy farms within the same region. Furthermore, Japfa has the best-in-class technologies to maximise yields at 40.9kg/cow/ day,” he says.

He expects the new farms to break even by FY2022 ending December and contribute full-year earnings from FY2023.

To that end, he has revised his EPS forecasts for FY2021 downwards by 3.5% and upwards for FY2022 and FY2023 by 0.23% and 8.4% respectively.

He reiterates his “add” rating with an unchanged target price of $1.22. “Our target price remains pegged to 11.5 times FY2022 EPS; the stock continues to trade cheaply at close to –0.5 standard deviation of forward P/E,” he adds. — Atiqah Mokhtar

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