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Brokers’ Digest: Pan-United, Yangzijiang Shipbuilding, Raffles Medical Group, Frencken, Japfa, Oiltek, CDL, AEM, DFI

The Edge Singapore
The Edge Singapore • 20 min read
Brokers’ Digest: Pan-United, Yangzijiang Shipbuilding, Raffles Medical Group, Frencken, Japfa, Oiltek, CDL, AEM, DFI
Pan-United's batching plant and trucks. Photo: Pan-United Corp
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Pan-United Corp
Price target:
CGS International ‘add’ 69 cents

Healthy demand

CGS International analysts Kenneth Tan and Ong Khang Chuen are keeping their “add” call on Pan-United Corporation as they see it benefitting from the “healthy” demand for ready mixed concrete (RMC) in Singapore and Malaysia. The company’s market leadership in the RMC space is also beneficial in the upcycle of Singapore’s construction sector.

Referring to data from the Building and Construction Authority (BCA), the analysts note that RMC demand in 1Q2024 rose 10% y-o-y or some 2% above 2019 levels.

“We believe large infrastructure contracts should be a key driver of RMC demand over FY2024 to FY2026,” write the analysts in their June 11 report. Tan and Ong also highlight that while contracts for the first two phases of the Cross Island MRT Line have “mostly been awarded” as at the end of May, contracts for phase three remain up for grabs.

They continue: “We estimate phase one and two contracts awarded amounted to around $13 billion while phase three contracts could be $5 billion.”

See also: CGS International keeps ‘add’ call on Sea following solid 2QFY2024 performance across segments

Furthermore, infrastructure works at Changi Airport’s Terminal 5 have also begun, with the first major construction tender launched in March.

Notably, Tan and Ong like Pan-United for its “promising” environmental, social and governance (ESG) potential as “about half” the company’s concrete products are low-carbon products designed to reduce carbon emissions.

“We see scope for accelerated green concrete adoption in the coming years, premised on developers working to achieve Singapore’s ambitious 2030 targets, and a ramp-up in large infrastructure projects (higher green concrete adoption from government-led projects),” write the analysts.

See also: CSE Global a key beneficiary of AI boom and DCs, Maybank keeps ‘buy’

They add: “Amid the nationwide push to achieve net zero emissions by 2050, we think Pan-United stands out among our coverage as a small-cap proxy riding on ESG tailwinds.”

On its Malaysia operations, Tan and Ong note that the company has “a robust construction outlook ahead”, backed by large infrastructure and industrial projects.

Since entering the country in 2015, Pan-United has worked on several large infrastructure projects, and the analysts “see potential” for a ramp-up in project awards as the government rolls out projects in the coming quarters.

“While we estimate revenue from Malaysia is still low at around 5% of revenue, clinching of large contracts could spur a higher contribution over the next two to three years, in our view,” write Tan and Ong.

With RMC demand in Singapore looking “strong”, the analysts have increased their earnings per share (EPS) estimates from FY2024 to FY2026 by 3% to 8% as they see stronger revenue growth and improved operating leverage. As a result, their target price is lifted to 69 cents from 64 cents previously.

The analysts also like Pan-United for its “decent” 6.1% yield for FY2024. Their new target price is still based on 5.8 times Pan-United’s FY2025 EV/Ebitda where EV refers to enterprise value.

Re-rating catalysts noted by Tan and Ong include large projects awarded and sustained margin expansion while downside risks include credit risks and weak construction demand due to an economic slowdown. — Douglas Toh

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

Yangzijiang Shipbuilding
Price target:
UOB Kay Hian ‘buy’ $2.86

Receiving due recognition from the market

UOB Kay Hian’s Adrian Loh has raised his target price on Yangzijiang Shipbuilding (YZJ) from $2.19 to $2.86, to reflect better earnings prospects with a steady drum beat of new order wins.

The counter has gained 62.4% year to date, beating the Straits Times Index’s 2.8%,  notes Loh in his June 10 note. “Market giving due recognition to a solid business,” he says.

With US$3.32 billion ($4.5 billion) in new orders since the start of the year, YZJ has achieved 74% of its 2024 target of US$4.5 billion versus UOB’s expectation of US$5 billion.

“Despite this outperformance, we note that management has remained particularly conservative and stuck to its original target while we have decided to upgrade our 2024 order win expectation to an admittedly high target of US$7 billion, which is a short way from its previous annual high of US$7.41 billion back in 2021.

On the other hand, YZJ is seen to enjoy higher margins as prices of steel, a key raw material, have held steady at RMB4,000 ($760) per tonne, says Loh.

He believes YZJ has the potential to increase its dividends, given how it holds a cash balance of RMB16.6 billion as at the end of last year, up 54% y-o-y.

Upon paying out FY2023 dividends totalling some $257 million, YZJ now holds the equivalent of 44 cents cash per share.

“Without any onerous spending on the horizon, we believe that the company could pay out more dividends,” says Loh.

For FY2024 to FY2026, Loh has raised his earnings estimate for the company by 10% to 30% due to a greater conviction that the company will be able to maintain its 20% shipbuilding margins in the medium to longer term.

Loh’s $2.86 target price is based on 9 times P/E, which is 2 standard deviations (s.d.) above the company’s five-year average of 6 times.

He believes that this premium valuation multiple is justified given YZJ’s earnings visibility that now extends into 2028 as well as its strong track record of safe and efficient shipbuilding for its international customer base.

Even so, the higher target price of $2.86 still pegs YZJ more cheaply versus other shipbuilders such as the Koreans, trading at 1.8 times P/B with 9%–14% ROE. YZJ, meanwhile, trades at FY2025 P/B of 1.6 times and generates an ROE of 20. — The Edge Singapore

Raffles Medical Group
Price target:
RHB Bank Singapore ‘neutral’ $1.06

Hunting for near-term catalyst

RHB Group Research is keeping its “neutral” call and $1.06 target price on Raffles Medical Group BSL -

(RMG) as analyst Shekhar Jaiswal says the group lacks near-term catalysts.

“While 2024 earnings growth will be driven by improvements in Raffles Medical’s Singapore operations and lower losses from its China unit, longer-term earnings will be driven by its China operations, which are a few years away from breaking even in ebitda terms,” he says.

“We also await the completion of its Vietnam acquisition (subject to regulatory approval). We see risks of higher operating costs amid a tight labour market for skilled healthcare workers, a still-low foreign patient load, and losses from the health insurance unit,” he adds.

At its latest AGM, RMG acknowledged the appreciation of the Singapore dollar against regional currencies, hence impacting Singapore’s position as a medical hub, as healthcare providers in neighbouring countries take advantage of this situation.

While RMG and the other healthcare players in Singapore have to distinguish themselves by offering superior quality care, as well as enhanced treatments and services to regain its position as a preferred medical tourism destination, Jaiswal believes that the foreign patient load could remain weak in the near term.

Meanwhile, Jaiswal highlights that RMG’s chairman Dr Loo Choon Yong has been increasing his stake in the group since late February. His holdings have increased to 54.34% at the end of May from 53.02% early this year.

The group has also released fresh ESG (environmental, social and governance) data. It reported Scope 1 and 2 emissions data for the first time in 2023, making it the baseline year. It is working towards tracking Scope 3 emissions data. It aims to reduce Scope 1 and Scope 2 emissions by 5% in the medium term (by 2031 and 2040) and by 10% in the long term (beyond 2040). It is also aiming for a 5% reduction in energy consumption intensity, a 5% reduction in water consumption intensity, and a 5% reduction in waste generation intensity by 2035.

“We keep RMG’s ESG score at 3.1 (out of 4) for now, even though we noticed a deterioration in electricity consumption intensity and water consumption intensity in 2023 over 2022, as we wait to see its progress towards achieving its recently announced ESG goals. As its ESG score is in line with the country’s median ESG score, we ascribe a 0% premium or discount to its assessed fair value as at the end of May,” says Jaiswal. — Samantha Chiew

Frencken Group
Price target:
OCBC Investment Research ‘buy’ $1.74

Growth opportunities from semiconductors

Analyst Donovan Tan of OCBC Investment Research has initiated a “buy” on Frencken Group E28 -

with a fair value of $1.74.

Tan notes that due to the semiconductor industry’s “cyclical” nature, it has begun to “show signs” of an uptick since 3QFY2023 ended September 2023, which he attributes to advancements in AI solutions.

“In its 1QFY2024 update, Frencken demonstrated ongoing recovery with revenue and net profit reaching $193.6 million and $9 million, respectively, marking a 12% and 73% y-o-y increase,” writes Tan.

He adds that with Frencken “effectively addressing” its surplus inventory and its utilisation rate of 60%, the company is “well-positioned” to ride on the semiconductor industry’s revival and subsequent surge in orders.

Tan continues: “Additionally, having a net cash balance sheet of $62.2 million not only serves as a buffer against potential financial challenges but also allows Frencken to make strategic investments or pursue growth opportunities when they arise.”

Another point of strength to note for Frencken is its “diverse segments that require unique capabilities”, says the analyst.

He highlights that the company’s long-standing partnerships require significant capital expenditure (capex) and time, meaning potential competitors are less likely due to the high-entry level needed.

“We anticipate that Frencken will continue to experience growth alongside its customers, as they entrust Frencken with new programs and products,” writes Tan.

Frencken’s other segments are also experiencing robust growth, with its medical segment showing an 11.4% increase y-o-y and its analytical and life sciences growing 15.2% y-o-y in FY2023 respectively.

“Furthermore, Frencken will benefit from its strategic shift to Asia, as its European customers increasingly move production offshore due to labour market challenges in Europe,” adds Tan.

The analyst’s FV, which is 2 standard deviations (s.d.) from the five-year average, is based on a 15.5 times price-to-earnings ratio (P/E) on his forecast 12-month blended forward earnings per share (EPS).

Tan continues: “We have used a higher P/E multiple to value Frencken as we anticipate that the semiconductor recovery would lead to an expansion in operating profit margins and consequently a double-digit EPS growth, as the company scales with increased volumes.”From a consensus forward 12-month price-to-book value ratio (P/B) valuation perspective, Frencken is currently trading at 1.38 times, inflecting upwards by 0.2 s.d. from its five-year historical average of 1.3 times.

“We believe that this upward re-rating will continue on the back of increasing confidence in the turnaround expectations for the industry. We are cautiously optimistic about Frencken’s turnaround as the semiconductor recovery continues to unfold,” says Tan.

Potential catalysts noted by him include the semiconductor upcycle, new product inductions from the company and lastly, improving institutional interest driven by the hype in tech. Conversely, investment risks include customer concentration risk, ongoing conflicts in Ukraine and the Middle East, and continued weakness in industrial automation. — Douglas Toh

Price target:
CGS International ‘add’ 37 cents

Bullish on festive season demand

CGS International is keeping its “add” call and target price of 37 cents unchanged on Japfa UD2 -

as the agrifood company returned to the black in its 1QFY2024 ended March results, as its average sales prices (ASPs) trended positively heading into the festive season in Lebaran, Indonesia and Tet, Vietnam.

Analyst Tay Wee Kuang writes in his June 6 note: “Japfa disclosed in its monthly update that average monthly broiler and day-old chick prices in Indonesia were up 6.2% and 30.6% q-o-q as of May 24, while swine prices in Vietnam were up 13.6% q-o-q, according to Vietnam feed company, Anova Feed.”

Tay highlights that the quarter-to-date ASPs are comparable to 3QFY2023, where the company reported ebit of US$87.9 million ($118.2 million) for its Indonesian operations and US$10.4 million for its Animal Protein Others (APO) segment.

Meanwhile, based on Tay’s estimates, prices of soybean meal and corn, which form 70% to 80% of Japfa’s animal feed, have also eased due to abundance. Global soybean meal prices have declined 23.7% since the start of the year, while global corn prices have retreated by 33.1% since the start of the year.

In Indonesia, domestic corn prices have also declined 17.2% q-o-q to an average of IDR4,500 (37 cents) per kilogram.

“As such, we believe that Japfa’s margins should improve q-o-q, with APO likely to return to profitability after experiencing quarterly losses since 3QFY2021, except in 3QFY2023, when reported core net profit was a modest US$1.7 million,” writes the analyst.

Tay has also looked to the El-Nino weather event as a favourable factor, where higher temperatures in 2HFY2023 should translate into cooler weather in Southeast Asia from June to August.

He adds: “This should support crop yields, leading to lower raw material prices for Japfa. Nevertheless, the return of La-Nina could result in unfavourable weather conditions, such as floods and hurricanes within the region.”

Tay’s target price is pegged to seven times FY2024 price-to-book value (P/BV) at 0.5 standard deviations (s.d.) above the five-year historical mean, as he thinks “there could be a re-rating following potential earnings beat in 2QFY2024”.

Re-rating catalysts include improved consumer sentiment and sustained ASPs in 2HFY2024 while downside risks include the danger of an outbreak of African Swine Fever (ASF) within Japfa’s facilities, which would result in one-off losses and margin compression from rising raw material prices. — Douglas Toh

Oiltek International
Price target:
PhillipCapital ‘buy’ 70 cents

In an enviable business

PhillipCapital analyst Paul Chew has initiated a “buy” call on Catalist-listed Oiltek International HQU -

with a target price of 70 cents.

In his report dated June 10, Chew notes Oiltek’s “enviable” business has a return on equity (ROE) of 31%, is asset-light and backed by net cash of RM132 million ($37.9 million), which is around 70% of its market capitalisation.

“Its high returns stem from selling proprietary know-how and successfully designing, operating, and commissioning customer plants with a 45-year track record of project completions,” the analyst writes.

At present, Chew believes that the company, which is dependent on its customers’ capital expenditure (capex) plans, is riding on multiple capex cycles, especially in the palm oil sector.

“These include growth in biodiesel capacity in Malaysia and Indonesia, higher value-added products downstream, and expansion of customer base in Africa and Latin America,” he says, adding that the largest growth opportunity will be in the growing use of sustainable aviation fuel oil that uses palm oil effluents in Southeast Asia.

In FY2023 ended December 2023, Oiltek’s net profit surged by 51% y-o-y to RM19.1 million from its strong order wins totalling RM322 million.

Its order book has been growing at a 50% CAGR over the past four years, with FY2024 poised to become the fifth straight year of record orders.

On June 3, Oiltek announced that it had secured new contracts worth RM94.8 million, bringing its order book to a new record high of RM400.5 million.

Chew’s target price is based on 15 times Oiltek’s estimated FY2024 P/E.

“There are no direct comparables. We peg Oiltek at a discount to the engineering sector, which trades at 24 times forward P/E. FY2024 EV/Ebitda is one times,” he says. — Felicia Tan

City Developments
Price target:
RHB Bank Singapore ‘buy’ $7.30

Divestment plan to be a positive

RHB Bank Singapore analyst Vijay Natarajan has kept his “buy” call on City Developments (CDL) with a lowered target price of $7.30 from $8 previously after the company significantly underperformed at a 15% loss since the start of the year against the Straits Times Index’s (STI) 3% rise.

“We believe investors fear its rising debt, which results in interest cost pressures and low return on equity (ROE). Management has reiterated divestments as a key focus this year (target: around $1 billion) — the materialisation of which will be a positive catalyst, in our view,” writes Natarajan.

He continues: “We raise our revised asset net value (RNAV) discount to 50% from 45% amid gearing concerns, but maintain our call with share prices trading near historic lows and two standard deviations (s.d.) below its price-to-RNAV ratio (P/RNAV) — limiting downside.”

Meanwhile, earlier in April, CDL and Mitsui Fudosan acquired a site at Zion Road for $1.1 billion, which can be developed into 740 residential units, a retail podium, and 290 rental apartment units. CDL has a 50% stake in the project.

Natarajan writes: “We see CDL’s bid of $1,202/square feet (sq ft)/plot ratio as reasonably attractive, at around 30% below comparable land parcels sold in past years and accretive to the bottom line.”

The company has also submitted two joint tender bids for the master developer site at Jurong Lake District, with the outcome set to be announced by 3QFY2024.

These moves follow the healthy response to CDL’s projects, with 429 units sold in 1QFY2024, generating $737 million in sales value, which is three times last year’s numbers.

The company has also been active in Europe, having acquired the 268-room Hilton Paris Opera hotel in May for EUR240 million ($350 million), and the Yardhouse project in the UK for GBP88 million ($149 million) in April, which will be developed into 209 co-living studios.

Following the UK acquisition, CDL’s UK living sector portfolio will comprise 1,857 operational and pipeline units and 2,400 beds in the purpose-built student accommodation sector.

Additionally, the company also has private rented sector assets in Japan and Australia which can provide a combined $3 billion in assets, which Natarajan notes: “can eventually be divested into a fund or REIT to trim gearing and boost ROEs, in our view.”

Notably, CDL’s net gearing including the future values of its investment properties is set to rise to around 65% post-acquisitions, and has been steadily rising over the last few years with “more acquisitions than divestments”.

“Rising interest costs have put a strain on its earnings, with interest cover for 1QFY2024 falling to 1.2 times. While the group is currently marketing various retail and industrial strata units in Singapore, we believe more sizeable divestments are needed to assuage ballooning interest cost pressures,” notes Natarajan.

After factoring in higher financing costs, the analyst has lowered his FY2024 to FY2025 profit after tax and minority interests (patmi) by 8% to 14%.

He adds: “CDL’s latest sustainability report shows good progress in achieving its ambitious environmental targets, but we see room for improvement in the governance framework and earnings transparency.”

Key drivers noted by Natarajan include CDL’s strong recovery in hospitality and a steady build-up of its recurring income stream, the resilient Singapore residential market with healthy unbilled sales and the company’s strong brand presence and track record in Singapore.

Conversely, key risks include disappointing or negative returns from its overseas venture, an unexpected sharp decline in Singapore’s economy and the continued rise in interest rates. — Douglas Toh

AEM Holdings
Price target:
CGS International ‘reduce’ $1.82

Leadership change

CGS International’s William Tng has lowered his target price for AEM Holdings AWX -

to $1.82 from $1.84 previously and reiterated his “reduce” call, as he thinks that investors will only relook the stock in the 4QFY2024 ending December when prospects for FY2025 are clearer.

Tng has also reduced his FY2024–FY2026 earnings per share (EPS) estimate by 1.12% after adjusting for AEM’s 1-for-100 bonus share issue announced during its full-year results instead of a dividend payout.

Tng’s de-rating catalysts include further delay or cancellation of customer orders and slower economic growth, which will reduce customer demand for AEM’s contract manufacturing subsidiary.

AEM recently announced the resignation of CEO Chandran Nair, who will be replaced by Amy Leong on July 1.

Leong was born and raised in China and went to the US when she was 16. She holds a Master’s in Material Science from Stanford University as well as over 25 years of semiconductor test and measurement experience, according to AEM’s press release.

Leong has been with FormFactor since October 2012, and before this, she was the VP of Marketing at MicroProbe (acquired by FormFactor) from April 2010 to October 2012. Before joining MicroProbe, Leong worked at Gartner Inc as a research director from 2008 to 2010 covering the system-on-chip and microcontroller markets.

The analyst notes that CGS International hosted AEM for a CEO transition chat with their clients on June 7, in which both incoming and departing CEOs of AEM joined the virtual call.

“We understand AEM’s customers are familiar with Leong given her long career in the semiconductor industry. In our view, as the new CEO comes on board, AEM will also fill its CFO vacancy,” says Tng.

“As Taiwan’s importance in the AI supply chain grows, we think AEM may need to expand its presence there. We would also like to see Leong work with the AEM board to explore higher standards of investor disclosure, such as target financial models (revenue, margin goals that the company hopes to achieve) and quarterly revenue, margin and EPS guidance.”

As AEM competes with global players, the CEO and the board should also consider if AEM can attain a better valuation in other financial markets, which would help the company in its M&A strategy, Tng notes. Tng’s target price for AEM is still based on a 9.6 times FY2025 P/E.  — Nicole Lim

DFI Retail Group
Price target:
RHB Bank Singapore ‘buy’ US$2.81

Performance on track

RHB Bank Singapore’s Alfie Yeo has maintained his “buy” call on DFI Retail Group D01 -

(DFI) while increasing his target price from US$2.80 ($3.78) to US$2.81 as he continues to anticipate continued earnings recovery for the company.

On May 23, DFI released its update for the 1QFY2024 ended March 31, which continued to meet the analyst’s expectations. DFI’s overall revenue increased 2% y-o-y while its underlying profit grew more than 60% y-o-y boosted by better profitability.

The analyst adds that despite the decline in DFI’s food retail division’s same-store sale growth (SSSG) due to weaker consumption, it saw margin improvement through cost control.

Yeo breaks down the performance of the rest of DFI’s segments: The convenience division’s SSSG grew in Macau, South China and Singapore as margins more than doubled due to better sales mix while the health and beauty division’s SSSG grew in Malaysia, Indonesia, and North Asia with improved margins due to cost control and better gross margins.

“Among key associates, Maxim’s had flat profit growth, while Yonghui and Robinson’s Retail’s profits grew,” says the analyst.

Due to DFI’s 1QFY2024 performance being on track with his forecast, the analyst’s estimates remain unchanged. Yeo also notes that management guidance for FY2024’s underlying profit attributable to shareholders remains between US$180 million and US$220 million.

“Although growth in 2HFY2024 is expected to normalise given [a] higher base in 2HFY2023, we see continued earnings recovery in FY2024 and beyond, led by improving the profitability of key segments, including the food retail division,” adds Yeo.

While his estimates remain unchanged, the analyst’s increased sum-of-the-parts (SOTP)-based target price is largely attributed to Yonghui’s better share price which has increased by 2% from RMB2.57 (47 cents) to RMB2.63 since the analyst’s previous report dated March 12. With DFI’s 19.9% stake in the company, this increase in Yonghui’s value has positively impacted the analyst’s sum of parts valuation resulting in a slightly higher overall target price for DFI.

Yeo also notes that DFI’s dividend yield remains “decent” following the practice of uplifting dividends back to the group level by its parent company Jardine Matheson Holdings J36 -

J36 -1.39% Remove Stock. As of now, the stock trades at an attractive 11 times FY2025 P/E in comparison to the analyst’s implied target P/E of 15 times.

That said, potential downside risks to DFI’s earnings and margins identified by Yeo include a slower-than-expected recovery in consumer spending and higher-than-expected costs. — Ashley Lo

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