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Broker's Digest: Venture Corp, Civmec, OCBC, The Hour Glass, First Resources

The Edge Singapore
The Edge Singapore11/10/2022 10:34 PM GMT+08  • 12 min read
Broker's Digest: Venture Corp, Civmec, OCBC, The Hour Glass, First Resources
Here are the stocks to watch out for this week.
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Venture Corporation

Price target:
Maybank Securities ‘buy’ $20.20
CGS-CIMB Research ‘add’ $19.62

Recovery on track

With its latest 3QFY2022 ended Sept 30 results boasting improvements across the board, Venture Corp seems to be on track for a recovery. Analysts are bullish on its prospects, while keeping in mind potential risks from a volatile macroeconomic environment.

Analysts from Maybank Securities and CGS-CIMB Research have maintained their respective “buy” and “add” calls on Venture, but Maybank’s Jarick Seet has raised his target price by almost 30% to $20.20 from $19.55.

CGS-CIMB’s William Tng and Izabella Tan, on the other hand, maintained their target price at $19.62.

See also: Brokers' Digest: Mapletree Industrial Trust, IREIT Global, Jumbo Group, Netlink NBN Trust, PropNex

In his note, Seet calls Venture his “top pick” in the Singapore tech sector, and notes that Venture reported a “solid” 3QFY2022, with revenue up 32.8% y-o-y to $1.02 billion and net profit after tax (NPAT) rising 26.4% y-o-y to $97.4 million, which beat his respective forecasts of $890 million and $89 million.

He adds: “We remain positive on Venture’s robust order book which is well-diversified in terms of both customers and industries.”

Seet notes that Venture reported growth across all domains, resulting in quarterly revenue once again exceeding $1 billion with backlog orders still to clear.

See also: Top Glove unlikely to turn profitable in the near term: Maybank

Even in the semiconductor segment where a slowdown is expected, management remains confident that its differentiation in capabilities, design and products should see continued strong demand from the specific value chain where it operates.

Furthermore, he highlights that downside risks to Venture are protected by an “attractive yield” of 4.7%. Seet notes that management declared an interim dividend of 25 cents per share this year and he expects the final dividend to be at 50 cents per share.

Seet also points out that management will also conduct a corporate share buyback to utilise its $700.7 million net cash position more efficiently.

On the interest rate front, Seet says that the strengthening US dollar is beneficial for Venture, considering that the majority of Venture’s revenues are in US dollars, and a large part of its cost structure is in Malaysian ringgit, followed by Chinese yuan and US dollars.

He believes that Venture will be able to seamlessly navigate uncertainties like geopolitical tensions and Covid-19 lockdowns, and is shifting towards higher-margin products and solutions.

As for CGS-CIMB’s Tng and Tan, they believe the company is “on track for recovery” to pre-Covid net profit levels, adding that the 3QFY2022 results have surpassed their expectations.

However, they add that while the results came in above their expectations, they prefer to “err on the side of caution and maintain our [current] FY2022 net profit forecast, given macro headwinds and valuation basis”.

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

Tng and Tan share Seet’s view that Venture is well-positioned to weather a slowdown with its net cash balance sheet with no debt, and demonstrated differentiated capabilities evidenced by its pretax margin trend. — Lim Hui Jie


Price target:
Maybank Securities ‘buy’ 94 cents

Off to a good start

Civmec is off to a good start, with 1QFY2023 ended September results in line with Maybank Securities analyst Eric Ong’s expectations.

Civmec’s 1QFY2023 net profit after tax jumped 31.3% y-o-y to A$14.2 million ($12.91 million) on solid performance across all operating sectors, writes Ong. The company’s 1QFY2023 earnings account for about 27% and 26% of Maybank and consensus’ full-year estimates respectively.

Civmec is a construction and engineering services provider to the resources, energy, infrastructure, marine and defence sectors. In an Oct 27 note, Ong is maintaining “buy” on Civmec with a lower target price of 94 cents from $1 previously, “given the depreciation of the Australian dollar”.

Revenue for the quarter grew 15.6% y-o-y to A$228.3 million, underpinned by increased activity levels and the timing of project revenue recognition, notes Ong.

Ebitda margin improved by 0.4 percentage points to 11.3%, with some contracts nearing conclusion, while the group simultaneously ramped up activity on several new projects. “We think margins should continue to expand with greater economies of scale, and higher contribution from the maintenance segment,” notes Ong.

While the company’s order book has decreased slightly to A$935 million as at end-September 2022, tendering activity across all sectors remained buoyant for work this financial year, writes Ong.

Civmec recently undertook a number of smaller maintenance contracts in the southwest of Western Australia for new clients. “There are also a number of large contracts that the group is actively tendering for work commencing from end-FY2023.”

According to management, there is good visibility of upcoming projects for existing clients and there is no indication that future project plans are likely to change despite the uncertain economic outlook.

Civmec’s joint-venture arrangement with Serco, named the Australia Maritime Alliance (AMA), has submitted a tender for the LAND 8710 Phase 1A programme, constructing amphibious vessels for the Royal Australian Navy. A decision on the successful tenderer is expected to be made before the end of FY2023. — Jovi Ho

Oversea-Chinese Banking Corporation

Price target:
RHB Group Research ‘buy’ $15.00
Maybank Securities ‘buy’ $14.70
CGS-CIMB Research ‘add’ $13.70

Mixed sentiments following 3Q results

Some analysts see a stable outlook ahead for Oversea-Chinese Banking Corp (OCBC) following its results for 3QFY2022 ended September, with mid-single-digit loan growth within reach in the final quarter of the year.

RHB Group Research analysts are the most bullish among research houses here, maintaining “buy” on OCBC with a higher target price of $15 from $13.90 previously.

“Robust net interest margin (NIM) expansion, benign credit cost on improving asset quality and tightly controlled cost growth were key standouts in 3QFY2022,” RHB analysts say in a Nov 7 note. “Earnings upgrade for refreshed guidance for NIM and credit costs have resulted in valuation falling to attractive levels”.

Higher interest rates have lifted banks’ bottomlines. OCBC reported earnings of $1.6 billion for 3QFY2022, up 31% y-o-y; while revenue was up 23% y-o-y to $3.15 billion.

OCBC’s NIM increased by 54 basis points (bps) to 2.06% for 3QFY2022. This helped lift quarterly net interest income (NII) to more than $2 billion for the first time, with a gain of 44% y-o-y to $2.10 billion.

OCBC added 2% q-o-q to its loan book, bringing year-to-date growth to 4.6% on an annualised 6.1%, note RHB analysts.

Management expects credit demand, which gained momentum in 3QFY2022, to be sustained in 4QFY2022, they add. “We believe OCBC will end FY2022 with a 6% y-o-y growth in loans.”

OCBC is guiding to post 2.1% NIM in 4QFY2022. “NIM expanded by a robust 35 bps q-o-q to 2.06% in 3QFY2022, the second consecutive quarter of better-than-peer margin improvement. Management attributed the NIM uplift to improved margins across OCBC’s key markets as the increase in asset yields outpaced the rise in funding costs. Management expects to maintain NIM at 2.15% in 4QFY2022. This would result in an average NIM of 1.9% for FY2022.”

RHB thinks this is a conservative target. “We see an upside risk to management guidance as we believe NIM would likely edge higher, although at a more moderate rate as funding costs trend higher.”

Meanwhile, Maybank Securities analyst Thilan Wickramasinghe thinks both margins and funding costs are set to rise. In a Nov 5 note, he is maintaining “buy” on OCBC with a higher target price of $14.70 from $14.39 previously.

About 90% of OCBC’s loans are on floating rates, he notes. “This has enabled the group to reprice rate hikes effectively.

However, current account savings account (CASA) deposits have fallen to 56% from 62% a year ago and management expects funding costs to pick up pace going into 2023.” However, he believes NIM growth will start to taper in 2HFY2023. “We forecast FY2022 NIM to expand 42 bps y-o-y, followed by 9 bps y-o-y in FY2023. Concurrently, we lower our FY2023-FY2024 loan growth forecasts by 2–4 percentage points due to uncertainty in macro conditions, particularly in North Asia. Nevertheless, improvements in NIM should offset this slowdown, in our view.”

In addition, asset quality is a key concern for the coming year, says Wickramasinghe.

OCBC’s non-performing loans (NPL) fell to 1.2% from 1.5% a year ago. Relief loans are now just 0.2% of its loan book. However, Greater China NPL increased three times y-o-y.

“Management claims this is primarily from a Singapore-based customer that has invested in Mainland property, and it has been classified for company-specific reasons. The group is not seeing sectoral stress so far,” writes Wickramasinghe.

Nevertheless, as interest rates continue to rise, he expects sectoral stress risks to increase as clients see increasing debt servicing burdens. “We have raised FY2023–FY2024 NPL ratios by 6 bps to 27 bps as well as provisioning costs by 2%– 15% as a result.”

On the other hand, CGS-CIMB Research analysts Andrea Choong and Lim Siew Khee think OCBC’s conservative NIM guidance spells compression in the coming year, such as when the US Fed pauses or cuts rates.

In a Nov 5 note, they are maintaining “add” on OCBC with a lower target price of $13.70 from $15.50 previously.

“Going into FY2023, there will likely be continued CASA outflow into fixed deposits given the higher yields. Nonetheless, OCBC expects to be able to maintain its CASA ratio above 50% over the medium term,” write Choong and Lim. OCBC posted a CASA ratio of 56% in the latest quarter.

For FY2023, management “conservatively” guides for a 2.1% NIM. Choong and Lim believe that this implies some NIM compression to come as the potential decline in asset yields move ahead of locked-in funding costs, such as in fixed deposits. “In all, we think that OCBC’s NIM expansion may have been front-loaded in 2QFY2022 to 3QFY2022, and expect this to narrow going forward.” — Jovi Ho

The Hour Glass

Price target:
DBS Group Research ‘hold’ $2.12

Uncertain macroeconomic outlook, recessionary fears

DBS Group Research is keeping its “hold” call on luxury watch retailer The Hour Glass with a lower target price of $2.12 from $2.54 previously.

This comes on the back of the group announcing its 1HFY2023 ended September results, which saw earnings increase 35% y-o-y to $85.5 million, while revenue was up 18% at $555.5 million. The group also declared an interim dividend of 2.0 cents per share.

In a Nov 2 report, DBS research team said that the group’s 1HFY2023 earnings were more resilient than anticipated despite the ongoing macroeconomic uncertainties. Although margins have cooled off from its peak, 1HFY2023 gross and net margins remained firm at 32.4% and 15.2%.

“Given the resilient market, we have raised FY2023 earnings by 19%, backed by FY2023 revenue growth of 9%,” says DBS, which forecasted a net profit of $154 million and ebitda of $259 million for The Hour Glass.

While earnings are expected to remain firm, the research team is keeping its “hold” call as it has pegged the group’s valuation to a lower forward P/E ratio of 9.0x, down from 13.5 previously, in lieu of the uncertain macroeconomic outlook and rising recessionary fears.

“Although The Hour Glass has witnessed firm earnings in 1HFY2023, we believe recessionary fears will continue to pose as headwinds to its valuations. Most luxury goods players have seen their share prices decline year-to-date and are now trading below their four-year historical average P/E ratios, whilst the group trades at +1 standard deviation of its four-year average,” says DBS.

Nonetheless, DBS views the group’s long-term outlook as “healthy”, as it is a key beneficiary to Asia’s growing number of high-net-worth individuals (HNWIs). Asia is estimated to see the fastest growth in the number of HNWIs with a four-year CAGR of 6.4% by 2025, according to Statista and Credit Suisse estimates. “We observe a positive correlation of 0.67 between the number of HNWIs in Asia and the group’s sales, and this bodes well for luxury goods players over the long term,” says DBS. — Samantha Chiew

First Resources

Price target:
UOB Kay Hian ‘buy’ $1.70

Rebound in CPO prices

UOB Kay Hian (UOBKH) analysts Jacquelyn Yow Hui Li and Leow Huey Chuen have upgraded First Resources to “buy” with an unchanged target price of $1.70.

In their Oct 28 report, the analysts note that First Resources’ share price had declined by 14% since UOBKH’s last downgrade in June. This could have factored in the negative earnings impact from Indonesia’s policy changes.

“First Resources’ share price has strengthened by 11% from its recent low in mid-October which is in tandem with the recent rebound in crude palm oil (CPO) prices due to market concerns about the serious flooding situation in Central and West Kalimantan, which may lead to lower-than-expected Indonesia palm oil production and the extension of the Black Sea Grain Deal which will be expiring in early November,” the analysts add.

First Resources’ 3QFY2022 ended September results announcement is scheduled to be released on Nov 14. Based on its current estimates, UOBKH expects the company to report a core net profit of US$55 million ($77 million) to US$60 million for the period.

Key items to look out for include lower upstream margin due to lower CPO average selling prices (ASPs) and higher costs, mainly from fertilisers. The analysts also expect stronger sales volume, especially in its refined products in 3QFY2022, with the high inventory carried from 2QFY2022 as well as the recovery of Indonesia palm oil exports as the government slowly relaxes the exports control.

“On top of that, we anticipate better biodiesel sales as well, thanks to cheaper palm oil biodiesel vs gasoil which led to higher export sales,” they add.

The analysts reckon that First Resources’ fertiliser application may still be delayed in 3QFY2022, mainly due to the unfavourable weather in Indonesia. Also, the high rainfall season is still continuing in 4QFY2022, with floods happening in Kalimantan. Hence, they suspect that the company would not be able to reach its initial fertiliser application target.

Yow and Leow maintain their net profit forecasts for FY2022–FY2024 at US$247 million, US$229 million and US$231 million respectively.

They highlight First Resources’ generous dividend policy, with up to 50% of its underlying net profit starting from FY2022. “With our assumption of 50% dividend payout ratio, this translates to a stable dividend yield of 6%–7% for FY2022– FY2024 despite our lower CPO ASP assumption for FY2023–FY2024 at RM4,000 [$1,193] per tonne.” — Khairani Afifi Noordin

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