Following the near-euphoria towards the end of last year, the stock market is now heading towards a correction phase. Jarick Seet, who heads the small and mid-cap research division of RHB Bank, warns that pullbacks will happen again if Covid-19 infections escalate or new strains appear, as seen in several countries which have had to reinstate movement restrictions. He adds that a drag may also come if the efficacy of the vaccines turns out to be not as good as has been advertised.
Nevertheless, Seet expects the uptrend to continue, led by growth in the semiconductors sector and recovery in tourism and cyclicals. While it will take time for this to pan out, he says there already are a few gems that investors can consider.
Top on Seet’s watchlist is Straco Corp, a developer, operator and investor in tourist attractions and activities. Besides Singapore Flyer, the iconic ferris wheel attraction here, most of its attractions are in China: the Shanghai Ocean Aquarium, Underwater World Xiamen, Lintong Lixing Cable Car and Chao Yuan Ge, a restoration site holding a historical monument.
Unsurprisingly, Straco’s earnings last year was hit by the pandemic. On Aug 13, the company reported losses of $6.7 million for the six months ended June 30, from earnings of $17.5 million in the year earlier 1HFY2019 period.
There are recent signs of recovery. For the nine months ended Sept 30, the company remained in the red with losses of $197,000, from earnings of $36.3 million in the same period in the preceding year. Revenue plunged 77.8% y-o-y to $20.9 million because of the pandemic. However, for the most recent 3QFY2020 ended Sept 30, it was back in the black, with earnings of $6.5 million, down from $18.8 million a year earlier, as the lockdown in China eased and domestic travel was largely allowed.
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Perversely, the limitation on international travel is helping Straco, whose attractions largely cater to local visitors. “People in China may just want to travel more within the country since there are fewer restrictions compared to going overseas,” he observes.
While capacity caps are in place, Seet believes that the assets in China will have a stronger contribution to Straco’s performance this year. He acknowledges that some movement restrictions have been reinstated in recent weeks, as cases of the virus re-emerged. However, he does not see a big negative impact on Straco, as domestic travel during this period is largely confined to people going back to their hometowns for the
Lunar New Year period.
Drawing reference to travel patterns of previous years, he expects a pick-up in domestic tourism in the second and third quarters of the year, barring any further movement restrictions.
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As such, Seet expects Straco’s earnings this year to recover, partly due to the low base effect of 2020. While he does not have a target price on the counter, he seems to think its 53 cents closing price on Feb 5, near an all-time-low, is a steal. Prior to the pandemic, the stock was trading at around $1.
Besides operational recovery, Straco’s balance sheet seems well-buttressed by its cash and equivalent holdings of $158.9 million as at Sept 30, 2020. Seet also points out that Straco’s management, led by executive chairman Wu Hsioh Kwang, an old China hand, has been steadily buying back its own shares at around 50 cents. Some 1.1 million shares were bought back between August and November 2020.
Food Empire Holdings
This high-profile food manufacturer is another company on Seet’s radar. All eyes have been on the counter since Feb 3 when its shares were trading at 85.5 cents, 14.76% or 11 cents higher than its last close of 74.5 cents. This triggered a query from the Singapore Exchange Regulation (SGX RegCo) at about 4.50pm that day, asking the company to confirm its compliance with the listing rules and to reveal any information on what may have prompted the price surge.
Food Empire Holdings has responded that it has been compliant with the listing rules and is not aware of what triggered the sudden hike. Its shares were up 2.5 cents or 2.94% to close at 87.5 cents on Feb 5. This sees the counter trading at a price-to-earnings ratio of 13.5 times, thereby giving it a valuation of $474.5 million.
“At a market valuation of 10x FY2021 price-to-earnings, Food Empire is one of the cheapest consumer staples stocks,” says Seet. He believes this company could even be considered for privatisation, given its undervalued position. By comparison, the food manufacturer’s peers are trading at 20–30x price-to-earnings.
As such, Seet is convinced that Food Empire is a strong “buy” with a target price of $1.27. This, he says, will give the counter a 44% upside from its Feb 5 close. He also notes that the company has been, almost on a daily basis, buying back its own shares, at prices ranging between 50 and 60 cents in late December to around 76 cents in January. “It shows that they are very confident,” notes Seet.
He also believes that the company’s offerings — which include instant beverage products, frozen convenience food and snack food — will remain in demand this year. Specifically, he expects stronger demand for instant coffee, as people are increasingly staying home and so are not getting their caffeine fix at cafes as much as they used to.
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Seet’s comments come despite the 19.5% drop in Food Empire’s 3QFY2020 net profit after tax to US$6.3 million ($8.40 million), from US$7.8 million a year ago. Revenue for the quarter had declined by 8.5% to US$70.3 million, thereby bringing gross profit to US$26.5 million, down 13.1% from the previous year.
This decline was largely due to lower sales contributions from Food Empire’s Russia and Ukraine markets as the Russian Ruble and Ukrainian Hryvna depreciated against the US dollar at that time. Its other market, Vietnam, suffered from lower sales too. However, Seet is of the opinion that the company’s full-year results for FY2020 — which will be announced later this month — will come in “much better”. He believes the company will give out a final and special dividend per share of 2 cents, which will translate to an FY2020 yield of 2.6%.
Marco Polo Marine
The worst seems to be over for integrated marine logistics company Marco Polo Marine (MPM), according to Seet. This company had been badly hit by the 2014 oil crisis but after undergoing a November 2017 restructuring exercise where it received a cash injection of $60 million, it has resumed full-scale operations.
The company primarily provides ship chartering services such as the chartering, re-chartering and transhipment of tugboats and barges to customers mainly from offshore oil and gas, mining, commodities, construction and infrastructure. Seet notes that while the company has been having fewer clients since the pandemic, it has continued to serve piecemeal orders, which has kept activities at its chartering arm ongoing. This helped cushion the drag from its shipyard arm, which provides building, repairs and broking services of tugboats and barges.
Overall, for FY2020 ended September 2020, the company’s revenue increased by 2% over FY2019. However, losses widened from $3.7 million in FY2019 to $9.2 million in FY2020. Besides the tougher operating conditions, the company’s FY2019 earnings were partly lifted by one-off gains from sale of a vessel and forex gains recognised.
Now, in the new financial year, MPM sees a 50% to 60% pick in the utilisation of its ship chartering services for the 1QFY2021 ended December 2020. According to Seet, MPM is now looking to bring this up even further by 70% to 80% in its 3QFY2021 ending in June 2021.
Additionally, Seet observes that MPM has been diversifying its customer base from the oil and gas industry into the offshore infrastructure and renewable energy sectors. This includes submarine cable installations and services to offshore wind farms in Taiwan. Seet is optimistic of the company’s foray into wind energy, as such a move has become a popular effort adopted globally to combat climate change. If this segment takes off, he says MPM can expect better earnings for the current FY2021.
In another positive sign, MPM was able to maintain its cash and cash equivalents of $13.6 million as at Sept 30, 2020, unchanged from a year ago. Net cash generated from operations, of around $4.1 million, was offset by capital expenditure. This shows that despite the overall impact from Covid-19, the company is not “burning cash”,” says Seet.
Another interesting aspect is the significant gap between MPM’s share price of 1.8 cents as of Feb 5, and its net asset value, says Seet. As of Sept 30, 2020, the company’s net asset value was 2.8 cents, down from 3.1 cents from the same date last year. The group of white knights which came to MPM’s rescue back in 2017 paid 2.8 cents as well.