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Broker's Digest: ST Engineering, Frencken, CDL, Econ Healthcare (Asia)

The Edge Singapore
The Edge Singapore9/16/2021 04:57 PM GMT+08  • 9 min read
Broker's Digest: ST Engineering, Frencken, CDL, Econ Healthcare (Asia)
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ST Engineering
Price target:
UOB Kay Hian “buy” $4.25

Value seen as new order flows in

UOB Kay Hian has upgraded ST Engineering to “buy” with an unchanged target price of $4.25.

“We value ST Engineering on an EV/Invested Capital basis and have raised our terminal growth rate assumption to 2.7%,” writes analyst K Ajith in a Sept 14 report.

To Ajith, the counter’s stock price, which has declined by 7.8% following its results for the 1HFY2021 ended June, represents an opportunity to accumulate more shares in the group.

On Aug 12, ST Engineering reported a 15% y-o-y increase in earnings of $296.1 million for the 1HFY2021. The group also registered a 2% growth y-o-y in revenue of $3.65 billion.

Despite the good showing, Ajith surmises that the decline in ST Engineering’s stock price was partly due to concerns that its earnings for the 2HFY2021 could be weaker h-o-h.

The concerns came amid a slowdown in US airline seat capacity, as well as global hesitancy to receive vaccinations, especially in the US.

Nevertheless, Ajith has identified higher vaccination rates in the US to be one of the share price catalysts for the group. In addition, Ajith says there are reasons to be optimistic looking beyond 2022.

This includes the securing of two engine maintenance contracts, one of which being an exclusive fiveyear contract with Alaska Airline. The contract with the airline is set to commence in 2022.

Secondly, ST Engineering announced, in August, that it had, through Elbe Flugzeugwerke (EFW), secured new Airbus A320/A321 passenger-to-freighter (P2F) orders and options from BBAM leasing.

EFW is a joint venture between ST Engineering and Airbus.

To Ajith, the contracts hold “scope for gradual pick-up in aerospace earnings by mid-2022”.

In addition, the group’s defence and public security (DPS) business is more resilient, accounting for 68% of revenue in its 1HFY2021 results.

The business also accounted for the highest improvement in base operating earnings among the rest of the group’s businesses.

“Aside from naval contracts (berthing barges, polar security cutters, and oceanographic survey vessels) for the US Navy, ST Engineering is a key contractor for Singapore’s public security and is also involved in the deployment of security robotics at key infrastructure installations,” he writes.

ST Engineering has also scored other wins including the $180 million contract to renew and modernise the communications systems for Singapore’s MRT and LRT lines.

To this end, Ajith sees ST Engineering’s record orderbook of $16.8 billion and dividend yield to limit downside risk. As it is, the group’s orderbook as at end-June, stood higher than that of pre-Covid-19 levels.

ST Engineering should also be able to maintain its dividend payout of 15 cents, which translates to a yield of 3.99% at $3.76, he adds. — Felicia Tan

Price target:
UOB Kay Hian “buy” $2.62

Avimac acquisition to ramp up semiconductor capacity, add exposure to aerospace

UOB Kay Hian analyst Clement Ho has maintained his “buy” call on Frencken Group and raised his target price from $2.52 to $2.62 after its $14 million acquisition of aerospace and semiconductor focused company Avimac.

In a Sept 15 report, Ho says that he believes this “bite-sized acquisition would help ramp up capacity expansion, particularly in the semiconductor segment, as well as to help the group gain access to new technologies and competencies.

Avimac was founded in 2018 by industry veteran Joe Lau, who was the founder of JEP Precision Engineering. The company is a subsidiary of JEP Holdings, now under UMS Holdings.

Prior to the acquisition, Avimac was a supplier to Frencken in various manufacturing programmes, and Frencken’s management cited that Avimac could act as a springboard for the group to penetrate the commercial aerospace engineering industry.

This was due to its established customer base (counting GE Aviation and Commercial Aircraft Corporation of China as clients), certified manufacturing facilities and forthcoming programmes.

Ho notes that as at June 30, Frencken’s cash balance of $159.4 million and total borrowings of $87.5 million is more than sufficient to support the acquisition.

At this point, no additional injection is expected for Avimac and management does not foresee a significant increase in the group’s operating expenses or working capital requirements.

Separately, he expects the global demand for semiconductor components to remain strong. The current chip shortage situation in the semiconductor industry is driving demand for both front- and back-end semiconductor equipment.

As such this bodes well for the key semiconductor customers of Frencken, who are mainly in the business of manufacturing equipment to make semiconductor chips.

Ho says, “Current indications and outlook of these customers are seeing a secular uptrend and we are of the view that demand for semiconductor parts and equipment is likely to be sustained into 2022. He is of the view that Frencken’s valuation is supported by its strong earnings growth profile, with the CAGR of the company’s EPS estimated at 24% from 2020–2023. — Lim Hui Jie

City Developments
Price target:
Bank of America “buy” $8
Citigroup “buy” $11.02
CLSA “buy” $9

On a ‘repair mode’ following divestment of Sincere for US$1

Analysts from Bank of America (BofA) Securities, Citi Research, CLSA and Lim & Tan are all positive on City Developments (CDL) after the group announced that it was divesting its entire stake in Sincere Property Group for a token sum of US$1.

On Sept 10, CDL announced it was fully divesting its 51% stake in the cash-strapped Chinese property group to an unrelated third party.

At the same time, Sincere will transfer the remaining 15.4% interest in Shenzhen Tusincere Technology Park to CDL as partial repayment of a loan still owed to the latter.

BofA analysts Donald Chua and Chan Xian Ning have kept “buy” on CDL with a target price of $8 following the news of the divestment.

To them, the divestment “closes this chapter” and that the closure should “remove a lingering overhang on the stock”.

“A full divestment also helps CDL avoid being engaged in a possibly long drawn bankruptcy reorganisation of Sincere,” add the analysts in a Sept 13 report. “With this overhang removed, management can now focus on repairing its standing with investors, starting with driving operational recovery in its core markets.”

As it is, the divestment has no impact on Chua and Chan’s estimates as they had previously written the value of Sincere as zero in their model.

Looking ahead, Chua and Chan see “decent risk-reward” on CDL with the counter at a deep discount of 50% to its revalued net asset value (RNAV) or over –1 standard deviation below mid-cycle.

“An impending Singapore REIT (S-REIT) initial public offering or IPO (announced by CDL), redevelopments of Fuji Xerox Tower and Central Mall, and potential value unlocking from hotel divestments are some of the steps to be taken by CDL,” write the BofA analysts.

“Meanwhile, its residential presales in Singapore remain robust, with the recent 1HFY2021 results showing signs that the worst of the operational drag from hotels is behind us.”

Citi Research analyst Brandon Lee too has kept a “buy” on CDL with a target price of $11.02 as the group focused on making a clean exit from Sincere.

The move, says Lee, could “finally narrow its RNAV discount”. According to Citi’s estimates, CDL is trading at a 55% discount to its RNAV versus its five-year mean of 25%.

The remaining financial exposure of around $85 million have already been written off earlier and is unlikely to impact CDL’s NAV per share.

“With Sincere now on the backburner, we expect CDL to focus on Singapore residential and hotel operations,” writes Lee in a Sept 12 report.

“Near term catalysts are better-than-expected take-up of 696-unit CanningHill Piers and successful listing of UK commercial REIT, with favourable outcome from Millennium & Copthorne’s (M&C) strategic review and lifting of residential policy risk as medium-term catalysts,” he adds.

CLSA analyst Wong Yew Kiang has upgraded his recommendation on CDL to “buy” from “underperform” with a higher target price of $9 from $7.52 previously.

Following the “stunning move”, CDL is now deemed as Wong’s top developed pick ahead of CapitaLand.

“The financial woes of Sincere have been a key drag on CDL’s share price and we view this announcement as a major positive catalyst for the stock to rerate,” writes Wong in a Sept 13 report.

The move also allays Wong’s earlier concerns of a drawn-out legal suit in the worst-case scenario of Sincere’s liquidation and potential off-balance sheet debt at Sincere, he says.

Like the rest of the analysts, Wong sees catalysts in the form of a potential UK commercial REIT listing in Singapore, asset recycling for some of its hotel assets, and the eventual recovery of its hotel operations.

Wong has kept his RNAV unchanged at $11.22 as he narrows his discount from 30% to 20%, tighter than its 25% average. — Felicia Tan

Econ Healthcare (Asia)
Price target:
DBS Group Research “buy” 40 cents

A play on the “golden silver economy”

DBS Group Research has initiated a “buy” on regional nursing home operator Econ Healthcare (Asia) with a target price of 40 cents, versus its IPO price of 28 cents.

Calling it a play on the “golden silver economy”, analyst Paul Yong sees the stock as currently trading at an “undemanding valuation” at 22.0 times FY2022 earnings, below the median of peers’ 23.9 times, writes Yong in his Sept 13 report.

Yong sees Econ Healthcare enjoying longer term demand, given how the private nursing home industry is estimated to grow at a CAGR of 13.6% in Singapore, 11.5% in Malaysia and 16.6% in China from 2020 to 2024.

Currently, Econ’s growth in Singapore will be driven by the commencement of the Build Own Lease (BOL) Henderson centre by FY2023 and BOL Jurong centre with 732 beds in FY2026.

The group will see growth in Malaysia and China from the ramp-up of nursing homes in Puchong in Malaysia, as well as Chongqing, Changshou and Chengdu in China by FY2023. In total, the nursing homes in Malaysia and China will bring an additional 862 beds.

Yong is also positive on Econ’s firm earnings outlook, which is supported by government tender wins.

“We project Econ to achieve a net profit CAGR of 12% over FY2021–FY2024 and 15% over FY2021–FY2026 as contributions from the BOL centres in Henderson and Jurong kick in from FY2023 and 2025 (FY2026) respectively,” he says.

On the flip side, key risks to the counter include lower occupancy rates, higher-than-expected staff costs, competition, the changes in level of subsidies in Singapore and ownership risk in Malaysia. — Felicia Tan

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