Singapore Market Focus
SMC strategy
DBS Group Research . Equity
Upside participation, downside
protection

Earnings still key; go for names with clear growth
catalysts – BreadTalk, Cityneon, mm2 Asia, and
Riverstone

Keep a firm eye on growth and another on
downside protection as small-mid caps have yet to
recover from recent selldown

Steady dividends make good safety nets – Chip Eng
Seng, Hong Leong Finance, Riverstone, Sheng
Siong, Sunningdale, and UMS

Trading cheap and ready to shine in 2018 – China
Aviation Oil, Delfi, Riverstone, and Roxy Pacific
Firm eye on earnings growth. Encouraged by the positive
earnings growth momentum displayed in 4Q, we seek to
identify stocks with clear catalysts to sustain double-digit
earnings growth over the next two years.
Our preferred picks to ride the earnings momentum –
Breadtalk, Cityneon, mm2 Asia, Riverstone
Dividends provide shelter amidst volatility. With results
season now over and dividend payments back in focus, we
believe that growth stocks with a dividend sweetener could
outperform over the next one to two months. Historically,
SMCs that have consistent dividend payouts also tend to be
more resilient.
With the FT ST Small Cap Index and FT ST Mid Cap Index
(FSTM) underperforming YTD and still trending near postFebruary correction lows, we believe that selected dividendpaying stocks are worth a relook, as their attractive
dividends could serve as a valuable safety net amidst volatile
markets.
Riverstone and Sunningdale make attractive dividend
growth plays. We also like Chip Eng Seng, Hong Leong
Finance, Sheng Siong and UMS for their stable dividends.
Opportunities to bottom fish companies currently
trading at attractive valuations. We also see opportunities
to bottom fish, as there are a few other companies that are
on the cusp of an earnings turnaround (Delfi, Roxy Pacific),
or trading at deep discounts despite strong growth
prospects (Riverstone, China Aviation Oil).
ed: TH / sa: AS, PY, CS
Refer to important disclosures at the end of this report
8 Mar 2018
STI : 3,450.69
Analyst
Lee Keng LING +65 6682 3703
leekeng@dbs.com
Carmen Tay +65 6682 3719
carmentay@dbs.com
Key Indices
FS STI Index
FS Small Cap Index
SGD Curncy
Daily Volume (m)
Daily Turnover (S$m)
Daily Turnover (US$m)
Current
3,450.69
397.06
1.35
2,668
1,483
1,100
% Chng
-1.2%
-0.3%
2.5%
EPS Gth
9.7
12.7
8.3
Div Yield
4.1
3.8
3.4
PER
17.1
15.2
14.0
EV/EBITDA
15.7
14.9
16.8
Source: Bloomberg Finance L.P.
Market Key Data
(%)
2017
2018F
2019F
(x)
2017
2018F
2019F
STOCKS
12-mth
Price
Mkt Cap
Target Price
S$
US$m
S$
3 mth
12 mth
Rating
Earnings Growth
BreadTalk Group
Ltd
Cityneon
Holdings
Ltd Asia
mm2
Riverstone
1.79
1.01
0.46
1.04
383
188
403
587
2.05
1.45
0.75
1.27
14.0
2.0
(13.3)
0.0
38.8
27.0
0.0
18.2
BUY
BUY
BUY
BUY
Dividend Plays
Chip Eng Seng
HL Finance
Riverstone
Holdings
Sheng
Siong
Group Ltd Tech
Sunningdale
Ltd Holdings
UMS
0.92
2.67
1.04
0.95
1.83
1.13
432
906
587
1,081
263
461
1.18
3.20
1.27
1.20
2.70
1.37
2.2
(1.8)
0.0
2.2
(1.6)
15.9
26.2
(0.4)
18.2
1.1
28.4
90.9
BUY
BUY
BUY
BUY
BUY
BUY
1.50
1.52
1.04
0.55
987
707
587
499
1.98
1.80
1.27
0.69
(5.7)
14.3
0.0
1.9
(0.7)
(34.5)
18.2
7.8
BUY
BUY
BUY
BUY
Attractive Valuations
China Aviation Oil
Delfi Ltd
Riverstone
Holdings
Roxy-Pacific
Holdings
Source: DBS Bank, Bloomberg Finance L.P.
Closing price as of 7 Mar 2018
Performance (%)
Market Focus
Season of Positive Revisions
Results are in. The recent 4Q reporting season concluded with a
positive earnings revision trend of +2% to +3% for FY18F and
FY19F earnings of stocks under our coverage. Within our smallmid cap (SMC) universe, c.65% reported results which were
within expectations, while c.16% were above.
Growth stocks with steady yields are more attractive. Encouraged
by the positive earnings growth momentum displayed in 4Q, we
seek to identify stocks with clear catalysts to sustain firm growth
momentum ahead. There are at least 16 SMCs under our
coverage offering >10% earnings growth in FY18F, as detailed
on the following page.
The upward revisions were led by APAC, Hi-P, Best World,
Riverstone, UMS and Hong Leong Finance. Notably, APAC
delivered impressive first full-year results post IPO, while Best
World, Riverstone and UMS saw record profits in FY17.
Apart from potential capital gains, small-mid cap stocks can also
pay good dividends – providing investors with both upside
participation and downside protection. With results season now
over and dividend payments back in focus, we believe that
Among the sectors, Technology shone the brightest with
growth stocks with a dividend sweetener could outperform over
earnings upgrades of +15.6% and +19.0% for FY18F and FY19F the next one to two months. Historically, SMCs that are
respectively, but results for the Oil & Gas sector remained weak. consistent dividend payouts also tend to be more resilient.
Post results earnings revision by sector
Current v s Prev . % Chng
Sec t or
Banking
F Y 18
3.3%
F Y 19
0.8%
Commodities Related
-1.8%
10.9%
Consumer Goods
-3.8%
3.2%
Consumer Serv ices
7.0%
9.2%
F inancials
-2.9%
-2.0%
Health Care
0.2%
-0.7%
Industrials
3.2%
2.9%
Oil & Gas
-3.4%
-9.5%
Real Estate
7.6%
-3.2%
REITS
2.6%
1.2%
Technology
15.6%
19.0%
Telecommunications
-0.4%
-0.3%
Grand T ot al
2.5%
1.5%
Source: DBS Bank
Additionally, we also see opportunities to bottom fish, as there
are a few other companies that are trading cheap but offer
steady growth and/or on the cusp of an earnings turnaround.
Key Investment Metrics: Riverstone checks all the boxes
Co mpany
Ea rnings
Gro wth
BreadTalk
√
√
China Aviation Oil
√
Chip Eng Seng
Cityneon
Delfi
√
√
Riverstone
Roxy Pacific
√
√
√
Sheng Siong
Sunningdale
UMS Holdings
Attractive
Va luations
√
√
√
√
√
√
Hong Leong Finance
mm2 Asia
Di vidend Play
√
√
√
√
√
√
√
√
Source: DBS Bank
.
Page 2
Market Focus
SMC stocks in our BUY list with > 10% earnings growth for FY18F
M kt
Pri c e
Ta rg e t
Ca p
(S$ )
Pri c e
%
EPS CAGR
(S$ m)
5 -M a r-1 8
(S$ )
Up s i d e
Ea rn i n g s Gth (%)
R c md
FY1 7
Roxy-Pacific
Dec
661.6
0.56
0.69
24%
BUY
(80.5)
532.8
66.6
224.7
1.8
Breadtalk
Dec
506.6
1.80
2.05
14%
BUY
60.3
57.1
7.0
29.7
3.9
2.2
Spore Medical Group
Dec
231.1
0.51
0.73
42%
BUY
243.8
46.7
5.8
24.6
-
-
Cityneon
Dec
254.4
1.04
1.45
39%
BUY
165.5
42.6
19.6
30.6
-
-
mm2 Asia
Mar
523.3
0.45
0.75
67%
BUY
21.4
28.4
21.3
24.8
-
-
Sunningdale
Dec
353.8
1.87
2.70
44%
BUY
(1.6)
24.3
6.5
15.1
3.7
4.0
Delfi
Dec
929.0
1.52
1.80
18%
BUY
(16.8)
19.8
19.7
19.8
1.8
2.2
Riverstone
Dec
763.3
1.03
1.27
23%
BUY
7.4
19.5
11.9
15.6
2.3
2.7
iFAST
Dec
242.2
0.92
1.26
37%
BUY
64.5
16.1
16.4
16.2
3.3
2.5
APAC
Dec
433.3
1.22
1.25
2%
BUY
63.1
14.3
6.5
10.3
1.6
4.1
Hi-P
Dec
2,051.9
2.54
2.48
-3%
BUY
131.3
14.0
10.5
12.2
9.8
2.4
Manulife US REIT
Dec
1,224.6
0.90
1.00
11%
BUY
68.5
14.0
0.4
7.0
6.2
7.0
China Aviation Oil
Dec
1,297.3
1.50
1.98
32%
BUY
12.2
9.1
10.6
3.0
2.9
UMS
Dec
611.5
1.14
1.37
20%
BUY
11.6
5.0
8.3
4.9
5.3
CDL Hospitality Trust
Dec
1,991.3
1.66
2.00
20%
BUY
10.3
4.1
7.2
5.6
6.1
84.3
(4.3)
FY1 9 F
(%)
Di v Yl d (%)
FYE
(4.0)
FY1 8 F
1 7 -1 9
Co mp a n y
FY1 8 F
FY1 9 F
1.6
Source: DBS Bank
Page 3
Market Focus
Look for Earnings Boosters
Firm eye on earnings growth, which remains key for SMCs. While
the earnings growth trend has been positive, we would favour
companies with strong, specific catalysts to help sustain doubledigit earnings growth over the next two years. Our preferred
picks include BreadTalk, Cityneon, mm2 Asia, and Riverstone.
Riding on growing scale and improving operating leverage to
deliver sustainable growth. Cityneon and mm2 Asia stand out as
young and fast-growing companies, and are still in their
transformative stages of growth. Cityneon has successfully
transformed into a creator of innovative and interactive
exhibitions, while mm2 Asia has established a meaningful
presence across the production value chain - from movie/drama
creation to exhibitions.
Meanwhile, Riverstone – which also features in several other
screens as a dividend growth play and bottom-fishing candidate,
is poised to deliver successive earnings records in the coming
years as the group ramps up on new capacity to meet growing
demand. Driven by new stores and cost management, the
outlook for BreadTalk also remains attractive.
Our preferred picks to ride the earnings momentum:
BreadTalk (BUY; TP: S$2.05)
We remain positive on BreadTalk over continued consolidation
of underperforming outlets that will yield better margins going
forward and sale of stakes in properties such as CHIJMES and
AXA Tower that will unlock shareholder value if they
materialise. Growth drivers remain intact and turnaround in
Bakery division led by store growth and better profitability in
FY18F will drive earnings growth. BreadTalk’s valuation, based
on its core business (ex-property investments), seems
compelling at 18x FY18F PE.
Cityneon (BUY; TP: S$1.45)
Though Cityneon has been listed for over ten years, it was
given a new lease of life when VHE Entertainment (VHE) was
injected into the group in September 2015. Cityneon has since
evolved to become a creator of innovative and interactive
exhibitions, focusing on creating captivating cutting-edge
content, and delivering engaging and interactive exhibitions to
audiences, from its traditional exhibition business.
Since its injection into Cityneon, VHE has secured two more
Intellectual Property (IP) rights – Transformers and Jurassic
World. Together with the first IP – Avengers, Cityneon is now
on a stronger and firmer growth path with a total of three IPs,
to help propel the group to even greater heights. We continue
to expect Cityneon to deliver explosive FY16-19F EPS CAGR
growth of 165%. Trading at a low PE-to-growth ratio of 0.2x
FY18F earnings, Cityneon is attractive to investors seeking
unique ideas in the entertainment industry.
mm2 Asia (BUY; TP: S$0.75)
mm2 Asia was listed on the SGX in December 2014 as a
leading producer of films and TV/online content in Asia. In a
short span of about three years, the group has evolved to
become a full-service provider in the entire value chain of
content creation to distribution, with the acquisition of
cinemas (18 in Malaysia and eight in Singapore), event
production and concert promotion company UnUsUaL, and
post-production company, Vividthree.
Having a strong presence in the entire value chain of content
creation and distribution further cements mm2's status as the
leader in the media/entertainment industry. With a much
larger and stronger scale, mm2 can now enjoy the synergistic
benefits from the entire value chain. We expect strong
earnings CAGR of 28% for FY17-20F, underpinned by growth
in productions, expansion into the China market, and
contribution from UnUsUaL. The cinema arm, on the other
hand, helps the group build a recurring income base.
Riverstone (BUY; TP: S$1.27)
A global market leader in niche cleanroom gloves, Riverstone’s
edge in the high-tech cleanroom segment sets it apart from
the bigger boys. Given intense competition in the healthcare
space, we see value in Riverstone’s growing cleanroom
business – which allows the group to command consistently
higher margins vs peers (16% vs peers’ c.10-15% in FY17).
With new cleanroom facilities set to kick in from 2Q18,
cleanroom capacity is expected to grow by c.33% to at least
2bn gloves p.a. The ramp-up on these new capacities should
help drive higher growth in cleanroom gloves vis-à-vis the
lower-margin healthcare business, allowing Riverstone’s
earnings growth of c.16% to catch up with larger peers’
c.17%.
Page 4
Market Focus
Dividends provide shelter amidst volatility
Small- and mid-cap indices have underperformed YTD. YTD,
the FT ST Small Cap Index (FSTS) is down 2.1%, while the FT
ST Mid Cap Index (FSTM) eased 1.6% vs +2.6% for the ST
Index. Both the FSTS and FSTM have not recovered from the
February selldown and are still trending near the February low.
As SMC stocks tend to be more volatile, dividends serve as a
safety net and offer stability amidst volatile markets.
In our screen, we focus on:
1)
YTD Performance - FSTS, FSTM and STI
Dividend sweeteners – Companies that have upped
their dividends recently on higher earnings achieved
in FY17
- APAC Realty, BreadTalk, Hi-P
2)
Dividend growth – Companies that could pay
increasing dividends over time
- Riverstone, Sunningdale
3)
Source: DBS Bank, Bloomberg Finance L.P.
(1)
Steady yields – Companies which have been
consistent in paying and/or growing dividends
- Chip Eng Seng, Hong Leong Finance, Sheng Siong,
UMS
Dividend sweetener on record FY17 earnings
On the back of record results, several companies have upped
their dividends as a sweetener. In the large-cap space, DBS
declared a higher S$1.20 dividend for FY17, to be maintained
going forward – which is nearly 2x that compared to previous
years. CapitaLand also hiked its 2017 dividend payout by 20%
to 12 Scts a share.
In the small-mid cap space, several companies that have also
raised their dividend payout in FY17 include APAC Realty,
BreadTalk and Hi-P:
APAC Realty declared a final dividend of 2 Scts per share in
4Q17. This works out to c. 90% of 4Q17 net profit, as APAC
was only listed at end-September 2017. APAC has guided that
it is committed to pay at least 50% of FY18F profit as
dividend.
Assuming a payout ratio of 60% for FY18F, dividend yield is
attractive at 4.5%. We believe that APAC, which owns one of
Singapore’s largest real estate agency, ERA Realty, is poised to
deliver a robust 10% 2-year CAGR in EPS on the back of a turn
in the Singapore residential market, which is at the cusp of a
multi-year recovery.
BreadTalk declared final and special dividends of 2 Scts and 3
Scts respectively, exceeded our expectations of a total of 4
Scts. Going forward, our positive stance for the stock
continues as BreadTalk's financial performance remains on a
growth trajectory. Higher-than-expected special dividends will
support the share price, while any property sale going forward
could act as a share price catalyst.
For Hi-P, the group has declared a special DPS of 19 Scts,
together with the 2Q17 results announcement. For the full
year FY17, dividend yield, excluding the special payout, works
out to 3% or 6 Scts DPS. Going forward, we expect higher
dividend payout ratio of 35% (up from 20%) in FY18F and
FY19F, which works out to a DPS of about 6 Scts, which is
similar to FY17, excluding special DPS of 19 Scts.
We expect earnings momentum for Hi-P to remain strong, on
the back of the new products in the Wireless and IoT
segments, and also an expanding customer base. We are now
expecting EPS CAGR of 41% for FY16-19F. Hi-P is in a sweet
spot now as more than half of its earnings are derived from
the Wireless (smartphone) and Computer Peripherals (IoT
segment, e.g. smart home) segments, which are expected to
continue to do well.
Page 5
Market Focus
(2)
Two companies that have emerged as dividend growth plays
Supported by firm earnings growth and strong cash flow
generation, both Sunningdale and Riverstone have been
paying increasingly higher dividends y-o-y over the past few
years:
DPS
FY12
FY13
FY14
FY15
FY16
FY17
Sunningdale
(S cts)
3.0
3.5
4.0
5.0
6.0
7.0
Riverstone
(sen)
3.1
3.1
3.5
6.5
6.5
Since FY12, Sunningdale has been growing dividends by at
least 0.5 Sct to 1 Sct p.a., resulting in a substantially higher
dividend payout of 7 Scts per share in FY17 vs 3 Scts in FY12.
While Riverstone does not have a fixed dividend policy, its past
payouts have averaged 40%. As profits grew, its dividend
payments have also more than doubled from 3.1 sen in FY12
to 7 sen for FY17.
Underpinned by capacity growth and ongoing production
ramps amidst robust demand, their core earnings are projected
to grow at 15-16% CAGR over FY17-19F, which provides
support for expectations of even higher dividends to be paid
going forward.
7.0
Source: Companies, DBS Bank
(3)
Consistency is key
Apart from REITs/Trusts, several SMCs have also demonstrated
consistency in paying good dividends. UMS has been paying a
fixed 5-6 Scts of dividends since 2010, and maintained its payout
despite issuing bonus shares in FY17. Chip Eng Seng also stands
out for its fixed 4-Sct dividend (with upside from special
dividends in bumper years), which is rare among small-cap
property developers.
Hong Leong Finance and Sheng Siong, which typically manage
dividends based on a target payout ratio rather than a fixed
amount per share, have also paid consistently good dividends in
past years. With earnings set to grow at 4% and 5.5% over
FY17-19F respectively, we believe the positive dividend growth
trend is likely to be maintained going forward.
Stocks with consistently good dividend payouts
Mk t
Price
T arget
Cap
(S$)
Price
%
(S$m)
5- Mar- 18
(S$)
Upside
DPS (ct s)
Company
F YE
Rcmd
UMS Holdings
Dec
611.5
1.14
1.37
20%
BUY
Hong Leong Finance
Dec
1,204.2
2.70
3.20
19%
BUY
Chip Eng Seng
Dec
571.3
0.92
1.18
29%
BUY
Sheng Siong
Dec
1,420.8
0.95
1.20
27%
BUY
F Y14
F Y17
F Y18F F Y19F
Div
EPS CA GR
Yld (%)
17- 19
F Y18F
(%)
F Y15
F Y16
6.0
6.0
6.0
5.6
6.0
6.0
5.3
10.0
11.0
9.0
13.0
13.6
14.1
5.0
6.0
4.0
4.0
4.0
4.0
4.0
2.9
3.5
3.8
3.3
3.4
3.6
P/E (x)
F Y18F
F Y19F
8.3
10.5
10.0
4.0
13.4
13.0
4.3
28.1
18.0
9.8
3.6
5.5
19.7
18.3
Source: Thomson Reuters, DBS Bank
Page 6
Market Focus
Upcoming distributions (DPS, payout dates and yields*)
Company
DPS ($)
BHG RETAIL REIT
DASIN RETAIL TRUST
ASIAN PAY TELEVISION TRUST
STRAITS TRADING CO. LTD
M1 LIMITED
UNITED OVERSEAS INSURANCE LTD
LEE METAL GROUP LTD
GREAT EASTERN HLDGS LTD
SINGAPORE TECH ENGINEERING LTD
KEPPEL TELE & TRAN
CEI LIMITED
UNITED OVERSEAS BANK LTD
UOB-KAY HIAN HOLDINGS LIMITED
SINGAPORE REINSURANCE COR LTD
SINGAPORE O&G LTD.
TALKMED GROUP LIMITED
CSE GLOBAL LTD
FRENCKEN GROUP LIMITED
VICOM LTD
HWA HONG CORPORATION LIMITED
AVI-TECH ELECTRONICS LIMITED
TELECHOICE INTERNATIONAL LTD
TREK 2000 INT'L LTD
MEMTECH INTERNATIONAL LTD
UMS HOLDINGS LIMITED
UOL GROUP LIMITED
OKP HOLDINGS LIMITED
DYNAMIC COLOURS LIMITED
CHALLENGER TECHNOLOGIES LTD
DBS GROUP HOLDINGS LTD
WHEELOCK PROPERTIES (S) LTD
COMFORTDELGRO CORPORATION LTD
SINGAPURA FINANCE LTD
WILMAR INTERNATIONAL LIMITED
AP OIL INTERNATIONAL LIMITED
OKP HOLDINGS LIMITED
OVERSEAS EDUCATION LIMITED
HL GLOBAL ENTERPRISES LIMITED
MULTI-CHEM LIMITED
CHIP ENG SENG CORPORATION LTD
HOCK LIAN SENG HOLDINGS LTD
HONG LEONG FINANCE LIMITED
CENTURION CORPORATION LIMITED
0.0273
0.0415
0.01625
0.06
0.062
0.19
0.01
0.6
0.1
0.035
0.034
0.65
0.048
0.008
0.0089
0.0137
0.015
0.0239
0.2288
0.011
0.013
0.016
0.01
0.055
0.03
0.175
0.02
0.015
0.022
1.1
0.06
0.0605
0.03
0.07
0.005
0.007
0.0275
0.03
0.044
0.04
0.018
0.09
0.015
Price @ 7
M ar 18
Div Y ld
(%)
0.80
0.89
0.57
2.25
1.78
7.60
0.41
30.33
3.35
1.54
1.00
27.65
1.43
0.32
0.37
0.70
0.37
0.62
6.05
0.32
0.51
0.27
0.27
1.65
1.13
8.45
0.35
0.28
0.49
28.09
1.79
2.00
1.03
3.18
0.24
0.35
0.37
0.52
0.92
0.92
0.47
2.67
0.50
3.4%
4.7%
2.9%
2.7%
3.5%
2.5%
2.4%
2.0%
3.0%
2.3%
3.4%
2.4%
3.4%
2.5%
2.4%
2.0%
4.1%
3.9%
3.8%
3.4%
2.6%
5.9%
3.8%
3.3%
2.7%
2.1%
5.8%
5.4%
4.5%
3.9%
3.4%
3.0%
2.9%
2.2%
2.1%
2.0%
7.4%
5.8%
4.8%
4.4%
3.8%
3.4%
3.0%
Ex Dat e Pay ment Dat e
08-Mar-18
14-Mar-18
14-Mar-18
16-Apr-18
18-Apr-18
19-Apr-18
20-Apr-18
20-Apr-18
24-Apr-18
25-Apr-18
26-Apr-18
26-Apr-18
27-Apr-18
27-Apr-18
27-Apr-18
27-Apr-18
30-Apr-18
30-Apr-18
30-Apr-18
30-Apr-18
30-Apr-18
02-May-18
02-May-18
02-May-18
02-May-18
02-May-18
03-May-18
03-May-18
03-May-18
03-May-18
03-May-18
03-May-18
03-May-18
03-May-18
03-May-18
03-May-18
04-May-18
04-May-18
04-May-18
04-May-18
04-May-18
04-May-18
04-May-18
28-Mar-18
27-Mar-18
23-Mar-18
04-May-18
27-Apr-18
03-May-18
07-May-18
08-May-18
08-May-18
09-May-18
15-May-18
13-Jun-18
19-Jun-18
28-May-18
18-May-18
09-May-18
18-May-18
11-May-18
10-May-18
18-May-18
15-May-18
21-May-18
16-May-18
18-May-18
25-May-18
11-May-18
17-May-18
15-May-18
18-May-18
15-May-18
14-May-18
14-May-18
14-May-18
16-May-18
25-May-18
17-May-18
17-May-18
23-May-18
23-May-18
23-May-18
22-May-18
23-May-18
18-May-18
Note: Dividend yield is derived based on upcoming distributions only, does not take into account interim dividends that have already been paid.
Source: DBS Bank, Bloomberg Finance L.P.
Page 7
Market Focus
Upcoming distributions (DPS, payout dates and yields*)
Company
DPS ($)
NERATELECOMMUNICATIONS LTD
MDR LIMITED
MFG INTEGRATION TECHNOLOGY LTD
PAN-UNITED CORPORATION LTD
FIRST RESOURCES LIMITED
UPP HOLDINGS LIMITED
JARDINE CYCLE & CARRIAGE LTD
HOSEN GROUP LTD
FEDERAL INT(2000) LTD
BBR HOLDINGS (S) LTD
LHT HOLDINGS LIMITED
HO BEE LAND LIMITED
ISDN HOLDINGS LIMITED
KINGSMEN CREATIVES LTD
BROOK CROMPTON HOLDINGS LTD.
VENTURE CORPORATION LIMITED
ENVIRO-HUB HOLDINGS LTD
GLOBAL TESTING CORPORATION LTD
0.015
7.98E-05
0.0075
0.008
0.0555
0.005
0.9248
0.001
0.02
0.006
0.05
0.1
0.006
0.015
0.05
0.6
0.003
0.09
Price @ 7
M ar 18
Div Y ld
(%)
0.37
0.00
0.32
0.39
1.73
0.25
35.93
0.05
0.37
0.22
0.81
2.55
0.22
0.61
0.79
27.09
0.04
1.25
4.1%
2.7%
2.4%
2.1%
3.2%
2.0%
2.6%
2.2%
5.4%
2.7%
6.2%
3.9%
2.8%
2.5%
6.3%
2.2%
7.9%
7.2%
Ex Dat e Pay ment Dat e
07-May-18
07-May-18
07-May-18
07-May-18
08-May-18
09-May-18
10-May-18
11-May-18
14-May-18
14-May-18
15-May-18
15-May-18
15-May-18
15-May-18
17-May-18
17-May-18
22-May-18
28-May-18
25-May-18
23-May-18
23-May-18
18-May-18
17-May-18
25-May-18
25-Jun-18
25-May-18
23-May-18
31-May-18
25-May-18
31-May-18
05-Jun-18
31-May-18
31-May-18
31-May-18
08-Jun-18
29-Jun-18
Note: Dividend yield is derived based on upcoming distributions only, does not take into account interim dividends that have already been paid.
Source: DBS Bank, Bloomberg
Page 8
Market Focus
Opportunities to bottom fish
Attractive valuations with a chance to shine in 2018. With
positive vibes gathered during the Q4 reporting season and a
handful of companies guiding for stronger operational
prospects in 2018, we would see the February correction as an
opportunity for investors to accumulate selective stocks at
attractive valuations.
Turnaround plays - Delfi and Roxy Pacific may have missed the
mark in their recent Q4 earnings report card compared to a
year ago, but are set for an earnings turnaround in 2018.
In our screen, we favour companies that are: -
Firm growth but cheap valuations. Trading at relatively cheap
valuations vs peers, the recent pullbacks in Riverstone and CAO
also offer investors a better entry point, ahead of their strong,
anticipated growth in subsequent quarters.
1) On the cusp of an earnings turnaround, and/or
i.e. Delfi Ltd, Roxy Pacific
Ongoing share buybacks for Roxy signal confidence in future
earnings, providing further support to its share price.
2) Trading at attractive valuations despite strong earnings
growth potential
i.e. Riverstone Holdings, China Aviation Oil (CAO)
Four stocks to bottom fish in 2018
Company
FYE
Mkt
Price
Target
Cap
(S$)
Price
Upside
Rcmd
Core Earnings Gth (%)
EPS
CAGR
P/E (x)
P/BV (%)
17-19
Delfi
Dec
(S$m)
929.0
5-Mar-18
1.52
(S$)
1.80
(%)
18%
BUY
FY17
(16.8)
FY18F
19.8
FY19F
19.7
(%)
19.8
FY18F
25.0
FY19F
20.9
FY18F
3.1
FY19F
2.9
Roxy Pacific
Dec
661.6
0.56
0.69
24%
BUY
(80.5)
532.8
66.6
224.7
16.1
9.6
1.2
Riverstone
Dec
763.3
1.03
1.27
23%
BUY
7.4
19.5
11.9
15.6
14.7
13.1
China
Aviation Oil
Dec
1,297.3
1.50
1.98
32%
BUY
(4.0)
12.2
9.1
10.6
10.2
9.3
Net
Cash
(Debt) as
% of
Mkt Cap
2.1%
(%)
2.2%
1.1
(83.0%)
1.6%
3.1
2.7
4.0%
2.7%
1.2
1.1
18.2%
2.9%
Source: Thomson Reuters, DBS Bank
Delfi (BUY; TP: S$1.80) - Turning the corner
Roxy Pacific (BUY; TP: S$0.69) – Ready for launch
With its share price currently trading near six-year lows, Delfi’s
weak operating environment appears to be priced in and is
worth a relook. 4Q17 performance suggests that weakness
might have bottomed out, and is set to improve from FY18F.
One of the earliest to land bank in the current market cycle,
Roxy’s investments in small but freehold residential sites gives
the company the flexibility to launch quickly and hit the
market.
Riding on the low-base effect, improving sentiment, lower raw
materials, and positive production rationalisation effects,
earnings could grow at c.20% CAGR over FY17-19F and drive
a meaningful recovery in share price.
Strong take-up rates for The Navian – its first launch in 2018
have been encouraging. With a total of six residential
developments in Singapore ready for launch in 2018 (two to
three of which will be within 1Q18), the group is well poised to
capture the rise in buyer demand ahead of its peers, and grow
earnings quickly at c.53% CAGR over FY17-19F.
Our TP of S$1.80 is based on regional peer average of 26x,
pegged to blended FY18F/19F earnings.
Yield
Still largely “undiscovered” among institutional funds, we
believe the ability to surprise on the upside is high over the
near term. Roxy currently trades at 1.3x FY18F P/BV, below
historical average. At its peak, Roxy traded at 2.3x P/BV.
Page 9
Market Focus
Riverstone (BUY; TP: $1.27) – Cleanroom edge not priced in yet
China Aviation Oil (BUY; TP: $1.98) – Firm growth ahead
Given the competitive nature of the healthcare glove industry
(which represents the bulk of peer revenues), we see value in
Riverstone’s growing cleanroom glove business, which allows
the group to command consistently higher margins vs peers.
CAO’s jet fuel import business segment as well as its key
associate SPIA, which roughly accounts for over 80% of CAO’s
earnings, are set to benefit from the double-digit pace of
international travel growth in China over the next few years.
We believe the market has yet to fully appreciate Riverstone’s
unique strengths and leadership in the cleanroom glove arena,
as its shares continue to trade cheaply (below its historical
average forward PE) vs larger peers, which have re-rated
strongly in recent months despite unchanged fundamentals.
Based on consensus estimates, Hartalega is currently trading at
+1SD of its historical average, while Top Glove and Kossan are
at above +2SD.
In particular, with a fifth runway in Shanghai Pudong soon to
start commercial operations, contribution from SPIA is well
poised to enjoy firm growth ahead. The continued expansion in
its jet fuel supply business will also help its trading business to
reap benefits from a greater scale and network.
We see the valuation gap of c.55% (vs larger peers’ c.29x)
narrowing and Riverstone at least trading at its historical
average forward PE of 16x FY19F PE (from c.13x currently) as
the group ramps up on its incoming cleanroom glove capacities
to deliver higher-quality earnings growth at 16% CAGR over
FY17-19F. Better-than-expected execution could spark a
further re-rating to 18x PE (+1 SD), in line with peers.
With over US$300m in cash (net cash of US$180m) and a
strengthened management team, the group will step up its
efforts on the M&A front to make value-accretive acquisitions,
which could act as a further re-rating catalyst for the stock.
Page 10
Singapore Company Guide
Breadtalk Group Ltd
Refer to important disclosures at the end of this report
Version 4 | Bloomberg: BREAD SP | Reuters: BRET.SI
DBS Group Research . Equity
7 Nov 2017
BUY
Dough is holding shape
Last Traded Price ( 6 Nov 2017): S$1.605 (STI : 3,381.85)
Price Target 12-mth: S$2.01 (25% upside) (Prev S$2.04)
Analyst
Alfie YEO +65 6682 3717 alfieyeo@dbs.com
Andy SIM CFA +65 6682 3718 andysim@dbs.com
What’s New
•
3Q17 earnings in line, Restaurants and Food Atrium
offset Bakery’s drag on operating profit
•
Interim DPS of 1 Sct declared
•
Sale of AXA Tower a potential catalyst
•
Maintain BUY and S$2.01 TP
Maintain BUY, TP raised to S$2.01. We remain positive on
BreadTalk over continued consolidation of underperforming
outlets that will yield better margins going forward and sale of
stakes in properties such as CHIJMES and AXA Tower that will
unlock shareholder value if they materialise. Based on 3Q17
results, growth drivers remain intact and turnaround in Bakery
division led by store growth and better profitability in FY18F will
drive earnings growth next year. BreadTalk’s valuation, based
on its core business (ex-property investments), is compelling at
17x FY18F PE.
Where we differ. We believe consensus has yet to factor in the
value of BreadTalk’s investment properties into its share price.
BreadTalk’s core business is undervalued at 17x FY18F PE after
stripping out the value of investment properties from the
current share price. Applying a 22x PE valuation to the retail
business and adding back the value of its investment properties,
our derived a target price is S$2.01, which is above consensus.
Price Relative
Potential catalyst. We see potential for special dividends if
Perennial sells AXA Tower. BreadTalk could pay c.4.5 Scts in
special dividends upon the sale of AXA Tower based on our
estimates.
Forecasts and Valuation
FY Dec (S$ m)
Revenue
EBITDA
Pre-tax Profit
Net Profit
Net Pft (Pre Ex.)
Net Pft Gth (Pre-ex) (%)
EPS (S cts)
EPS Pre Ex. (S cts)
EPS Gth Pre Ex (%)
Diluted EPS (S cts)
Net DPS (S cts)
BV Per Share (S cts)
PE (X)
PE Pre Ex. (X)
P/Cash Flow (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
Earnings Rev (%):
Consensus EPS (S cts):
Other Broker Recs:
2016A
615
80.0
29.7
11.4
8.63
(29.2)
4.07
3.07
(29)
4.05
3.85
46.9
39.5
52.3
5.1
6.4
2.4
3.4
0.3
8.8
2017F
603
82.3
44.8
24.4
16.4
89.7
8.67
5.82
90
8.63
5.00
50.6
18.5
27.6
5.7
6.1
3.1
3.2
0.1
17.8
2018F
630
84.7
39.1
21.8
21.8
33.3
7.76
7.76
33
7.73
3.00
55.4
20.7
20.7
6.2
5.7
1.9
2.9
CASH
14.7
2019F
658
89.0
42.0
23.5
23.5
7.4
8.34
8.34
7
8.30
3.00
60.7
19.3
19.3
5.8
5.2
1.9
2.6
CASH
14.4
(4)
5.5
B: 2
(1)
7.5
S: 0
(1)
8.2
H: 1
Source of all data on this page: Company, DBS Bank, Bloomberg
Finance L.P
ed: TH / sa: YM, PY
Valuation:
Our TP of S$2.01 is derived from a sum-of-parts (SOTP)
valuation. On a per share basis, we value its retail business at
22x FY18F PE at S$1.71, investment properties at S$0.43
based on market value, net debt at -S$0.13 per share.
Key Risks to Our View:
Operational risks include food safety and licences as well as
negative publicity. In extreme cases, food operating licences
can be revoked for lapse in food safety. Negative publicity may
also result in weaker demand and poorer marketability when
selling its franchises as the public and franchisees shy away
from their association with BreadTalk.
At A Glance
Issued Capital (m shrs)
Mkt. Cap (S$m/US$m)
Major Shareholders (%)
Meng Tong Quek
Lih Leng Lee
Primacy Investment Ltd
Free Float (%)
3m Avg. Daily Val (US$m)
ICB Industry : Consumer Services / Food & Drug Retailers
281
452 / 332
34.0
18.6
14.0
0.24
Company Guide
Breadtalk Group Ltd
WHAT’S NEW
3Q17 results
3Q17 within estimates. Headline earnings of S$4m (+22% yo-y) and revenue of S$154m (-2% y-o-y) were in line with our
forecasts. Revenue declined 7.8% y-o-y due to lower sales
across all divisions.
Lower revenue dragged by Bakery division. Bakery revenue
declined 2% y-o-y to S$77.2m, affected by 1) the termination
of underperforming franchisees in China and Shanghai; and
2) lower revenue from directly operated stores in Shanghai
and Beijing. Food Atrium revenue declined by 9.4% y-o-y to
S$36.8m on lower number of outlets (decrease of three
outlets). Restaurant sales (Din Tai Fung) improved 8.3% y-o-y
to S$31.1m.
4orth, a separate segment carved out for F&B new concepts.
BreadTalk reported separate segmentals for 4orth, a new F&B
business concepts division. The division has the five operating
outlets of Sō, a rebranded concept from RamenPlay, and
90%-owned Song Fa Bak Kut Teh in China and Thailand.
EBITDA and EBIT for 9M17 were S$0.3m and -S$0.4m
respectively. These numbers were carved out from the
Restaurant segment which previously consolidated them. This
leaves the Restaurant segment with just the Din Tai Fung
operations.
Bakery division led to lower margins. Headline gross and
operating margins declined to 55.2% (-1.1ppt) and 6.7% (1.7ppt) on Bakery’s higher raw material costs and lower
profitability from directly operated stores in Singapore and
Shanghai, and rationalisation of underperforming franchisees.
While group margins were lower, Food Atrium’s operating
margin improved to 7.6% from an operating loss in 3Q16.
Restaurant's operating margins remained at 21%.
Operating profit decline was within expectations. EBITDA was
S$20.9m (-19.1% y-o-y) while EBIT was at S$10.4m (-21.2%
y-o-y). Lower one-off items such as PPE write-offs and
disposals gain/loss helped PBT and PAT to reach S$9m
(+8.4% y-o-y) and S$4m (+22.2% y-o-y) respectively. An
interim dividend of 1 Sct was declared, in line with
expectations.
3Q17 tracking our estimates. We have anticipated lower
operating profit led by lower revenue from the Bakery division
undergoing store franchisee rationalisation. Therefore, this set
of results is largely expected. While headline operating profit
declined slightly due to ongoing restructuring of the Bakery
Division, Restaurant Division and Food Atrium Division
remained positive with revenue and operating profit growth
respectively.
Asset sale remains a likely stock catalyst. We remain positive
on the stock as 1) continued consolidation of
underperforming outlets will contribute to better margins
going forward; 2) sale of stake in properties such as CHIJMES
and AXA Tower will unlock shareholder value if they
materialise; 3) full-year headline earnings may even track
slightly ahead due to comparatively lower one-off items.
Maintain BUY, S$2.01 TP. Our earnings remain largely
unchanged and outlook continues to track our estimates.
BreadTalk’s results are largely led by its Bakery division as
seen in this 3Q17 numbers. Post restructuring of Bakery
franchisees in China this year, we expect store opening and
revenue growth to resume from FY18F onwards. No change
to our recommendation since long-term growth drivers
remain intact. Maintain BUY on the stock.
Company Guide
Breadtalk Group Ltd
Quarterly / Interim Income Statement (S$m)
FY Dec
Revenue
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
3Q2016
2Q2017
3Q2017
% chg yoy
% chg qoq
157
148
154
(2.0)
4.5
(68.8)
(65.0)
(69.2)
0.5
6.4
88.5
82.6
85.1
(3.9)
3.1
(79.6)
(73.4)
(74.7)
(6.2)
1.8
13.2
9.16
10.4
(21.2)
13.4
0.0
0.0
0.0
nm
nm
Associates & JV Inc
0.56
(0.2)
0.0
nm
(89.4)
Net Interest (Exp)/Inc
(1.2)
(0.8)
(0.7)
40.5
17.8
Exceptional Gain/(Loss)
(4.2)
(1.3)
(0.7)
84.7
(49.7)
Pre-tax Profit
8.32
6.81
9.02
8.4
32.4
Tax
(3.0)
(2.8)
(2.9)
(3.8)
1.5
Minority Interest
(2.1)
(1.9)
(2.2)
(4.3)
15.8
Net Profit
3.26
2.11
3.98
22.2
88.3
Net profit bef Except.
7.50
3.41
4.63
(38.3)
35.8
EBITDA
25.9
19.4
20.9
(19.1)
7.7
Margins (%)
Gross Margins
56.3
55.9
55.2
Opg Profit Margins
8.4
6.2
6.7
Net Profit Margins
2.1
1.4
2.6
Source of all data: Company, DBS Bank
Company Guide
Breadtalk Group Ltd
Bakery outlets
CRITICAL DATA POINTS TO WATCH
Critical Factors
Less aggressive store expansion to focus on driving higher
operating efficiencies and margin improvement. The focus is to
raise efficiency of its existing operations, lower operating costs,
and expand margins. Store openings till year-end will therefore
not be aggressive. We see margins improving at the group level,
driven by the swing to profitability at the Food Atrium business,
cost-saving initiatives at the Bakery, and improved sales mix
from the Restaurant business. We expect store expansion to be
more aggressive once cost efficiencies and margin
improvements are realised from FY18F.
Restaurant outlets
Driving margin improvement through cost efficiencies. Initiatives
such as better demand planning, more efficient human resource
planning, and tighter cost controls have helped to benefit
operating margins. They have led to lower food wastage, and
reduction in unnecessary payroll expenses. Management has
also been spending less on capex, leading to some moderation
in depreciation expenses going forward.
Non-performing legacy franchisees. We expect to see a stronger
franchisee base with less drag from non-performing accounts
post restructuring of franchisee accounts. As franchise outlets
have higher net margins, and lower direct operational risk, there
is potential for Bakery margins to increase as well given that
franchise revenue is royalty income, recognised as a percentage
of franchisee sales with minimal costs to BreadTalk. We expect
margins to increase when a mix of franchise stores improves
going forward.
Food court outlets
Changes to management personnel, tenant-mix and tenant
quality have enabled Food Atrium to turn profitable. Food
Atrium division has made a marked turnaround in FY17F. While
its Food Atriums in Singapore were profitable in FY16, Food
Atrium in tier 2 cities in China were a drag. Changes were made
to the China portfolio in FY16 by closing non-performing
outlets especially in tier 3 cities. It also replaced China Food
Atrium’s management team with new personnel which made
changes to tenant quality and tenant mix, which led to
improvements in performance and occupancy at its China Food
Atriums. Food Atrium openings this year will include Shenzhen,
Guangdong and Shanghai.
New outlet in London this year. BreadTalk has already planned
for a new outlet in London this year through a JV (BreadTalk is
the major shareholder of the JV) with Fairy Rise Development
(Din Tai Fung franchise owner), Din Tai Fung Taiwan, a UK
partner and a Taiwanese individual. We also see scope for more
outlets in Thailand as there are currently only three Din Tai Fung
restaurants. As restaurant margins are attractive, better sales
mix from Restaurant business would improve overall
profitability.
Total
Annual sales per outlet S$m
Source: Company, DBS Bank
Company Guide
Breadtalk Group Ltd
Appendix 1: A look at Company's listed history – what drives
its share price?
Share price has been driven by various factors including earnings, properties and strategic investors
(S$)
2.00
1.80
1.60
Re-rated on new
BreadTalk IHQ building
and Minor International
taking a stake
Sale and earnings growth
declined, higher interest
costs, lower net margins
1.40
1.20
1.00
0.80
0.40
0.20
0.00
Source: DBS Bank
Gain in Perennial CHIJMES
investment, operating
margin expansion
Earnings
turnaround,
potential sale of
AXA Tower
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
Oct-16
Jan-17
Apr-17
Jul-17
Oct-17
0.60
Company Guide
Breadtalk Group Ltd
Balance Sheet:
Cash business; balance sheet currently in net debt. As with all
food service companies, BreadTalk is a cash business. The
business generated S$65-90m of operating cashflows annually
and S$28-54m of positive free cashflows in the last three years.
Net debt as of end-September 2017 was about S$36m,
equivalent to approximately S$0.13 per share, or net debt ratio
of 0.25x. BreadTalk was in net cash till FY12 when it built its
BreadTalk IHQ. In FY13 when it opened its IHQ, net debt was
S$89m. It further issued S$75m of bonds in FY16 due 1 April
2019 at 4.6% coupon for general corporate purposes, including
refinancing of existing borrowings, and financing capital
expenditure and general working capital.
Leverage & Asset Turnover (x)
Capital Expenditure
Share Price Drivers:
Changes to property holdings are likely to drive share price.
Valuations for BreadTalk re-rated to an all-time high when it
moved into its IHQ in 2013. Similarly, when it sold 112 Katong
last year and declared special dividends, its share price re-rated
as well. In 4Q16, BreadTalk announced the sale of 111
Somerset, which also lifted BreadTalk’s share price in
anticipation of special dividends.
ROE (%)
Key Risks:
Food safety and licences. As a restaurant operator, it is
important to maintain food safety. Lapses would lead to
reputational risks and in extreme cases, food operation licences
could be revoked.
Negative publicity affects consumer confidence and the
marketability of its franchise. BreadTalk has had some negative
publicity, especially in 2015 over food safety and food
preparation procedures in Singapore and China. Incidents such
as these can generate negative response from the public which
can potentially affect sales as well as the marketability of its
franchise overseas.
Forward PE Band (x)
Company Background
BreadTalk Group is a Singapore-based food and beverage
(F&B) group engaged in the operations and franchising of
bakery/confectionery outlets, food courts and restaurants
across the region. BreadTalk’s portfolio currently has six brands
– BreadTalk, ToastBox, Food Republic, Ramen Play, San Pou Tei
and Din Tai Fung. It operates over 900 outlets across 17
countries.
PB Band (x)
Source: Company, DBS Bank
Company Guide
Breadtalk Group Ltd
Key Assumptions
FY Dec
2015A
2016A
2017F
2018F
2019F
Bakery outlets
Restaurant outlets
Food court outlets
Total
Annual sales per outlet
862
30.0
65.0
957
0.65
862
32.0
57.0
951
0.65
856
34.0
61.0
951
0.63
859
36.0
61.0
956
0.66
864
38.0
61.0
963
0.68
Segmental Breakdown
FY Dec
2015A
2016A
2017F
2018F
2019F
308
143
173
0.0
306
150
159
0.0
296
154
153
0.0
303
166
161
0.0
311
179
169
0.0
624
615
603
630
658
5.15
25.8
(2.9)
4.51
12.6
23.2
(7.5)
4.18
9.57
26.5
8.57
(4.8)
9.39
25.7
6.92
(0.3)
9.32
27.7
7.01
0.0
32.6
32.5
39.9
41.7
44.0
1.7
18.0
(1.7)
N/A
N/A
5.2
4.1
15.4
(4.7)
N/A
N/A
5.3
3.2
17.3
5.6
N/A
N/A
6.6
3.1
15.5
4.3
N/A
N/A
6.6
3.0
15.5
4.2
N/A
N/A
6.7
2015A
2016A
2017F
2018F
2019F
624
(294)
330
(298)
32.6
0.0
(1.3)
(1.3)
(4.6)
25.4
(10.8)
(7.0)
0.0
7.60
12.2
80.9
615
(278)
337
(305)
32.5
0.0
(0.8)
(4.8)
2.80
29.7
(12.1)
(6.2)
0.0
11.4
8.63
80.0
603
(268)
334
(295)
39.9
0.0
0.13
(3.2)
8.01
44.8
(11.4)
(9.0)
0.0
24.4
16.4
82.3
630
(277)
353
(311)
41.7
0.0
0.13
(2.8)
0.0
39.1
(9.1)
(8.2)
0.0
21.8
21.8
84.7
658
(290)
369
(325)
44.0
0.0
0.14
(2.2)
0.0
42.0
(9.7)
(8.8)
0.0
23.5
23.5
89.0
5.9
0.6
30.8
(45.0)
(1.5)
(1.1)
(0.2)
(29.2)
(2.0)
2.9
22.6
89.7
4.5
2.9
4.6
33.3
4.5
5.1
5.5
7.4
52.9
5.2
1.2
6.0
1.4
5.2
55.6
24.7
54.9
5.3
1.9
8.8
2.1
5.4
94.7
6.8
55.5
6.6
4.0
17.8
4.6
8.6
57.7
12.5
56.0
6.6
3.5
14.7
4.0
9.0
38.7
15.1
56.0
6.7
3.6
14.4
4.1
8.9
36.0
20.3
Revenues (S$m)
Bakery operations
Restaurant sales
Food Atrium income
Others
Total
Operating profit (S$m)
Bakery operations
Restaurant sales
Food Atrium income
Others
Total
Operating profit margin (%)
Bakery operations
Restaurant sales
Food Atrium income
Others
Others
Total
Income Statement (S$m)
FY Dec
Revenue
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
Net Profit before Except.
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins & Ratio
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
Source: Company, DBS Bank
Negative on 1) Higher
expenses for corporate
services, treasury functions;
and 2) EBIT losses at new
segment 4orth.
Company Guide
Breadtalk Group Ltd
Quarterly / Interim Income Statement (S$m)
FY Dec
3Q2016
4Q2016
Revenue
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Net Profit
Net profit bef Except.
EBITDA
1Q2017
2Q2017
3Q2017
157
(68.8)
88.5
(79.6)
13.2
0.0
0.56
(1.2)
(4.2)
8.32
(3.0)
(2.1)
3.26
7.50
25.9
153
(67.8)
85.5
(75.8)
9.71
0.0
(1.0)
(0.9)
2.40
10.1
(4.7)
(1.4)
4.02
1.63
20.4
148
(66.7)
80.9
(75.3)
5.63
0.0
0.38
(1.0)
9.95
15.0
(2.6)
(1.7)
10.7
0.74
16.8
148
(65.0)
82.6
(73.4)
9.16
0.0
(0.2)
(0.8)
(1.3)
6.81
(2.8)
(1.9)
2.11
3.41
19.4
154
(69.2)
85.1
(74.7)
10.4
0.0
0.0
(0.7)
(0.7)
9.02
(2.9)
(2.2)
3.98
4.63
20.9
5.1
18.0
28.4
54.8
(2.6)
(21.2)
(26.3)
(78.3)
(3.7)
(17.6)
(42.0)
(54.6)
0.0
15.8
62.8
361.2
4.5
7.7
13.4
35.8
56.3
8.4
2.1
55.8
6.3
2.6
54.8
3.8
7.2
55.9
6.2
1.4
55.2
6.7
2.6
Balance Sheet (S$m)
FY Dec
2015A
2016A
2017F
2018F
2019F
Net Fixed Assets
Invts in Associates & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
206
33.9
126
102
9.88
60.0
7.28
545
181
35.3
105
138
9.81
59.2
6.46
534
179
35.4
105
140
9.70
58.4
6.46
534
177
35.5
104
165
10.1
61.1
6.46
559
172
35.7
103
195
10.5
63.8
6.46
587
ST Debt
Creditor
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
82.0
94.1
86.1
120
16.8
129
17.2
545
31.5
86.8
99.8
150
14.5
132
19.9
534
45.2
89.2
99.8
114
14.5
142
28.9
534
45.2
92.4
99.8
114
14.5
156
37.1
559
45.2
96.6
99.8
114
14.5
171
45.9
587
(103)
(99.6)
33.5
143.3
15.3
1.2
0.7
0.6
0.7
0.8
18.6
2.0
(111)
(43.5)
35.4
144.1
15.7
1.1
1.0
0.9
0.3
0.3
20.2
2.3
(114)
(18.7)
35.6
142.2
15.8
1.1
0.9
0.8
0.1
0.1
25.1
2.3
(115)
5.89
34.6
141.5
15.4
1.2
1.0
1.0
CASH
CASH
25.1
2.4
(116)
35.4
34.6
141.0
15.3
1.1
1.1
1.1
CASH
CASH
25.1
2.4
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
Non-Cash Wkg. Capital
Net Cash/(Debt)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Asset Turnover (x)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Net Debt/Equity ex MI (X)
Capex to Debt (%)
Z-Score (X)
Source: Company, DBS Bank
Company Guide
Breadtalk Group Ltd
Cash Flow Statement (S$m)
FY Dec
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
Opg CFPS (S cts)
Free CFPS (S cts)
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Alfie YEO
Andy SIM CFA
2015A
2016A
2017F
2018F
2019F
25.4
49.6
(6.9)
1.31
0.42
(3.4)
66.5
(37.5)
(20.4)
(22.9)
1.19
21.7
(57.9)
(4.2)
3.60
(0.7)
(8.7)
(10.0)
0.82
(0.6)
23.5
10.3
29.7
48.3
(9.1)
0.83
10.2
9.20
89.2
(36.7)
16.3
(2.8)
0.46
(2.3)
(25.0)
(8.0)
(20.6)
0.0
(9.6)
(38.2)
(0.4)
25.7
28.1
18.7
44.8
42.4
(11.4)
(0.1)
3.25
0.0
78.8
(40.0)
0.0
0.0
0.0
0.0
(40.0)
(14.1)
(22.1)
0.0
0.0
(36.2)
0.0
2.69
26.9
13.8
39.1
42.9
(9.1)
(0.1)
0.29
0.0
73.0
(40.0)
0.0
0.0
0.0
0.0
(40.0)
(8.4)
0.0
0.0
0.0
(8.4)
0.0
24.6
25.9
11.7
42.0
44.9
(9.7)
(0.1)
0.94
0.0
77.9
(40.0)
0.0
0.0
0.0
0.0
(40.0)
(8.4)
0.0
0.0
0.0
(8.4)
0.0
29.5
27.4
13.5
Company Guide
Breadtalk Group Ltd
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 7 Nov 2017 07:43:14 (SGT)
Dissemination Date: 7 Nov 2017 08:59:27 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
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Company Guide
Breadtalk Group Ltd
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
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2
in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has
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1
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Singapore Company Guide
China Aviation Oil
Version 7 | Bloomberg: CAO SP | Reuters: CNAO.SI
Refer to important disclosures at the end of this report
DBS Group Research . Equity
1 Mar 2018
BUY
Associates continue to shine
Last Traded Price ( 28 Feb 2018): S$1.58 (STI : 3,517.94)
Price Target 12-mth: S$1.98 (25% upside) (Prev S$2.08)
Analyst
Paul YONG, CFA +65 6682 3712 paulyong@dbs.com
What’s New
•
FY17 net profit of US$85.3mn (-4% YoY) misses our
projections by 5% due to higher than expected taxes
•
Outlook remains positive given firm global air travel
demand, led by strong growth in China
•
Net cash of US$180mn and strengthened management
team should help M&A ambitions
•
Maintain BUY with S$1.98 TP (13x FY18F PE)
Price Relative
Maintain BUY with an adjusted TP of S$1.98, as we still favour
CAO as an aviation growth proxy. We continue to like China
Aviation Oil given its monopolistic position as the sole importer
of bonded jet fuel into China, and for its 33% stake in the
exclusive jet fuel refueller at Shanghai Pudong International
Airport (SPIA). It also has a growing international jet fuel supply
and trading business that will increasingly benefit from CAO’s
greater scale. It is a beneficiary of growing air travel demand
both in China and globally as well.
Net cash of US$180mn or S$0.27 ps to help fund inorganic
growth. CAO had a cash balance of US$300mn, or net cash of
US$180mn, at the end of 2017 and has also recently refreshed
and strengthened its management team with seconded
personnel from parent China National Aviation Fuel Group Ltd
(CNAF). We believe this could help the company deliver on the
M&A front.
Where we differ: We have lower-than-consensus forecasts as
we are more conservative on trading gains in 2018F.
Potential catalysts: CAO’s share price should re-rate as it delivers
steady earnings growth and/or if it can make value accretive
acquisitions using its strong balance sheet position.
Forecasts and Valuation
FY Dec (US$ m)
Revenue
EBITDA
Pre-tax Profit
Net Profit
Net Pft (Pre Ex.)
Net Pft Gth (Pre-ex) (%)
EPS (S cts)
EPS Pre Ex. (S cts)
EPS Gth Pre Ex (%)
Diluted EPS (S cts)
Net DPS (S cts)
BV Per Share (S cts)
PE (X)
PE Pre Ex. (X)
P/Cash Flow (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
Earnings Rev (%):
Consensus EPS (S cts):
Other Broker Recs:
2016A
11,703
94.3
91.9
88.9
88.9
45.1
13.7
13.7
45
13.7
4.26
100
11.5
11.5
nm
8.9
2.7
1.6
CASH
14.3
2017A
16,268
95.9
92.2
85.3
85.3
(4.0)
13.1
13.1
(4)
13.1
4.46
111
12.0
12.0
nm
8.8
2.8
1.4
CASH
12.4
2018F
19,570
107
103
95.7
95.7
12.2
14.7
14.7
12
14.7
4.42
122
10.7
10.7
nm
7.8
2.8
1.3
CASH
12.6
2019F
21,765
116
112
104
104
9.1
16.1
16.1
9
16.1
4.83
133
9.8
9.8
nm
6.9
3.1
1.2
CASH
12.6
13.9
B: 4
(2)
15.9
S: 0
(2)
18.5
H: 1
Source of all data on this page: Company, DBS Bank, Bloomberg
Finance L.P
ed: DT / sa:YM, PY, CS
Valuation:
Valuations attractive at 8.5x FY18F ex-cash PE. Given that 80%
of its earnings is derived from monopolistic businesses with a
firm growth outlook, we see current valuations at 10.7x
FY18PE, declining to 9.8x FY19F PE, as attractive. Factoring in
net cash per share of S$0.28, valuations are even more
enticing. Our target price is based on 13x FY18F PE, or +1 SD
of its historical average, and has not factored in acquisitions.
Key Risks to Our View:
Weaker demand for air travel and execution risk. A sustained
slowdown in demand for air travel could hit jet fuel demand
and volumes. Further, the group could also face execution risks
in its trading business and on prospective M&As.
At A Glance
Issued Capital (m shrs)
Mkt. Cap (S$m/US$m)
Major Shareholders (%)
China National Aviation Fuel Grp
BP Plc
Free Float (%)
3m Avg. Daily Val (US$m)
ICB Industry : Oil & Gas / Oil & Gas Producers
865
1,366 / 1,032
51.0
20.1
28.9
1.1
Company Guide
China Aviation Oil
WHAT’S NEW
Better associate contributions offset by higher tax expenses and lower trading gains
CAO’s full-year results missed our expectations by 5%, with
net profit declining 4% YoY to US$85.3mn as tax expenses
were higher than we expected. The company maintained its
full-year dividend at 4.5 Scts, which is equal to a c.30%
payout.
Full-year revenues rose 39% YoY to US$16.3bn on higher oil
prices as well as supply and trading volumes, which increased
by 14.6% YoY to 37.31mn tonnes. Gross profit, however, fell
by 12.1% YoY to US$38.7mn on lower gains from trading
and optimisation activities, as “markets reclined to
backwardation in 3Q17 further exacerbated by increase in
supply & operational costs incurred due to various supply
disruptions caused by weather and refinery outages”.
Contributions from associates rose by 7.8% YoY to
US$71.5mn, led by a 5.8% YoY increase in contribution from
SPIA to US$64.2m while all other associates also saw
improved performances. Tax expenses jumped 133% YoY to
US$6.9mn mainly due to the decline in deferred tax assets
following the utilisation of unabsorbed tax losses from prior
years to offset current year’s profits, the increase in
recognition of deferred tax liabilities on the share of
undistributed retained earnings from associates, and tax
expenses incurred on the transfer of shareholding.
Outlook remains positive. Looking ahead, with international
travel expected to grow at a double-digit pace in China for
the next few years, CAO’s jet fuel import business segment as
well as its key associate SPIA, which we estimate together
account for over 80% of CAO’s earnings, are set to benefit.
In particular, with a fifth runway in Shanghai Pudong soon to
start commercial operations, contribution from SPIA is well
poised to enjoy firm growth ahead.
Meanwhile, continued expansion in its international jet fuel
supply business will also help its trading business to reap
benefits from a greater scale and network. CAO has cash of
over US$300mn (net cash of US$180mn) and we believe that
with a refreshed and strengthened management team
(seconded from parent CNAF), the group will step up on its
efforts on the M&A front to make value accretive
acquisitions, which could act as a further re-rating catalyst for
the stock.
We lower our FY18 and FY19 earnings estimates by 2.6%
and 2.4% respectively, factoring in higher associate
contributions offset by lower gross profit and higher tax
expenses. Our TP is now S$1.98, from S$2.08 previously,
mainly due to a weaker USD/SGD rate.
Quarterly / Interim Income Statement (US$m)
FY Dec
Revenue
Cost of Goods Sold
4Q2016
3Q2017
4Q2017
% chg yoy
% chg qoq
3,276
5,223
4,061
24.0
(22.3)
(22.3)
(3,265)
(5,219)
(4,052)
24.1
Gross Profit
10.6
4.33
8.34
(21.3)
92.5
Other Oper. (Exp)/Inc
(5.4)
(2.6)
(6.5)
20.5
150.8
Operating Profit
5.21
1.75
1.85
(64.4)
6.1
0.0
0.0
0.0
-
-
Associates & JV Inc
13.3
21.5
16.8
26.2
(21.8)
Net Interest (Exp)/Inc
(0.2)
(0.4)
(1.3)
(576.3)
(212.4)
0.0
0.0
0.0
-
-
Pre-tax Profit
18.3
22.8
17.4
(5.4)
(24.0)
Tax
(0.4)
(1.4)
(3.3)
687.5
134.9
0.0
0.0
0.0
-
-
Net Profit
17.9
21.4
14.0
(21.7)
(34.5)
Net profit bef Except.
17.9
21.4
14.0
(21.7)
(34.5)
EBITDA
18.5
23.3
18.7
0.7
(19.7)
Gross Margins
0.3
0.1
0.2
Opg Profit Margins
0.2
0.0
0.0
Net Profit Margins
0.5
0.4
0.3
Other Non Opg (Exp)/Inc
Exceptional Gain/(Loss)
Minority Interest
Margins (%)
Source of all data: Company, DBS Bank
Company Guide
China Aviation Oil
CRITICAL DATA POINTS TO WATCH
Critical Factors
Sole importer of jet fuel into China with growing international
presence… Leveraging on the network of its parent CNAF, a
state-owned enterprise that is the largest aviation transportation
logistics services provider in China, CAO has a monopoly in the
supply of imported jet fuel (or bonded jet fuel) to 17
international airports in China. With CNAF’s support, CAO has
also expanded its business to the marketing and supply of jet
fuel to airline companies at 48 international airports outside of
the China, spanning the Asia Pacific, North America, Europe
and the Middle East.
Middle Distillates Volumes (m tonnes)
Other Oil Product Volumes (m tonnes)
Given its monopoly, CAO is poised to benefit from the longterm growth of China’s international air travel market. Coupled
with its ongoing international expansion, we expect middle
distillates & jet fuel volumes supplied and traded to grow to
20.8mn by FY18F, and 21.8mn tonnes by FY19F, from 19.8mn
tonnes in 2017.
Optimising margins through trading. Given that CAO enjoys
cost-plus pricing for its China jet fuel import business, and after
hedging downside risk, CAO will seek to further optimise
margins when viable trading opportunities arise. While
opportunities to improve margins are available in both
backwardation and contango markets, CAO generally prefers
contango markets as it allows for superior opportunities for
margin optimisation from the storing and trading of fuels
(which also includes gas oil, fuel oil and avgas).
We project that CAO’s average gross profit per tonne (on a
combined and blended basis), which in 2017 was lower than in
2015 and 2016, will rise gradually from 2018F onwards as it
benefits from economies of scale.
Steady growth in contributions from associates, including prized
asset SPIA. CAO’s best-performing asset, the 33% owned
associate SPIA, has always been a significant contributor to
CAO’s bottom line, accounting for over 90% of total associate
contribution. With two new runways added in the last 18
months, which has doubled the capacity of the airport, and an
additional satellite concourse expected to be completed by
2019, capacity at Shanghai Pudong, China’s second largest
airport, is expected to be raised from 60 million to 80 million
passengers a year, which should underpin SPIA’s long-term
growth prospects.
Implied Average Middle Distillate Price (USD/bbl)
Gross Profit per Tonne (US$)
Contribution from Associates (US$ m)
Source: Company, DBS Bank
Company Guide
China Aviation Oil
Balance Sheet:
Strong balance sheet with a net cash position of US$180mn as
at end-2017. With net cash of US$180mn as at end-2017, we
believe the group has sufficient firepower with room to gear up
further to finance its M&A opportunities and grow the scale and
reach of its business and profits.
Share Price Drivers:
Progress on the M&A front. While CAO is armed with dry
powder for potential acquisitions and investments, it has yet to
announce significant M&A plans – its last major investment was
in 2013, when the company acquired a 39% stake in refueller
CNAF Hong Kong Refuelling Ltd. Management has shared that
they will be looking at both “asset-light” investments, which
will allow the group to gain access to air spaces, customer
contracts, strategic alliances and further trading synergies, as
well as “asset-backed” investments (or infrastructure assets),
which may include airport refueling stations, pipelines going
into airports and storage facilities. We believe that the
deployment of cash to fund value-accretive opportunities should
lead to a further rerating of the stock.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Key Risks:
Weaker demand for air travel. Given the group’s exposure to
the air passenger market, events that could significantly
dampen traveller sentiment, such as the outbreak of diseases
and acts of terror, could weigh on global demand for jet fuel.
Potential mark-to-market losses. As SPIA and CNAF-HKR hold
inventories of 15 days and seven days respectively, these have
to be marked to market. In a declining oil price environment,
these would result in paper losses for these associates, which
add volatility to CAO’s bottom line.
Forward PE Band (x)
Trading and execution risks. CAO is exposed to a myriad of
risks that are inherent in the lifecycle of trades, which include
market risk, credit risk, and operational risk.
Company Background
China Aviation Oil (Singapore) Corporation Ltd is principally
engaged in the supply and trading of bonded jet fuel, with a
monopoly in China and a growing international presence. Apart
from jet fuel, the group also trades and/or supplies other
transportation fuels (such as fuel oil, gas oil and aviation gas)
and has varying equity stakes in oil-related assets. These assets
include airport refueling facilities (SPIA and CNAF HKR),
pipelines (China National Aviation Fuel TSN-PEK Pipeline
Transportation Corp Ltd) and storage facilities (China Aviation
Oil Xinyuan Petrochemicals Co Ltd and at Oilhub Korea Yeosu
Co Ltd).
PB Band (x)
Source: Company, DBS Bank
Company Guide
China Aviation Oil
Key Assumptions
FY Dec
Middle Distillates Volumes
(m
tonnes)
Other
Oil Product
Volumes
(m tonnes)
Implied Average
Middle
Distillate
Priceper
(USD/bbl)
Gross Profit
Tonne
(US$)
Contribution from
Associates (US$ m)
Segmental Breakdown
FY Dec
Revenues (US$m)
Middle distillates
Other oil products
Total
Income Statement (US$m)
FY Dec
Revenue
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
Net Profit before Except.
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins & Ratio
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
Source: Company, DBS Bank
2015A
2016A
2017A
2018F
2019F
11.9
8.28
74.4
1.76
42.3
18.6
14.0
52.7
1.35
66.4
19.8
17.5
65.2
1.04
71.5
20.8
18.0
75.2
1.09
78.8
21.8
18.6
80.2
1.14
84.7
2015A
2016A
2017A
2018F
2019F
7,010
1,978
8,987
7,754
3,949
11,703
10,233
6,034
16,268
12,398
7,172
19,570
13,886
7,879
21,765
2015A
2016A
2017A
2018F
2019F
8,987
(8,952)
35.4
(13.1)
22.3
0.0
42.3
(1.0)
0.0
63.6
(2.3)
0.0
0.0
61.3
61.3
66.2
11,703
(11,659)
44.1
(17.3)
26.7
0.0
66.4
(1.3)
0.0
91.9
(3.0)
0.0
0.0
88.9
88.9
94.3
16,268
(16,229)
38.7
(15.3)
23.5
0.0
71.5
(2.8)
0.0
92.2
(6.9)
0.0
0.0
85.3
85.3
95.9
19,570
(19,527)
42.3
(15.3)
27.0
0.0
78.8
(2.8)
0.0
103
(7.2)
0.0
0.0
95.7
95.7
107
21,765
(21,719)
46.2
(15.8)
30.4
0.0
84.7
(2.8)
0.0
112
(7.9)
0.0
0.0
104
104
116
(47.3)
19.1
104.8
24.7
30.2
42.5
19.7
45.1
39.0
1.7
(12.3)
(4.0)
20.3
11.2
15.0
12.2
11.2
8.8
12.8
9.1
0.4
0.2
0.7
10.7
5.5
3.7
29.8
21.5
0.4
0.2
0.8
14.3
8.1
3.8
31.1
21.4
0.2
0.1
0.5
12.4
5.2
2.7
33.9
8.4
0.2
0.1
0.5
12.6
4.7
2.8
30.0
9.7
0.2
0.1
0.5
12.6
4.5
3.0
30.0
10.9
Company Guide
China Aviation Oil
Quarterly / Interim Income Statement (US$m)
FY Dec
4Q2016
1Q2017
Revenue
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Net Profit
Net profit bef Except.
EBITDA
2Q2017
3Q2017
4Q2017
3,276
(3,265)
10.6
(5.4)
5.21
0.0
13.3
(0.2)
0.0
18.3
(0.4)
0.0
17.9
17.9
18.5
3,311
(3,296)
15.5
(3.4)
12.1
0.0
14.9
(0.6)
0.0
26.4
(1.1)
0.0
25.3
25.3
27.0
3,673
(3,662)
10.6
(2.8)
7.77
0.0
18.3
(0.4)
0.0
25.7
(1.1)
0.0
24.6
24.6
26.1
5,223
(5,219)
4.33
(2.6)
1.75
0.0
21.5
(0.4)
0.0
22.8
(1.4)
0.0
21.4
21.4
23.3
4,061
(4,052)
8.34
(6.5)
1.85
0.0
16.8
(1.3)
0.0
17.4
(3.3)
0.0
14.0
14.0
18.7
(16.9)
(24.6)
2.6
(22.8)
1.1
45.6
132.0
41.1
10.9
(3.4)
(35.7)
(2.8)
42.2
(10.8)
(77.5)
(12.9)
(22.3)
(19.7)
6.1
(34.5)
0.3
0.2
0.5
0.5
0.4
0.8
0.3
0.2
0.7
0.1
0.0
0.4
0.2
0.0
0.3
Balance Sheet (US$m)
FY Dec
2015A
2016A
2017A
2018F
2019F
Net Fixed Assets
Invts in Associates & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
6.21
266
9.43
171
56.8
337
0.0
846
5.65
281
9.18
287
171
591
0.0
1,344
5.19
321
7.53
300
210
1,069
0.0
1,913
4.95
333
7.26
318
252
1,286
0.0
2,201
4.70
346
7.00
350
281
1,430
0.0
2,418
ST Debt
Creditor
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
0.0
247
0.01
0.0
6.16
593
0.0
846
100
588
0.62
0.0
6.31
650
0.0
1,344
120
1,060
0.95
0.0
7.92
724
0.0
1,913
120
1,276
7.21
0.0
7.92
791
0.0
2,201
120
1,419
7.86
0.0
7.92
864
0.0
2,418
147
171
26.3
21.7
1.9
8.1
2.3
2.1
CASH
CASH
N/A
14.6
173
187
14.5
13.1
3.6
10.7
1.5
1.3
CASH
CASH
0.4
10.7
218
180
18.6
18.5
4.3
10.0
1.3
1.2
CASH
CASH
0.4
10.4
255
198
22.0
21.8
4.3
9.5
1.3
1.1
CASH
CASH
0.4
10.4
284
230
22.8
22.6
4.5
9.4
1.3
1.2
CASH
CASH
0.4
10.1
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
Non-Cash Wkg. Capital
Net Cash/(Debt)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Asset Turnover (x)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Net Debt/Equity ex MI (X)
Capex to Debt (%)
Z-Score (X)
Source: Company, DBS Bank
Company Guide
China Aviation Oil
Cash Flow Statement (US$m)
FY Dec
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
Opg CFPS (S cts)
Free CFPS (S cts)
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Paul YONG, CFA
2015A
2016A
2017A
2018F
2019F
63.6
1.56
(2.2)
(42.3)
33.1
(1.7)
52.1
(0.3)
0.0
0.0
37.2
0.19
37.2
(12.8)
0.0
0.0
(0.3)
(13.0)
(0.1)
76.2
2.92
7.99
91.9
1.21
0.0
(66.4)
(25.8)
(1.4)
(0.5)
(0.4)
0.0
0.0
36.2
1.47
37.3
(19.3)
100
0.0
(0.3)
80.4
(0.4)
117
3.89
(0.1)
92.2
0.94
(0.7)
(71.5)
(46.1)
(2.1)
(27.2)
(0.4)
0.0
0.0
45.5
3.60
48.7
(27.7)
20.0
0.0
(1.6)
(9.3)
0.62
12.8
2.90
(4.3)
103
0.94
(1.0)
(78.8)
(44.1)
0.0
(19.9)
(0.4)
0.0
0.0
67.1
0.0
66.6
(28.7)
0.0
0.0
0.0
(28.7)
0.0
18.0
3.72
(3.1)
112
0.94
(7.2)
(84.7)
(29.4)
0.0
(8.0)
(0.4)
0.0
0.0
71.8
0.0
71.3
(31.3)
0.0
0.0
0.0
(31.3)
0.0
32.0
3.29
(1.3)
Company Guide
China Aviation Oil
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 1 Mar 2018 12:02:16 (SGT)
Dissemination Date: 1 Mar 2018 12:13:57 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated
corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)
redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or
warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without
notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific
investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees
only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial
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arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not
to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons
associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have
positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and
other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may
not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to
update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED
UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.
Company Guide
China Aviation Oil
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s)
primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the
issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real
estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the
management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or
his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has
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banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the
DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates do not
have a proprietary position in the securities recommended in this report as of 31 Jan 2018.
2.
Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research
Report.
Compensation for investment banking services:
3.
BSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document
should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced:
4.
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other
investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1
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Singapore Company Guide
Chip Eng Seng
Refer to important disclosures at the end of this report
Version 2 | Bloomberg: CHIP SP | Reuters: CESE.SI
DBS Group Research . Equity
14 Feb 2018
BUY
Attractive Valuations and Yield
Last Traded Price ( 13 Feb 2018): S$0.95 (STI : 3,415.07)
Price Target 12-mth: S$1.18 (24% upside)
Analyst
Carmen Tay +65 6682 3719 carmentay@dbs.com
Derek TAN +65 6682 3716 derektan@dbs.com
What’s New

FY17 revenue and PATMI of S$859.7m and S$35.5m came
in within expectations on higher development sales

Spotlight for 2018 and 2019 remains on upcoming
launches at Woodleigh and Changi

Meanwhile, growing recurring income and strong dividend
track record (even in 2009) are attractive attributes;
Proposes 4 Sct dividend for FY17, representing 4.2% yield

Maintain BUY with TP of S$1.18
Integrated real estate developer with strong capability to
leverage upcoming property upturn. Singapore-based Chip Eng
Seng Corporation (CES) has been selectively acquiring projects
in Singapore and overseas which are ripe for the picking. Most
of the group’s residential projects have already been
substantially sold and, together with an estimated construction
order book of S$560m (as at Jan 2018), CES has locked in at
least S$1bn in sales – which will be recognised progressively,
underpinning strong earnings visibility in the coming years.
Meanwhile, plans to launch recently acquired residential sites at
Woodleigh and Changi in 2H18 and 1H19 respectively, should
boost the group’s earnings and NAV in the medium term.
Where we differ: A largely uncovered stock, we like CES for its
strong earnings visibility and the potential to unlock its
undervalued hotel portfolio.
Potential catalysts: Successful pre-sales, landbanking activities
Price Relative
Forecasts and Valuation
FY Dec (S$ m)
Revenue
EBITDA
Pre-tax Profit
Net Profit
Net Pft (Pre Ex.)
Net Pft Gth (Pre-ex) (%)
EPS (S cts)
EPS Pre Ex. (S cts)
EPS Gth Pre Ex (%)
Diluted EPS (S cts)
Net DPS (S cts)
BV Per Share (S cts)
PE (X)
PE Pre Ex. (X)
P/Cash Flow (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
Earnings Rev (%):
Consensus EPS (S cts):
Other Broker Recs:
2016A
748
98.6
76.1
35.7
35.7
(43.3)
5.75
5.75
(43)
5.75
4.00
123
16.5
16.5
nm
13.1
4.2
0.8
0.9
4.7
2017A
860
102
70.2
35.5
35.5
(0.5)
5.72
5.72
(1)
5.72
4.00
125
16.6
16.6
nm
18.6
4.2
0.8
1.6
4.6
2018F
799
108
67.2
31.7
31.7
(10.6)
5.11
5.11
(11)
5.11
4.00
126
18.6
18.6
11.0
18.8
4.2
0.8
1.7
4.1
2019F
1,228
164
121
58.3
58.3
83.7
9.39
9.39
84
9.39
4.00
131
10.1
10.1
2.8
12.4
4.2
0.7
1.5
7.3
5
5.50
B: 2
27
4.00
S: 0
17
8.00
H: 0
Source of all data on this page: Company, DBS Bank, Bloomberg
Finance L.P
ed: JLC / sa:YM, PY, CS
Potential unlocking of undervalued hotel portfolio. The group
has also built up a sizable hotel and commercial portfolio. The
jewel is Park Hotel Alexandra, which is recorded in its book at
an estimated S$210m (S$475k/key) but potential realisable
value, if sold, could be as high as S$376m (S$850k/key), which
means a 27Scts upside to current NAV. While the hotel provides
stable recurring cash flow to the group, substantial value could
be unlocked, given the robust demand for hotel assets in
Singapore.
Valuation:
Maintain BUY and SOTP-based TP of S$1.18. Assuming a
conservative 45% discount (vs larger peers’ 10%) to RNAV of
S$1.88 and valuing its construction business at peers’ average
of 8x FY18F PE, we arrive at a SOTP-based TP of S$1.18. A
prospective 4.2% yield is also on offer.
Key Risks to Our View:
(i) Execution risk, (ii) Weaker demand, (iii) Competition, (iv)
Equity fund raising risk
At A Glance
Issued Capital (m shrs)
Mkt. Cap (S$m/US$m)
Major Shareholders (%)
Tiam Seng Lim
Tiang Chuan Lim
Lee Meng Chia
Free Float (%)
3m Avg. Daily Val (US$m)
ICB Industry : Financials / Real Estate
621
590 / 446
12.5
7.1
4.1
76.3
1.3
Company Guide
Chip Eng Seng
WHAT’S NEW
Chip Eng Seng’s FY17 results in line; Maintains 4 Sct dividend
FY17 PATMI of S$35.5m; Results in line. In 4Q17, CES delivered
PATMI of S$14.5m on revenue of S$256.1m (+22.4% q-o-q),
primarily on stronger contributions from the Property
Development and Hotel segments, which helped offset
weakness in the Construction division.
Expanding investment portfolio to further boost recurring
income. While dwarfed at the top-line (c.6.1% of sales), we
estimate that CES’ portfolio of investment assets roughly
contributed c.13% of FY17 EBIT.
With the recent addition of a Grade-A office building at 205
On a full-year basis, revenue was up 14.9% to S$859.7m, while Queen Street (Auckland) at end-2017 and the proposed
earnings (PATMI) held relatively steady y-o-y at S$35.5m, in line acquisition of its fourth hospitality asset, Mercure & Ibis Styles
with our expectations.
Grosvenor Hotel in Adelaide, we believe contributions from this
segment will be even more meaningful in FY18F.
The Property Development segment was the key revenue driver
for the group this quarter, contributing S$194m (or c.76% of
Proposes 4Sct dividend for FY17, which is expected to be paid
sales) on the progressive recognition of ongoing development
on 23 May 2018.
projects (High Park Residences and Grandeur Park Residences)
and proceeds from the handover of completed townhouses in
Maintain BUY with TP of S$1.18; Offers attractive 4.2% yield.
Doncaster, Melbourne, which should continue to contribute
Apart from the strong earnings visibility from ongoing
positively to 1Q18 revenue.
development projects and the potential unlocking of its
undervalued hotel portfolio, we also like CES for its strong
The Hospitality division continued to gain traction during the
dividend payment record.
quarter, gaining 31.8% q-o-q to S$13.7m on the back of
higher occupancies for its key hotel assets, Park Hotel
Notably, the company has consistently paid dividends through
Alexandra (Singapore) and Grand Park Kodhipparu (Maldives),
the property cycle – even in 2008/2009, and has maintained a
which only commenced operations in June 2017. Contributions fixed dividend of 4 Scts over the last eight years.
from a newly-added asset, The Sebel Mandurah in Australia,
also helped.
Quarterly / Interim Income Statement (S$m)
FY Dec
Revenue
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
4Q2016
250
3Q2017
209
4Q2017
256
% chg yoy
% chg qoq
2.4
22.4
(204)
(174)
(204)
(0.1)
17.2
45.7
35.1
52.1
14.0
48.5
(10.4)
(4.8)
(21.5)
106.9
349.8
35.3
30.3
30.6
(13.4)
1.0
0.0
0.0
0.0
-
-
0.0
0.02
0.39
nm
nm
(4.7)
(5.9)
(4.8)
(1.0)
18.1
0.0
0.0
0.0
-
-
Pre-tax Profit
30.6
24.5
26.2
(14.3)
7.1
Tax
(7.7)
(5.7)
(4.5)
(41.0)
(21.2)
0.0
(4.7)
(7.2)
nm
53.9
Net Profit
22.9
14.0
14.5
(36.6)
3.5
Net profit bef Except.
22.9
14.0
14.5
(36.6)
3.5
EBITDA
37.2
32.9
35.5
(4.4)
7.9
Gross Margins
18.3
16.8
20.4
Opg Profit Margins
14.1
14.5
12.0
Net Profit Margins
9.2
6.7
5.7
Minority Interest
Margins (%)
Source of all data: Company, DBS Bank
Company Guide
Chip Eng Seng
CRITICAL DATA POINTS TO WATCH
FY19F Potentially a Banner Year for Property Development
Growing landbank signals earnings potential beyond 2021.
Beyond the existing development projects, we believe that CES’
unutilised landbank is indicative of the group’s longer-term
earnings potential and cash flow generation capability. While
the majority of CES’ landbank currently lies in Australia, we are
comforted by the group’s recent moves to replenish its
Singapore landbank.
We believe that both the Woodleigh and Changi land plots,
which are slated for launch in 2H18 and 1H19 respectively,
could add more than 1,000 new units for sale, with an
estimated combined GV of close to S$1.5 bn.
Net construction order book estimated at S$560m. CES’
construction revenues are mainly derived from Singapore public
housing, public transport infrastructure, and private residential
projects. While local construction outlook still appears
favourable at this juncture, the extent to which CES is able to
truly benefit from these positive trends hinges upon the success
and viability of its tenders. Following its recent S$168m contract
win in Jan 2018, we estimate CES’ construction order book to
be closer to S$560m (vs S$397.1m at end-4Q17).
Recurring income pool to see further boost on steady expansion
in Hotels and Investments portfolio. Over the years, CES has
been increasingly active in the management of its hotel and
investment portfolio, resulting in a growing asset base (to c.9
properties at end-FY17) and higher recurring income.
Revenue (S$ m)
1,000
912.7
800
571.7
600
400
347.5
411.7
FY15
FY16
492.5
200
0
FY17
FY18F
Recent Acquisitions to Boost Recurring Income
70
58.5
60
Revenue (S$ m)
Critical Factors
Substantial proportion of ongoing developments pre-sold ahead
of completion. The progressive sale and revenue recognition
from six available-for-sale development properties provides
earnings visibility over the next few years. Recent launches have
been well received. As at 31 Dec 2017, a substantial proportion
of units at ongoing developments were pre-sold ahead of their
completion – at least 87.5% for Grandeur Park Residences
(which was only launched in March 2017) to 100% for High
Park Residences (a collaboration between CES, Heeton Holdings,
and KSH Holdings).
62.0
48.7
50
40
30
FY19F
38.0
23.1
20
10
0
FY15
FY16
FY17
FY18F
FY19F
RNAV of S$1.88 and SOTP-based TP of S$1.18
B re a kd o wn o f R NAV
I n ve s tme n t Pro p e rti e s
Investment Properties (Revalued)
less book value
Surplus / Deficit
O M V ($ m)
320
-320
0
De ve l o p me n t Pro p e rti e s
NPV of Development Profits
230
With the recent addition of 4.5-star The Sebel Mandurah
(purchase includes strata restaurant property) in Nov 2017 and
a Grade-A office building at 205 Queen Street, Auckland through a 50%-joint venture with Roxy-Pacific, we estimate that
CES’ recurring income base would see a 20% boost y-o-y to
c.S$58.5m in FY18F.
Ho te l O p e ra ti o n s
less book value (Hotels + Assoc)
521
-355
Surplus / Deficit
166
B o o k NAV
770
This would represent approximately 6.7% of consolidated
revenue, up from 5.1% in FY16. Further acquisitions, including
the completion of its proposed acquisition of Mercure & Ibis
Styles Grosvenor Hotel in Adelaide, could provide more upside.
Total Shares
R NAV
R NAV / Sh a re (S$ )
1 ,1 6 6
621
1 .8 8
Discount
45%
Di s c o u n te d R NAV / Sh a re (S$ )
1 .0 3
SO TP Va l u a ti o n
S$
Discounted RNAV / Share (S$)
1.03
Value of Construction Business / Share
0.15
SO TP-b a s e d TP (S$ ):
Source: Company, DBS Bank
1 .1 8
Company Guide
Chip Eng Seng
Appendix 1: A look at Company's listed history – what drives its share price?
Prior to May 2015, CHIP SP’s share price was mainly driven by NAV growth
Last Price vs NAVPS (S$)
1.5
Mar 2017:
Sentiment lifted on
property curb
relaxation measures
Correlation: + 0.786
Aug 2014: JV acquired
178,724sqft of land at
Fernvale Road (Singapore)
1.1
Apr - Aug 2015:
Sector-wide selldown on macro
weakness
Oct 2016: JV
acquires Maldivian
resort
Jun 2013: Award of
S$165m HDB contract
July 2017: JV
acquired 210,404
sqft of land at
Woodleigh Lane
0.7
Nov/Dec 2013: Acquired
28,002sqm of landbank in
Doncaster and investment
property in Melbourne
Sep 2013: Award of
S$103.8m HDB contract
0.3
Oct-12
Oct-13
Feb 2016: Acquired 24,394
sqm land parcel at New Upper
Changi Road (Singapore)
Oct-14
Oct-15
CHIP SP Equity
Jan 2017: M&A
potential given
cheap valuations
Oct-16
Oct-17
NAVPS
Source: DBS Bank, Bloomberg Finance L.P.
Strong Historical Correlation with SGXREDO Index
1.2
Little Correlation with Quarterly Earnings Performance
1500
1.2
0.8
1000
0.8
0.4
500
0.4
Correlation: +0.732
0.5
0.4
0.3
0.2
0.1
0
Oct-14
Oct-15
CHIP SP Equity (LHS)
Oct-16
0
Oct-17
SGXREDO Index (RHS)
Source: DBS Bank, Bloomberg Finance L.P.
0
Oct-14
Oct-15
Oct-16
T12M EPS (RHS)
Source: DBS Bank, Bloomberg Finance L.P.
0
Oct-17
CHIP SP Equity (LHS)
Company Guide
Chip Eng Seng
Balance Sheet:
Net gearing could rise from 0.9x in FY16 to c.2.2x following
recent en-bloc and land tender wins. While this appears high at
first look, successful sale of the Woodleigh site and Changi
Garden will alleviate any potential concerns from its alleviated
gearing level.
Leverage & Asset Turnover (x)
Share Price Drivers:
Acquisition of further landbank and/or a fourth hotel asset at a
reasonable price.
Potential transactions in Singapore hotel space could spark
revaluation of CES’s Park Hotel Alexandra. On the back of
strong transaction velocity in the office sector, investor attention
has been moving to the hotel sector. Given robust demand for
hotel assets in Singapore, we believe the potential realisable
market valuation for Park Hotel Alexandra would be c. S$850 a
key (when pegged to peers’ average) or close to S$376m vs
current book value of c.S$210m.
Capital Expenditure
Key Risks:
Weaker demand for private residential property across CES’ key
markets of Singapore and Australia could impact the success of
its future launches significantly.
ROE (%)
Keen competition across Property Development and
Construction segments. Judging by the recent spike in en-bloc
tenders at record sale prices and heightened competition for
landbank, land prices are expected to rise further. This could
impact CES’ ability to replenish its landbank (at a reasonable
price), which is imperative for future profitability and growth.
Meanwhile for the construction business, we note that EBIT
margins have come off over the years and remain watchful of
the competitive landscape in the local construction sphere as
this could lead to more aggressive bidding among contractors
and ultimately, compression of margins.
Forward PE Band (x)
Possible equity fund-raising to pare down debt. We project that
net gearing will rise to 2.2x over the next two years on the back
of a rise in landbanking activity, which are primarily covered by
loans. We believe that the company could potentially look at
equity fund-raising ahead to pare down gearing to a more
sustainable level.
PB Band (x)
Company Background
Founded in the 1960s as a construction company, Singaporebased Chip Eng Seng Corporation (CES) has expanded its scope
and scale over the past five decades, and has gradually
diversified into property development, investments, and
hospitality businesses.
Source: Company, DBS Bank
Company Guide
Chip Eng Seng
Segmental Breakdown
FY Dec
Revenues (S$m)
Property Development
Construction
Hotel Operations
Investment Properties
Others
Total
Income Statement (S$m)
FY Dec
Revenue
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
Net Profit before Except.
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins & Ratio
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
Source: Company, DBS Bank
2015A
2016A
2017A
2018F
2019F
347
306
14.1
8.97
0.10
676
412
298
27.4
10.6
0.06
748
572
239
38.6
10.1
0.0
860
492
253
42.9
10.4
0.0
799
913
258
46.2
10.7
0.0
1,228
2015A
2016A
2017A
2018F
2019F
676
(515)
161
(81.0)
80.4
0.0
1.02
(13.9)
0.0
67.6
(10.3)
5.74
0.0
63.0
63.0
87.5
748
(602)
146
(54.3)
92.2
0.0
(0.7)
(15.4)
0.0
76.1
(24.4)
(16.0)
0.0
35.7
35.7
98.6
860
(707)
153
(62.0)
90.5
0.0
0.58
(20.9)
0.0
70.2
(20.3)
(14.4)
0.0
35.5
35.5
102
799
(653)
146
(54.3)
91.9
0.0
5.12
(29.8)
0.0
67.2
(21.5)
(13.9)
0.0
31.7
31.7
108
1,228
(985)
243
(95.0)
147
0.0
5.12
(31.6)
0.0
121
(38.7)
(23.9)
0.0
58.3
58.3
164
(38.8)
(73.6)
(74.1)
(77.8)
10.6
12.6
14.6
(43.3)
14.9
3.6
(1.8)
(0.5)
(7.1)
5.8
1.5
(10.6)
53.7
51.4
60.5
83.7
23.9
11.9
9.3
8.5
3.2
2.8
39.6
5.8
19.6
12.3
4.8
4.7
1.7
1.1
69.6
6.0
17.7
10.5
4.1
4.6
1.4
0.6
70.0
4.3
18.3
11.5
4.0
4.1
1.1
0.1
78.2
3.1
19.8
12.0
4.7
7.3
2.0
1.0
42.6
4.7
Company Guide
Chip Eng Seng
Quarterly / Interim Income Statement (S$m)
FY Dec
4Q2016
1Q2017
Revenue
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Net Profit
Net profit bef Except.
EBITDA
2Q2017
3Q2017
4Q2017
250
(204)
45.7
(10.4)
35.3
0.0
0.0
(4.7)
0.0
30.6
(7.7)
0.0
22.9
22.9
37.2
182
(153)
29.2
(11.8)
17.4
0.0
0.19
(4.7)
0.0
12.9
(2.6)
(4.2)
6.11
6.11
19.4
213
(176)
36.1
(23.9)
12.2
0.0
0.02
(5.6)
0.0
6.66
(1.6)
(4.2)
0.82
0.82
14.4
209
(174)
35.1
(4.8)
30.3
0.0
0.02
(5.9)
0.0
24.5
(5.7)
(4.7)
14.0
14.0
32.9
256
(204)
52.1
(21.5)
30.6
0.0
0.39
(4.8)
0.0
26.2
(4.5)
(7.2)
14.5
14.5
35.5
64.7
95.3
97.2
152.1
(27.3)
(47.9)
(50.8)
(73.4)
16.9
(25.8)
(29.8)
(86.6)
(1.6)
129.1
148.6
1,615.0
22.4
7.9
1.0
3.5
18.3
14.1
9.2
16.1
9.6
3.4
17.0
5.7
0.4
16.8
14.5
6.7
20.4
12.0
5.7
2015A
2016A
2017A
2018F
2019F
Net Fixed Assets
Invts in Associates & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
225
12.1
298
442
625
249
54.1
1,907
220
6.36
302
482
1,128
81.2
13.7
2,232
324
6.94
341
258
1,689
89.7
19.2
2,728
463
12.1
341
186
1,714
79.4
19.2
2,816
602
17.2
341
269
1,603
122
19.2
2,974
ST Debt
Creditor
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
120
117
79.6
738
109
748
(5.3)
1,907
234
86.4
81.6
937
117
766
10.7
2,232
8.74
58.5
95.3
1,524
233
774
34.3
2,728
8.74
66.8
104
1,574
233
781
48.2
2,816
8.74
101
121
1,624
233
815
72.1
2,974
Non-Cash Wkg. Capital
Net Cash/(Debt)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Asset Turnover (x)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Net Debt/Equity ex MI (X)
Capex to Debt (%)
Z-Score (X)
733
(416)
125.6
81.5
555.5
0.3
4.3
2.2
0.6
0.6
2.3
NA
1,055
(689)
80.6
62.3
538.2
0.4
4.2
1.4
0.9
0.9
(0.2)
NA
1,644
(1,275)
36.3
38.0
738.4
0.3
12.7
2.1
1.6
1.6
7.7
NA
1,642
(1,396)
38.6
35.6
968.1
0.3
11.1
1.5
1.7
1.8
9.5
NA
1,522
(1,364)
30.0
31.4
621.6
0.4
8.7
1.7
1.5
1.7
9.2
NA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
Balance Sheet (S$m)
FY Dec
Source: Company, DBS Bank
Company Guide
Chip Eng Seng
Cash Flow Statement (S$m)
FY Dec
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
Opg CFPS (S cts)
Free CFPS (S cts)
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Carmen Tay
Derek TAN
2015A
2016A
2017A
2018F
2019F
67.6
6.09
(27.2)
(1.0)
255
(0.4)
300
(20.0)
(1.1)
(1.4)
4.52
0.0
(17.9)
(37.4)
(80.8)
(6.3)
0.0
(124)
(0.2)
157
7.24
44.9
76.1
7.09
(34.2)
0.66
(292)
(14.3)
(257)
2.28
(2.5)
8.20
1.07
0.0
9.03
(24.8)
312
0.05
0.0
287
(0.2)
39.1
5.68
(41.0)
70.2
11.1
(22.2)
(0.6)
(524)
(25.9)
(492)
(118)
72.0
(28.6)
0.30
(0.1)
(74.2)
(24.8)
364
3.29
0.0
342
(0.1)
(224)
5.25
(98.1)
67.2
11.1
(12.8)
(5.1)
(6.8)
0.0
53.6
(150)
0.0
0.0
0.0
0.0
(150)
(24.8)
50.0
0.0
0.0
25.2
(0.1)
(71.4)
9.73
(15.5)
121
11.1
(21.5)
(5.1)
102
0.0
208
(150)
0.0
0.0
0.0
0.0
(150)
(24.8)
50.0
0.0
0.0
25.2
(0.1)
82.9
17.0
9.31
Company Guide
Chip Eng Seng
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 14 Feb 2018 09:25:19 (SGT)
Dissemination Date: 14 Feb 2018 10:12:29 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated
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redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
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Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
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UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
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Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
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commodity referred to in this report.
Company Guide
Chip Eng Seng
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
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primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the
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COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates do not
have a proprietary position in the securities recommended in this report as of 31 Jan 2018.
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Report.
Compensation for investment banking services:
3.
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4.
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5.
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Disclosure of previous investment recommendation produced:
6.
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1
An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of
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2
Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a
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Singapore Company Guide
Cityneon Holdings
Refer to important disclosures at the end of this report
Version 10 | Bloomberg: CITN SP | Reuters: CNHL.SI
DBS Group Research . Equity
28 Feb 2018
BUY
Marvelous transformation
Last Traded Price ( 28 Feb 2018): S$1.04 (STI : 3,517.94)
Price Target 12-mth: S$1.45 (39% upside)
Analyst
Lee Keng LING +65 6682 3703 leekeng@dbs.com
What’s New
•
Significant surge in FY17 revenue and net profit, partly
due to acquisition of Jurassic World
•
Moving up the value chain for the traditional business
•
Explore M&A opportunities; a fourth IP
•
Maintain BUY; TP S$1.45
FY17 a transformation year. With the acquisition of Jurassic
World in August last year, Cityneon is now on a stronger and
firmer growth path. Together with the two existing Intellectual
Property rights (IPs) – Avengers and Transformers and the
traditional business, Cityneon reported record high revenue that
broke the S$100m mark and 163% jump in net profit to
S$17.4m. We continue to expect Cityneon to deliver explosive
FY16-19F EPS CAGR growth of 165%. Trading at a low PE-togrowth ratio of 0.2x FY18F earnings, Cityneon is attractive to
investors seeking unique ideas in the entertainment industry.
Where we differ: Assuming more travelling sets. We assume
nine exhibition sets for FY18F and FY19F (five for Avengers, two
each for Transformers and Jurassic World), vs consensus of
seven to eight sets for FY18F and FY19F.
Price Relative
S$
Relative Index
1.3
Potential catalyst: M&A, a fourth IP, expanding project pipeline,
focus on higher-margin projects for the traditional business.
680
1.1
580
0.9
480
0.7
380
0.5
280
0.3
180
0.1
Feb-14
Feb-15
Feb-16
Cityneon Holdings (LHS)
Forecasts and Valuation
FY Dec (S$ m)
Revenue
EBITDA
Pre-tax Profit
Net Profit
Net Pft (Pre Ex.)
Net Pft Gth (Pre-ex) (%)
EPS (S cts)
EPS Pre Ex. (S cts)
EPS Gth Pre Ex (%)
Diluted EPS (S cts)
Net DPS (S cts)
BV Per Share (S cts)
PE (X)
PE Pre Ex. (X)
P/Cash Flow (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
Earnings Rev (%):
Consensus EPS (S cts):
Other Broker Recs:
2016A
96.8
12.4
7.33
6.54
6.54
650.6
2.67
2.67
577
2.67
0.0
28.3
38.9
38.9
132.8
21.0
0.0
3.7
0.1
11.0
80
Feb-18
Feb-17
Relative STI (RHS)
2017A
117
30.1
20.2
17.4
17.4
165.5
7.10
7.10
166
7.10
0.0
33.9
14.7
14.7
nm
10.8
0.0
3.1
0.9
22.8
2018F
140
42.5
31.2
24.7
24.7
42.6
10.1
10.1
43
10.1
0.0
44.0
10.3
10.3
6.2
7.1
0.0
2.4
0.4
26.0
2019F
154
48.6
36.8
29.6
29.6
19.6
12.1
12.1
20
12.1
0.0
56.1
8.6
8.6
6.8
5.7
0.0
1.9
0.2
24.2
6.50
B: 4
9.40
S: 0
11.3
H: 0
Source of all data on this page: Company, DBS Bank,
Bloomberg Finance L.P
ed: TH / sa:YM, PY, CS
Valuation:
Maintain BUY; TP S$1.45. Our earnings forecast is based on
nine exhibition sets in total for FY18F and FY19F. We have
assumed the construction of an additional Jurassic World
travelling set in FY18F. Our target price of S$1.45 is based on
PE valuation peg of 14.4x, which is at a 20% discount to
peers’ average PE of 18x on FY18F earnings.
Key Risks to Our View:
VHE’s limited track record. Victory Hill Exhibitions (VHE) was
formed in 2012 and its first exhibition was held in New York in
2014.
Earnings dependent on number of visitors, especially for the
permanent set in Las Vegas.
At A Glance
Issued Capital (m shrs)
Mkt. Cap (S$m/US$m)
Major Shareholders (%)
Lucrum1 Investment Limited
Free Float (%)
3m Avg. Daily Val (US$m)
ICB Industry : Consumer Services / Media
245
254 / 192
69.0
31.1
0.79
Company Guide
Cityneon Holdings
WHAT’S NEW
FY17 a record-high year
RESULTS HIGHLIGHTS
Significant surge in FY17 revenue and net profit: FY17
revenue broke the S$100m mark, rising 20.7% y-o-y to
S$116.7m, in line with our forecast. Net profit jumped
162.9% to S$17.4m, 6% above our estimates. Part of the
growth is due to the contribution from the newly acquired
third intellectual property rights (IPR), Jurassic World - The
Exhibition in August 2017. Together with the other two IPRs
(Disney’s Marvel’s Avengers S.T.A.T.I.O.N. and Hasbro’s
Transformers), Cityneon had a total of six exhibition sets in
2017.
IPR accounts for 70.5% of total gross profit. Revenue for the
IPR surged 187%, mainly derived from contracts entered
during the year including the opening of Marvel's Avengers
S.T.A.T.I.O.N. Exhibitions in Taipei, Beijing and Russia as well
as the opening of Transformers Exhibition in Chongqing,
China. The IPR segment accounts for 43.5% of the total
revenue for the group but 70.5% of gross profit, due to its
high margin of 88.7%. Hence an improvement was seen in
the aggregate gross profit margins from 36.0% in FY16 to
53.5% in FY17.
Timely release of sequel movies from the franchises in 2018.
There are several movies from the franchises on which
Cityneon has based its exhibits, set to be released in 2018.
There are three Marvel movies planned, and one each from
the Transformers and Jurassic World franchise. The timing of
these movie releases augurs well for the group’s IPR business.
Moving up the value chain for the traditional business.
Cityneon will continue to expand its full suite of “Design &
Build” services, especially for the upcoming 2020 World Expo
in Dubai, to continue its success in the previous World Expos
in Shanghai and Milan.
OUTLOOK
Exploring M&A opportunities; a fourth IP. Cityneon has put in
place its financing needs and will continue to explore new
business development opportunities including M&A activities.
It will continue to align its traditional core business with that
of the IPR business, especially in the area of creative and
design.
For the IPR segment, besides investing in new exhibition
travelling sets for its three existing IPs, Cityneon is also
seeking to secure a fourth IP to take the group to greater
heights.
EARNINGS & RECOMMENDATION
Maintain BUY; TP S$1.45. No changes to our earnings
forecasts based on nine exhibition sets in total for FY18F and
FY19F (five for Avengers, two each for Transformers and
Jurassic World). We have assumed the construction of an
additional Jurassic World travelling set in FY18F. Our target
price of S$1.45 is based on PE valuation peg of 14.4x, which
is at a 20% discount to peers’ average PE of 18x on FY18F
earnings.
Company Guide
Cityneon Holdings
Quarterly / Interim Income Statement (S$m)
FY Dec
Sales
Cost of Goods Sold
Gross Profit
Other Operating Expenses
2H16
1H17
2H17
% chg yoy
% chg qoq
50.4
49.7
67.0
32.9
34.8
(33.6)
(26.5)
(26.4)
(21.4)
(0.1)
16.8
23.3
40.6
141.4
74.4
(16.3)
(14.5)
(27.6)
69.2
90.6
Non-Operating Income
0.0
0.0
0.0
-
-
Interest Income
0.0
0.0
0.0
-
-
Interest Expense
(0.2)
(0.5)
(1.6)
600.0
215.4
Share of Associates' or JV Income
4.3
(0.0)
(0.1)
(0.1)
182.4
Exceptional Gains/(Losses)
0.0
0.0
0.0
-
-
Pretax Profit
1.6
8.6
11.6
622.9
35.6
Tax
0.3
(0.8)
(1.9)
n.m.
129.3
(0.1)
0.0
(0.0)
(62.0)
(370.0)
1.8
7.7
9.6
423.8
24.8
Minority Interests
Net Profit
Margins
Gross Margins (%)
33.3%
46.8%
60.5%
Pretax Profit Margins (%)
3%
17%
17%
Net Profit Margins (%)
4%
16%
14%
Source of all data: Company, DBS Bank
Company Guide
Cityneon Holdings
Avengers S.T.A.T.I.O.N.
CRITICAL DATA POINTS TO WATCH
Critical Factors
Number of IPs secured. To date, Cityneon has secured three IP
rights – with Marvel Entertainment to use Avengers
S.T.A.T.I.O.N. till 2024, with HASBRO Studios for the
Transformers franchise till 2023 and the latest Jurassic World –
The Exhibition from Universal Studios till 2027. With more IP
rights, Cityneon would be able to build various exhibition sets to
cater to different demand.
Scalable business model. The first sets for Avengers and
Transformers had each cost around US$8-9m to build, but
subsequent sets had cost only about one-third of the original
cost per set. Though the cost for Jurassic World is higher,
subsequent sets are also expected to be lower. Thus, Cityneon is
able to achieve operational leverage with every subsequent set
built. We believe that more sets would be needed to fulfil the
overwhelming demand. We assume nine sets for FY18F and
FY19F (five for Avengers, two each for Transformers and
Jurassic World), up from a total of six sets in FY17.
Transformers
The nine exhibition sets would enable Cityneon to hold
exhibitions in various parts of the world. Only the Las Vegas set
in the US is permanent, while the rest are travelling sets, and
will be moved from one location to another after the exhibition
ends, which usually lasts for a few months. For every location or
project, Cityneon would be able to book revenues that include
licensing fees, minimum guarantees from the operator and also
merchandise sales. Assuming that an exhibition lasts for about
3-4 months, theoretically, a set can be used 2-3 times per year
based on a back-to-back schedule.
Project pipeline. Transformers in China was launched in
December 2017. Besides China, VHE also intends to venture
into Europe, US and the rest of Asia with both the Avengers
and Transformer sets. For the newly acquired Jurassic World set,
the schedule is full till 2019. It is slated to tour another two
cities in the US after Chicago in 2018, before it moves on to
Europe and Asia. Cityneon is planning to build a second
travelling set in 2018.
Manageable execution risk with upfront licensing fees.
Execution risk is minimal for the travelling exhibits as the bulk of
the risk is borne by the operator. There is operating risk for only
the permanent set in Las Vegas.
Jurassic World – The Exhibition
Project pipeline and assumption
Avengers
S.T.A.T.I.O.N
A1*
• Las Vegas
A2
• China till end
2019
A3
• Russia, Moscow:
Nov 17
• Asia
• Europe
A4
• Australia,
Melbourne: Mar
18
A5
• Asia: 3 years
Transformers
Jurassic Park
TF1
• China: Dec 2017 –
Dec 2019
TF2
• Asia: 3 years
JW1
• Chicago: 26 May
2017 – 7 Jan 2018
JW1
• 2 cities in USA
Source: Company, DBS Bank
JW1
• Europe / Asia
JW2
• Europe
Company Guide
Cityneon Holdings
Appendix 1: A look at Company's listed history – what drives its share price?
Source: DBS Bank; Bloomberg Finance L.P.
Company Guide
Cityneon Holdings
Balance Sheet:
Expansion should increase debt levels, but still below 1x net
debt/equity. Cityneon has secured short-term debt of ~S$66m to
fund the acquisition of Jurassic World, building of new exhibits and
upgrading of existing sets. Another ~S$23m long-term debt is for the
acquisition of the office property in Singapore. Despite this, the
group is expected to remain in a <1x net debt/equity position,
barring other unexpected capex outlays.
Capital Expenditure
S$m
45.0
40.0
35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0
2015A
Share Price Drivers:
Securing new exhibition locations. There are no limits on locations
for its IP rights. Cityneon can venture into any part of the world with
the three existing franchises. Though it makes more business sense to
target the larger cities first, VHE has vast opportunities as there are
>30 large cities globally, each with a population of >10m.
2016A
2017A
2018F
2019F
Capital Expenditure (-)
ROE (%)
25.0%
20.0%
15.0%
Moving up the value chain for the traditional business. For the
traditional business, the focus would be on the theme park building
projects, which generally command higher margins. Cityneon has
already established a successful track record with the completion of
the multi-million international theme park project in Shanghai, which
gives it a competitive advantage to secure other theme park-related
projects. It now aims to move up the value chain, instead of just
being a contractor.
Key Risks:
Limited track record for VHE. VHE was formed in 2012 and its first
exhibition was held in New York in 2014.
10.0%
5.0%
0.0%
2015A
2016A
2017A
2018F
2019F
Forward PE Band (x)
(x)
49.8
39.8
+2sd: 31.1x
29.8
+1sd: 23.2x
19.8
Avg: 15.4x
Earnings dependent on number of visitors. The permanent set in Las
Vegas is dependent on the number of visitors. For the travelling sets,
Cityneon will usually receive upfront payment fees from operators to
use its exhibits, but a higher number of visitors would enable the
group to generate higher royalties in excess of the minimum
guarantees on royalties. Furthermore, ancillary sales like merchandise,
photos, food & beverage are also dependent on the number of
visitors.
-0.2
Feb-14
-1sd: 7.6x
Feb-15
Feb-16
Feb-18
Business Model
Las Vegas (permanent sets)
Sources of revenue:
Ticket sales (incl.
processing charges)
Merchandise sales / Photo
ops
Sponsorship revenue
Naming rights
Travelling sets (operated by partners)
Sources of revenue:
20% cut of ticket sales
Minimum
guarantees
reduce risk
of nonperformance
Sources of expenditure:
Depreciation of the set
COGS (merchandise)
Company Background
Cityneon has evolved to become a creator of innovative and
interactive exhibitions, focusing on creating captivating cutting-edge
content, and delivering engaging and interactive exhibitions to
audiences. To date, it has secured three IP rights – with Marvel
Entertainment to use Avengers S.T.A.T.I.O.N. till 2024, HASBRO
Studios for the Transformers franchise till 2023, and Universal Studios
for Jurassic World – The Exhibition, expiring in 2027.
Feb-17
Upfront license fee from
partner for usage of set
Merchandise (sales to
partner + cut of final
sales to customer)
Sources of expenditure:
Depreciation of the set
COGS (merchandise)
Rental expense
SG&A/ other opex
(minimal)
SG&A/ other opex
Royalties to
Marvel/Hasbro (10% of
ticket sales)
Royalties to Marvel/Hasbro
(10% of net ticket sales)
Risk-reward
profile
Risk-reward profile:
Cityneon
takes
on execution
Cityneon takes
on execution
risk. risk.
Lower margin
(DBS
estimate
of 25%of
Lower
margin
(DBS
estimate
net margin)net
but higher
nominal
mid-teen
margin)
but take
higher
nominal take.
Source: Company, DBS Bank
Half of the 20% goes to Marvel or Hasbro
Low free float of c.30%. Cityneon shares are tightly held, with a
free float of about 30%. Post the general offer, Lucrum1, which is
majority-owned by Chinese parties and led by Executive Chairman &
Group CEO Mr Ron Tan, holds 69%. Ron Tan has a 15.5% stake in
Lucrum1.
9.8
Risk-reward
profile
Risk-reward profile:
No
execution
partner
runs the
No execution
risk;risk;
partner
runs the
operations
operations.
High margins
(DBS(DBS
estimate
25-35% 30High
margins
estimates
net margin) but lower nominal take
40% net margin) but lower
nominal take.
Company Guide
Cityneon Holdings
Segmental Breakdown
FY Dec
2015A
2016A
2017A
2018F
2019F
96.5
0.0
75.0
21.7
79.7
37.1
80.7
59.5
84.5
69.6
Total
Net Profit (S$m)
Old Business
Victory Hill Exhibitions
(VHE)
96.5
96.8
117
140
154
0.87
0.0
(0.5)
7.07
7.43
9.93
5.78
19.0
7.25
22.4
Total
Net Profit Margins (%)
Old Business
Victory Hill Exhibitions
(VHE)
0.87
6.54
17.4
24.7
29.6
0.9
N/A
(0.7)
32.6
9.3
26.8
7.2
31.9
8.6
32.1
0.9
6.8
14.9
17.6
19.2
2015A
2016A
2017A
2018F
2019F
96.5
(73.2)
23.3
(22.2)
1.15
0.0
0.02
(0.4)
0.0
0.79
0.04
0.04
0.0
0.87
0.87
2.63
96.8
(62.0)
34.8
(26.7)
8.09
0.0
(0.1)
(0.6)
0.0
7.33
(0.7)
(0.1)
0.0
6.54
6.54
12.4
117
(52.9)
63.8
(41.4)
22.4
0.0
(0.2)
(2.1)
0.0
20.2
(2.8)
0.0
0.0
17.4
17.4
30.1
140
(69.3)
70.9
(38.1)
32.7
0.0
0.0
(1.5)
0.0
31.2
(6.1)
(0.4)
0.0
24.7
24.7
42.5
154
(73.8)
80.3
(42.0)
38.3
0.0
0.0
(1.5)
0.0
36.8
(6.8)
(0.4)
0.0
29.6
29.6
48.6
23.7
(34.4)
(58.8)
(62.9)
0.3
371.4
606.2
650.6
20.7
142.5
177.6
165.5
20.1
41.1
45.8
42.6
9.9
14.5
17.0
19.6
24.1
1.2
0.9
2.3
1.2
1.0
0.0
3.1
36.0
8.4
6.8
11.0
6.3
7.3
0.0
12.6
54.7
19.2
14.9
22.8
9.7
10.5
0.0
10.7
50.5
23.3
17.6
26.0
10.3
11.4
0.0
22.1
52.1
24.8
19.2
24.2
11.5
12.1
0.0
25.9
Revenues (S$m)
Old Business
Victory Hill Exhibitions
(VHE)
Total
Income Statement (S$m)
FY Dec
Revenue
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
Net Profit before Except.
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins & Ratio
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
Source: Company, DBS Bank
Full contribution from
Jurassic World
Higher contribution
from VHE with the
acquisition of the third
IP
Company Guide
Cityneon Holdings
Quarterly / Interim Income Statement (S$m)
FY Dec
2H15
1H16
2H16
1H17
2H17
Sales
Cost of Goods Sold
Gross Profit
Other Operating Expenses
Non-Operating Income
Interest Income
Interest Expense
Share of Associates' or JV
Income
Exceptional Gains/(Losses)
Pretax Profit
Tax
Minority Interests
Net Profit
46.3
(28.3)
18.0
(12.2)
0.0
0.00
(0.4)
(0.1)
0.0
5.7
(1.0)
0.0
4.7
50.4
(33.6)
16.8
(16.3)
0.0
0.00
(0.2)
(0.0)
0.0
1.6
0.3
(0.1)
1.8
49.7
(26.5)
23.3
(14.5)
0.0
0.00
(0.5)
(0.1)
0.0
8.6
(0.8)
0.0
7.7
67.0
(26.4)
40.6
(27.6)
0.0
0.00
(1.6)
(0.1)
0.0
11.6
(1.9)
(0.0)
9.6
13.8
88.2
n.m.
(9.6)
22.3
16.2
7.3
29.5
64.3
32.9
141.4
423.8
38.8%
12%
10%
33.3%
3%
4%
46.8%
17%
16%
60.5%
17%
14%
2015A
2016A
2017A
2018F
2019F
Net Fixed Assets
Invts in Associates & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
16.0
0.38
10.7
24.3
0.19
26.0
9.95
87.6
43.4
0.26
10.4
22.6
0.73
28.7
13.9
120
80.2
0.07
39.3
17.9
0.68
75.9
23.6
238
86.9
0.0
37.9
43.7
0.39
49.9
23.6
242
93.1
0.0
36.5
65.9
0.42
54.9
23.6
274
ST Debt
Creditor
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
11.7
23.8
0.97
0.0
1.10
49.6
0.45
87.6
28.2
19.6
1.72
0.04
0.81
69.3
0.31
120
66.5
44.6
1.47
23.0
18.9
82.9
0.30
238
66.5
19.1
6.63
23.0
18.9
108
0.65
242
66.5
20.4
7.31
23.0
18.9
137
1.03
274
11.4
12.6
84.4
98.2
1.3
1.3
1.7
1.4
CASH
CASH
38.8
5.2
22.0
(5.7)
103.2
137.6
2.9
0.9
1.3
1.0
0.1
0.1
104.0
4.4
54.1
(71.6)
163.5
260.3
5.7
0.7
1.0
0.8
0.9
0.9
47.4
4.0
48.2
(45.9)
163.7
195.3
3.3
0.6
1.3
1.0
0.4
0.4
16.8
4.0
51.2
(23.6)
124.1
113.6
2.3
0.6
1.5
1.3
0.2
0.2
16.8
4.0
55.8
(42.1)
13.7
(12.5)
0.0
0.02
(0.2)
0.0
0.0
1.5
0.0
0.0
1.6
Growth (y-o-y)
Revenue Gth (%)
Gross Profit Gth (%)
Net Profit Gth (%)
Margins
Gross Margins (%)
Pretax Profit Margins (%)
Net Profit Margins (%)
Balance Sheet (S$m)
FY Dec
Non-Cash Wkg. Capital
Net Cash/(Debt)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Asset Turnover (x)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Net Debt/Equity ex MI (X)
Capex to Debt (%)
Z-Score (X)
Source: Company, DBS Bank
Debt to fund acquisition of
Jurassic World, building of
new exhibits and upgrading
of existing sets
Acquisition of office
property
Company Guide
Cityneon Holdings
Cash Flow Statement (S$m)
FY Dec
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
Opg CFPS (S cts)
Free CFPS (S cts)
2015A
2016A
2017A
2018F
2019F
0.79
1.47
(0.2)
0.0
0.80
0.07
2.89
(4.5)
(1.1)
(0.4)
0.0
(10.0)
(16.0)
(0.9)
(3.1)
15.7
0.87
12.6
0.85
0.39
0.95
(0.7)
7.33
4.44
(0.4)
0.12
(9.7)
0.18
1.92
(29.4)
0.0
0.0
0.0
(0.9)
(30.3)
0.0
15.8
12.5
(0.6)
27.7
0.16
(0.5)
4.76
(11.2)
20.2
7.84
(1.0)
0.19
(43.4)
5.12
(11.0)
(42.4)
0.0
0.0
0.0
0.15
(42.3)
0.0
39.2
0.0
11.8
51.0
(1.0)
(3.4)
13.2
(21.9)
31.2
9.73
(1.0)
0.0
0.75
0.0
40.7
(15.0)
0.0
0.0
0.0
0.0
(15.0)
0.0
0.0
0.0
0.0
0.0
0.0
25.7
16.3
10.5
36.8
10.3
(6.1)
0.0
(3.7)
0.0
37.2
(15.0)
0.0
0.0
0.0
0.0
(15.0)
0.0
0.0
0.0
0.0
0.0
0.0
22.2
16.7
9.09
Assume 9 sets in total
for 2018 and 2019
Part finance acquisition
of Jurassic World and
to build new sets
Source: Company, DBS Bank
Target Price & Ratings History
S$
1.24
Closing
Pric e
1:
14 Mar 17
0.80
1.26
BUY
2:
15 May 17
0.90
1.26
BUY
3:
30 May 17
0.94
1.23
BUY
4:
21 Sep 17
1.14
1.45
BUY
4
1.14
1.04
0.94
2
3
0.84
1
0.74
Feb-17
Apr-17
Jun-17
Aug-17
Oct-17
Dec-17
Feb-18
Not e : Share price and Target price are adjusted for corporate actions.
Source: DBS Bank
Analyst: Lee Keng LING
12- mt h
T arget Rat ing
Pric e
Dat e of
Report
S.No.
Company Guide
Cityneon Holdings
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 28 Feb 2018 17:40:47 (SGT)
Dissemination Date: 28 Feb 2018 17:49:25 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated
corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)
redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or
warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without
notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific
investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees
only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial
advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit)
arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not
to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons
associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have
positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and
other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may
not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to
update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED
UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.
Company Guide
Cityneon Holdings
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s)
primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the
issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real
estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the
management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or
his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has
procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of
research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment
banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment
banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the
DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates do not
have a proprietary position in the securities recommended in this report as of 31 Jan 2018.
2.
Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research
Report.
Compensation for investment banking services:
3.
DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past
12 months for investment banking services from Cityneon Holdings as of 31 Jan 2018.
4.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document
should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced:
5.
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other
investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1
An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of
which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person
accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2
Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a
new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term
does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new
listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Singapore Company Guide
Delfi Ltd
Refer to important disclosures at the end of this report
Version 7 | Bloomberg: DELFI SP | Reuters: DELF.SI
DBS Group Research . Equity
18 Dec 2017
BUY (Upgrade from HOLD)
Position for a better year ahead
Last Traded Price ( 14 Dec 2017): S$1.43 (STI : 3,416.94)
Price Target 12-mth: S$1.80 (26% upside) (Prev S$2.26)
Analyst
Andy Sim +65 6682 3718 andysim@dbs.com
Alfie YEO +65 6682 3717 alfieyeo@dbs.com
What’s New
•
Upgrade to BUY; accumulate on hopes of a better 2018
•
Project 20% profit growth in FY18F on better
sentiment, post product rationalisation
•
Share price at 6-year low and already priced in weak
operating environment
•
Despite call upgrade, we cut our TP to S$1.80
Price Relative
S$
Relative Index
191
3.7
171
151
3.2
131
2.7
111
2.2
91
71
1.7
51
Dec-14
Dec-15
Delfi Ltd (LHS)
Forecasts and Valuation
FY Dec (US$ m)
Revenue
EBITDA
Pre-tax Profit
Net Profit
Net Pft (Pre Ex.)
Net Pft Gth (Pre-ex) (%)
EPS (S cts)
EPS Pre Ex. (S cts)
EPS Gth Pre Ex (%)
Diluted EPS (S cts)
Net DPS (S cts)
BV Per Share (S cts)
PE (X)
PE Pre Ex. (X)
P/Cash Flow (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
Earnings Rev (%):
Consensus EPS (S cts):
Other Broker Recs:
31
Dec-17
Dec-16
Relative STI (RHS)
2016A
402
54.5
39.2
26.2
28.2
83.5
5.77
6.21
84
5.77
3.12
44.4
24.8
23.1
10.9
11.7
2.2
3.2
CASH
11.8
2017F
385
46.6
34.9
23.4
23.4
(16.8)
5.17
5.17
(17)
5.17
2.86
46.4
27.7
27.7
17.1
13.5
2.0
3.1
CASH
11.4
2018F
415
53.9
41.3
28.1
28.1
19.8
6.19
6.19
20
6.19
3.41
49.8
23.1
23.1
20.0
11.6
2.4
2.9
CASH
12.9
2019F
449
63.0
49.4
33.6
33.6
19.7
7.41
7.41
20
7.41
3.70
53.8
19.3
19.3
16.5
9.8
2.6
2.7
CASH
14.3
(32)
5.4
B: 1
(30)
7.5
S: 0
N/A
8.2
H: 2
Source of all data on this page: Company, DBS Bank,
Bloomberg Finance L.P
ed: CK / sa:YM, PY
Where we differ: Worth a re-look and accumulate despite
current weak performance. Despite Delfi’s current weak
operating performance, we believe the counter is worth a relook. While the upcoming 4Q17 results, expected to be released
in Feb 2018, may not register a significant turnaround, we
believe it should show a bottoming-out trend at worst.
211
4.2
1.2
Dec-13
Thesis: Turning the corner; upgrade to BUY. Delfi’s share price is
at 6-year low and has slumped by 36% YTD on the back of its
disappointing performance. This was due to softer sentiment in
Indonesia and product-rationalisation initiatives. Looking ahead,
we believe its share price could have priced in the current
subdued situation and should improve as we move into FY18F.
This is on the back of: (i) low-base effect, coupled with expected
improvement in sentiment in 2018; (ii) nearing end of
production rationalisation efforts; and (iii) lower raw material
costs.
Potential catalyst: Better-than-expected operating performance
could set the stage for a meaningful share price recovery after a
couple of years of dismal performance. We now project
earnings growth of 20% each year in FY18F/19F, marking a
reverse from our previous forecast of profit contraction. Further
upward revision could re-rate share price.
Valuation:
Our TP drops to S$1.80 as we slash our forecasts by 32%/
30%, coupled with rolling over our PE valuations to
FY18F/19F, but still based on 26x PE, in line with regional
peers.
Key Risks to Our View:
Slower-than-expected earnings recovery. Our thesis is premised
on expectations of better prospects in 2018. A slower-thanexpected earnings recovery arising from higher raw material
costs, a weaker rupiah, investment costs, or continued erosion
in share price could render our thesis void.
At A Glance
Issued Capital (m shrs)
Mkt. Cap (S$m/US$m)
Major Shareholders (%)
Berlian Enterprises Ltd
Commonwealth Bank of Austr
Standard Life Aberdeen Plc
Free Float (%)
3m Avg. Daily Val (US$m)
ICB Industry : Consumer Goods / Food Producers
611
874 / 649
50.5
16.5
7.6
37.8
0.70
Company Guide
Delfi Ltd
WHAT’S NEW
Position for a better year ahead
Upgrade to BUY, share price at 6-year low: Despite a dismal
operating performance in 3Q17 and YTD, we believe 2018
should turn out to be a better year ahead for Delfi. As we
move into the finishing months of 2017, we advocate
accumulating the counter and are upgrading it to BUY, with a
revised TP of S$1.80.
Its share price has dipped by 36% YTD on the back of dismal
operating performance due to softer-than-expected
sentiment and the company’s product-rationalisation efforts.
Whilst we slash our forecasts by 30%-32% for FY17F/18F,
we believe operating performance should have bottomed and
looks to be on the recovery path.
We recognise that operating performance may not show a
rapid improvement in the closing quarters of 2017, but its
share price is at a 6.5-year low and with the
underperformance this year, we believe it could be time to
accumulate.
What caused the dismal performance in share price this year?
In general, its operating performance has been weak as seen
from 1Q17 to 3Q17 results. The weak performance was due
to (i) weak consumer environment in Indonesia; and (ii)
impact of the group’s ongoing production-rationalisation
exercise to remove underperforming SKUs (stock keeping
units).Thus, sales slid by 5% y-o-y in for 9M17, while net
profit came in at US$18.2m, down by 19% y-o-y. In fact, if
not for a recognition of US$4.6m gain on the back of the
divestment of 50% stake in PT Ceres Meiji Indotama
Indonesia recognised in 2Q17, 9M17 headline net profit
would have been worse. Also, 1H17 also saw a lower interim
dividend of 1.22 UScts, down from 1.36 UScts in 1H16, due
lower profits.
SKU rationalisation almost done; continued product
development.
Delfi’s share price has declined by c.32% YTD, arising from a
weaker-than-expected operating performance. Going
forward, management has indicated that its strategy to
rationalise its SKUs is almost done and is ready to continue its
trend to launch new products. That said, it will also be
cognisant of changing customer preferences and look
towards relaunching new products, although not at the rate
of 25-30 products a year seen prior to 2014.
Looking forward - improvement in sentiment in 2018.
Consumer F&B companies in Indonesia had a relatively
disappointing 2017 YTD, which possibly was due to various
factors such as a prolonged weak commodity price
environment, higher electricity tariff for households, lower
minimum wage increase, tax reform and slow government
spending. Looking ahead, our Indonesia consumer team
expects a stronger dose of fiscal stimulus that can lead to
more efforts in supporting consumers’ purchasing power
ahead of Indonesia’s presidential election (PE) in 2019. As
such, this could bode well for companies like Delfi which
derives a majority of its revenue from Indonesia.
Softer raw material costs could boost margins. In 2016,
consumer companies, particularly F&B, has benefited from
margin expansion, particularly due to the benign raw material
environment seen back in 2015. There tends to be a lagged
effect for raw material price movements. Looking into 2018,
we expect a repeat of the events in 2016 due again to the
generally subdued prices. As can be seen, the prices of several
soft commodities have decreased YTD (as of time of writing,
such as sugar (-26%), cocoa (-12%) and palm oil (-18%).
Notwithstanding the above, we remain cognisant that
packaging materials prices could chip some shine off the
benefits of soft commodities prices. Overall, we believe the
net impact should still be positive for companies like Delfi.
Upgrade to BUY; TP: S$1.80
Look towards 2018. We revise our forecasts down by 3032% to align with the YTD performance and now expect
FY17F EPS to register a contraction of -17% on the back of
lower sales, coupled with higher operating expenses. That
said, we believe the weak performance for 2017 should soon
be a thing of the past and investors should look towards the
performance in FY18F. We are projecting earnings to reverse
and post growth of 20% each year in FY18F and FY19F.
Worth a re-look. Share price at 6-year low, TP: S$1.80.
Having said all that, we believe Delfi is worth a re-look and
accumulating given its share price is at 6-year low, retreating
by 36% YTD. Delfi also has a strong distribution network
within Indonesia, and is still the market leading in chocolate
confectionery despite recent weak operating figures. We
upgrade our recommendation to BUY, from HOLD, with a
revised TP of S$1.80 that implies 26% potential upside.
Risks: Illiquidity in shares; turnaround in operations. Our
positive thesis is on expectations that we are past the worst
for Delfi, and 4Q17 should show a bottoming-out trend and
2018 will turn out better. In the event that this fails to
materialise, its share price could continue to de-rate. Its
shares are relatively illiquid and hence there are days in which
there could be unexplained significant movements.
Company Guide
Delfi Ltd
Sugar: down 26% YTD
Cocoa: -11% YTD
+69%
+26%
Source: ThomsonReuters, DBS Bank
Source: ThomsonReuters, DBS Bank
CPO: down 18% YTD
Milk Powder: down by 32% YTD
Source: ThomsonReuters, DBS Bank
Source: ThomsonReuters, DBS Bank
Company Guide
Company Guide
Delfi Ltd
Delfi Ltd
Peers valuation comparison
Trade
currency
Market
Cap
(US$m)
Px Last
PE
(Act)
PE (Yr
1)
PE(Yr
2)
EV/EBITDA
(LTM)
P/BV
(x)
P/Sales
(x)
ROE
(%)
Operating
Margin
(%)
Net
Margin
(%)
Dividend
Yield
(%)
Net
Gearing
(%)
Delfi Ltd
SGD
650
1.43
24.8x
27.7x
23.1x
12.4x
3.1x
1.7x
13%
9.8%
6.5%
2.1%
-7%
Unilever Indonesia Tbk PT
IDR
29,298
52125
57.9x
54.7x
48.9x
40.0x
61.9x
9.7x
136%
21.7%
16.0%
1.7%
43%
Mayora Indah Tbk PT
IDR
4,117
2500
40.4x
40.8x
34.3x
22.2x
8.5x
2.9x
22%
12.6%
7.4%
0.8%
44%
Gudang Garam Tbk PT
Indofood Sukses Makmur
Tbk PT
Indofood CBP Sukses
Makmur Tbk PT
Nippon Indosari Corpindo
Tbk PT
IDR
11,137
78575
20.2x
20.3x
18.0x
12.3x
3.8x
1.9x
17%
13.3%
8.8%
3.3%
46%
IDR
4,819
7450
16.1x
15.0x
13.9x
8.1x
2.1x
0.9x
14%
12.4%
5.7%
3.2%
81%
IDR
7,495
8725
26.7x
26.3x
24.2x
16.2x
5.4x
2.9x
20%
14.1%
10.4%
1.8%
-31%
IDR
574
1260
36.6x
38.2x
24.3x
20.0x
4.5x
3.1x
20%
17.6%
11.1%
1.1%
31%
Jollibee Foods Corp
PHP
5,297
246
39.0x
38.7x
33.9x
22.8x
6.9x
2.1x
18%
5.7%
5.4%
0.9%
-14%
Universal Robina Corp
PHP
6,606
151
21.8x
29.9x
27.6x
16.2x
4.3x
3.0x
20%
14.9%
13.6%
1.1%
35%
Nestle (Malaysia) Bhd
MYR
5,743
100
40.5x
35.7x
32.8x
26.6x
34.8x
4.5x
98%
15.8%
12.6%
2.7%
39%
Avg (total)
Avg (exUnilever)
33.2x
33.3x
28.7x
30.2x
30.6x
26.1x
19.6x
4.6x
3.1x
27%
14.5%
18.2%
2.8%
27%
Company
Peers
Thai Beverage PCL
SGD
18,102
0.97
17.0x
20.1x
19.2x
BreadTalk Group Ltd
SGD
344
1.64
21.8x
23.4x
21.9x
5.8x
3.5x
0.8x
9%
4.8%
1.9%
1.5%
48%
JUMBO Group Ltd
SGD
281
0.59
26.2x
21.3x
19.9x
14.7x
5.8x
2.6x
22%
12.2%
10.0%
1.7%
-74%
21.7x
21.6x
20.3x
Source: ThomsonReuters, DBS Bank (Prices as of 18 Dec 2017)
Page 4
Company Guide
Delfi Ltd
Quarterly / Interim Income Statement (US$m)
FY Dec
Revenue
3Q2016
2Q2017
3Q2017
% chg yoy
% chg qoq
86.6
100
87.9
1.5
(12.3)
(55.8)
(66.9)
(57.4)
2.8
(14.2)
30.7
33.3
30.5
(0.7)
(8.4)
(20.4)
(19.4)
(23.8)
16.7
22.5
10.4
13.9
6.75
(34.9)
(51.5)
0.0
0.0
0.0
-
-
Associates & JV Inc
(0.3)
0.0
(0.6)
(92.7)
nm
Net Interest (Exp)/Inc
(1.0)
(0.8)
(0.7)
31.9
15.4
0.0
0.0
0.0
-
-
Pre-tax Profit
9.07
13.1
5.47
(39.7)
(58.3)
Tax
(3.1)
(3.8)
(2.2)
(31.4)
(43.6)
0.0
0.0
0.0
-
-
Net Profit
5.93
9.29
3.32
(44.1)
(64.3)
Net profit bef Except.
5.93
9.29
3.32
(44.1)
(64.3)
EBITDA
12.2
16.7
9.02
(26.2)
(45.8)
Gross Margins
35.5
33.2
34.7
Opg Profit Margins
12.0
13.9
7.7
Net Profit Margins
6.9
9.3
3.8
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Exceptional Gain/(Loss)
Minority Interest
Margins (%)
Source of all data: Company, DBS Bank
Company Guide
Delfi Ltd
Rupiah assumption
CRITICAL DATA POINTS TO WATCH
13635.0
Critical Factors
Indonesia macro consumption the key driver. Revenue growth is
tied to Indonesia’s consumer spending since Indonesia sales
accounted for 72% of FY16 revenue. The combination of
multiple factors: a prolonged weak commodity price
environment, higher electricity tariff for households, lower
minimum wage increase, tax reform and slow government
spending led to a slowdown in households’ consumption YTD
2017. An improvement in consumer confidence would aid topline recovery.
Input costs contribute significantly to cost of sales. Key inputs
are cocoa, sugar, milk, palm oil and packaging, all of which
contribute over 75% to cost of sales. We estimate that cocoa,
milk and sugar each makes up 30%, 15% and 15% of total
costs respectively. Commodity inputs are largely imported into
Indonesia and are mainly paid in US dollars, while finished
products are sold mainly in Indonesia in rupiah. About 70% of
the group’s COGS are denominated in US dollars.
Rupiah movements can impact gross margins. The depreciation
of the rupiah against the US dollar has led to significantly higher
input costs in 2015. Average gross margins were over 30%
previously but were below this level in middle of 2015 due to
the weak rupiah. This has, however, recovered in 2016 and
2017 given the stable rupiah and management’s costcontainment initiatives. Our sensitivity analysis shows that every
5% depreciation of the rupiah against the US dollar would lead
to a 1.1% fall in net profit. However, operating margins have
weakened since 4Q16 (YTD) given investments in its distribution
channels.
Strong market position. Delfi still has a dominant market share
in Indonesia of about 50%. Distribution channels cover both
general and modern trade extensively. Delfi's competitive
advantage is in the general trade, as it has a first-mover
advantage and considerable reach into suburban and rural
areas. Global players have already been competing in the
market but mainly in the modern channels.
Philippines positive but still relatively small. Regional markets,
mainly comprising the Philippines, contribute close to 30% of
sales, but insignificantly to EBITDA. Delfi's market share stands
at about 10% and it is still investing into the market, including
its brand portfolio and its route-to-market/distribution channels.
Improvements in operating efficiencies and profitability will
contribute to earnings growth to some extent.
13000
13300
13400
13500
13500
2015A
2016A
2017F
2018F
2019F
11687.1
9739.3
7791.4
5843.6
3895.7
1947.9
0.0
BC vol growth (%)
7
7.1
6
2.4
-1
-2.3
-5
-7.0
-11.8
-16.5
-15
2015A
2016A
2017F
2018F
2019F
5
5
2018F
2019F
BC ASP growth (%)
5
5.10
4.08
3.06
3
2.04
1.02
0
0.00
2015A
2016A
2017F
BC gross margins
35.1
34.8
34.7
34.6
34.4
2016A
2017F
2018F
2019F
29.8
28.1
21.1
14.0
7.0
0.0
2015A
Source: Company, DBS Bank
Company Guide
Delfi Ltd
Appendix 1: A look at Company's listed history – what drives its share price?
Comments
Delfi’s share price looks to be closely
correlated to forward mean EPS. In our view,
this in turn is contingent upon sales, gross
margins, operating margins.
Source: ThomsonReuters, DBS Bank
Comments
From the chart, we noted that operating
margins precede movements in share price
by about one to two quarters. In actual
terms, the time lead could be shorter as
results are announced about a month after
the close of the quarter.
That said, we believe operating margins for
the group could be a share price driver.
The recent slump in share price could
provide an opportunity, as we believe
operating margins could be on the mend.
We project margins to be 10.8%/ 11.8% in
FY18F/19F, up from FY17F’s 10% and a low
of 7.7% seen in 3Q17.
Source: ThomsonReuters, DBS Bank
Company Guide
Delfi Ltd
Balance Sheet:
Net cash provides buffer for inorganic opportunities. Post the
sale of its Cocoa Ingredients to Barry Callebaut, Delfi is a pure
consumer goods-focused company. It is in a net cash position,
from a net debt position prior to the disposal. This could serve
as a war chest for Delfi to undertake inorganic growth
opportunities, particularly when economic conditions
deteriorate further, thus providing more options. Even with the
capital reduction of US$60m (completed in June 2016), the
group remains and will still be in a net cash position, barring
any significant investments.
Share Price Drivers:
Potential M&A opportunities. The acquisition of rivals in key
markets such as Indonesia and the Philippines will help the
company defend and gain market share, thereby enhancing its
position in the chocolate confectionery business.
Leverage & Asset Turnover (x)
0.45
1.2
0.40
1.2
0.35
0.30
1.1
0.25
1.1
0.20
0.15
1.0
0.10
1.0
0.05
0.00
0.9
2015A
2016A
2017F
Gross Debt to Equity (LHS)
2018F
2019F
Asset Turnover (RHS)
Capital Expenditure
US$m
25.0
20.0
15.0
10.0
5.0
Revenue growth in key market: Indonesia. A sustained top-line
growth, coupled with recovery in operating margins could
provide an upward push to Delfi's stock price as investors
continue to buy into Indonesia's consumption growth story.
0.0
2015A
2016A
2017F
2018F
2019F
Capital Expenditure (-)
ROE (%)
14.0%
Key Risks:
Input costs. Commodity price increases particularly in cocoa,
sugar and crude palm oil may erode margins, if there is
insufficient lead time for the company to increase product
prices.
12.0%
10.0%
8.0%
6.0%
4.0%
Slowdown in the Indonesian economy. As over 70% of
revenue originates from Indonesia, a slowdown in Indonesia's
economy will affect sales and consumption. A slower
Indonesian economy, including lower subsidies, wages,
disposable incomes, etc., will give rise to earnings risks.
Currency risk. The company reports its earnings in US dollars
with a significant portion of its input costs also denominated in
US dollars. Revenues are denominated largely in rupiah. The
rupiah’s depreciation will erode margins if ASPs remain
unchanged.
2.0%
0.0%
2015A
2016A
2017F
2018F
Forward PE Band (x)
(x)
105.7
+2sd: 96.5x
85.7
+1sd: 73.9x
65.7
Avg: 51.4x
45.7
-1sd: 28.9x
25.7
Company Background
Delfi manufactures, markets and distributes confectionery
products. The company has a broad brand portfolio that
extends across multiple product categories and different price
points. Its key markets are Indonesia, the Philippines, Singapore
and Malaysia. Its brands command approximately 50% market
share in Indonesia.
2019F
5.7
Dec-13
-2sd: 6.3x
Dec-14
Dec-15
Dec-16
PB Band (x)
(x)
7.4
+2sd: 6.87x
6.4
+1sd: 5.97x
5.4
Avg: 5.08x
4.4
-1sd: 4.18x
3.4
2.4
Dec-13
-2sd: 3.28x
Dec-14
Source: Company, DBS Bank
Dec-15
Dec-16
Company Guide
Delfi Ltd
Key Assumptions
FY Dec
2015A
2016A
2017F
2018F
2019F
Rupiah assumption
BC vol growth (%)
BC ASP growth (%)
BC gross margins
13,000
(15.0)
3.00
29.8
13,300
(1.0)
5.00
34.8
13,400
(5.0)
0.0
34.7
13,500
7.00
5.00
34.6
13,500
6.00
5.00
34.4
Segmental Breakdown
FY Dec
2015A
2016A
2017F
2018F
2019F
296
110
296
107
283
102
305
110
330
119
406
402
385
415
449
39.0
0.44
54.2
0.53
46.4
0.51
53.6
0.55
62.8
0.59
39.5
54.8
46.9
54.2
63.3
13.2
0.4
18.4
0.5
16.4
0.5
17.6
0.5
19.0
0.5
9.7
13.6
12.2
13.0
14.1
2015A
2016A
2017F
2018F
2019F
406
(285)
121
(89.2)
31.6
0.0
0.06
(4.2)
(20.1)
7.39
(12.1)
0.01
0.0
(4.7)
15.3
39.5
402
(262)
140
(94.1)
45.6
0.0
(0.3)
(4.1)
(2.0)
39.2
(13.1)
0.0
0.0
26.2
28.2
54.5
385
(251)
134
(95.0)
38.6
0.0
(0.3)
(3.3)
0.0
34.9
(11.5)
0.0
0.0
23.4
23.4
46.6
415
(272)
144
(98.9)
44.9
0.0
(0.3)
(3.3)
0.0
41.3
(13.2)
0.0
0.0
28.1
28.1
53.9
449
(294)
154
(101)
53.0
0.0
(0.3)
(3.3)
0.0
49.4
(15.8)
0.0
0.0
33.6
33.6
63.0
(19.5)
(52.1)
(57.4)
(69.4)
(0.9)
37.9
44.2
83.5
(4.3)
(14.5)
(15.4)
(16.8)
8.0
15.6
16.4
19.8
8.0
17.0
18.1
19.7
29.8
7.8
(1.2)
(1.8)
(1.1)
(5.7)
N/A
7.5
34.8
11.3
6.5
11.8
7.2
10.1
54.0
11.2
34.7
10.0
6.1
11.4
6.8
9.5
55.3
11.6
34.6
10.8
6.8
12.9
7.8
10.7
55.0
13.5
34.4
11.8
7.5
14.3
8.8
11.9
50.0
15.9
Revenues (US$m)
Indonesia
Regional markets
Total
EBITDA (US$m)
Indonesia
Regional markets
Total
EBITDA Margins (%)
Indonesia
Regional markets
Total
Income Statement (US$m)
FY Dec
Revenue
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
Net Profit before Except.
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins & Ratio
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
Source: Company, DBS Bank
Company Guide
Delfi Ltd
Quarterly / Interim Income Statement (US$m)
FY Dec
3Q2016
4Q2016
Revenue
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Net Profit
Net profit bef Except.
EBITDA
1Q2017
2Q2017
3Q2017
86.6
(55.8)
30.7
(20.4)
10.4
0.0
(0.3)
(1.0)
0.0
9.07
(3.1)
0.0
5.93
5.93
12.2
106
(65.0)
40.6
(31.1)
9.52
0.0
(0.1)
(1.0)
(2.0)
6.42
(2.8)
0.0
3.65
5.65
12.8
93.1
(62.4)
30.7
(21.5)
9.22
0.0
0.24
(0.8)
0.0
8.67
(3.0)
0.0
5.63
5.63
12.2
100
(66.9)
33.3
(19.4)
13.9
0.0
0.0
(0.8)
0.0
13.1
(3.8)
0.0
9.29
9.29
16.7
87.9
(57.4)
30.5
(23.8)
6.75
0.0
(0.6)
(0.7)
0.0
5.47
(2.2)
0.0
3.32
3.32
9.02
(18.6)
(17.0)
(19.8)
(27.0)
22.0
4.4
(8.1)
(4.7)
(11.8)
(4.2)
(3.1)
(0.5)
7.6
36.3
50.8
65.2
(12.3)
(45.8)
(51.5)
(64.3)
35.5
12.0
6.9
38.4
9.0
3.5
33.0
9.9
6.0
33.2
13.9
9.3
34.7
7.7
3.8
Balance Sheet (US$m)
FY Dec
2015A
2016A
2017F
2018F
2019F
Net Fixed Assets
Invts in Associates & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
117
2.95
9.36
120
59.6
56.3
23.3
388
127
2.77
10.1
67.7
54.7
61.8
18.5
342
135
2.49
10.1
74.6
55.0
55.0
18.5
351
143
2.20
10.1
77.2
59.4
59.4
18.5
370
150
1.89
10.1
84.1
64.1
64.1
18.5
393
ST Debt
Creditor
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
59.5
25.9
30.7
15.2
14.1
242
0.12
388
44.2
34.7
39.3
9.58
13.3
201
0.11
342
44.2
24.1
49.4
9.58
13.3
210
0.11
351
44.2
26.0
51.1
9.58
13.3
226
0.11
370
44.2
28.1
53.7
9.58
13.3
244
0.11
393
82.5
44.9
62.2
38.1
87.1
0.9
2.2
1.5
CASH
CASH
29.4
4.6
61.0
14.0
53.6
43.7
82.4
1.1
1.7
1.1
CASH
CASH
30.4
5.0
55.0
20.9
55.4
44.1
82.4
1.1
1.7
1.1
CASH
CASH
31.6
4.9
60.1
23.4
50.2
34.8
79.5
1.2
1.8
1.1
CASH
CASH
31.6
4.9
65.0
30.3
50.2
34.7
79.3
1.2
1.8
1.2
CASH
CASH
31.6
4.9
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
Non-Cash Wkg. Capital
Net Cash/(Debt)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Asset Turnover (x)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Net Debt/Equity ex MI (X)
Capex to Debt (%)
Z-Score (X)
Source: Company, DBS Bank
Includes gain from
divestment of 50% stake in
PT Ceres Meiji Indotama
Indonesia (US$4.6m) in 2Q17
Company Guide
Delfi Ltd
Cash Flow Statement (US$m)
FY Dec
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
Opg CFPS (S cts)
Free CFPS (S cts)
2015A
2016A
2017F
2018F
2019F
7.39
7.85
(19.7)
(0.1)
24.8
23.0
43.3
(22.0)
(0.3)
0.0
0.0
(38.8)
(61.1)
(34.2)
5.91
0.0
(8.0)
(36.3)
1.70
(52.4)
4.07
4.70
39.2
9.18
(13.5)
0.27
18.3
6.12
59.7
(16.4)
(0.7)
0.0
0.0
0.0
(17.1)
(8.3)
(24.7)
(60.0)
(2.2)
(95.2)
0.81
(51.8)
9.12
9.55
34.9
8.32
(1.4)
0.28
(4.2)
0.0
38.0
(17.0)
0.0
0.0
0.0
0.0
(17.0)
(14.1)
0.0
0.0
0.0
(14.1)
0.0
6.90
9.30
4.64
41.3
9.29
(11.5)
0.29
(6.8)
0.0
32.5
(17.0)
0.0
0.0
0.0
0.0
(17.0)
(13.0)
0.0
0.0
0.0
(13.0)
0.0
2.51
8.67
3.41
49.4
10.3
(13.2)
0.31
(7.4)
0.0
39.4
(17.0)
0.0
0.0
0.0
0.0
(17.0)
(15.4)
0.0
0.0
0.0
(15.4)
0.0
6.95
10.3
4.94
Source: Company, DBS Bank
Target Price & Ratings History
2.41
S$
2.21
1.81
1.61
1.41
Feb-17
Apr-17
Jun-17
Aug-17
Oct-17
Not e : Share price and Target price are adjusted for corporate actions.
Source: DBS Bank
Analyst: Andy Sim
Alfie YEO
Dat e of
Report
Closing
Pric e
1:
24 F eb 17
2.33
1
2.01
1.21
Dec-16
S.No.
12- mt h
T arget Rat ing
Pric e
2.26
HOLD
Company Guide
Delfi Ltd
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 18 Dec 2017 18:12:14 (SGT)
Dissemination Date: 18 Dec 2017 18:34:19 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated
corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)
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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
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Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
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Company Guide
Delfi Ltd
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
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COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates do not
have a proprietary position in Thai Beverage Public Company, recommended in this report as of 30 Nov 2017.
2.
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Report.
Compensation for investment banking services:
3.
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12 months for investment banking services from Indofood Sukses Makmur as of 30 Nov 2017.
4.
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Disclosure of previous investment recommendation produced:
5.
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investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
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1
An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of
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2
Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a
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listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Singapore Company Guide
Hong Leong Finance
Version 3
Refer to important disclosures at the end of this report
| Bloomberg: HLF SP | Reuters: HLSF.SI
DBS Group Research . Equity
13 Nov 2017
BUY
Building momentum
Last Traded Price ( 10 Nov 2017): S$2.72 (STI : 3,420.10)
Price Target 12-mth: S$3.20 (18% upside) (Prev S$3.20)
Analyst
Singapore Research Team
equityresearch@dbs.com
Sue Lin LIM +65 8332 6843 suelinlim@dbs.com
What’s New




3Q17 earnings above expectations; at an inflection
point with improved loan yields and loan growth
Raising FY17-19F earnings on higher NIM and loan
growth; potential uplift in dividends to c.5% yield
Beneficiary of rising interest rates and macro
environment, albeit smaller impact vs banks; sustained
improvement in earnings traction should support share
price momentum; M&A possibility is a bonus
Maintain BUY, TP of S$3.20
Price Relative
S$
Relative Index
3.1
216
2.9
196
2.7
176
156
2.5
136
2.3
116
2.1
96
1.9
Nov-13
Nov-14
Nov-15
Hong Leong Finance (LHS)
Forecasts and Valuation
FY Dec (S$m)
Pre-prov. Profit
Net Profit
Net Pft (Pre Ex.)
Net Pft Gth (Pre-ex) (%)
EPS (S cts)
EPS Pre Ex. (S cts)
EPS Gth Pre Ex (%)
Diluted EPS (S cts)
PE Pre Ex. (X)
Net DPS (S cts)
Div Yield (%)
ROAE Pre Ex. (%)
ROAE (%)
ROA (%)
BV Per Share (S cts)
P/Book Value (x)
Earnings Rev (%):
Consensus EPS (S cts):
Other Broker Recs:
2016A
65.1
53.1
53.1
(27.2)
12.0
12.0
(27)
12.0
22.7
9.00
3.3
3.1
3.1
0.4
382
0.7
76
Nov-17
Nov-16
Relative STI (RHS)
2017F
97.4
80.5
80.5
51.8
18.1
18.1
51
18.1
15.0
12.1
4.4
4.7
4.7
0.6
386
0.7
2018F
108
88.5
88.5
9.8
19.8
19.8
10
19.8
13.7
13.3
4.9
5.1
5.1
0.7
393
0.7
2019F
109
89.4
89.4
1.1
20.1
20.1
1
20.1
13.6
13.4
4.9
5.1
5.1
0.4
400
0.7
5
17.0
B: 1
13
18.0
S: 0
9
18.0
H: 0
Source of all data on this page: Company, DBS Bank, Bloomberg
Finance L.P.
ed: JS / sa: xxx, PY
Beneficiary of better macroeconomic environment; M&A potential.
Hong Leong Finance (HLF) has a unique role to play in the Small
Medium Enterprises lending scene in Singapore as the largest
financial company (finco) locally. We believe HLF will benefit from the
better macroeconomic environment as we have started to see better
loan growth and loan yields returning in 3Q17, in line with higher
systemic loan growth and better interest rate outlook. The strong
9M17 earnings prompted us to raise FY17F earnings by 5% on higher
NIM and loan growth. On a positive outlook on the macro front and
interest rate environment, we also expect loan growth and NIM to
improve, hence raising FY18-19F earnings by 5-13% p.a. Sustained
improvement in earnings traction should be positive to share price.
Elsewhere, we believe that with the MAS’ rule relaxation on fincos in
mid-Feb 2017, which lifted the limits on uncollateralised loans as a
percentage of capital funds (from 10% to 25% of capital funds) and
liberalised its existing policy to allow a foreign takeover of a finco
(subject to certain conditions), opens new opportunities for HLF.
Where we differ. We are the only broker covering the stock. Post
MAS’ rule relaxation, all three fincos have re-rated on possibility of
M&A. However, we believe HLF’s current share price has yet to price
in this year’s earnings recovery, as well as its strength as the largest
finco in Singapore.
Potential catalyst. Sustained improvement in earnings profile should
support share price momentum. Additional catalysts would include
further relaxation of funding and lending rules, as well as M&A
newsflow. Under a M&A scenario, which is a bonus for the company,
we believe HLF should attract a minimum 1x BV or S$3.80 as current
shareholders are unlikely to sell out at lower valuation given its
prospects under the expected new regulatory regime.
Valuation:
Maintain BUY, TP of S$3.20. Our TP of S$3.20 is derived from the
Gordon Growth Model with 5% ROE, 2% long-term growth and 6%
cost of equity, implying c.0.8x FY17F BV. Despite a 5-13% earnings
revision, we had previously already imputed prospects of HLF reaching
an ROE level of 5%. The 3Q17 results has proven so.
Key Risks to Our View:
As a smaller financial institution, and with exposure to riskier business
lending, HLF may be more prone to asset-quality upsets should the
economic cycle deteriorate. Also, HLF is more sensitive to changes in
fixed deposits rate, in contrast to banks who have a large CASA base.
At A Glance
Issued Capital (m shrs)
Mkt. Cap (S$m/US$m)
Major Shareholders (%)
Hong Leong Investment Holding
Hong Realty Pte Ltd
Free Float (%)
3m Avg. Daily Val (US$m)
ICB Industry : Financials / General Financial
446
1,212 / 892
22.45
5.24
69.38
0.25
Company Guide
Hong Leong Finance
WHAT’S NEW
Strong earnings growth continues; results above expectations
Highlights
Strong earnings growth continues; results above our
expectations. HLF continues its strong earnings growth
momentum and recorded S$23.6m net profit in 3Q17 (+84.2%
y-o-y/+12.9% q-o-q), despite recognising a one-off provision of
S$2.8m, as broad-based growth in net interest income across
interest on loans, hiring charges, and other interest income
kicked in, from higher loan yields and loan growth of 2.2%
during the quarter, as well as lower cost of funding partially
offset by a lower average loan base. Fee income also grew
26.3% y-o-y/-6.5% q-o-q in 3Q17 to S$3.8m.
One-off provision of S$2.8m. In 3Q17, HLF topped up
provisions by S$2.8m. Including reversal of provisions in 1H17,
9M17 provisions stood at S$2.5m. We remain confident on
HLF’s asset quality as demonstrated by its low provision and NPL
levels historically. What remains a wildcard is the effect of the
implementation of IFRS9/SFRS109.
Outlook
Loan growth of 2.2% q-o-q encouraging. We believe loan
contraction bottomed out in 1Q17 as loan book saw first
significant tick up in 3Q17 after remaining largely flat in 2Q17
after seeing a contraction through FY2016. We believe that
loan growth is set for recovery against better economic
conditions with encouraging signs of an improving property
market and GDP outlook.
FY17-19F earnings raised by 5-13%; expect higher dividends.
We revised our earnings forecasts upwards by 5%/13%/9% in
FY17F/18F/19F, reflecting better loan yields and loan growth
outlook ahead. As a result, we now expect a minimum12 Scts
dividend per share, a 33% increase from previous year’s
dividend per share of 9 Scts. Stock is currently trading at ~4.4%
dividend yield at current prices
Value and recommendation
Maintain BUY, TP at S$3.20. Our TP of S$3.20 is derived from
the Gordon Growth Model with 5% ROE, 2% long-term
growth and 6% cost of equity, implying c.0.8x FY17F BV.
Despite a 5-9% earnings revision, we had previously already
imputed prospects of it reaching an ROE level of 5%. The 3Q17
results has proven so.
Company Guide
Hong Leong Finance
Quarterly / Interim Income Statement (S$m)
FY Dec
3Q2016
2Q2017
3Q2017
% chg yoy
% chg qoq
Net Interest Income
32.0
42.6
47.4
48.0
11.1
Non-Interest Income
35.1
46.8
51.2
46.1
9.6
Operating Income
35.1
46.8
51.2
46.1
9.6
Operating Expenses
(20.4)
(21.0)
(20.1)
(1.2)
(4.0)
Pre-Provision Profit
14.7
25.8
31.1
111.7
20.6
Provisions
0.75
(0.7)
(2.8)
nm
307.4
Associates
0.0
0.0
0.0
-
-
Exceptionals
0.0
0.0
0.0
-
-
Pretax Profit
15.4
25.1
28.3
83.5
12.9
Taxation
(2.7)
(4.2)
(4.8)
80.1
12.8
0.0
0.0
0.0
-
-
12.8
20.9
23.6
84.2
12.9
Net Interest Income Gth
(5.9)
17.5
11.1
Net Profit Gth
15.8
26.8
12.9
NIM
N/A
N/A
N/A
NPL ratio
N/A
N/A
N/A
Loan-to deposit
N/A
N/A
N/A
Cost-to-income
58.1
44.9
39.3
N/A
N/A
N/A
Minority Interests
Net Profit
Growth (%)
Key ratio (%)
Total CAR
Source of all data: Company, DBS Bank
Company Guide
Hong Leong Finance
Margin Trends
CRITICAL DATA POINTS TO WATCH
Critical Factors
Opportunities from MAS’ rule relaxation. HLF was the first finco allowed
to offer business current accounts, subject to various conditions prior to
the MAS’ rule relaxation. Going forward, positive catalysts could also
come from cheaper funding if HLF is able to hold institutional deposits
like the banks, thereby allowing HLF to act as the “go-to-bank” for
various transactions for SMEs. There could also be further opportunities in
unsecured lending, however, we think caution should be exercised on
unsecured lending to smaller-sized SMEs due to risk concerns. We note
that the new MAS rules have not been implemented, and we look
towards its full implementation and more clarity in 2H2017.
S$ m
200
180
160
140
120
100
80
60
40
20
0
1.5%
1.4%
1.3%
1.2%
1.1%
1.0%
2015A
2016A
2017F
Net Interest Income
2018F
2019F
Net Interest Income Margin
Gross Loan& Growth
S$ m
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
10,000
8,000
NIM set to recover after 2016’s decline. The dip in FY2016’s net interest
margin (NIM) was caused by expensive fixed deposits taken in towards
the end of 2015 due to competition for fixed deposits among banks
alike, in lieu of the impending rate hike. HLF’s cost of deposit was 1.6%
for FY2016. According to our channel checks, fixed deposit rates have
since fallen from the highs at end-2015 to beginning 2016 (some banks
were offering as high as 1.8% - 1.9% for 12-month fixed deposits) to
<1.3% currently. We believe that with expensive deposits now out of its
system, HLF can focus on managing cost of funds going forward. There
may also be a NIM uptick should Fed rate hikes translate into rising SIBOR
yields in 2H2017. We estimate HLF’s NIM for FY2017 to normalise to
levels above FY2015’s.
6,000
4,000
2,000
0
2015A
2016A
Gross Loan (LHS)
2017F
2018F
2019F
Gross Loan Growth (% ) (Y oY ) (RHS)
Customer Deposit & Growth
S$ m
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
12,000
10,000
8,000
6,000
4,000
Better loan growth outlook. With the exception of FY2012 which saw
expansion in balance sheet with loan growth of 19.3% and customer
deposits growth of 29.4%, HLF’s loan growth has been in the mid-single
digit range between 2014 and 2015. The loan book in 2016 shrank due
to lumpy development projects attaining Temporary Occupation Permit
(TOP). We expect loan growth to be in the low single digit range in FY17F
due to the slower overall loan momentum in Singapore. HLF remains
selective in writing loans for private residential properties due to the
unattractive yield, and remains cautious about the commercial property
market.
Highly selective key areas of growth. We remain optimistic about selected
growth industries for HLF, such as medical and equipment financing,
which continued to see high growth rates in the last few years. We also
expect to see vehicle loan growth given the relaxation of rules on loan-tovalue ratios and loan tenure, and unwavering interest in the luxury cars
segment. HDB financing, in contrast to private residential properties,
remains a key focus for HLF. The relaxation of unsecured lending limits
could catalyse further lending.
2,000
0
2015A
2016A
2017F
2018F
2019F
Customer Deposits (LHS)
Customer Deposits Growth (% ) (Y oY ) (RHS)
Loan-to-Deposit Ratio Trend
S$ bn
101%
13,563
96%
12,563
11,563
91%
10,563
86%
9,563
81%
8,563
76%
2015A
Loans
2016A
Deposit
2017F
2018F
2019F
Loan-to-Deposit Ratio (RHS)
Cost & Income Structure
S$ m
1,000
900
800
700
600
500
400
300
200
100
0
60%
50%
40%
30%
20%
10%
0%
2015A
2016A
Net Interest Income
Source: Company, DBS Bank
2017F
2018F
Non-interest Income
2019F
Cost-to-income Ratio
Company Guide
Hong Leong Finance
Appendix 1: A look at Company's listed history – what drives its share price?
NIM is well sought after, corresponds with share price re-rating
S$
%
3.5
2.4
2.2
2.0
3.0
1.8
1.6
2.5
1.4
1.2
1.0
2.0
0.8
0.6
1.5
0.4
0.2
Share price (LHS)
Jan-17
Jul-16
Oct-16
Jan-16
Apr-16
Oct-15
Jul-15
Jan-15
Apr-15
Jul-14
Oct-14
Jan-14
Apr-14
Jul-13
Oct-13
Apr-13
Jan-13
Jul-12
Oct-12
Jan-12
Apr-12
Jul-11
Oct-11
Jan-11
Apr-11
Oct-10
Jul-10
Jan-10
0.0
Apr-10
1.0
NIM (RHS)
Source: Bloomberg Finance L.P., DBS Bank
We observe that from 2010 to the beginning of 2012, HLF’s share price was on a downward trend, in line with its full-year
NIM. Between 2013 and mid-2015, HLF’s share price was largely range bound due to flattish NIM of 1.3%. Thereafter,
HLF’s share price was on a downward trend due to lower full -year NIM.
Going forward, HLF should continue to leverage on its competitive strength as a strong property loans financier and SME
bank, as well as potential growth prospects versus its finco peers. Stronger loan growth, higher loan yields and lower cost
of funds should contribute to higher net interest income and NIM for HLF.
Higher NIM should bode well for HLF’s share price.
Higher NIM should bode well for HLF’s share price.
Company Guide
Hong Leong Finance
Asset Quality
Balance Sheet:
Asset quality is sound. HLF’s non-performing loans (NPL) position is
graded in line with industry standards. HLF’s NPL ratio has been
consistently low and is the lowest among its finco peers, at 0.8% for
FY2016– comprising secured NPL of 0.7% and unsecured NPL of 0.1%.
HLF’s NPL ratio is also considerably lower than local banks’ NPL which are
above 1%, as HLF mostly lends on a secured basis with LTV below 100%.
In the event of a bad loan, HLF is typically able to recover most amounts
outstanding.
Strong capital position. HLF maintains a strong capital position at 16.4%
for FY2016, well above the statutory requirement of 12%, prescribed by
the Finance Companies Act.
1.0%
0.8%
0.6%
0.4%
0.2%
0.0%
NPL Ratio
2015A
-0.2%
2016A
2017F
2018F
2019F
Provision Charge-Off
Rate
-0.4%
-0.6%
-0.8%
-1.0%
Capitalisation (%)
16.0%
14.0%
Share Price Drivers:
Further relaxation of funding and lending rules. Further to MAS’
announcement in Feb 2017, any further relaxation of rules pertaining to
fincos, for instance, liberalisation of funding sources to allow business
CASA without restrictions, allowing fincos to garner retail CASA, could
catalyse HLF’s share price.
M&A newsflow. We believe that HLF is an extremely attractive takeover
target for foreign banks/entities that are keen to expand their reach in
the Singapore SME lending space. Any M&A-related newsflow would
further catalyse HLF’s share price.
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
2015A
2016A
2017F
Tier-1 CAR
2018F
2019F
Total CAR
ROE (%)
5.0%
4.0%
3.0%
Key Risks:
Risk to asset quality. While HLF applies stringent credit underwriting
procedures, unexpected deterioration in HLF’s loan portfolio could pose
downside risk to earnings. Deterioration in the loan portfolio could be
caused by softening of the economic cycle and/or worsening business
conditions limited to a specific sector.
Sensitive to fixed deposits rate. HLF is more sensitive to changes in S$
fixed deposits rate, in contrast to banks who have large CASA base. High
fixed deposits rate will lead to higher cost of funds, affecting NIM.
Company Background
Hong Leong Finance, the financial services arm of Hong Leong Group
Singapore, is Singapore’s largest finance company with a distribution
network of 28 branches and over 600 employees. HLF has more than 55
years of experience in Small and Medium-sized Enterprise (SME) lending,
offering a wide range of products and services, including deposits and
savings, consumer and corporate loans, government assistance
programmes for SMEs, as well as corporate finance and advisory services.
2.0%
1.0%
0.0%
2015A
2016A
2017F
2018F
2019F
Forward PE Band (x)
22.6
(x)
20.6
+2sd: 20.5x
18.6
+1sd: 18.4x
16.6
Avg: 16.3x
14.6
-1sd: 14.1x
12.6
-2sd: 12x
10.6
Nov-13
Nov-14
Nov-15
Nov-16
PB Band (x)
0.9
(x)
0.9
0.8
+2sd: 0.78x
0.8
+1sd: 0.72x
0.7
0.7
Avg: 0.66x
0.6
-1sd: 0.61x
0.6
-2sd: 0.55x
0.5
0.5
0.4
Nov-13
Nov-14
Source: Company, DBS Bank
Nov-15
Nov-16
Company Guide
Hong Leong Finance
Key Assumptions
FY Dec
Gross Loans Growth
Customer Deposits Growth
Yld. On Earnings Assets
Avg Cost Of Funds
Income Statement (S$m)
FY Dec
Net Interest Income
Non-Interest Income
Operating Income
Operating Expenses
Pre-provision Profit
Provisions
Associates
Exceptionals
Pre-tax Profit
Taxation
Minority Interests
Preference Dividend
Net Profit
Net Profit bef Except
Growth (%)
Net Interest Income Gth
Net Profit Gth
Margins, Costs & Efficiency (%)
Spread
Net Interest Margin
Cost-to-Income Ratio
Business Mix (%)
Net Int. Inc / Opg Inc.
Non-Int. Inc / Opg inc.
Fee Inc / Opg Income
Oth Non-Int Inc/Opg Inc
Profitability (%)
ROAE Pre Ex.
ROAE
ROA Pre Ex.
ROA
Source: Company, DBS Bank
2015A
2016A
2017F
2018F
2019F
5.3
9.3
2.4
1.3
(5.7)
(8.8)
2.5
1.6
2.8
5.0
2.6
1.4
4.0
7.0
2.6
1.5
5.0
7.0
2.7
1.5
2015A
2016A
2017F
2018F
2019F
162
12.9
175
(91.8)
83.1
3.64
0.0
0.0
86.8
(13.9)
0.0
0.0
72.9
72.9
137
12.8
149
(84.3)
65.1
(1.1)
0.0
0.0
64.0
(11.0)
0.0
0.0
53.1
53.1
170
13.2
183
(85.4)
97.4
(0.4)
0.0
0.0
97.0
(16.5)
0.0
0.0
80.5
80.5
181
13.6
194
(86.5)
108
(1.0)
0.0
0.0
107
(18.1)
0.0
0.0
88.5
88.5
182
14.4
197
(87.6)
109
(1.1)
0.0
0.0
108
(18.3)
0.0
0.0
89.4
89.4
8.8
16.0
(15.7)
(27.2)
24.1
51.8
6.4
9.8
0.9
1.1
1.1
1.3
52.5
0.9
1.1
56.4
1.2
1.4
46.7
1.2
1.4
44.6
1.2
1.4
44.6
92.6
7.4
7.1
0.2
91.5
8.5
8.4
0.1
92.8
7.2
7.1
0.1
93.0
7.0
6.9
0.1
92.7
7.3
7.2
0.1
4.4
4.4
0.6
0.6
3.1
3.1
0.4
0.4
4.7
4.7
0.6
0.6
5.1
5.1
0.7
0.7
5.1
5.1
0.4
0.4
Expect NIM expansion
beyond FY15 levels
Company Guide
Hong Leong Finance
Quarterly / Interim Income Statement (S$m)
FY Dec
3Q2016
4Q2016
Net Interest Income
Non-Interest Income
Operating Income
Operating Expenses
Pre-Provision Profit
Provisions
Associates
Exceptionals
Pretax Profit
Taxation
Minority Interests
Net Profit
1Q2017
2Q2017
3Q2017
32.0
35.1
35.1
(20.4)
14.7
0.75
0.0
0.0
15.4
(2.7)
0.0
12.8
33.1
37.4
37.4
(18.9)
18.5
(0.8)
0.0
0.0
17.7
(3.0)
0.0
14.7
36.3
40.0
40.0
(21.1)
18.9
0.92
0.0
0.0
19.8
(3.4)
0.0
16.5
42.6
46.8
46.8
(21.0)
25.8
(0.7)
0.0
0.0
25.1
(4.2)
0.0
20.9
47.4
51.2
51.2
(20.1)
31.1
(2.8)
0.0
0.0
28.3
(4.8)
0.0
23.6
(5.9)
15.8
3.5
15.0
9.6
12.0
17.5
26.8
11.1
12.9
2015A
2016A
2017F
2018F
2019F
Cash/Bank Balance
Government Securities
Inter Bank Assets
Total Net Loans & Advs.
Investment
Associates
Fixed Assets
Goodwill
Other Assets
Total Assets
1,796
1,333
0.0
10,091
0.55
0.0
27.9
0.0
38.4
13,287
1,485
1,258
0.0
9,515
0.55
0.0
24.5
0.0
29.5
12,313
1,645
1,271
0.0
9,785
0.55
0.0
22.9
0.0
30.3
12,754
1,994
1,296
0.0
10,174
0.55
0.0
21.6
0.0
31.5
13,519
14,686
1,322
0.0
10,686
0.55
0.0
23.6
0.0
33.1
26,752
Customer Deposits
Inter Bank Deposits
Debts/Borrowings
Others
Minorities
Shareholders' Funds
Total Liab& S/H’s Funds
11,444
0.0
0.0
155
0.0
1,688
13,287
10,442
0.0
0.0
174
0.0
1,697
12,313
10,964
0.0
0.0
66.9
0.0
1,724
12,754
11,731
0.0
0.0
34.5
0.0
1,753
13,519
12,553
0.0
0.0
12,417
0.0
1,782
26,752
Growth (%)
Net Interest Income Gth
Net Profit Gth
Balance Sheet (S$m)
FY Dec
Source: Company, DBS Bank
Company Guide
Hong Leong Finance
Financial Stability Measures (%)
FY Dec
Balance Sheet Structure
Loan-to-Deposit Ratio
Net Loans / Total Assets
Investment / Total Assets
Cust . Dep./Int. Bear. Liab.
Interbank Dep / Int. Bear.
Asset Quality
NPL / Total Gross Loans
NPL / Total Assets
Loan Loss Reserve Coverage
Provision Charge-Off Rate
Capital Strength
Total CAR
Tier-1 CAR
2015A
2016A
2017F
2018F
2019F
88.2
75.9
0.0
100.0
0.0
91.1
77.3
0.0
100.0
0.0
89.2
76.7
0.0
100.0
0.0
86.7
75.3
0.0
100.0
0.0
85.1
39.9
0.0
100.0
0.0
0.7
0.6
147.7
0.0
1.0
0.7
122.5
0.0
0.8
0.6
140.5
0.0
0.8
0.6
145.5
0.0
0.8
0.3
140.0
0.0
15.1
0.0
16.4
0.0
16.6
0.0
15.9
0.0
8.2
0.0
Expect lower NPL ratio
on better economic
outlook
Source: Company, DBS Bank
Target Price & Ratings History
2.92
S$
2
2.82
1
2.72
2.62
3
2.52
2.42
2.32
2.22
2.12
2.02
Nov-16
Jan-17
Mar-17
May-17
Jul-17
Sep-17
Note : Share price and Target price are adjusted for corporate actions.
Source: DBS Bank
Analyst: Singapore Research Team
Sue Lin LIM
Nov-17
12-m t h
Target Rat ing
Price
S.No.
Dat e of
Report
Clos ing
Price
1:
05 Apr 17
2.83
3.20
BUY
2:
28 Apr 17
2.80
3.20
BUY
3:
10 Aug 17
2.67
3.20
BUY
Company Guide
Hong Leong Finance
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 13 Nov 2017 10:19:11 (SGT)
Dissemination Date: 13 Nov 2017 10:29:10 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated
corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)
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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
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associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have
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Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may
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This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
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The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
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UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
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assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
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mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.
Company Guide
Hong Leong Finance
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s)
primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the
issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real
estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the
management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or
his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has
procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of
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banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the
DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates do not
have a proprietary position in the securities recommended in this report as of 31 Oct 2017.
2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research
Report.
Compensation for investment banking services:
3.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document
should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced:
4.
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other
investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1
An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of
which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person
accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2
Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a
new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term
does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new
listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Singapore Company Guide
mm2 Asia
Refer to important disclosures at the end of this report
Version 15 | Bloomberg: MM2 SP | Reuters: MM2A.SI
DBS Group Research . Equity
8 Feb 2018
BUY
Growth intact
Last Traded Price ( 7 Feb 2018): S$0.495 (STI : 3,383.77)
Price Target 12-mth: S$0.75 (52% upside) (Prev S$0.73)
Growth path on track. We continue to expect strong earnings
CAGR of 28% for FY17-20F, underpinned by growth in
productions, expansion into the China market, and contribution
from UnUsUaL. The cinema arm, on the other hand, helps the
group build a recurring income base. Having a strong presence
in the entire value chain of content creation and distribution
further cements mm2's status as the leader in the
media/entertainment industry. With a much larger and stronger
scale, especially with the completion of the Cathay cinema
acquisition, mm2 can now enjoy the synergistic benefits from
the entire value chain.
Analyst
Lee Keng LING +65 6682 3703 leekeng@dbs.com
What’s New
•
Newly acquired cinemas boosted 3Q18 revenue but
dragged down margins
•
Earnings cut by 9-11%, on slightly lower revenue from
cinema and higher interest cost
•
Maintain BUY, TP of S$0.75, as we rolled forward
valuation to FY19F
3Q18 results: 3Q18 revenue surged 190% y-o-y to S$52.4m,
boosted by newly acquire cinemas in Malaysia and Singapore.
Net earnings jumped by a smaller 53% to S$6.4m on lower
margins.
Price Relative
S$
Relative Index
0.7
1068
0.6
0.5
868
0.4
668
0.3
468
0.2
268
0.1
0.0
Dec-14
68
Dec-15
Dec-16
mm2 Asia (LHS)
Forecasts and Valuation
FY Mar (S$ m)
Revenue
EBITDA
Pre-tax Profit
Net Profit
Net Pft (Pre Ex.)
Net Pft Gth (Pre-ex) (%)
EPS (S cts)
EPS Pre Ex. (S cts)
EPS Gth Pre Ex (%)
Diluted EPS (S cts)
Net DPS (S cts)
BV Per Share (S cts)
PE (X)
PE Pre Ex. (X)
P/Cash Flow (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
Earnings Rev (%):
Consensus EPS (S cts):
Other Broker Recs:
Dec-17
Relative STI (RHS)
2017A
95.4
41.4
25.9
18.8
18.8
130.1
1.80
1.80
98
1.80
0.0
8.25
27.6
27.6
84.7
12.4
0.0
6.0
CASH
30.7
2018F
163
53.2
36.5
25.3
25.3
34.6
2.18
2.18
21
2.18
0.0
15.2
22.7
22.7
25.5
10.3
0.0
3.3
CASH
19.2
2019F
258
69.5
46.2
32.5
32.5
28.4
2.80
2.80
28
2.80
0.0
18.0
17.7
17.7
21.1
11.0
0.0
2.7
0.7
16.9
2020F
306
77.8
54.5
39.5
39.5
21.3
3.40
3.40
21
3.40
0.0
21.4
14.6
14.6
11.7
9.9
0.0
2.3
0.6
17.2
(9)
2.40
B: 2
(11)
3.20
S: 0
NEW
3.50
H: 0
Source of all data on this page: Company, DBS Bank, Bloomberg
Finance L.P
ed: TH / sa:YM, PY, CS
Where we differ: Higher valuation peg vs consensus. We value
the production business at 25x PE, in line with peers listed in
Asia, vs consensus’ valuation of about 22x. For UnUsUaL, we
value it at current valuation. For the cinema segment, we use
21x PE valuation peg.
Potential catalyst: Reaping the fruits of labour in North Asia. We
expect North Asia to contribute >70% of production revenue
from FY18F, up from 36% in FY16 and 56% in FY17. Upside to
earnings would come from more projects, especially in China,
where the market is bigger and budgets are much higher.
Valuation:
Reiterate BUY, TP of S$0.75. Our sum-of-parts target price is
now S$0.75, after accounting for slightly lower revenue from
the cinema, higher interest costs and rolling forward our
valuation to FY19F earnings on valuation peg of 25x.
Key Risks to Our View:
No long-term financing arrangements for productions. The
commencement of each production is dependent on mm2’s
ability to secure funding.
Unavailability of good scripts. Lack of good scripts for
production may lead to less support from stakeholders.
At A Glance
Issued Capital (m shrs)
Mkt. Cap (S$m/US$m)
Major Shareholders (%)
Wee Chye Ang
StarHub Ltd
Yeo Khee Seng
Free Float (%)
3m Avg. Daily Val (US$m)
ICB Industry : Consumer Services / Media
1,163
576 / 434
49.9
9.8
8.1
43.2
0.87
Company Guide
mm2 Asia
WHAT’S NEW
3Q18 results boosted by cinema acquisitions
Newly acquired cinemas boosted revenue... Group revenue
surged 190% to S$52.4m, mainly due to the acquisition of
the Lotus cinemas in Malaysia and Cathay cinemas in
Singapore, and also its core production business and
UnUsUaL, the event production and concert promotion arm.
Nine-month revenue accounts for 65% of our FY18F
revenue, roughly in line, as Cathay cinemas only account for
one-month contribution. Gross profit jumped 172% y-o-y to
S$24.2m.
...but dragged down margins: 3Q18 net margin eased to
12.3%, from 14.6% in 2Q18 and 23.3% in 3Q17, partly due
to the increasing contribution from the cinema arm, which
has lower margins, and also the one-off expenses for the
recent cinema acquisitions.
Outlook
Core production
Expect key contribution from North Asia. Going forward,
mm2 will continue to focus on its core business in Singapore
and Malaysia as well as expand it to Hong Kong, Taiwan,
China and also the US. Productions in these markets are
expected to continue to form a bigger part of its revenue into
FY2019, especially from North Asia. We expect North Asia to
contribute about 70% of production revenue from FY18F, up
from 36% in FY16 and 56% in FY17. For 9-month FY18,
revenue from North Asia contributed approximately 76% of
the group's production revenue.
Seeking listing of Vividthree on Catalist. mm2’s subsidiary
Vividthree is seeking listing on the Catalist board of SGX.
mm2 acquired a 51% stake in Vividthree, a 3D animation
company, in early 2015 for S$3.06m or a PE of about 3x.
Incorporated in 2006, Vividthree has grown to become a
leading player and go-to studio in the field of visual effects
(VFX), 3D animation, virtual reality and computer generation
imagery (CGI) in Singapore. Though Vividthree’s contribution
to mm2 is still small now, accounting for 5-6% of the
group’s revenue and gross profit in FY17, a successful listing
should provide more visibility to attract the best talents for its
management, which is crucial for the creative business, and
pave the way for higher growth ahead, while parent mm2
can unlock value.
Platform business
The only cinema operator in both Malaysia and Singapore.
mm2 is now the second largest cinema operator in
Singapore, following the completion of the Cathay cinema
acquisition in November last year. In Malaysia, it is the fourth
biggest player, with ownership of 18 cinemas. The group is
now the only cinema operator in Malaysia and Singapore,
with major presence in both countries, and is in a strategic
position to optimise its capital expenditure and reach out to a
wider audience, thus reaping economies of scale.
UnUsUaL benefitting from rising demand for concerts and
events. With the increase in demand for concerts and events
in the region, UnUsUaL, with its dominant market position, is
set to benefit from this rising trend. It will continue to expand
into the region and also to bring in more western concerts.
Furthermore, the recent signing of the letter of intent to
present 48 “Disney On Ice” shows could open the door for
more Disney projects ahead.
Earnings and Recommendation
FY18F to FY19F earnings cut by 9-11%. We have lowered
FY18F to FY19F earnings by 9-11%, after accounting for
slightly lower revenue from the cinema segment and higher
interest costs. We continue to expect strong earnings growth
CAGR of 28% for FY17-20F, driven by all its core production
and platform businesses. Maintain BUY, new target price of
S$0.75, after rolling forward the sum-of-parts valuation to
FY19F earnings, and also lower valuation peg of 25x (vs 28x
previously), except for event production & concert
promotion, which is based on UnUsUal's current market
value.
Sum of parts valuation
Se g me n t
Production & Distribution
Cinema Operation
Post-Production
Event Production &
Concert Promotion
To ta l va l u e
Sta ke
100%
100%
51%
41.91%
Number of shares
Va l u e p e r s h a re (S$ )
Source: Company, DBS Bank
Va l u a ti o n
(S$ m)
478.8
180.8
31.9
As s u mp ti o n
Based on 25x PE, in line with peers
Based on 21x PE, in line with peers
Based on 25x PE, in line with peers
180.6 Based on current valuation
8 7 2 .1
1,162.2
0 .7 5
Company Guide
mm2 Asia
Quarterly / Interim Income Statement (S$m)
FY Mar
3Q17
2Q18
3Q18
% chg yoy
% chg qoq
Revenue
18.0
60.3
52.4
190.4
-13.2
Cost of Goods Sold
(9.2)
(34.8)
(28.2)
207.9
-19.0
Gross Profit
8.9
25.5
24.2
172.4
-5.2
Other Oper. (Exp)/Inc
0.0
0.0
0.0
-
-
Operating Profit
8.9
25.5
24.2
172.4
-5.3
Other Non Opg (Exp)/Inc
1.1
(0.2)
0.5
-56.3
-381.8
Associates & JV Inc
0.0
0.0
0.2
nm
nm
Net Interest (Exp)/Inc
0.0
0.0
0.0
-
-
Exceptional Gain/(Loss)
0.0
0.0
0.0
-
-
Pre-tax Profit
5.8
15.0
10.4
79.6
-31.0
Tax
(0.9)
(1.8)
(1.9)
111.7
2.5
Minority Interest
(0.7)
(2.2)
(2.0)
203.4
-7.6
Net Profit
4.2
11.0
6.4
52.9
-41.4
Net profit bef Except.
4.2
11.0
6.4
52.9
-41.4
EBITDA
8.7
15.2
14.0
61.9
-7.7
Gross Margins (%)
49.2
42.3
46.1
Opg Profit Margins (%)
49.2
42.3
46.1
Net Profit Margins (%)
23.3
18.2
12.3
Margins
Source of all data: Company, DBS Bank
Company Guide
mm2 Asia
Business Model – The Film Budget
CRITICAL DATA POINTS TO WATCH
Producer’s Fee
Critical Factors
Synergistic acquisitions
mm2 has made several acquisitions to maintain its competitive
advantage, and to build synergies across the entire value chain.
For content creation, mm2 has several tie-ups globally to coproduce films. It has also acquired a 51% stake in Vividthree, a
computer graphic studio, which is planning to go for Catalist
listing on SGX.
Team / Crew Fees
For the platform business, mm2 is the number four player in
Malaysia, and owns a total of 18 cinemas with a market share
of about 14% in terms of number of screens. It has also
acquired the entire eight Cathay cinemas in Singapore.
Other than cinemas, mm2 owns a 42% stake in UnUsUaL Ltd, a
market leader in large-scale live events and concerts, and is also
beefing up its OTT (over-the-top) platform.
Prints & Advertising Cost
Healthy production pipeline
The number of production titles has increased steadily over the
last few years; from six productions in FY14, to about 18 in
FY17. mm2 has a robust production pipeline of 35 production
titles, from April 2017 to September 2018. Out of these, 23
titles or 62% are from North Asia. In terms of production
budget, North Asia accounts for almost 80% of the total.
Expansion in North Asia
We expect North Asia to contribute about 70% of production
revenue from FY18F, up from 36% in FY16 and 56% in FY17.
mm2 has a unique presence in all the Chinese markets,
including Singapore, Malaysia, Hong Kong, Taiwan, and China.
This presents ample cross-border collaboration opportunities.
One example is the remaking of existing successful titles in
China, with the adaptation of local settings, which would be
more appealing to the locals there. mm2 is also looking to
expand to non-Chinese speaking markets like Korea, Japan,
Thailand, India, and the US.
Income to mm2
Script Rights
Director’s Fee
Production Team / Crew Fees
Production Cost
Post - Production Cost
Business Model – Gross Receipts (Box Office)
Box Office Receipts
less
Exhibitors’ Cost
less
Marketing Costs
less
Distribution Commission
less
Producer Bonus *
Equals
Income to mm2
Return to Stakeholders
(mm2 may also be a
stakeholder)
Net Receipts
* only when return is higher than stakeholders’ ROI
Revenue Breakdown by Segment
UnUsUaL is also leveraging on mm2’s network of contacts in
the media and entertainment industry to expand into North
Asia.
Digital age shift – content is king
The evolution of the media industry, from traditional media (TV,
radio, newspaper) to digital media leads to increasing
opportunities for mm2, which is strong in content creation and
platform businesses.
Profitability Trend
Source: Company, DBS Bank
Company Guide
mm2 Asia
Appendix 1:
A look at Company's listed history – what drives its share price?
Source: Company, DBS Bank
Company Guide
mm2 Asia
Balance Sheet:
Net gearing position in FY19F. We expect the group to take on
more debt financing for the acquisition of the Cathay cinemas
in Singapore. Net gearing for FY19F is thus expected to increase
to 0.77x, from net cash in FY18F.
Share Price Drivers:
Cost savings and efficiency from horizontal integration. The full
integration of the content business (production of movies,
Vividthree) and platform business (Cinema, UnUsUaL) would
lead to better efficiency and cost savings for the group. For
example, the ownership of cinemas not only provides a source
of recurring income to the group but also cost savings as mm2
usually has to pay about 50% of its gross box office proceeds
for rental of cinemas. Cinema operations is a profitable
business, and may even be profitable with less than 30% of the
seats occupied. mm2’s multiple platform capabilities would
place the group in a position to better distribute and exhibit
content to reach a wider audience.
Bigger production budget = higher growth
As mm2 adopts a fee-based model, its revenue is directly
correlated to the size of the production budget. We expect
North Asia, especially China, to contribute about 70% of
production revenue from FY18F, up from 36% in FY16 and
56% in FY17. The budget for China tends to be much bigger,
about S$10m on average per production, vs average of S$1-2m
for Singapore and Malaysia projects, and S$3m for Hong Kong
and Taiwan productions.
Number of Titles (Production & Distribution)
Number of Titles
Number of Titles
Year
(Production)
(Distribution)
FY Mar 2012
3
2
FY Mar 2013
6
8
FY Mar 2014
6
18
FY Mar 2015
9
26
FY Mar 2016
14
24
FY Mar 2017
18
26
Apr 17 to Sep 18*
35
* projection
UnUsUal: Number of Events (Production & Concert Promotion)
Number of
Number of
Year
Events
Concerts
(Production)
(Promotion)
FY Dec 2013
68
12
FY Dec 2014
46
9
FY Dec 2015
51
10
FY Mar 2017
64
19
Name of cinemas
Malaysia
Cathay
Mega Cineplex
Lotus
Total Malaysia
Singapore
Cathay
Total Singapore
Key Risks:
No long-term financing arrangements for productions. The
commencement of each production is dependent on mm2’s
ability to secure funding.
Cinemas acquired
Number of cinemas
Number of screens
2
3
13
18
22
11
84
127
8
8
64
64
Forward PE Band (x)
(x)
29.3
Unavailability of good scripts. Lack of good scripts for
production may lead to less support from stakeholders.
+2sd: 28.2x
24.3
+1sd: 22.3x
19.3
Inability to predict the commercial success of movies produced.
The commercial success of its productions is primarily
determined by inherently unpredictable audience reactions.
Company Background
mm2 Asia is a leading producer of films and TV/online content
in Asia. As a producer, mm2 provides services over the entire
film-making process – from financing and production to
marketing and distribution, and thus has diversified revenue
streams. mm2 also owns entertainment company, UnUsUaL,
and cinemas in Malaysia and Singapore.
Avg: 16.5x
14.3
-1sd: 10.6x
9.3
4.3
Dec-14
-2sd: 4.8x
Dec-15
Dec-16
Dec-17
PB Band (x)
(x)
8.0
+2sd: 7.87x
7.0
+1sd: 6.53x
6.0
5.0
Avg: 5.2x
4.0
-1sd: 3.87x
3.0
-2sd: 2.54x
2.0
Dec-14
Dec-15
Source: Company, DBS Bank
Dec-16
Dec-17
Company Guide
mm2 Asia
Segmental Breakdown
FY Mar
Revenues (S$m)
Production & Distribution
Cinema Operation
Event Production &
Concert Promotion
Post-Production
Total
Gross profit (S$m)
Production & Distribution
Cinema Operation
2016A
2017A
2018F
2019F
2020F
29.8
55.3
12.6
73.7
46.8
95.8
108
124
113
22.6
37.9
49.2
64.0
4.87
5.00
5.00
5.00
38.3
95.4
163
258
306
13.1
26.5
7.56
33.2
25.7
43.1
59.2
56.0
62.1
15.2
19.7
25.6
2.69
3.50
3.50
3.50
18.4
45.3
77.5
125
147
44.0
nm
47.9
60.0
45.0
55.0
45.0
55.0
45.0
55.0
nm
nm
40.0
40.0
40.0
nm
55.4
70.0
70.0
70.0
48.0
47.5
47.5
48.7
48.0
2016A
2017A
2018F
2019F
2020F
38.3
(20.0)
18.4
(8.0)
10.4
0.0
0.0
(0.4)
0.0
9.99
(1.1)
(0.7)
0.0
8.18
8.18
19.4
95.4
(50.1)
45.3
(18.7)
26.5
0.0
0.0
(0.6)
0.0
25.9
(3.8)
(3.2)
0.0
18.8
18.8
41.4
163
(85.8)
77.5
(39.2)
38.3
0.0
0.0
(1.9)
0.0
36.5
(6.2)
(4.9)
0.0
25.3
25.3
53.2
258
(132)
125
(70.8)
54.6
0.0
0.0
(8.4)
0.0
46.2
(7.9)
(5.8)
0.0
32.5
32.5
69.5
306
(159)
147
(84.3)
63.0
0.0
0.0
(8.4)
0.0
54.5
(9.3)
(5.8)
0.0
39.5
39.5
77.8
57.9
95.2
56.7
59.4
148.8
113.6
155.5
130.1
71.2
28.6
44.5
34.6
57.7
30.7
42.5
28.4
19.0
12.0
15.3
21.3
48.0
27.1
21.3
29.5
15.3
25.0
0.0
26.8
47.5
27.8
19.7
30.7
16.2
24.6
0.0
43.1
47.5
23.5
15.5
19.2
9.6
12.4
0.0
20.6
48.7
21.2
12.6
16.9
6.6
6.4
0.0
6.5
48.0
20.5
12.9
17.2
5.8
5.9
0.0
7.5
Event Production &
Concert Promotion
Post-Production
Total
Gross profit Margins (%)
Production & Distribution
Cinema Operation
Event Production &
Concert Promotion
Post-Production
Total
Income Statement (S$m)
FY Mar
Revenue
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
Net Profit before Except.
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins & Ratio
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
Source: Company, DBS Bank
Partial contributions from
Lotus and Cathay
Partial contributions
from UnUsUaL
Mainly to finance
acquisition of Cathay
cinema chain in
Singapore
Company Guide
mm2 Asia
Quarterly / Interim Income Statement (S$m)
FY Mar
Revenue
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Net Profit
Net profit bef Except.
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
Balance Sheet (S$m)
FY Mar
1Q2018
2Q2018
3Q2018
24.6
(9.3)
15.4
(5.8)
9.55
0.05
0.0
0.0
0.0
9.57
(1.8)
(1.4)
6.40
6.40
11.0
31.4
(16.8)
14.6
(6.9)
7.71
0.46
(0.2)
0.0
0.0
7.99
(1.6)
(1.8)
4.60
4.60
9.81
52.4
(28.2)
24.2
(14.5)
9.72
0.50
0.16
0.0
0.0
10.4
(1.9)
(2.0)
6.43
6.43
14.7
N/A
nm
nm
nm
27.6
(10.4)
(19.3)
(28.2)
66.9
49.9
26.0
40.0
62.4
38.8
26.0
46.5
24.5
14.6
46.1
18.5
12.3
2016A
2017A
2018F
2019F
2020F
Net Fixed Assets
Invts in Associates & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
3.65
0.0
26.1
4.74
9.83
24.4
0.26
69.0
11.2
1.49
54.3
25.8
23.3
46.4
0.58
163
71.8
0.0
42.0
122
31.4
95.8
0.58
363
306
0.0
28.2
85.0
48.4
151
0.58
619
355
0.0
14.5
134
58.3
180
0.58
742
ST Debt
Creditor
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
0.20
23.8
4.21
2.85
0.75
36.2
0.98
69.0
11.1
48.4
7.56
0.58
0.97
86.5
7.94
163
11.1
82.8
8.17
70.6
0.97
177
12.9
363
11.1
128
9.82
242
0.97
209
18.7
619
11.1
154
11.2
292
0.97
249
24.5
742
6.49
1.69
214.2
640.7
243.0
0.7
1.4
1.0
CASH
CASH
279.3
10.9
14.3
14.1
135.5
373.5
171.2
0.8
1.4
1.1
CASH
CASH
141.0
6.6
36.9
40.0
158.9
337.4
140.6
0.6
2.4
2.1
CASH
CASH
75.4
6.6
62.8
(168)
175.0
327.2
124.1
0.5
1.9
1.6
0.7
0.8
93.0
4.7
73.8
(169)
197.1
355.4
134.8
0.5
2.1
1.8
0.6
0.7
16.5
4.7
Non-Cash Wkg. Capital
Net Cash/(Debt)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Asset Turnover (x)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Net Debt/Equity ex MI (X)
Capex to Debt (%)
Z-Score (X)
Source: Company, DBS Bank
Mainly to finance acquisition
of Cathay cinema chain in
Singapore
Company Guide
mm2 Asia
Cash Flow Statement (S$m)
FY Mar
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
Opg CFPS (S cts)
Free CFPS (S cts)
2016A
2017A
2018F
2019F
2020F
9.99
8.98
(1.1)
0.0
(22.6)
0.0
(4.7)
(8.5)
0.0
0.0
0.0
0.0
(8.5)
0.0
2.35
9.10
(0.7)
10.7
0.0
(2.5)
1.98
(1.5)
25.9
14.8
(3.8)
0.01
(30.8)
0.0
6.12
(16.5)
0.0
0.0
0.0
0.0
(16.5)
0.0
17.8
18.0
0.0
35.8
0.0
25.4
3.52
(1.0)
36.5
14.8
(5.6)
0.0
(23.2)
0.0
22.5
(61.6)
0.0
0.0
0.0
0.0
(61.6)
0.0
70.0
65.0
0.0
135
0.0
96.0
3.93
(3.4)
46.2
14.8
(6.2)
0.0
(27.6)
0.0
27.3
(235)
0.0
0.0
0.0
0.0
(235)
0.0
171
0.0
0.0
171
0.0
(36.7)
4.72
(17.9)
54.5
14.8
(7.9)
0.0
(12.5)
0.0
49.1
(50.0)
0.0
0.0
0.0
0.0
(50.0)
0.0
50.0
0.0
0.0
50.0
0.0
49.1
5.29
(0.1)
FY17 and FY18 Acquisition of cinemas
and RINGS.TV
Assume debt financing
for future acquisitions
Assume 70% debt
financing for Cathay
cinema acquisition
Proceeds from share
placement
Source: Company, DBS Bank
Target Price & Ratings History
0.68
S$
Closing
Pric e
1:
13 Apr 17
0.51
0.63
BUY
2:
23 May 17
0.59
0.70
BUY
3:
24 May 17
0.59
0.70
BUY
4:
14 J un 17
0.60
0.70
BUY
5:
19 J ul 17
0.59
0.75
BUY
6:
24 J ul 17
0.53
0.75
BUY
7:
14 Aug 17
0.48
0.60
BUY
8:
02 Nov 17
0.57
0.73
BUY
9:
03 Nov 17
0.55
0.73
BUY
0.63
4
23
0.58
8
5
6
0.53
9
1
0.48
7
0.43
Feb-17
Apr-17
Jun-17
Aug-17
Oct-17
Dec-17
Feb-18
Not e : Share price and Target price are adjusted for corporate actions.
Source: DBS Bank
Analyst: Lee Keng LING
12- mt h
T arget Rat ing
Pric e
Dat e of
Report
S.No.
Company Guide
mm2 Asia
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 8 Feb 2018 12:08:40 (SGT)
Dissemination Date: 8 Feb 2018 14:52:29 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated
corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)
redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
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Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may
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This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
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The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
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UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
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Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
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Company Guide
mm2 Asia
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
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primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the
issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real
estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the
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COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates do not
have a proprietary position in the securities recommended in this report as of 29 Dec 2017.
2.
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Report.
Compensation for investment banking services:
3.
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12 months for investment banking services from mm2 Asia as of 29 Dec 2017.
4.
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5.
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should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced:
6.
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investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
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1
An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of
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2
Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a
new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term
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listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Singapore Company Guide
Riverstone Holdings
Refer to important disclosures at the end of this report
Version 10 | Bloomberg: RSTON SP | Reuters: RVHL.SI
DBS Group Research . Equity
26 Feb 2018
BUY (Upgrade from HOLD)
Lifted by the semiconductor upcycle
Last Traded Price ( 23 Feb 2018): S$1.04 (STI : 3,533.22)
Price Target 12-mth: S$1.27 (22% upside) (Prev S$1.09)
Upgrade to BUY with TP of S$1.27 as we see earnings growing on
strong cleanroom ramp-up. A global market leader in niche Class 10
and Class 100 cleanroom gloves, Riverstone’s edge in the high-tech
cleanroom segment sets it apart from the bigger boys. Given intense
competition in the healthcare space, we see value in Riverstone’s
growing cleanroom business – which allows the group to command
consistently higher margins vs peers (16% vs peers’ c.10-15% in FY17).
Analyst
Carmen Tay +65 6682 3719 carmentay@dbs.com
What’s New
•
Riverstone delivers record earnings in FY17 despite
unfavourable forex; headline profits up 7.4% y-o-y to
RM129.3m
•
Core earnings outpaced output growth slightly (+17.1% vs
16.9% y-o-y), implying its strategy to grow the highermargin cleanroom segment is paying off
•
Riverstone can outperform peers amid industry headwinds
as it ramps up on cleanroom glove capacity
•
Upgrade to BUY with a higher TP of S$1.26
With new cleanroom facilities set to kick in from 2Q18, cleanroom
capacity is expected to grow by c.33% to at least 2bn gloves p.a. The
ramp-up on these new capacities should help drive higher growth in
cleanroom gloves vis-à-vis the lower-margin healthcare business,
allowing Riverstone’s earnings growth of c.16% to catch up with larger
peers’ c.17%.
Where we differ: We are more bullish vs consensus as we expect the
improved output mix to help sustain margins and drive bottom line.
Potential catalysts: Further capacity expansion, sustained increase in
cleanroom glove mix (and thus margins), and inorganic growth.
Price Relative
S$
Capacity expansion and improving mix to underpin long-term growth.
In anticipation of strong demand for both its cleanroom and healthcare
gloves, Riverstone is now in the process of accelerating its expansion
plans. Under its revised three-year expansion plan, we expect total
glove production capacity to grow to 9bn pieces by end-2018 (vs 8.2bn
previously) and 10.4bn pieces p.a. by end-2019.
Relative Index
1.3
390
1.1
340
290
0.9
240
0.7
190
0.5
140
0.3
Feb-14
Feb-15
Feb-16
Riverstone Holdings (LHS)
Forecasts and Valuation
FY Dec (RM m)
Revenue
EBITDA
Pre-tax Profit
Net Profit
Net Pft (Pre Ex.)
Net Pft Gth (Pre-ex) (%)
EPS (S cts)
EPS Pre Ex. (S cts)
EPS Gth Pre Ex (%)
Diluted EPS (S cts)
Net DPS (S cts)
BV Per Share (S cts)
PE (X)
PE Pre Ex. (X)
P/Cash Flow (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
Earnings Rev (%):
Consensus EPS (S cts):
Other Broker Recs:
2016A
655
169
139
120
120
(4.9)
5.46
5.46
(5)
5.46
2.19
25.1
19.1
19.1
19.3
13.0
2.1
4.1
CASH
23.2
90
Feb-18
Feb-17
Relative STI (RHS)
2017A
817
186
151
129
129
7.4
5.86
5.86
7
5.86
2.36
28.8
17.7
17.7
15.7
11.8
2.3
3.6
CASH
21.8
2018F
934
230
178
154
154
19.5
7.01
7.01
19
7.01
2.82
33.0
14.8
14.8
16.7
9.6
2.7
3.2
CASH
22.7
2019F
1,055
260
199
173
173
11.9
7.84
7.84
12
7.84
3.15
37.6
13.3
13.3
11.1
8.2
3.0
2.8
CASH
22.2
B: 1
0
6.90
S: 0
6
7.50
H: 2
Source of all data on this page: Company, DBS Bank,
Bloomberg Finance L.P
ed: TH / sa: JC, PY, CS
Backed by robust demand and expectations of a higher cleanroom mix,
we project earnings to grow at a c.16% CAGR from RM129m in FY17
to RM173m by FY19F.
Valuation:
Upgrade to BUY with TP of S$1.27, based on 16x FY19F PE.
Underpinned by double-digit capacity growth and higher-quality
earnings growth supported by more stable cleanroom margins, we
believe that Riverstone deserves to at least trade at its historical average
valuation of 16x FY19F PE, which represents a c.45% discount to larger
peers’ 29x.
Key Risks to Our View:
Global economic slowdown. While margins for cleanroom gloves tend
to be resilient, demand for these gloves could be threatened in the
event of a slowdown in the global economy.
At A Glance
Issued Capital (m shrs)
741
Mkt. Cap (S$m/US$m)
771 / 584
Major Shareholders (%)
Ringlet Investment Limited
50.8
Wai Keong Lee
10.9
Free Float (%)
33.5
3m Avg. Daily Val (US$m)
0.28
ICB Industry : Health Care / Health Care Equipment & Services
Company Guide
Riverstone Holdings
WHAT’S NEW
Riverstone rises above persistent headwinds to deliver record-breaking FY17
Record RM129.3m profit in FY17. Riverstone delivered a
decent set of 4Q17 results despite challenging operating
conditions. Sales grew 12.2% q-o-q to c.RM210.7m on the
back of capacity growth, but the unfavourable mix shift
towards a higher proportion of lower-margin healthcare
gloves resulted in relatively flat earnings of c.RM34.2m (vs
RM34.3m in 3Q17).
have improved by >20% q-o-q to nearly 100% currently,
which further supports our view that the cleanroom
segment is starting to see stronger growth vs the healthcare
segment.
Higher dividend of 7 Scts for FY17 as Riverstone maintains a
40% payout, up 8% from 6.49 Scts in FY16.
Anticipate weaker 1Q18 as headwinds persist, but stronger
growth to kick in from 2Q18. With operating conditions
little changed, we expect industry headwinds – fluctuations
in USD/MYR, volatile raw material prices and operating costs
– to remain a bane for the glove industry at large. Further,
with the revised foreign worker levy policy and gas price
hike coming into force in January 2018, we anticipate 1Q18
results to be weak across the industry.
Forex volatility a drag on strong core growth momentum.
Volatility in the USD/MYR rate has weighed heavily on the
sector’s performance, Riverstone was not spared. In FY17,
the group incurred net foreign exchange losses of c.RM13m,
partly offset by hedging gains of c.RM6.8m as the company
typically hedges c.50% of contracted sales.
All else equal, underpinned by a c.33% increase in
cleanroom capacity to at least 2bn by end-2Q18, Riverstone
is set to see stronger growth ahead. Full contribution from
these incoming cleanroom capacities will likely only come in
from FY19 as the group ramps up on production
progressively.
Apart from the forex drag, Riverstone’s core growth was
otherwise strong, growing c.17.1% y-o-y to c.RM135.5m (vs
c.RM115.8m in FY16):
Riverstone due for a re-rating. While shares of larger peers –
Kossan, Hartalega and Top Glove have re-rated strongly in
recent months, Riverstone’s strengths remain
underappreciated. Based on consensus estimates, Hartalega
currently trades at +1SD of its historical forward PE
valuations, Top Glove and Kossan above +2SD. Meanwhile,
Riverstone continues to trade below its historical average
forward PE. As a result, Riverstone’s discount gap has
widened significantly vs peers, from c.28% to 49%
currently.
On a full-year basis, the record sales and earnings of
RM817.4m and RM129.3m were largely in line.
(RM$ m)
FY16
FY17
%Chg
(yoy)
Net Profit
120.4
129.3
+7.4%
(9.3)
13.0
4.7
(6.7)
115.8
135.5
Adjustments:
Forex Loss
(Gain)
Fair Value Loss
(Gain) on
Derivatives
Adjusted Net
Profit
+17.1%
Source: Company, DBS Bank
Plans to further cultivate cleanroom business starting to pay
off. Taking into account Riverstone’s temporary operational
hiccup in 3Q which affected its production ramp, we
observe that core earnings momentum has in fact outpaced
output growth at 17.1% vs 16.9% respectively, implying
that plans to further grow cleanroom sales are starting to
bear fruit.
While dipping lines can be used interchangeably between
healthcare and cleanroom gloves, the latter typically
undergo additional secondary processes in specialised
cleanroom facilities. Discussions during the 3Q17 and 4Q17
results briefing revealed that utilisation for these facilities
Underpinned by capacity growth at c.17% CAGR (vs larger
peers’ average of c.15.2%) over FY17-19 and higher-quality
earnings growth supported by more defensible margins, we
believe that Riverstone deserves to at least trade at its
historical average valuation of 16x FY19F PE (c.45%
discount to larger peers’ 29x) as earnings growth catches
up. Better-than-expected execution on these incoming
capacities could spark a further re-rating to 18x FY19F PE
(+1SD), in line with peers.
Upgrade to BUY with a higher TP of S$1.27, based on 16x
FY19F PE. Post 4Q17, we assume higher margins on a more
favourable product mix, and partly offset by lower ASPs
resulting from the recent forex weakness, we raise our
FY19F earnings projections by c.6% to RM172.8m.
After rolling forward our earnings base to FY19F to better
capture the strong growth potential from the roll-out of
incoming cleanroom capacities, and pegging to historical
average forward valuation of 16x, we arrive at a higher TP of
S$1.27 (vs S$1.09 previously). Upgrade to BUY.
Company Guide
Riverstone Holdings
Quarterly / Interim Income Statement (RMm)
4Q2016
3Q2017
4Q2017
% chg yoy
% chg qoq
183
188
211
15.1
12.2
Cost of Goods Sold
(135)
(137)
(159)
18.1
16.2
Gross Profit
48.2
50.8
51.5
6.8
1.3
Other Oper. (Exp)/Inc
(6.8)
(10.9)
(11.0)
61.7
0.8
Operating Profit
41.4
40.0
40.5
(2.2)
1.4
Other Non Opg (Exp)/Inc
0.0
0.0
0.0
-
-
Associates & JV Inc
0.0
0.0
0.0
-
-
Net Interest (Exp)/Inc
0.0
(0.3)
(0.3)
nm
6.7
Exceptional Gain/(Loss)
0.0
0.0
0.0
-
-
Pre-tax Profit
41.4
39.7
40.3
(2.8)
1.5
Tax
(5.4)
(5.3)
(6.0)
11.8
13.3
FY Dec
Revenue
Minority Interest
0.0
0.0
0.0
-
-
Net Profit
36.0
34.3
34.2
(5.0)
(0.3)
Net profit bef Except.
36.0
34.3
34.2
(5.0)
(0.3)
EBITDA
49.7
48.3
48.9
(1.7)
1.2
Gross Margins
26.3
27.1
24.4
Opg Profit Margins
22.6
21.3
19.2
Net Profit Margins
19.7
18.3
16.2
Margins (%)
Source of all data: Company, DBS Bank
Company Guide
Riverstone Holdings
Capital Expenditure (RM$m)
CRITICAL DATA POINTS TO WATCH
110
111.4
Critical Factors
Growth in global demand for healthcare gloves, at least in near
to medium term. The Malaysian Rubber Glove Manufacturers
Association (MARGMA) estimates that demand for healthcare
gloves is likely to grow at 8-12% p.a. between 2014 and 2020.
94.3
95.5
75
75
2018F
2019F
79.6
63.6
54.2
47.7
31.8
As a relatively new entrant in the healthcare glove industry and
with ambitions to grow revenue from this segment quickly to
drive its earnings, we project a ramp-up in Riverstone’s
healthcare glove production at a 17.5% CAGR over FY17-19F.
15.9
0.0
2015A
2016A
2017A
Production Capacity (m gloves)
Long-term trends also indicate favourable demand prospects.
According to MARGMA, the global demand ratio of natural
rubber and synthetic (nitrile) rubber gloves shifted from 74:26 in
2009 to 53:47 in 2014. On the back of rising awareness of latex
allergies in emerging economies and the synthetic variety's low
cost, we expect the ratio to shift away from natural rubber
gloves in the long run.
9102.5
Riverstone could be a beneficiary of the long-run substitution of
rubber gloves and PVC gloves (especially for the cleanroom
segment) by nitrile gloves as it is principally engaged in the
production of the latter.
0.0
8924
7590
7282.0
6371
5252
5461.5
3942
3641.0
1820.5
2015A
2016A
2017A
2018F
Cleanroom Gloves (m gloves)
1892
1929.73
Capacity expansion to underpin growth. To capitalise on the
favourable demand growth outlook in both the short and long
term, Riverstone guided that it now expects to expand its
manufacturing capacity to a minimum of 7.6bn gloves by end2017, 9bn gloves by end-2018 and 10.4bn gloves by end-2019,
as compared to 8.2bn gloves by 2018 previously.
We expect new production capacities to propel top-line growth
at a CAGR of 13.6% between FY17 and FY19F, as they
gradually come on stream.
Higher proportion of cleanroom gloves. As Riverstone’s glove
production lines can be used interchangeably for both
healthcare and higher-margin cleanroom glove production,
priority is typically given to cleanroom glove orders.
2019F
1609
1543.78
1274
1157.84
985
1014
2015A
2016A
771.89
385.95
0.00
2017A
2018F
2019F
Healthcare Gloves (m gloves)
7032
7102.4
5981
5681.9
5097
4238
4261.5
2956
2841.0
With demand in the niche cleanroom segment mainly stemming
from the semiconductor and mobile tablet sectors, we see
Riverstone as an indirect beneficiary of the current
semiconductor upcycle. Given the current competitive landscape
within the healthcare glove space, a higher sustained proportion
of cleanroom glove production could help Riverstone better
defend margins vs peers (which are predominantly focused in
the production of healthcare gloves).
1420.5
0.0
2015A
2016A
2018F
2019F
Operating Margins (%)
26.0
25.8
21.2
20.8
Greater efficiency from higher automation and larger scale
should help to maintain margins. Despite competition and
pressure on ASPs, we expect automation efforts and
Riverstone’s growing economies of scale to help shore up and
sustain operating margins above 19%, to support stable growth
in net profit ahead.
2017A
18.6
19.3
19.2
2017A
2018F
2019F
15.6
10.4
5.2
0.0
2015A
2016A
Source: Company, DBS Bank
Company Guide
Riverstone Holdings
Balance Sheet:
Healthy balance sheet. In 1Q17, the company took on debt for
the first time in five years to fund its upcoming expansion plans.
Despite this, we note that Riverstone remained in a net cash
position of RM89.3m as at end 4Q17.
Forecast net fixed asset growth at a CAGR of 10% between
2015 and 2019. As capacity is expected to double in 2019 from
2015 levels, we project the group’s net fixed assets to jump by
nearly 50% from RM286m in 2015 to RM419m in 2018.
Leverage & Asset Turnover (x)
0.25
1.2
0.20
1.2
0.15
1.1
0.10
1.1
0.05
0.00
1.0
2015A
2016A
2017A
2018F
Gross Debt to Equity (LHS)
Share Price Drivers:
Opportunities for inorganic growth. Due to the stringent
requirements for the establishment of cleanroom facilities,
Riverstone does not rule out the possibility of acquiring quality
cleanroom glove manufacturing companies in the future.
Cultivation of new markets for cleanroom products. As
cleanroom products are manufactured in controlled
environments and are subject to stringent requirements, they
are able to deliver much higher margins relative to healthcare
gloves. The ability to cultivate new markets for cleanroom
products, similar to what Riverstone recently achieved with its
diversification into the consumer electronics sector, should help
to boost earnings.
Asset Turnover (RHS)
Capital Expenditure
RMm
120.0
100.0
80.0
60.0
40.0
20.0
0.0
2015A
2016A
2017A
2018F
2019F
Capital Expenditure (-)
ROE (%)
An acceleration of capacity expansion plans beyond the current
guidance of 10.4bn gloves by end-2019 could drive a further rerating of share price.
25.0%
Key Risks:
Global economic slowdown could impact cleanroom sales. A
slowdown in the general economy could lead to declines in
discretionary spending and manufacturing activity in the HDD
industry. Although Riverstone has been gradually reducing its
exposure to HDDs, down from historical highs of up to 70%,
they still make up less than 50% of the company's cleanroom
portfolio today.
10.0%
Intensifying competition could erode profitability. We believe
that oversupply over the next few years is unlikely given the
more balanced demand-supply outlook for healthcare gloves
among Malaysian peers compared to a year ago. However,
rising competition from budding glove manufacturing regions
such as Thailand and China could threaten Riverstone’s market
share and pricing power later on if it fails to advance on the
technological front.
2019F
20.0%
15.0%
5.0%
0.0%
2015A
2016A
2017A
2018F
2019F
Forward PE Band (x)
(x)
25.5
+2sd: 21.9x
20.5
+1sd: 18x
15.5
Avg: 14x
10.5
-1sd: 10.1x
5.5
Feb-14
-2sd: 6.2x
Feb-15
Feb-16
Feb-17
PB Band (x)
Company Background
Riverstone Holdings (RSTON SP) is a natural rubber and nitrile
(synthetic rubber) glove manufacturer specialising in cleanroom
and healthcare gloves. It is also engaged in the manufacture
and distribution of other ancillary products such as finger cots,
packaging bags and face masks.
(x)
6.7
5.7
+2sd: 5.23x
4.7
+1sd: 4.42x
3.7
Avg: 3.61x
-1sd: 2.8x
2.7
1.7
Feb-14
-2sd: 1.98x
Feb-15
Source: Company, DBS Bank
Feb-16
Feb-17
Company Guide
Riverstone Holdings
Key Assumptions
FY Dec
2015A
2016A
2017A
2018F
2019F
Capital Expenditure
(RM$m)
Production Capacity (m
gloves)
Cleanroom Gloves (m
gloves)
Healthcare Gloves (m
gloves)
Operating Margins (%)
54.2
3,942
985
2,956
25.8
94.3
5,252
1,014
4,238
21.2
110
6,371
1,274
5,097
18.6
75.0
7,590
1,609
5,981
19.3
75.0
8,924
1,892
7,032
19.2
Income Statement (RMm)
FY Dec
2015A
2016A
2017A
2018F
2019F
560
(385)
175
(30.5)
144
0.0
0.0
0.0
0.0
144
(17.8)
0.0
0.0
127
127
169
655
(482)
173
(34.3)
139
0.0
0.0
0.0
0.0
139
(18.5)
0.0
0.0
120
120
169
817
(620)
198
(45.9)
152
0.0
0.0
(1.0)
0.0
151
(21.5)
0.0
0.0
129
129
186
934
(702)
233
(52.8)
180
0.0
0.0
(1.8)
0.0
178
(23.7)
0.0
0.0
154
154
230
1,055
(795)
260
(57.2)
202
0.0
0.0
(3.0)
0.0
199
(26.6)
0.0
0.0
173
173
260
40.3
68.4
78.0
78.4
16.9
(0.3)
(3.8)
(4.9)
24.8
10.5
9.4
7.4
14.3
23.6
18.5
19.5
12.9
12.8
12.4
11.9
31.2
25.8
22.6
29.7
24.7
28.8
37.8
NM
26.4
21.2
18.4
23.2
19.2
22.7
40.0
138,849.0
24.2
18.6
15.8
21.8
17.9
20.7
40.2
148.4
24.9
19.3
16.5
22.7
18.4
20.6
40.2
100.0
24.6
19.2
16.4
22.2
17.6
19.1
40.2
67.4
Revenue
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
Net Profit before Except.
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins & Ratio
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
Source: Company, DBS Bank
Company Guide
Riverstone Holdings
Quarterly / Interim Income Statement (RMm)
FY Dec
4Q2016
1Q2017
Revenue
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Net Profit
Net profit bef Except.
EBITDA
2Q2017
3Q2017
4Q2017
183
(135)
48.2
(6.8)
41.4
0.0
0.0
0.0
0.0
41.4
(5.4)
0.0
36.0
36.0
49.7
206
(154)
51.8
(12.4)
39.4
0.0
0.0
(0.2)
0.0
39.2
(5.6)
0.0
33.6
33.6
47.6
213
(170)
43.7
(11.7)
32.0
0.0
0.0
(0.3)
0.0
31.7
(4.6)
0.0
27.1
27.1
40.3
188
(137)
50.8
(10.9)
40.0
0.0
0.0
(0.3)
0.0
39.7
(5.3)
0.0
34.3
34.3
48.3
211
(159)
51.5
(11.0)
40.5
0.0
0.0
(0.3)
0.0
40.3
(6.0)
0.0
34.2
34.2
48.9
9.6
19.4
21.7
20.8
12.4
(4.2)
(5.0)
(6.7)
3.7
(15.3)
(18.8)
(19.5)
(11.9)
19.8
25.0
26.8
12.2
1.2
1.4
(0.3)
26.3
22.6
19.7
25.2
19.1
16.3
20.5
15.0
12.7
27.1
21.3
18.3
24.4
19.2
16.2
Balance Sheet (RMm)
FY Dec
2015A
2016A
2017A
2018F
2019F
Net Fixed Assets
Invts in Associates & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
277
0.0
9.61
129
61.2
103
6.06
585
337
0.0
8.62
103
67.0
140
11.9
668
420
0.0
9.74
114
71.1
145
20.9
781
444
0.0
9.74
165
71.4
187
20.9
898
462
0.0
9.74
277
80.8
211
20.9
1,062
ST Debt
Creditor
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
0.0
84.4
7.65
0.0
11.7
482
0.0
585
0.0
90.5
9.92
0.0
12.7
555
0.0
668
6.00
102
8.45
19.0
11.2
634
0.01
781
6.00
76.7
8.45
69.0
11.2
727
0.01
898
6.00
86.9
8.45
119
11.2
830
0.01
1,062
78.2
129
61.8
68.3
52.3
1.1
3.2
2.5
CASH
CASH
N/A
16.6
119
103
67.8
70.7
51.8
1.0
3.2
2.4
CASH
CASH
N/A
15.4
127
89.3
63.7
60.0
43.1
1.1
3.0
2.2
CASH
CASH
441.1
14.7
194
89.8
64.8
50.0
39.9
1.1
4.9
3.9
CASH
CASH
100.0
14.7
217
152
68.8
40.5
37.7
1.1
5.8
4.8
CASH
CASH
60.0
10.9
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
Non-Cash Wkg. Capital
Net Cash/(Debt)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Asset Turnover (x)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Net Debt/Equity ex MI (X)
Capex to Debt (%)
Z-Score (X)
Source: Company, DBS Bank
Company Guide
Riverstone Holdings
Cash Flow Statement (RMm)
FY Dec
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
Opg CFPS (S cts)
Free CFPS (S cts)
2015A
2016A
2017A
2018F
2019F
144
24.8
(18.5)
0.0
(26.3)
(2.3)
122
(54.2)
0.0
0.0
0.0
0.0
(54.2)
(25.8)
0.0
0.0
0.0
(25.8)
7.07
49.2
6.73
3.08
139
29.9
(22.6)
0.0
(31.8)
4.65
119
(94.3)
(2.3)
0.0
0.0
0.0
(96.6)
(48.5)
0.0
0.0
0.0
(48.5)
0.65
(25.5)
6.84
1.12
151
34.5
(21.3)
0.0
(11.6)
(6.8)
146
(110)
0.0
0.0
0.0
0.0
(110)
(48.1)
25.0
0.0
0.0
(23.1)
(1.3)
11.1
7.13
1.61
178
50.4
(23.7)
0.0
(67.3)
0.0
138
(75.0)
0.0
0.0
0.0
0.0
(75.0)
(62.1)
50.0
0.0
0.0
(12.1)
0.0
50.5
9.29
2.84
199
57.7
(26.6)
0.0
(23.4)
0.0
207
(75.0)
0.0
0.0
0.0
0.0
(75.0)
(69.5)
50.0
0.0
0.0
(19.5)
0.0
113
10.5
5.99
Source: Company, DBS Bank
Target Price & Ratings History
1.24
S$
1.19
Closing
Pric e
1:
24 F eb 17
0.92
0.92
HOLD
2:
05 May 17
0.97
1.07
BUY
3:
17 J ul 17
1.05
1.07
BUY
4:
04 Aug 17
1.05
1.07
BUY
5:
07 Aug 17
1.06
1.09
HOLD
6:
08 Nov 17
1.07
1.09
HOLD
1.14
1.09
4
1.04
3
0.99
6
5
2
0.94
0.89 1
0.84
0.79
Feb-17
Apr-17
Jun-17
Aug-17
Oct-17
Dec-17
Feb-18
Not e : Share price and Target price are adjusted for corporate actions.
Source: DBS Bank
Analyst: Carmen Tay
12- mt h
T arget Rat ing
Pric e
Dat e of
Report
S.No.
Company Guide
Riverstone Holdings
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 26 Feb 2018 08:01:40 (SGT)
Dissemination Date: 26 Feb 2018 08:56:54 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
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Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
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The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
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UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
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Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
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commodity referred to in this report.
Company Guide
Riverstone Holdings
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.
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The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
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primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the
issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real
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have a proprietary position in the securities recommended in this report as of 31 Jan 2018.
2.
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Report.
Compensation for investment banking services:
3.
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manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
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should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced:
4.
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investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
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1
An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of
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2
Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a
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Singapore Company Guide
Roxy-Pacific Holdings
Refer to important disclosures at the end of this report
Version 1 | Bloomberg: ROXY SP | Reuters: RXYP.SI
DBS Group Research . Equity
15 Feb 2018
BUY
Ready, set, go!
Last Traded Price ( 14 Feb 2018): S$0.56 (STI : 3,402.86)
Price Target 12-mth: S$0.69 (23% upside)
Analyst
Rachel TAN +65 6682 3713 racheltanlr@dbs.com
Derek TAN +65 6682 3716 derektan@dbs.com
What’s New

FY17 net profit -41% y-o-y; lower development profits
and income from investment properties (divestment)

Unrecognised sales stood at S$459m; largely in
Australia with expected completion in FY18/FY19

First launch in FY18 saw 50% take-up

Declared final div of 0.771 Scents; maintain 40%
payout
Price Relative
Forecasts and Valuation
FY Dec (S$ m)
Revenue
EBITDA
Pre-tax Profit
Net Profit
Net Pft (Pre Ex.)
Net Pft Gth (Pre-ex) (%)
EPS (S cts)
EPS Pre Ex. (S cts)
EPS Gth Pre Ex (%)
Diluted EPS (S cts)
Net DPS (S cts)
BV Per Share (S cts)
PE (X)
PE Pre Ex. (X)
P/Cash Flow (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
Earnings Rev (%):
Consensus EPS (S cts):
Other Broker Recs:
Where we differ. Poised to hit an upbeat Singapore property
market with six freehold residential developments. We are one of
the first few brokerages to have initiated coverage on Roxy. While
the market may have overlooked Roxy for its size, we believe “best
things come in small packages”. We believe Roxy, being one of
the earliest to landbank in the current market cycle, has six
freehold residential developments in Singapore which will be ready
to launch in 2018, two to three of which will be launched within
1Q18. We see this as a window for the group to capture the rise
in buyer demand before its peers.
Potential catalysts: Strong sales take-up, more landbanking,
acquisitions of good-quality investment properties.
Lower FY17 results but all eyes on FY18. FY17 net profit fell 41%
y-o-y largely from lower contributions from development
properties and investment properties (post-divestment). Despite a
weak FY17 results, management is upbeat on FY18, anticipating
better property sales, contributions from newly-acquired
investment properties, and a better outlook on Singapore’s
hospitality sector. Declared 0.771 Scents final dividend.
2016A
385
67.6
65.6
49.8
33.4
(57.4)
4.17
2.80
(57)
4.17
1.67
41.2
13.4
20.0
88.6
17.5
3.0
1.4
1.0
10.5
2017A
247
41.6
46.7
29.4
6.51
(80.5)
2.47
0.55
(80)
2.47
0.98
42.2
22.7
102.5
nm
29.4
1.8
1.3
1.1
5.9
2018F
190
77.4
54.1
41.2
41.2
532.8
3.46
3.46
533
3.46
0.86
44.6
16.2
16.2
nm
20.3
1.5
1.3
1.7
8.0
2019F
406
120
94.8
68.7
68.7
66.6
5.76
5.76
67
5.76
1.44
49.5
9.7
9.7
34.4
13.5
2.6
1.1
1.6
12.2
3.60
B: 2
19.2
S: 0
57.0
H: 0
Source of all data on this page: Company, DBS Bank, Bloomberg
Finance L.P
ed: JLC / sa:YM, PY, CS
Maintain BUY; TP of S$0.69. We are maintaining our BUY rating
and TP of S$0.69 (based on 30% discount to RNAV) on RoxyPacific Holdings (Roxy). Benefitting from being early in the current
en-bloc cycle, Roxy is one of the few “undiscovered” mid-cap
developer proxies to ride the recovery of the Singapore property
market. BUY!
Valuation:
Our TP of S$0.69 is based on 30% discount to RNAV of S$0.98.
The stock currently trades at 1.2x FY18F P/BV, below historical
average. At its peak, Roxy trades at 2.3x P/BV.
Key Risks to Our View:
i) Slower take-up rates, ii) Government regulates more to manage
the Singapore property market, iii) AUD / NZD / JPY forex
fluctuations, and iv) acquisitions of less-desirable investment
properties.
At A Glance
Issued Capital (m shrs)
Mkt. Cap (S$m/US$m)
Major Shareholders (%)
Kian Lim Investment Pte Ltd
Teo Hong Lim
Sen Lee Development Pte Ltd
Free Float (%)
3m Avg. Daily Val (US$m)
ICB Industry : Financials / Real Estate
1,192
668 / 508
38%
12%
11%
22%
0.13
Company Guide
Roxy-Pacific Holdings
WHAT’S NEW
Ready, set, go!
FY17 net profit fell 41% y-o-y largely from lower
development profits and lower contributions from investment
properties: Roxy’s FY17 net profit fell 41% y-o-y to S$29m,
mainly due to lower revenue (-36% y-o-y) and lower share of
results from associates (-30% y-o-y) on the back of lower
recognition of Eon Shenton, partially offset by higher fair
value gains from investment properties (+40% y-o-y).
Acquired three more land sites in Dec17 / Jan18. Roxy
remains active in its landbanking activities and has
accumulated another three more sites in Dec17 / Jan18 and
now owns 10 development sites, as a mean to replenish its
landbank and to capture good opportunities. The sites are
located mainly in the RCR. Management expects to launch
these properties in FY19.
Lower revenue was recorded in all segments but mainly in
development properties (-41% y-o-y) and investment
properties (-14% y-o-y).
Received interest to acquire its 117 Clarence Street.
According to media reports, we understand that Roxy has
received encouraging interest to acquire its 117 Clarence
Street office building in Sydney. The building was jointly
acquired with Tong Eng Group in Feb16. Management may
consider a divestment if the offer price is attractive. We have
yet to include the new landbank in the numbers.
The decrease in revenue from development properties was
largely due to lower revenue recognised from projects
completed or nearing completion in FY17 such as Jade
Residences, Whitehaven, and LIV on Wilkie. In addition, there
was an absence of revenue recognised from LIV on Sophie
which was completed in FY16.
The fall in investment properties was mainly due to the loss of
rental income following the divestment of 59 Goulburn
Street.
Revenue from hotel properties fell 4% y-o-y mainly due to
lower RevPar of Grand Mercure Roxy Hotel, following more
subdued corporate activity in FY17 and pricing competition
from new hotel supply.
Gross profit margin improved to 24% from 21% in FY16,
largely led by better margins of 15% recorded from its
development properties (vs 14% in FY16).
Roxy has declared a final dividend of 0.771 Scents. This brings
total FY17 dividend to 0.985 Scents vs 1.667 Scents in FY16.
The dividend payout ratio remains stable at 40%.
Unrecognised sales stood at S$459m as at FY17: As at FY17,
unrecognised sales stood at S$459m largely from its Australia
properties (89%) which are expected to be completed in
2018 / 2019.
First launch in FY18 (The Navian) recorded 50% sales take-up
in one month; targets to launch six properties (including The
Navian) in FY18. Roxy officially launched its first property in
FY18, The Navian in Jan18. As at 5 Feb 18, it has sold 23
units, 50% of total units, which is an encouraging sign, in our
view. Conservatively, management targets to launch six
properties (including The Navian) in FY18 with a total of 440
units. However, management hopes to launch another 1 or 2
more properties in FY18, if ready, to capture the demand as
soon as possible. Next in line to be launched are Harbour
View Gardens (after Chinese New Year) and Grange Road site
(expected in Apr18) while the Upper Bukit Timah site, the
River Valley site, and the Guillemard Lane site are expected to
be launched in 2Q18 / 3Q18.
Expect to see better RevPar in 2H18. While FY17 was a
challenging year for its hotel property in Singapore, Grand
Mercure Singapore Roxy, management expects to see some
improvement in RevPar in 2H18 as supply starts to taper off,
reducing pricing competition. In addition, management is
upbeat on the major events to be held in FY18, following
encouraging signs seen in the beginning of the year with the
Singapore Airshow 2018.
The newly acquired hotel in Osaka (Oct17) has been
successfully rebranded to Noku Roxy in Jan18 which will be
self-managed.
Noku Maldives started operations in Dec17 and expected to
be fully open soon while its hotel in Phuket is expected to be
completed and begin operations in FY19.
Maintain BUY; TP of S$0.69. We maintain our BUY rating and
target price of S$0.69. We believe Roxy is a good small- to
mid-cap proxy to Singapore property and is poised to benefit
from upbeat sentiment in the sector from the launch of six
freehold residential properties before its peers. In addition,
Roxy, being small and nimble, has been selective in small but
freehold land sites. This gives them the flexibility i) to launch
quickly and hit the market before its peers; ii) to adopt the
quick-turnaround model; and iii) to change according to
market sentiment. Key potential catalysts are i) strong sales
take-up rates upon launch; ii) ability to landbank continually;
and iii) acquisition of good-quality investment properties.
Roxy currently trades at 1.3x FY18F P/BV, below historical
average. At its peak, Roxy traded at 2.3x P/BV.
Company Guide
Roxy-Pacific Holdings
Quarterly / Interim Income Statement (S$m)
FY Dec
Revenue
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
4Q2016
3Q2017
4Q2017
% chg yoy
% chg qoq
93.1
60.3
43.3
(53.5)
(28.1)
(73.0)
(42.7)
(31.4)
(57.0)
(26.5)
20.2
17.5
11.9
(40.8)
(32.0)
(11.4)
(11.4)
(5.7)
(50.2)
(50.3)
8.73
6.10
6.24
(28.6)
2.2
0.0
0.0
0.0
-
-
Associates & JV Inc
8.13
0.51
5.22
(35.8)
nm
Net Interest (Exp)/Inc
(3.7)
(3.2)
(2.7)
27.0
15.6
Exceptional Gain/(Loss)
0.17
0.0
0.0
-
-
Pre-tax Profit
13.3
3.39
8.75
(34.3)
158.1
Tax
(1.4)
(1.1)
(1.4)
1.3
23.8
Minority Interest
(0.7)
(0.8)
(0.1)
nm
nm
Net Profit
11.3
1.50
7.27
(35.5)
385.3
Net profit bef Except.
11.1
1.51
7.27
(34.5)
383.3
EBITDA
19.1
7.12
13.1
(31.3)
84.6
Margins (%)
Gross Margins
21.6
29.1
27.5
Opg Profit Margins
9.4
10.1
14.4
Net Profit Margins
12.1
2.5
16.8
Source of all data: Company, DBS Bank
Company Guide
Roxy-Pacific Holdings
Revenue (FY15 – FY19F)
CRITICAL DATA POINTS TO WATCH
600
502
Beefing up its recurring-income portfolio. Since the slowdown
of the Singapore property market in 2013, Roxy has started to
venture out of Singapore and expanded its horizon to build its
portfolio of assets to improve recurring income and provide
stability in earnings. In FY17, Roxy acquired four commercial
buildings, two in Australia, and two in New Zealand, adding to
its portfolio of one commercial building (excluding the
divestment of 59 Goulburn commercial building).
Revenue (S$'mn)
500
300
233
213
200
2015
2016
Development Properties
2017F
Hotel Ownership
2018F
2019F
Investment Properties
Gross profit (FY15 – FY19F)
200.0
180.0
160.0
140.0
147.3
129.7
120.0
100.0
81.2
80.0
69.2
59.2
60.0
40.0
20.0
2015
2016
Development Properties
2017F
Hotel Ownership
2018F
2019F
Investment Properties
Gross profit margin (%)
These properties will start to contribute from FY18 onwards.
Replenishing landbank for sustainability. As Roxy adopts a
quick-turnaround model and launches all its landbank in FY18,
the ability to replenish its landbank promptly would be crucial in
ensuring sustainability of its Singapore residential business if it
continues strengthening for a longer period of time. So far, it
has historically proven its ability to source for strategic land sites
and possibly faces less competition as it typically targets smaller
plots of land which may not be attractive to larger developers.
385
400
In addition, the Group continues to build its hospitality
segment, which will add to its recurring income. In FY17, the
Group acquired Tenmabashi Grand Hotel Osaka for JPY3bn.
35%
32%
33%
31%
Gross profit margin (%)
Realisation of development projects in Australia upon
completion. Roxy’s investments in development projects in
Australia in 2015 will soon pay off when five projects are
completed by 2018. The projects have all been substantially sold
(>95% sold) except the last project launched in 3Q17; Art
House at West End Glebe. The units sold have a total sales value
of approximately S$300mn and could potentially contribute
21% to 44% of FY18F – FY19F earnings.
461
100
Revenue (S$'mn)
Critical Factors
Launching six freehold residential projects in Singapore in 2018.
As developers now rush to landbank, Roxy can reap the benefits
of being one of the earliest to landbank among the mid- to
small-cap developers and successfully acquire seven plots of
land to be launched in 2018. As such, Roxy has a total of c.476
residential units to be launched in 2018 that could potentially
generate more than S$0.5bn in total GDV. Assuming 100%
take-up rates, sales volume could potentially grow 8x y-o-y on
annualised sales volume for FY17.
29%
29%
28%
27%
25%
25%
23%
21%
21%
19%
17%
15%
2015
2016
2017F
2018F
2019F
RNAV (S$’mn)
OMV (S$'mn)
Surplus / deficit of assets:
Development properties
Landbank
Hotel properties
Investment properties
NAV
RNAV
No of shares
RNAV per share (S$)
Discount
Price Target (S$)
Source: Company, DBS Bank
105.9
18.5
447.2
97.6
669.2
504.0
1,173.2
1,193.5
0.98
30%
0.69
Company Guide
Roxy-Pacific Holdings
Appendix 1:
Remarks
660
14,000
560
12,000
10,000
460
8,000
L ed by a change in Singapore
p ro perty's sentiment as seen in a
p ick-up in sales volume
360
260
6,000
4,000
160
Sales volume (units)
Share price abs perf (INdex)
Roxy’s absolute performance vs Singapore property industry sales volume
2,000
-
Dec-08
May-09
Oct-09
Mar-10
Aug-10
Jan-11
Jun-11
Nov-11
Apr-12
Sep-12
Feb-13
Jul-13
Dec-13
May-14
Oct-14
Mar-15
Aug-15
Jan-16
Jun-16
Nov-16
Apr-17
Sep-17
60
Sale volume (units) - RHS
Abs Price Perf - LHS
Share price performance is
positively correlated with
sales volume in the
Singapore property
industry, especially in the
initial stages of an upcycle
seen in 2017, when
sentiment in the property
sector turned positive,
supported by an increase in
sales volume.
Source: DBS Bank, Thomson Analytics, Company
Roxy’s absolute performance vs its property sales volume
Sales volume (units)
260
L ed by strong
sales volume
in 2012
900
St rong sales led
by property sales
in Australia /
M alaysia
800
700
600
210
500
400
160
300
200
110
Share price abs perf (Index)
310
Remarks
100
60
2011
2012
2013
2014
2015
% change in PPI - RHS
2016
The market did not
reward Roxy despite the
strong sales
performance in 2016. As
the strong sales volume
was led by sales in
Australia and Malaysia,
share price performance
seemed to be more
correlated with its sales
volume in Singapore.
9M2017 FY2018E
Abs Price Perf - LHS
Source: DBS Bank, Thomson Analytics, Company
Roxy’s absolute performance vs PPI changes
Remarks
20
15
560
10
460
5
360
0
-5
260
-10
160
-15
% change in PPI - RHS
Source: DBS Bank, Thomson Analytics, Company, SGX
Abs Price Perf - LHS
Sep-17
Apr-17
Nov-16
Jan-16
Jun-16
Aug-15
Oct-14
Mar-15
May-14
Jul-13
Dec-13
Feb-13
Sep-12
Apr-12
Jun-11
Nov-11
Jan-11
Aug-10
Oct-09
Mar-10
Dec-08
-20
May-09
60
% change in PPI (%)
Share price abs perf (INdex)
660
We do not see much
correlation between
share price performance
and property price
changes.
Company Guide
Roxy-Pacific Holdings
Balance Sheet:
Undervalued Net Asset Value (NAV). The group’s NAV is
conservative largely because the carrying values of its hospitality
portfolio is at historical cost. In addition, development
properties comprise close to 60% of its total assets, which
typically offer more upside upon the realisation of these
development properties. Its RNAV is more than double its
current NAV.
Net debt to equity stands at 1x in FY17. Roxy’s net debt to
equity stood at 1x as at FY17. We expect the ratio could
increase to 1.7x following the landbanking / development and
acquisition of investment properties activities in FY16/FY17.
While it may seem high, its NAV could be conservative as
mentioned above. The Group’s net debt to adjusted NAV
(ANAV) stood at 0.6x as at FY17.
Leverage & Asset Turnover (x)
Capital Expenditure
Share Price Drivers:
Strong sales take-up rates. Strong sales take-up rates upon
launch would boost confidence and ensure sustainable
profitability in its development properties. Depending on the
prices, it is also a testament that the market is receptive of
higher property prices. In addition, share price performance is
positively correlated to sales volume, especially the group’s sales
in Singapore.
ROE (%)
Replenishing landbank is key to income sustainability. As Roxy
adopts a quick-turnaround model and plans to launch all its
landbank ahead of its peers, its ability to replenish landbank is
key to income sustainability in the longer term.
Key Risks:
Slower take-up rates. With six developments expected to be
launched in FY18, slower take-up rates for its properties would
impact the needs for more financing, thus, increasing its costs.
In addition, Roxy has the five-year timeline to complete its sales
before the ABSD and QC charges kick in.
Forward PE Band (x)
Government regulates more to manage Singapore property.
Despite the multiple ‘warnings’ by the government to be
cautious of excessive exuberance in the property market, the
land bids and the property market remain robust and bullish.
We remain cautious that the government may decide to
implement some measures to ensure that the Singapore
property market remains sustainable in the medium term and
that it doesn’t become a “runaway train”. Depending on the
measures implemented, it could impact both the demand for
its projects or its future landbanking opportunities.
PB Band (x)
Company Background
Roxy-Pacific Holdings (Roxy) has a long track record in the
property and hospitality space since it was established in May
1967. Listed in March 2008, Roxy is one of the reputable
small- to mid-cap developers and has established its brand in
small- to medium-sized residential developments targeting
middle-to-upper-middle-income segments.
Source: Company, DBS Bank
Company Guide
Roxy-Pacific Holdings
Segmental Breakdown
FY Dec
Revenues (S$m)
Development Properties
Hotel Ownership
Investment Properties
Total
Gross Profit (S$m)
Development Properties
Hotel Ownership
Investment Properties
2015A
2016A
2017A
2018F
2019F
404
44.5
12.2
327
46.3
12.5
192
44.3
10.8
122
43.0
24.9
338
43.0
24.9
461
385
247
190
406
93.3
27.8
8.58
45.3
26.9
9.00
28.0
24.0
7.59
20.3
23.2
17.8
62.8
23.2
17.8
Total
Gross Profit Margins (%)
Development Properties
Hotel Ownership
Investment Properties
130
81.2
59.5
61.3
104
23.1
62.4
70.6
13.9
58.1
71.9
14.6
54.2
70.5
16.6
54.0
71.5
18.6
54.0
71.5
Total
28.1
21.1
24.1
32.3
25.6
2015A
2016A
2017A
2018F
2019F
461
(331)
130
(35.9)
93.8
0.0
11.1
(10.6)
6.75
101
(15.9)
(0.1)
0.0
85.1
78.3
110
385
(304)
81.2
(38.7)
42.5
0.0
18.6
(11.9)
16.4
65.6
(12.7)
(3.1)
0.0
49.8
33.4
67.6
247
(187)
59.5
(36.8)
22.8
0.0
13.0
(12.0)
22.9
46.7
(15.4)
(1.9)
0.0
29.4
6.51
41.6
190
(128)
61.3
(37.4)
33.1
0.0
38.5
(17.5)
0.0
54.1
(10.3)
(2.6)
0.0
41.2
41.2
77.4
406
(302)
104
(38.6)
74.4
0.0
38.5
(18.1)
0.0
94.8
(18.0)
(8.1)
0.0
68.7
68.7
120
45.0
(3.6)
69.7
(12.9)
(16.4)
(38.5)
(54.7)
(57.4)
(36.0)
(38.5)
(46.3)
(80.5)
(23.1)
86.1
45.2
532.8
113.8
55.0
124.7
66.6
28.1
20.4
18.5
19.8
6.0
6.0
26.8
8.8
21.1
11.0
12.9
10.5
3.5
2.6
39.9
3.6
24.1
9.2
11.9
5.9
2.0
1.1
39.9
1.9
32.3
17.4
21.7
8.0
2.6
1.8
25.0
1.9
25.6
18.3
16.9
12.2
4.1
3.6
25.0
4.1
Income Statement (S$m)
FY Dec
Revenue
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
Net Profit before Except.
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins & Ratio
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
Source: Company, DBS Bank
Contributions from
development properties
in Australia, expected to
be completed in FY18,
recognised on a
completed basis
Higher contributions
from newly acquired
investment properties
Company Guide
Roxy-Pacific Holdings
Quarterly / Interim Income Statement (S$m)
FY Dec
4Q2016
1Q2017
Revenue
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Net Profit
Net profit bef Except.
EBITDA
2Q2017
3Q2017
4Q2017
93.1
(73.0)
20.2
(11.4)
8.73
0.0
8.13
(3.7)
0.17
13.3
(1.4)
(0.7)
11.3
11.1
19.1
65.4
(49.1)
16.3
(7.6)
8.75
0.0
2.62
(3.8)
1.55
9.17
(2.9)
(0.4)
5.91
4.36
13.1
77.8
(64.1)
13.8
(7.7)
6.07
0.0
4.67
(4.0)
18.7
25.4
(10.1)
(0.6)
14.7
(4.0)
12.5
60.3
(42.7)
17.5
(11.4)
6.10
0.0
0.51
(3.2)
0.0
3.39
(1.1)
(0.8)
1.50
1.51
7.12
43.3
(31.4)
11.9
(5.7)
6.24
0.0
5.22
(2.7)
0.0
8.75
(1.4)
(0.1)
7.27
7.27
13.1
2.4
20.7
(15.8)
49.2
(29.7)
(31.4)
0.2
(60.7)
18.9
(4.5)
(30.6)
(190.8)
(22.6)
(43.2)
0.6
(138.0)
(28.1)
84.6
2.2
383.3
21.6
9.4
12.1
24.9
13.4
9.0
17.7
7.8
18.9
29.1
10.1
2.5
27.5
14.4
16.8
2015A
2016A
2017A
2018F
2019F
Net Fixed Assets
Invts in Associates & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
130
127
181
395
0.13
28.9
547
1,409
176
158
200
325
0.78
93.2
509
1,462
216
198
127
322
1.07
53.3
598
1,516
263
237
161
175
1.07
39.2
772
1,648
309
275
161
131
1.07
83.9
772
1,733
ST Debt
Creditor
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
485
11.8
110
323
21.3
458
0.63
1,409
562
15.6
85.3
271
33.1
491
3.75
1,462
554
88.9
30.9
318
16.5
503
5.07
1,516
554
9.69
10.3
518
16.5
532
7.69
1,648
554
20.7
18.0
518
16.5
591
15.8
1,733
Non-Cash Wkg. Capital
Net Cash/(Debt)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Asset Turnover (x)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Net Debt/Equity ex MI (X)
Capex to Debt (%)
Z-Score (X)
454
(413)
40.5
13.7
0.1
0.3
1.6
0.7
0.9
0.9
1.7
0.0
502
(507)
57.8
16.7
0.6
0.3
1.4
0.6
1.0
1.0
5.8
NA
533
(549)
108.3
105.0
1.9
0.2
1.4
0.6
1.1
1.1
6.1
NA
793
(897)
89.0
146.6
3.2
0.1
1.7
0.4
1.7
1.7
4.9
NA
819
(941)
55.4
18.8
1.3
0.2
1.7
0.4
1.6
1.6
4.9
NA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
Balance Sheet (S$m)
FY Dec
Source: Company, DBS Bank
Higher gearing from
investments made in
FY16 / FY17
Company Guide
Roxy-Pacific Holdings
Cash Flow Statement (S$m)
FY Dec
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
Opg CFPS (S cts)
Free CFPS (S cts)
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Rachel TAN
Derek TAN
2015A
2016A
2017A
2018F
2019F
101
4.90
(8.6)
(1.1)
62.5
(6.2)
153
(13.7)
0.0
(24.2)
3.68
1.31
(32.9)
(22.8)
(97.0)
0.0
(102)
(222)
0.24
(102)
7.55
11.6
65.6
6.48
(24.6)
(18.6)
(16.7)
(4.6)
7.54
(48.3)
0.0
(17.1)
13.3
2.36
(49.7)
(21.5)
19.0
0.0
(32.4)
(34.8)
1.28
(75.7)
2.03
(3.4)
46.7
5.75
(2.1)
(13.0)
(5.6)
(51.5)
(19.7)
(53.1)
99.2
(38.5)
3.34
3.20
14.2
(16.4)
41.9
0.0
(22.6)
2.85
(0.2)
(2.9)
(1.2)
(6.1)
54.1
5.75
(30.9)
(38.5)
(65.1)
0.0
(74.7)
(53.1)
(33.7)
0.0
0.0
(174)
(261)
(11.7)
200
0.0
0.0
188
0.0
(147)
(0.8)
(10.7)
94.8
7.00
(10.3)
(38.5)
(33.6)
0.0
19.4
(53.1)
0.0
0.0
0.0
0.0
(53.1)
(10.3)
0.0
0.0
0.0
(10.3)
0.0
(44.0)
4.44
(2.8)
Company Guide
Roxy-Pacific Holdings
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 15 Feb 2018 10:02:44 (SGT)
Dissemination Date: 15 Feb 2018 10:14:22 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated
corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)
redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
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associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have
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Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may
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This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
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The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
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which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED
UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.
Company Guide
Roxy-Pacific Holdings
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
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primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the
issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real
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COMPANY-SPECIFIC / REGULATORY DISCLOSURES
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2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research
Report.
Compensation for investment banking services:
3.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
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should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced:
4.
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other
investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1
An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of
which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person
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2
Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a
new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term
does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new
listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Singapore Company Guide
Sheng Siong Group
Refer to important disclosures at the end of this report
Version 10 | Bloomberg: SSG SP | Reuters: SHEN.SI
DBS Group Research . Equity
28 Jul 2017
BUY
CONTINUES DELIVERING
Last Traded Price ( 27 Jul 2017): S$0.95 (STI : 3,354.71)
Price Target 12-mth: S$1.20 (26% upside)
Maintain BUY TP S$ 1.20, margin expansion to drive earnings
growth. We remain positive on Sheng Siong as we see growth
led by improving margins. We believe expansion of its
distribution centre will continue and the company will sustain
gross margins going forward. Margins remain on the uptrend –
supported by the increase in direct sourcing, bulk handling, and
fresh mix – contributing to earnings growth. Stock is trading
attractively at 19.8x FY18F PE, compared to its historical average
of 23x since listing. Yield is attractive at 4.5%.
Analyst
Alfie YEO +65 6682 3717 alfieyeo@dbs.com
Andy SIM CFA +65 6682 3718 andysim@dbs.com
What’s New

2Q17 earnings in line, gross margin expansion
continues

DPS of 1.55 Scts declared

Amazon’s entry not a serious threat for now

Maintain BUY, TP S$1.20
Where we differ. We do not think Amazon’s entry will pose a
serious threat to Sheng Siong for now for six reasons. The
online pie remains small; Sheng Siong’s target customers are
not the millennials who are open to online grocery shopping;
Amazon’s warehouse is relatively small; Amazon will pose a
more direct threat to Redmart; its pricing is not exactly cheap to
attract offline buyers online; and the online market will take
time to gain share from brick-and-mortar stores rather than
ramp up rapidly.
Price Relative
S$
Relative Index
1.2
215
1.1
195
1.0
175
0.9
155
0.8
135
0.7
115
0.6
95
0.5
Jul-13
Jul-14
Jul-15
Sheng Siong Group (LHS)
Forecasts and Valuation
FY Dec (S$ m)
Revenue
EBITDA
Pre-tax Profit
Net Profit
Net Pft (Pre Ex.)
Net Pft Gth (Pre-ex) (%)
EPS (S cts)
EPS Pre Ex. (S cts)
EPS Gth Pre Ex (%)
Diluted EPS (S cts)
Net DPS (S cts)
BV Per Share (S cts)
PE (X)
PE Pre Ex. (X)
P/Cash Flow (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
Earnings Rev (%):
Consensus EPS (S cts):
Other Broker Recs:
2016A
797
80.0
76.2
62.7
62.7
10.4
4.17
4.17
10
4.17
3.75
16.8
22.8
22.8
18.3
17.1
3.9
5.7
CASH
25.3
75
Jul-17
Jul-16
Relative STI (RHS)
2017F
807
85.4
80.4
66.8
66.8
6.5
4.44
4.44
6
4.44
3.99
17.2
21.4
21.4
20.0
16.1
4.2
5.5
CASH
26.1
2018F
828
92.2
86.8
72.0
72.0
7.8
4.79
4.79
8
4.79
4.31
17.7
19.8
19.8
13.2
14.7
4.5
5.4
CASH
27.4
2019F
878
101
92.2
76.5
76.5
6.2
5.08
5.08
6
5.08
4.57
18.2
18.7
18.7
14.7
13.3
4.8
5.2
CASH
28.3
(3)
4.50
B: 6
0
4.70
S: 1
0
4.90
H: 2
Source of all data on this page: Company, DBS Bank, Bloomberg
Finance L.P
ed: JLC / sa:JC, YM, PY
Potential catalyst. We believe that Sheng Siong, with its decent
store network and logistics chain, could possibly be a takeover
target by online players eventually. Online players such as
Alibaba’s 盒马鲜生 and Amazon (Wholefoods) are taking the
online-to-offline route, operating physical stores.
Valuation:
Our target price for Sheng Siong is S$ 1.20, based on 25x
FY18F PE. The valuation is pegged at +1SD of its historical
mean since listing and below regional peers' average of 30x
PE.
Key Risks to Our View:
Store openings, price competition. Revenue growth will be led
by new store openings. Excessive discounts and promotions in
the market by competitors will ultimately result in lower
margins.
At A Glance
Issued Capital (m shrs)
1,504
Mkt. Cap (S$m/US$m)
1,428 / 1,052
Major Shareholders (%)
SS Holdings
29.85
Lim Family
33.99
Free Float (%)
36.16
3m Avg. Daily Val (US$m)
1.5
ICB Industry : Consumer Services / Food & Drug Retailers
Company Guide
Sheng Siong Group
WHAT’S NEW
2Q17 results
2Q17 in line: Earnings of S$$16m (+6% y-o-y) were in line
with our expectations. Revenue of S$202m (+7% y-o-y) was
driven by 0.9% SSSG and 5.2% from new stores. Better
consumer sentiment was offset by footfall decline at stores
affected by the slowdown in the oil and gas industry,
Woodlands store, as well as Tampines renovation. An interim
DPS of 1.55 Scts was declared, amounting to 70% payout in
1H17.
Gross margins all-time high: Gross margins hit an all-time
high of 26.6% due to lower input costs, better supplier
rebates, and better fresh food mix.
Record high operating profit margin at 8.9%. Operating
profit was S$17.9m (+11.8% y-o-y), and flat Q-o-Q.
Operating expenses increased by (+6.8% y-o-y), led by admin
expenses which grew 6% to S$33.6m. Operating profit
margin was at a record high as gross margins expanded while
operating expenses were kept at 17.7% of sales.
Other income fell. Other income dropped to S$1.8m and this
was due to 1) lower rental income as the property floor area
of its Tampines site was increased to 25,000 sqft; and 2) a
decline in government grants on lower wage credits as well
as temporary and special employment schemes.
Expect gross margins to improve further. As expected, Sheng
Siong continued in its margin improvement with record gross
and operating margins. We have held the view that margin
expansion will continue on the back of better input prices as
it expands its distribution centre going forward. Completion
of new warehouse space going forward will drive the growth
of gross margins further with bulk and volume discounts.
Correlation between the stock price and gross margin is
strong at 0.9. The Verge store has closed but the Woodlands
store’s lease has been extended to October 2017. Two new
stores will open in 3Q17 - the 4,300-sqft Fajar Road store and
Page 2
the 12,000-sqft Woodlands St 12 store. The Kunming store is
expected to open in September 2017.
Amazon opens this week, not a real threat for now. Amazon
has started operations in Singapore with Amazon Prime Now,
sending jitters through Sheng Siong’s stock investors. The
entry of Amazon should not affect Sheng Siong for now as
1) Singapore’s online grocery retail market remains small at
<2% (S$96m) of modern grocery retail sales of S$6b;
2) Amazon’s scale is relatively small; its 100,000-sqft
warehouse is comparable to Redmart’s but far smaller than
DFI’s 260,000-sqft, SSG’s 500,000-sqft and NTUC Fairprice’s
730,000-sqft warehouses;
3) Amazon would pose a direct threat to Redmart as they
both target the same customers in the online grocery space;
4) we do not see the market size swelling just because
Amazon is coming in, as the growth of the grocery market is
still largely based on population size and inflation, which
requires a real shift from store to online for Sheng Siong to
be affected;
5) our initial price comparison showed that Amazon’s pricing
is not exactly cheap at the moment, making it difficult to take
share off the physical stores at current prices;
6) Sheng Siong’s target customers are largely not the techsavvy millennials who are open to buying from online
channels.
Maintain BUY, S$1.20 TP. Our forecasts remain largely
unchanged. We maintain BUY with S$1.20 TP, based on 25x
FY18F PE. Even though we do not see fundamentals playing
out immediately on Amazon’s entry, we are mindful that the
market may be cautious on long-term implications to Sheng
Siong and hence would like to highlight that negativity could
weigh on the stock over the short term, based on market
sentiment.
Company Guide
Sheng Siong Group
Quarterly / Interim Income Statement (S$m)
2Q2016
1Q2017
2Q2017
% chg yoy
% chg qoq
189
217
202
6.8
(7.2)
Cost of Goods Sold
(139)
(163)
(148)
6.2
(9.1)
Gross Profit
49.4
54.3
53.5
8.4
(1.5)
FY Dec
Revenue
Other Oper. (Exp)/Inc
(33.3)
(36.3)
(35.6)
6.8
(1.9)
Operating Profit
16.0
18.0
17.9
11.8
(0.6)
Other Non Opg (Exp)/Inc
2.14
2.53
1.80
(16.0)
(28.7)
0.0
0.0
0.0
-
-
0.20
0.02
0.03
(83.8)
37.5
0.0
0.0
0.0
-
-
Pre-tax Profit
18.4
20.6
19.8
7.5
(4.0)
Tax
(3.2)
(3.5)
(3.7)
14.1
5.9
0.0
0.01
0.0
-
-
Net Profit
15.2
17.1
16.1
6.1
(6.1)
Net profit bef Except.
15.2
17.1
16.1
6.1
(6.1)
EBITDA
22.1
24.3
23.4
6.0
(3.6)
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Minority Interest
Margins (%)
Gross Margins
26.1
25.0
26.6
Opg Profit Margins
8.5
8.3
8.9
Net Profit Margins
8.0
7.9
8.0
Source of all data: Company, DBS Bank
Company Guide
Sheng Siong Group
Rev per sqft
CRITICAL DATA POINTS TO WATCH
1892
1848
1850
1816
1808
2015A
2016A
2017F
2018F
2019F
1911.1
Critical Factors
Store expansion. Sheng Siong currently operates 43 stores
(including at Loyang Point which is under renovation).
Compared to the other local operators, it has scope to expand
its store network, particularly in areas such as Serangoon,
Hougang and Sengkang, where it has a small presence.
Management targets to ultimately operate 50 stores islandwide. In the past six years, 0-8 stores were opened annually,
largely a function of supply of HDB shop space available for
tender and Sheng Siong’s ability to win the tenders. Sheng
Siong mainly operates in HDB estates.
1638.1
1365.1
1092.0
819.0
546.0
273.0
0.0
Operation Area (sqft)
525977.3
431000
450000
455664
2016A
2017F
485664
515664
420781.8
Gross margin expansion through better sales mix. The gross
margin for fresh products is estimated to be >30%, and close to
20% for non-fresh grocery items. Sheng Siong’s product mix
stands at approximately 40% fresh vs 60% non-fresh. We see
headroom for its sales mix to improve to 50% for each as it
skews its store offerings towards fresh products.
315586.4
210390.9
105195.5
0.0
2015A
Mandai Distribution Centre to expand. The Mandai Distribution
Centre allows Sheng Siong to perform direct sourcing and bulk
handling. This effectively drives down input costs, resulting in
cost savings and better margins. We estimate that the facility is
currently running at only 90% of capacity and a new
warehouse adjacent to the current one is expected to start
construction in FY17F. It will be able to secure more suppliers
and products to trade through the distribution centre to
effectively enjoy more bulk handling and higher supplier
rebates. Margins are expected to trend up as utilisation
increases towards full capacity.
2018F
2019F
Number of stores
52.02
41.62
42
39
48
45
51
31.21
20.81
10.40
0.00
2015A
2016A
2017F
2018F
2019F
SSSG (%)
Margin expansion through direct sourcing. Sheng Siong is
increasingly sourcing directly from suppliers such as farms
instead of from middlemen. The company has the resources to
place large orders, which is welcomed by producers.
6.0%
5.0%
4.0%
Affected by
SG50
promotion and
discounting
3.0%
2.0%
Generating more same-store-sales growth (SSSG) to increase
revenue. Sheng Siong has been able to maintain positive SSSG
since 4Q13 (excluding 4Q15, 1Q16) through longer operating
hours and renovation of older stores, offering the correct
products and effective marketing. SSSG has been affected partly
by the renovation of the Loyang store from 3Q16 to 1Q17. The
SSSG would have been positive had the Loyang store performed
similarly to the previous year and was not shut down for
renovation. Maintaining positive SSSG will support earnings
growth.
Weak demand
conditions,
store
renovations
1.0%
0.0%
-1.0%
3Q & 4Q would be
negativ e 1.2% &
2.7% if include
Loy ang store
renov ation
-2.0%
-3.0%
1Q14
3Q14
1Q15
3Q15
1Q16
3Q16
1Q17
Gross Margins (%)
27.0
26.5
26.0
25.5
Kunming store in China to open in 2017. Its first store in
Kunming (40,000 sqft) is expected to commence operations in
2017. Downside for the JV is limited to its US$6m paid-up
capital, which is sufficient to open 2-3 new stores.
25.0
24.5
24.0
23.5
23.0
22.5
22.0
1Q14
3Q14
1Q15
Source: Company, DBS Bank
Page 4
3Q15
1Q16
3Q16
1Q17
Company Guide
Sheng Siong Group
Appendix 1: A look at Company's listed history – what drives its share price?
Correlation of stock price to gross margin improvement is strong at 0.9
1.20
S$
Gross margins (RHS)
Share price (LHS)
Gross margins
expanded from
20.8% to 23.2%
1.00
30
28
25
0.80
0.60
Gross margins
at all time high
of c.26%
0.40
23
20
Gross margins
expanded from
23.8% to 25.2%
Feb-17
Aug-16
Feb-16
Aug-15
Feb-15
Aug-14
Feb-14
Aug-13
Feb-13
Aug-12
Aug-11
Feb-12
18
0.20
Source: DBS Bank
%
Company Guide
Sheng Siong Group
Balance Sheet:
Leverage & Asset Turnover (x)
2.2
0.05
0.05
Net cash of over S$70m or c.4 Scts per share. The excess cash
allows for strategic store acquisitions if suitable real estate arises
for it to expand its store presence in the future. The business
generates positive working capital. Inventory is purchased on
credit, and quickly turned into cash. Over the past seven years,
the business has generated between S$20-75m of operating
cashflow each year. Dividend payout is attractive at 90%. We
expect this to be maintained as long as there is no significant
requirement for cash funding.
Share Price Drivers:
0.04
2.2
0.04
0.03
0.03
2.1
0.02
0.02
2.1
0.01
0.01
0.00
2.0
2015A
2016A
2017F
Gross Debt to Equity (LHS)
2018F
2019F
Asset Turnover (RHS)
Capital Expenditure
S$m
100.0
90.0
80.0
Strong earnings growth performance. Sheng Siong’s financial
performance has consistently met our expectations, delivering
earnings growth (5-year CAGR of 18.1% since FY11) through a
combination of margin expansion, store growth and SSSG. We
believe continued delivery of consistent performance and profit
growth will support a strong share price.
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
2015A
2016A
2017F
2018F
2019F
Capital Expenditure (-)
China to be a wildcard. We believe Sheng Siong’s JV in China is
a wildcard. If operations prove to be successful, in time to
come, China can provide an alternate source of growth. There is
scope for the number of stores to increase should Sheng Siong’s
business model work. Downside remains limited to US$6m for
now should the JV fail.
ROE (%)
25.0%
20.0%
15.0%
10.0%
Key Risks:
5.0%
Revenue growth limited by store openings. Store expansion in
Singapore is largely dependent on the supply of new
supermarket retail space released by HDB and its ability to
secure the tenders.
0.0%
2015A
2016A
2017F
2018F
2019F
Forward PE Band (x)
(x)
27.4
Excessive discounts and promotions may erode margins.
Heavier discounts and promotions vis-a-vis competitors would
drive sales revenue, but this could be gained at the expense of
margins.
25.4
+2sd: 23.8x
23.4
+1sd: 22.2x
21.4
Avg: 20.5x
19.4
Company Background
Sheng Siong is the third-largest supermarket operator in
Singapore, behind NTUC Fairprice and Dairy Farm
International.
‐1sd: 18.8x
17.4
‐2sd: 17.2x
15.4
Jul-13
Jul-14
Jul-15
Jul-16
PB Band (x)
7.3
(x)
6.8
6.3
+2sd: 6.41x
5.8
+1sd: 5.88x
5.3
Avg: 5.36x
4.8
‐1sd: 4.83x
4.3
‐2sd: 4.31x
3.8
Jul-13
Jul-14
Source: Company, DBS Bank
Page 6
Jul-15
Jul-16
Company Guide
Sheng Siong Group
Key Assumptions
FY Dec
Rev per sqft
Operation Area (sqft)
Number of stores
Segmental Breakdown
FY Dec
Revenues (S$m)
Singapore
Total
Operating profit (S$m)
Singapore
Total
Operating profit Margins
Singapore
Total
Income Statement (S$m)
FY Dec
Revenue
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
Net Profit before Except.
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins & Ratio
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
Source: Company, DBS Bank
2015A
2016A
2017F
2018F
2019F
1,892
431,000
39.0
1,848
450,000
42.0
1,850
455,664
45.0
1,816
485,664
48.0
1,808
515,664
51.0
2015A
2016A
2017F
2018F
2019F
764
797
807
828
878
764
797
807
828
878
57.2
65.1
70.3
76.7
84.3
57.2
65.1
70.3
76.7
84.3
7.5
8.2
8.7
9.3
9.6
7.5
8.2
8.7
9.3
9.6
2015A
2016A
2017F
2018F
2019F
764
(576)
189
(132)
57.2
9.26
0.0
1.22
0.0
67.7
(10.9)
0.0
0.0
56.8
56.8
70.6
797
(592)
205
(140)
65.1
10.5
0.0
0.57
0.0
76.2
(13.5)
0.0
0.0
62.7
62.7
80.0
807
(597)
210
(140)
70.3
9.53
0.0
0.64
0.0
80.4
(13.7)
0.0
0.0
66.8
66.8
85.4
828
(610)
218
(141)
76.7
9.60
0.0
0.58
0.0
86.8
(14.8)
(0.1)
0.0
72.0
72.0
92.2
878
(645)
233
(148)
84.3
7.20
0.0
0.78
0.0
92.2
(15.7)
(0.1)
0.0
76.5
76.5
101
5.3
12.1
9.7
20.8
4.2
13.3
13.7
10.4
1.3
6.7
8.0
6.5
2.5
7.9
9.1
7.8
6.1
9.3
9.9
6.2
24.7
7.5
7.4
23.6
15.9
19.8
92.7
NM
25.7
8.2
7.9
25.3
16.6
21.3
89.9
NM
26.0
8.7
8.3
26.1
17.3
22.4
89.9
NM
26.3
9.3
8.7
27.4
18.0
23.8
89.9
NM
26.5
9.6
8.7
28.3
18.1
25.4
89.9
NM
Company Guide
Sheng Siong Group
Quarterly / Interim Income Statement (S$m)
FY Dec
2Q2016
3Q2016
Revenue
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Net Profit
Net profit bef Except.
EBITDA
4Q2016
1Q2017
2Q2017
189
(139)
49.4
(33.3)
16.0
2.14
0.0
0.20
0.0
18.4
(3.2)
0.0
15.2
15.2
22.1
202
(150)
52.5
(35.6)
16.9
2.21
0.0
0.02
0.0
19.1
(3.4)
0.0
15.7
15.7
22.8
197
(145)
51.8
(35.3)
16.5
2.37
0.0
0.01
0.0
18.9
(3.5)
0.0
15.4
15.4
22.6
217
(163)
54.3
(36.3)
18.0
2.53
0.0
0.02
0.0
20.6
(3.5)
0.01
17.1
17.1
24.3
202
(148)
53.5
(35.6)
17.9
1.80
0.0
0.03
0.0
19.8
(3.7)
0.0
16.1
16.1
23.4
(9.5)
(4.0)
2.5
(7.6)
7.2
3.3
5.2
3.3
(2.7)
(1.1)
(1.9)
(1.5)
10.2
7.7
9.0
11.0
(7.2)
(3.6)
(0.6)
(6.1)
26.1
8.5
8.0
25.9
8.3
7.7
26.3
8.4
7.8
25.0
8.3
7.9
26.6
8.9
8.0
2015A
2016A
2017F
2018F
2019F
Net Fixed Assets
Invts in Associates & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
178
0.0
0.0
126
52.5
11.8
0.0
368
252
0.0
0.0
63.5
61.9
10.4
0.0
388
254
0.0
0.0
57.5
61.3
12.1
0.0
385
262
0.0
0.0
77.5
62.6
11.0
0.0
413
256
0.0
0.0
95.6
66.2
11.6
0.0
430
ST Debt
Creditor
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
0.0
109
12.6
0.0
2.24
244
0.0
368
0.0
118
13.0
0.0
2.45
252
2.79
388
0.0
108
13.7
0.0
2.45
259
2.79
385
0.0
127
14.8
0.0
2.45
266
2.89
413
0.0
135
15.7
0.0
2.45
274
2.99
430
(57.1)
126
5.4
66.4
31.0
2.1
1.6
1.1
CASH
CASH
N/A
10.0
(58.3)
63.5
5.1
71.5
36.2
2.1
1.0
0.6
CASH
CASH
N/A
9.3
(47.9)
57.5
5.1
70.6
38.6
2.1
1.1
0.6
CASH
CASH
N/A
9.9
(68.5)
77.5
5.1
72.1
38.0
2.1
1.1
0.6
CASH
CASH
N/A
8.8
(72.9)
95.6
4.7
76.1
37.4
2.1
1.2
0.7
CASH
CASH
N/A
8.8
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
Balance Sheet (S$m)
FY Dec
Non-Cash Wkg. Capital
Net Cash/(Debt)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Asset Turnover (x)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Net Debt/Equity ex MI (X)
Capex to Debt (%)
Z-Score (X)
Source: Company, DBS Bank
Page 8
Company Guide
Sheng Siong Group
Cash Flow Statement (S$m)
FY Dec
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
Opg CFPS (S cts)
Free CFPS (S cts)
2015A
2016A
2017F
2018F
2019F
67.7
13.4
(10.7)
0.0
2.54
0.52
73.5
(30.4)
0.0
0.0
0.0
1.22
(29.2)
(48.9)
0.0
0.0
0.0
(48.9)
0.04
(4.5)
4.72
2.86
76.2
14.9
(12.6)
0.0
0.77
(1.2)
78.1
(89.3)
0.0
0.0
0.0
0.57
(88.7)
(54.8)
0.0
0.0
2.59
(52.2)
0.40
(62.4)
5.14
(0.7)
80.4
15.1
(13.0)
0.0
(11.0)
0.0
71.5
(17.5)
0.0
0.0
0.0
0.0
(17.5)
(60.0)
0.0
0.0
0.0
(60.0)
0.0
(6.0)
5.49
3.59
86.8
15.5
(13.7)
0.0
19.5
0.0
108
(23.5)
0.0
0.0
0.0
0.0
(23.5)
(64.7)
0.0
0.0
0.0
(64.7)
0.0
20.0
5.90
5.63
92.2
16.4
(14.8)
0.0
3.50
0.0
97.4
(10.5)
0.0
0.0
0.0
0.0
(10.5)
(68.7)
0.0
0.0
0.0
(68.7)
0.0
18.2
6.25
5.78
Source: Company, DBS Bank
Target Price & Ratings History
1.16
S$
S.No.
1.11
4
1.06
2
6
35
12
1.01
14
10
0.96 1
8
13
9
11
7
0.91
0.86
Jul-16
Sep-16
Nov-16
Jan-17
Mar-17
May-17
Jul-17
Not e : Share price and Target price are adjusted for corporate actions.
Source: DBS Bank
Analyst: Alfie YEO
Andy SIM CFA
Dat e of
Report
Closing
Pric e
12- mt h
T arget Rat ing
Pric e
1:
27 J ul 16
0.99
1.09
BUY
2:
29 Aug 16
1.05
1.09
BUY
3:
26 Sep 16
1.08
1.09
BUY
4:
29 Sep 16
1.07
1.18
BUY
5:
04 Oct 16
1.08
1.18
BUY
6:
27 Oct 16
1.07
1.19
BUY
7:
24 F eb 17
0.96
1.13
BUY
8:
17 Mar 17
0.94
1.13
BUY
9:
10 Apr 17
0.98
1.13
BUY
10:
02 May 17
0.98
1.14
BUY
11:
12:
13:
14:
20 Jun 17
03 Jul 17
10 Jul 17
18 Jul 17
0.98
1.00
0.99
0.99
1.20
1.20
1.20
1.20
BUY
BUY
BUY
BUY
Company Guide
Sheng Siong Group
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 28 Jul 2017 08:58:33 (SGT)
Dissemination Date: 28 Jul 2017 09:16:22 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated
corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)
redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or
warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without
notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific
investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees
only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial
advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit)
arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not
to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons
associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have
positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and
other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may
not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to
update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED
UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.
Page 10
Company Guide
Sheng Siong Group
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s)
primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the
issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real
estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the
management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or
his associate does not have financial interests
2
in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has
procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of
research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment
banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment
banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the
DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1.
DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates have a
proprietary position in Sheng Siong Group recommended in this report as of 30 June 2017.
2.
Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research
Report.
Compensation for investment banking services:
3.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document
should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced:
4.
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other
investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1
An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of
which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person
accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2
Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a
new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term
does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new
listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Singapore Company Guide
Sunningdale Tech Ltd
Refer to important disclosures at the end of this report
Version 3 | Bloomberg: SUNN SP | Reuters: SUND.SI
DBS Group Research . Equity
22 Feb 2018
BUY
A dividend growth play
Last Traded Price ( 22 Feb 2018): S$1.93 (STI : 3,488.46)
Price Target 12-mth: S$2.70 (40% upside)
4Q17 performance trends broadly similar to 3Q; dividends raised for
FY17. Broad trends observed in 3Q17 extended into 4Q.
Notwithstanding ongoing currency headwinds, Sunningdale’s top- and
bottom-line performance held relatively steady q-o-q, in line with our
expectations. Notably, the group saw record Automotive sales of
c.S$67.7m. Contributions from Mould Fabrication were also sustained
at higher levels, which may have positive implications for the
group as some of these projects could be converted into commercial
contracts for the group later on.
Analyst
Carmen Tay +65 6682 3719 carmentay@dbs.com
What’s New
•
4Q17 earnings of c.S$7.7m impacted by forex but core
growth momentum (+32.9% to S$10.6m) remains firm
•
YTD declines in USD/MYR and USD/CNY imply that forex
headwinds may extend into 1Q18
•
Ahead of the ramp-up in Penang, the promise of a
higher dividend for FY17 (and potentially higher payout
in FY18F) should provide some support for the stock
•
Maintain BUY with TP of S$2.70
Earnings Rev (%):
Consensus EPS (S cts):
Other Broker Recs:
Positive underlying trends and strong fundamentals underpin steady
growth outlook. Sunningdale has delivered consistent margin
improvements and growth over the last few years. Ahead, several
underlying trends such as (1) the broad-based substitution of metallic
with plastic components in a wide range of industrial applications, and
(2) favourable demand outlook across the group’s three key endsectors, indicate longer-term potential.
2016A
684
73.6
47.2
39.1
31.7
34.2
20.9
16.9
33
20.5
6.00
188
9.2
11.4
6.8
4.7
3.1
1.0
CASH
11.5
2017A
725
72.4
39.4
31.4
31.4
(1.0)
16.7
16.7
(2)
16.4
7.00
195
11.6
11.6
10.0
5.0
3.6
1.0
CASH
8.7
2018F
758
85.3
49.3
39.2
39.2
25.1
20.7
20.7
24
20.6
7.50
207
9.3
9.3
4.0
3.8
3.9
0.9
CASH
10.4
2019F
787
89.9
52.4
41.8
41.8
6.5
22.1
22.1
6
21.9
7.50
221
8.7
8.7
5.2
3.3
3.9
0.9
CASH
10.3
B: 3
21.3
S: 0
23.5
H: 0
Source of all data on this page: Company, DBS Bank, Bloomberg
Finance L.P
ed: TH / sa:DT, PY, CS
Where we differ: We believe that Sunningdale’s world-class
engineering capabilities, global presence and diversification are
underappreciated, and the stock deserves to at least trade at the global
average valuation of 13x FY18F PE vs consensus’ average of 11x.
Potential catalysts: Sunningdale’s share price should re-rate as it delivers
steady earnings growth or value-accretive acquisitions.
Price Relative
Forecasts and Valuation
FY Dec (S$ m)
Revenue
EBITDA
Pre-tax Profit
Net Profit
Net Pft (Pre Ex.)
Net Pft Gth (Pre-ex) (%)
EPS (S cts)
EPS Pre Ex. (S cts)
EPS Gth Pre Ex (%)
Diluted EPS (S cts)
Net DPS (S cts)
BV Per Share (S cts)
PE (X)
PE Pre Ex. (X)
P/Cash Flow (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
Overall, we like Sunningdale for its strong business fundamentals and
as a dividend growth play. Sunningdale has paid increasing dividends
over the last six years, from 3 Scts in FY12 to 7 Scts for FY17. Backed by
strong core growth, operating cash flows and lower capex needs, we
believe dividends could further rise to 7.5 Scts (or higher) in FY18F.
As the group grows capacity, ramps up production and strengthens
business development efforts to ride these positive trends and unlock
greater economies of scale, we project core earnings to grow at an
15% CAGR over FY16-18F.
Valuation:
Maintain BUY with a TP of S$2.70, based on 13x FY18F PE. Offering
a lower risk-reward profile vs local peers and higher growth vs the
bigger boys in the US, our TP at S$2.70, which is based on global
average of 13x FY18F PE, is fair.
Key Risks to Our View:
Global economic slowdown could pose significant challenges
to Sunningdale, especially in Consumer/IT and Automotive.
At A Glance
Issued Capital (m shrs)
189
Mkt. Cap (S$m/US$m)
365 / 276
Major Shareholders (%)
Boon Hwee Koh
15.9
Yarwood Engineering And Trading
8.1
Goi Seng Hui
8.1
Free Float (%)
64.3
3m Avg. Daily Val (US$m)
0.93
ICB Industry : Industrials / Electronic & Electrical Equipment
Company Guide
Sunningdale Tech Ltd
WHAT’S NEW
4Q17 impacted by currency volatility but core growth momentum remains strong
4Q17 results in line. Sunningdale’s sales momentum was
sustained in 4Q17, with top line coming in at c.S$187m (vs
S$188.1m delivered in 3Q17). Notably, the company saw a
record contribution of c.S$67.7m from the Automotive
segment, which represented c.36% of consolidated revenues.
Notwithstanding lower q-o-q contributions in 4Q17, mainly
due to the advancement of orders to earlier quarters,
Consumer/IT remained the key source of revenues of the
group at c.38% of sales.
Earnings also held steady at c.S$7.7m (essentially flat q-o-q)
despite volatile foreign exchange environments for the
USD/MYR and USD/CNY, which resulted in foreign exchange
losses of c.S$2.8m. Over the quarter, we observe that the
USD/MYR and USD/CNY fell by 3.7% and 2.3% respectively.
Barring the currency impact, core growth momentum was
otherwise strong, and we estimate that core earnings would
have been c.38% higher, closer to S$10.6m:
4Q16
3Q17
4Q17
%Chg
%Chg
(QoQ)
(YoY)
Sales
184.1
188.1
187.0
(0.6%)
1.6%
Net Profit
21.5
7.7
7.7
0.4%
(64%)
% Net Margin
11.7%
4.1%
4.1%
Forex Loss (Gain)
(8.4)
3.1
2.8
(2.4%)
32.9%
Disposal Loss
(Gain)
(5.1)
Adj. Net Profit
7.9
10.8
10.6
% Net Margin
4.3%
5.7%
5.6%
Source: Company, DBS Bank
Brace for further forex weakness in upcoming 1Q18 as
declines in main currency pairs imply that forex headwinds
may extend into 1Q18.
Stronger growth to kick in from 2Q18 onwards. With the
Penang plant set to kick in from 2Q18, we anticipate a
gradual ramp-up in new projects and sales. We also view the
high, sustained contributions from Mould Fabrication (for the
second consecutive quarter since 3Q17) positively as history
suggests that some of these projects could be converted into
commercial contracts for the group later on.
Ahead of the ramp-up in Penang, the promise of a higher
dividend for FY17 should provide support for the
stock. Subsequent to the group’s inaugural 2.5-Sct dividend
for 1H17, a final 4.5-Sct dividend has also been proposed,
bringing payout for FY17 to 7 Scts per share.
Supported by steady operating cash flows, Sunningdale’s
dividend payout has been on a rising trend, and compared to
local small-cap peers, stands out as a dividend growth play:
DPS
FY12
FY13
FY14
FY15
FY16
FY17
3.0
3.5
4.0
5.0
6.0
7.0
(S cts)
Source: Company, DBS Bank
Maintain BUY with TP of S$2.70. Our earnings projections
and recommendation remain largely unchanged as
expectations of higher growth in FY18F are largely offset by
higher assumed tax rates of c.20% vs c.17% previously.
Company Guide
Sunningdale Tech Ltd
Quarterly / Interim Income Statement (S$m)
4Q2016
3Q2017
4Q2017
% chg yoy
% chg qoq
184
188
187
1.6
(0.6)
Cost of Goods Sold
(159)
(161)
(162)
1.9
0.5
Gross Profit
25.1
27.0
25.0
(0.2)
(7.1)
FY Dec
Revenue
Other Oper. (Exp)/Inc
(16.8)
(17.4)
(17.8)
5.9
2.2
Operating Profit
8.29
9.55
7.26
(12.4)
(24.0)
Other Non Opg (Exp)/Inc
15.8
1.03
1.69
(89.3)
63.9
Associates & JV Inc
0.22
0.31
0.53
144.0
74.4
Net Interest (Exp)/Inc
(0.6)
(0.8)
(0.8)
(31.8)
3.9
0.0
0.0
0.0
-
-
Pre-tax Profit
23.8
10.1
8.70
(63.4)
(13.7)
Tax
(2.3)
(2.4)
(1.0)
(57.7)
(59.6)
0.0
0.0
0.0
-
-
Net Profit
21.5
7.72
7.75
(64.0)
0.4
Net profit bef Except.
21.5
7.72
7.75
(64.0)
0.4
EBITDA
31.5
17.9
16.5
(47.7)
(7.9)
Exceptional Gain/(Loss)
Minority Interest
Margins (%)
Gross Margins
13.6
14.3
13.4
Opg Profit Margins
4.5
5.1
3.9
Net Profit Margins
11.7
4.1
4.1
Source of all data: Company, DBS Bank
Company Guide
Sunningdale Tech Ltd
Critical Factors
Beneficiary of the broad-based substitution for functional plastics in
the Automotive, Consumer/IT and Healthcare sectors. Owing to
improved plastic material properties (i.e. strength and durability) and
higher cost efficiency, precision plastic components are increasingly
replacing their metal counterparts in a wide range of industrial
applications – particularly in the automotive, consumer goods and
healthcare sectors.
Factors Driving Adoption of Plastic (vs Metal) Components
End-use
Drivers
Industries
Automotive
Government regulations to reduce the weight of
vehicles to reduce harmful emissions
Consumer
Goods
Popularity of consumer wearables with the
emergence of cloud computing and Internet of
Things (IoT) technologies, thus stimulating demand
for plastics in electronic components
Healthcare
Automotive Sales
Consumer/IT Sales
Replacement of metal with plastic (which are
cheaper) components to boost profit margins
New technologies (i.e. antimicrobial plastic) are
purportedly able to repel bacteria on surfaces
Plastic devices are cheaper to use and easier to replace
Healthcare Sales
Source: DBS Bank
Additionally, the underlying demand outlook across the above endsectors is also positive and industry experts have forecast these to
grow at high single-digit to low double-digit levels per annum into
2020. Riding on these trends, we project Sunningdale’s top line to
grow at a steady 4.2% CAGR over FY17-19F.
Raising capacity. While most of the industry players are focused on
managing costs amid the challenging business climate, Sunningdale
is one of few precision engineering companies that continues to
actively invest in future growth.
Operating Margins (%)
In anticipation of the group’s medium- to longer-term capacity
requirements, Sunningdale is constructing a new facility in Penang
(Malaysia), which is near the operations of a number of Fortune 500
companies and on track for completion by end-1Q18 and ramp-up
from 2Q18. As plant utilisation at newer facilities (i.e. Chuzhou and
Thailand) remains low, there is room for Sunningdale to add capacity
at these sites progressively alongside order growth.
Steady margin expansion to drive sustainable growth. Apart from its
global presence and manufacturing strengths, we also like
Sunningdale for its proven ability to consistently deliver and its
steadily improving margins. Strategies the group can employ to
deliver sustainable growth include:
Effective Tax Rate (%)
(i) Development or acquisition of new engineering capabilities,
(ii) Higher-margin sales mix,
(iii) Productivity improvements and cost advantages on growing scale,
through resource optimisation and automation
Source: Company, DBS Bank
Company Guide
Sunningdale Tech Ltd
Appendix 1: A look at Company's listed history – what drives its share price?
Historical Relationship Between Earnings Growth and Sunningdale’s Share Price
2.5
Correlation: +0.775
Proposed acquisition of precision
plastic manufacturer, First
Engineering Limited
2
1.5
Achieves core net profit
growth of 34.1% for FY16;
Share price also surges on
takeover potential
0.3
0.25
0.2
Issues profit guidance
due to impairment of
goodwill
0.15
0.1
0.05
1
0
0.5
0
1/2/2012
Raised S$25m via private placement of 20% new shares
Proposed acquisition
to Yarwood Engineering and Mr Sam Goi, to finance
of Europe-based
potential organic and inorganic growth opportunities
SKAN -tooling
that may arise in future
1/2/2013
1/2/2014
1/2/2015
Last Price (LHS)
Source: DBS Bank, ThomsonReuters
1/2/2016
T12M EPS (RHS)
Saw a 52.1% surge
in earnings to
S$42.1m for FY15
1/2/2017
-0.05
-0.1
-0.15
1/2/2018
Company Guide
Sunningdale Tech Ltd
Balance Sheet:
Low gearing. Still on growth mode, Sunningdale’s net cash
position of S$1.6m (<1% of current market cap) as at end4Q17 is much lower than local peers’ average of c.30%.
Further, given low gearing of 0.28x as at end-4Q17, there
remains room for Sunningdale to gear up for acquisitions if
attractive opportunities arise.
Share Price Drivers:
Growing on acquisitions. Sunningdale has made three
acquisitions since 2010 – UFE in 2011, First Engineering in 2014
and SKAN-tooling in 2015. With cash of S$111m as at end3Q17 and restructuring of its South China plant now complete,
Sunningdale could be looking to acquire.
Leverage & Asset Turnover (x)
Capital Expenditure
Judging from its earlier acquisitions, we believe that the group’s
criteria for future M&As would likely include precision plastic
players which provide access to (1) new geographies, (2) wider
product offerings or capabilities within existing Automotive,
Consumer/IT and Healthcare verticals, and (3) new clientele.
Takeover potential in the longer term. Sunningdale’s proven
record of strong cash flow generation, healthy balance sheet
with slight net cash of S$1.6m, and inexpensive valuations – the
stock currently trades at undemanding valuations of c.1x P/BV
and 9.5x FY18F PE (vs local peer average of 1.3x and 11x
respectively) – could lead to a takeover offer.
ROE (%)
Given the group’s advanced manufacturing capabilities, global
manufacturing footprint and diversified MNC customer base,
we see Sunningdale as an attractive takeover target for private
equity (PE) funds or larger top-tier players in the precision plastic
field looking to (1) acquire advanced manufacturing capabilities,
(2) have global manufacturing facilities, or (3) gain immediate
access to a diversified MNC customer base.
Key Risks:
Global economic slowdown. With exposure across some of the
world’s main manufacturing regions, a global economic
slowdown could pose significant challenges to Sunningdale as
several of its industry segments such as Consumer/IT and
Automotive are sensitive to fluctuations in the global economy.
Forward PE Band (x)
Fluctuations in raw material costs. Key raw materials for
Sunningdale are resin and engineering plastics, which typically
represent c.50% of COGS. Despite cost-plus arrangements,
volatility in raw material prices can still weigh on earnings.
Managing currency exposures. Due to its wide geographical
presence and broad client base, Sunningdale transacts in
various currencies such as USD, RMB, and MYR but reports in
SGD. The largest currency exposure is to the USD, which we
estimate represents approximately 40% of the group’s
revenue.
PB Band (x)
Company Background
Sunningdale (SUNN SP) provides one-stop turnkey plastic
solutions, with capabilities ranging from product and mould
designs, fabrication, injection moulding, micro-precision
engineering, finishings, through to the precision assembly of
complete products. The group is mainly focused on three
sectors - Automotive, Consumer/IT and Healthcare.
Source: Company, DBS Bank
Company Guide
Sunningdale Tech Ltd
Key Assumptions
FY Dec
Automotive Sales
Consumer/IT Sales
Healthcare Sales
Operating Margins (%)
Effective Tax Rate (%)
2015A
2016A
2017A
2018F
2019F
219
269
49.8
4.15
1.70
245
273
48.5
4.40
17.3
264
285
51.7
4.96
20.3
282
293
55.8
5.95
20.3
299
299
60.8
6.15
20.3
2015A
2016A
2017A
2018F
2019F
674
(584)
90.8
(62.8)
28.0
(1.2)
0.90
(3.4)
18.5
42.8
(0.7)
0.0
0.0
42.1
23.6
61.1
684
(590)
94.3
(64.2)
30.1
11.8
0.94
(3.0)
7.40
47.2
(8.2)
0.0
0.0
39.1
31.7
73.6
725
(619)
106
(69.6)
36.0
5.18
1.22
(3.0)
0.0
39.4
(8.0)
0.0
0.0
31.4
31.4
72.4
758
(644)
114
(69.4)
45.1
5.18
1.41
(2.4)
0.0
49.3
(10.0)
0.0
0.0
39.2
39.2
85.3
787
(668)
119
(70.5)
48.4
5.18
1.48
(2.6)
0.0
52.4
(10.7)
0.0
0.0
41.8
41.8
89.9
41.8
21.1
86.3
(2.1)
1.5
20.4
7.6
34.2
5.9
(1.6)
19.3
(1.0)
4.6
17.7
25.5
25.1
3.8
5.4
7.3
6.5
13.5
4.2
6.2
13.2
7.0
4.4
22.0
8.3
13.8
4.4
5.7
11.5
6.2
6.2
28.7
10.0
14.6
5.0
4.3
8.7
4.7
6.0
42.0
12.1
15.1
6.0
5.2
10.4
5.7
7.5
36.2
18.5
15.1
6.2
5.3
10.3
5.8
7.6
34.0
18.4
Income Statement (S$m)
FY Dec
Revenue
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
Net Profit before Except.
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins & Ratio
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
Source: Company, DBS Bank
Company Guide
Sunningdale Tech Ltd
Quarterly / Interim Income Statement (S$m)
FY Dec
4Q2016
1Q2017
Revenue
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Net Profit
Net profit bef Except.
EBITDA
2Q2017
3Q2017
4Q2017
184
(159)
25.1
(16.8)
8.29
15.8
0.22
(0.6)
0.0
23.8
(2.3)
0.0
21.5
21.5
31.5
172
(146)
25.9
(17.1)
8.71
1.60
0.18
(0.7)
0.0
9.83
(2.1)
0.0
7.70
7.70
17.6
178
(150)
27.7
(17.3)
10.4
0.86
0.21
(0.7)
0.0
10.8
(2.6)
0.0
8.20
8.20
18.5
188
(161)
27.0
(17.4)
9.55
1.03
0.31
(0.8)
0.0
10.1
(2.4)
0.0
7.72
7.72
17.9
187
(162)
25.0
(17.8)
7.26
1.69
0.53
(0.8)
0.0
8.70
(1.0)
0.0
7.75
7.75
16.5
6.7
50.1
(19.3)
111.1
(6.7)
(44.1)
5.1
(64.2)
3.4
5.0
19.6
6.5
6.0
(3.2)
(8.3)
(5.9)
(0.6)
(7.9)
(24.0)
0.4
13.6
4.5
11.7
15.0
5.1
4.5
15.6
5.9
4.6
14.3
5.1
4.1
13.4
3.9
4.1
2015A
2016A
2017A
2018F
2019F
Net Fixed Assets
Invts in Associates & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
187
5.54
20.8
121
106
168
4.36
613
192
5.27
19.4
115
115
194
7.68
649
194
6.08
19.7
105
146
212
5.48
688
196
7.34
18.7
148
121
201
5.48
697
197
8.68
17.7
169
125
208
5.48
732
ST Debt
Creditor
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
74.0
150
2.25
46.0
9.58
331
0.0
613
67.6
184
3.93
32.2
9.63
351
0.0
649
60.8
206
2.69
42.9
9.74
366
0.0
688
60.8
182
10.0
42.9
9.74
391
0.0
697
60.8
189
10.7
42.9
9.74
419
0.0
732
126
1.11
88.3
75.7
71.5
1.1
1.8
1.3
CASH
CASH
20.0
129
15.5
96.6
109.1
72.2
1.1
1.7
1.2
CASH
CASH
28.8
155
1.60
102.3
120.8
80.9
1.1
1.7
1.2
CASH
CASH
29.9
134
44.1
99.3
116.2
79.8
1.1
1.9
1.4
CASH
CASH
33.8
139
65.5
94.9
107.1
70.8
1.1
1.9
1.4
CASH
CASH
33.8
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
Balance Sheet (S$m)
FY Dec
Non-Cash Wkg. Capital
Net Cash/(Debt)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Asset Turnover (x)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Net Debt/Equity ex MI (X)
Capex to Debt (%)
Source: Company, DBS Bank
Barring forex losses of
c.S$2.8m, we estimate core
earnings would have been
closer to S$10.6m.
Company Guide
Sunningdale Tech Ltd
Cash Flow Statement (S$m)
FY Dec
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
Opg CFPS (S cts)
Free CFPS (S cts)
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank
Analyst: Carmen Tay
2015A
2016A
2017A
2018F
2019F
42.8
33.5
(2.5)
(0.9)
(3.1)
(2.3)
67.4
(24.0)
0.0
(1.2)
0.76
0.0
(24.4)
(7.4)
(18.3)
0.0
0.71
(25.0)
0.0
18.0
38.0
23.4
47.2
30.8
(6.2)
(0.9)
(10.8)
(7.3)
52.8
(28.8)
0.0
0.0
1.08
0.0
(27.7)
(9.3)
(21.2)
0.0
(0.5)
(31.0)
0.0
(5.9)
34.1
12.9
39.4
30.1
(9.7)
(1.2)
(27.1)
4.87
36.3
(31.0)
(1.4)
0.0
0.14
0.0
(32.3)
(16.0)
5.15
0.0
(3.2)
(14.0)
0.0
(10.0)
33.7
2.82
49.3
33.6
(2.7)
(1.4)
12.8
0.0
91.5
(35.0)
0.0
0.0
0.14
0.0
(34.9)
(14.2)
0.0
0.0
0.0
(14.2)
0.0
42.5
41.6
29.9
52.4
34.9
(10.0)
(1.5)
(5.3)
0.0
70.5
(35.0)
0.0
0.0
0.14
0.0
(34.9)
(14.2)
0.0
0.0
0.0
(14.2)
0.0
21.4
40.1
18.7
Company Guide
Sunningdale Tech Ltd
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 22 Feb 2018 18:15:36 (SGT)
Dissemination Date: 22 Feb 2018 18:57:38 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
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Company Guide
Sunningdale Tech Ltd
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
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1
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2
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Singapore Company Guide
UMS Holdings
Refer to important disclosures at the end of this report
Version 10 | Bloomberg: UMSH SP | Reuters: UMSH.SI
DBS Group Research . Equity
28 Feb 2018
BUY
Beneficiary of Applied Materials’s strong growth
Last Traded Price ( 27 Feb 2018): S$1.14 (STI : 3,540.39)
Price Target 12-mth: S$1.37 (20% upside) (Prev S$1.21)
Maintain BUY with higher TP of S$1.35; front-end semiconductor
equipment play offering growth and attractive c.6% yield. UMS
Holdings (UMS) has partnered closely with Applied Materials for more
than a decade. Notably, despite its exposure to a cyclical industry,
UMS’s earnings have been less volatile since it was awarded the Endura
contract in 2010. The company also stands out for its strong cash flow
(even after paying dividends) generation capabilities and consistent
dividends, thus offering both yield and growth.
Analyst
Carmen Tay +65 6682 3719 carmentay@dbs.com
What’s New
•
UMS delivers record 4Q17 profits of S$15.8m on firm
growth momentum and positive one-off effects
•
Enlarged Penang facility ready for the ramp; plans to
bring on additional capacity signals optimism over
longer-term growth prospects
•
Cost savings should more than offset ASP reduction to
drive earnings growth over FY17-19F
•
Maintain BUY with higher TP of S$1.37; attractive
5.3% yield also on offer
Where we differ: We have assumed a larger discount to larger peers’
15x FY18F PE compared to consensus given its higher customer
concentration risk vs peers.
Price Relative
S$
Relative Index
Potential catalysts: Higher demand for semiconductor equipment,
diversification away from key client, earnings-accretive M&As
1.3
274
1.2
1.1
224
1.0
0.9
0.8
174
0.7
0.6
124
0.5
0.4
0.3
Feb-14
Feb-15
Forecasts and Valuation
FY Dec (S$ m)
Revenue
EBITDA
Pre-tax Profit
Net Profit
Net Pft (Pre Ex.)
Net Pft Gth (Pre-ex) (%)
EPS (S cts)
EPS Pre Ex. (S cts)
EPS Gth Pre Ex (%)
Diluted EPS (S cts)
Net DPS (S cts)
BV Per Share (S cts)
PE (X)
PE Pre Ex. (X)
P/Cash Flow (X)
EV/EBITDA (X)
Net Div Yield (%)
P/Book Value (X)
Net Debt/Equity (X)
ROAE (%)
Feb-16
UMS Holdings (LHS)
Earnings Rev (%):
Consensus EPS (S cts):
Other Broker Recs:
2016A
104
30.0
24.7
22.6
22.6
(34.1)
5.26
5.26
(34)
5.26
6.00
44.2
21.7
21.7
14.4
14.9
5.3
2.6
CASH
11.8
74
Feb-18
Feb-17
Relative STI (RHS)
2017A
162
59.6
55.2
52.0
52.0
130.3
9.70
9.70
84
9.70
5.60
40.1
11.8
11.8
15.6
9.6
4.9
2.8
CASH
25.7
2018F
179
68.9
61.9
58.1
58.1
11.6
10.8
10.8
12
10.8
6.00
44.9
10.5
10.5
8.1
7.8
5.3
2.5
CASH
25.5
2019F
188
72.2
65.0
61.0
61.0
5.0
11.4
11.4
5
11.4
6.00
50.3
10.0
10.0
8.6
7.0
5.3
2.3
CASH
23.9
B: 2
8
9.80
S: 0
6
9.90
H: 0
Source of all data on this page: Company, DBS Bank, Bloomberg
Finance L.P
ed: TH / sa: SM, PY, CS
Firm momentum and one-off gains/writebacks took UMS’s 4Q17
earnings to a record S$15.8m. Entering into 2018, growth will mainly
be supported by a ramp-up in its higher-margin Components business
and cost benefits arising from its shift to Penang. With imminent cost
savings set to offset the impact of lower ASPs, we raise our earnings
projections slightly by 6-8% for FY18-19F and roll forward our earnings
base to FY19F to arrive at a higher TP of S$1.37. Maintain BUY.
Positive outlook for key client Applied Materials augurs well for UMS.
SEMI predicts that global fab equipment spending could reach industry
all-time highs of over US$60.1bn in 2018. Reports by Applied Materials
also imply robust demand and a CAGR of c.10% into FY20F. This
augurs well for UMS given its primary role in the manufacture of
components for various semiconductor equipment and that it handles
c.70% of manufacturing and assembly for Applied Materials’s Endura
deposition system – especially given the successful extension of the
Endura contract.
Valuation:
Maintain BUY with higher TP of S$1.37, which is based on 12x (or 11x
ex-cash PE) FY18F PE, at a discount to larger peers’ 15x. An attractive
prospective yield of over 5% is on offer.
Key Risks to Our View:
Key client risk. Historically, c.90% of UMS’s revenues on average can be
attributed to Applied Materials. Disruptions to the relationship or
weakness in Applied Materials’s end demand could significantly weigh
on UMS’s performance.
At A Glance
Issued Capital (m shrs)
Mkt. Cap (S$m/US$m)
Major Shareholders (%)
Andy Luong
Free Float (%)
3m Avg. Daily Val (US$m)
ICB Industry : Industrials / Electronic & Electrical Equipment
536
612 / 462
20.1
79.9
2.5
Company Guide
UMS Holdings
WHAT’S NEW
FY17 a record year for UMS
New earnings record; 4Q17 slightly above on several oneoffs . UMS’s strong 3Q17 momentum was sustained into
4Q. Sales remained stable at c.S$38.7m (vs S$39.3 in 3Q), as
the sequential decline in contributions from Semiconductor
Integrated Systems (-10.3% q-o-q to S$18.2m on the back
of lower Endura shipments) were partly offset by stronger
contributions (+1.4% to c.S$19.3m) from the higher-margin
Components business. With contributions from the two key
segments holding relatively steady q-o-q, gross material
margins were thus maintained at c.58.3% in 4Q17, similar
to c.58.8% in 3Q.
Meanwhile, earnings came in slightly above as one-off
disposal gains and writebacks more than offset the impact
of forex losses and higher personnel costs to provide an
added boost to earnings. Stripping out nearly c.S$3.4m in
one-offs, FY17 PATMI would otherwise have been in line at
c.S$48.6m vs our forecast of S$47.9m (+1.1%):
FY17
PATMI
Loss (Gain) on Disposal of
Old Equipment
Inventory Provision Write
Back (Down)
Tax Overprovision Write
Back (Down)
Adjusted PATMI
S$ m
52.0
(1.8)
(1.1)
(0.5)
48.6
UMS could benefit from Applied Materials’s double-digit
growth in 2018. SEMI recently raised its projections for
global semiconductor manufacturing equipment sales in
2018, which it believes will grow by 7.5% to a record
US$60.1bn, compared to US$58bn previously. Separately,
SEMI also highlighted vast potential in China’s growing chip
market and predicts that the planned/ongoing construction
of 24 new fab projects across China alone could prompt
over US$11bn of investments in new wafer fab equipment
in 2018, and potentially surpass US$18bn by 2020.
Applied Materials also maintained its positive guidance
during its 4Q17 results in November, reiterating expectations
of double-digit revenue and profit growth in 2018.
Underlying demand trends also support Applied Materials’
rosy outlook, particularly (i) ongoing capacity additions to
meet growing demand for sensors and IoT devices, and (ii)
demand shifts from lithography to materials deposition and
removal arising from the transition to 3D memory.
Cost savings to more than offset ASP reduction, driving
earnings CAGR of 8.8% over FY17-19F; upside from further
order wins. Capacity utilisation for UMS’s Semiconductor
Integrated Systems (Endura) and Components businesses
currently stands at >90% and c.65% respectively. UMS is
also in the midst of bringing in new machines, which would
effectively raise capacity for Endura by c.30% by mid-2018,
which signals the company’s optimism over long-term
growth prospects.
Guiding for strong order flow with its key customer,
utilisation should improve as UMS ramps up progressively in
subsequent quarters. Following the completion of its shift to
Penang, UMS is also poised to reap substantial cost benefits,
which should kick in from FY18F.
While ASPs could trend lower as some of its operating cost
and tax savings are passed through to its key client, we
would argue that the improved pricing competitiveness
bodes well for further order wins as it signals UMS’s
willingness to sacrifice some margins in favour of volume
growth.
Proposed 3-Sct final dividend. UMS also proposed a 3-Sct
interim dividend to be paid on 25 May 2018, bringing total
dividends paid up c.17% from 6 Scts (pre bonus issue)/4.8
Scts (post bonus issue) per share in FY16 to 7 Scts/5.6 Scts in
FY17.
Similar to previous years, UMS is likely to maintain a 6-Sct
payout in FY18F, which represents an attractive prospective
yield of at least 5.3%.
Maintain BUY with higher TP of S$1.37 as we raise our
earnings projections slightly by 6-8% for FY18-19F to factor
in higher cost savings, and roll forward our earnings base to
FY19F.
Company Guide
UMS Holdings
Quarterly / Interim Income Statement (S$m)
FY Dec
Revenue
Cost of Goods Sold
4Q2016
3Q2017
4Q2017
% chg yoy
% chg qoq
34.2
39.3
38.7
13.2
(1.7)
(18.5)
(16.2)
(16.1)
(13.0)
(0.5)
Gross Profit
15.6
23.1
22.5
44.4
(2.5)
Other Oper. (Exp)/Inc
(6.9)
(7.9)
(9.3)
33.7
17.7
Operating Profit
8.67
15.2
13.3
52.9
(13.0)
Other Non Opg (Exp)/Inc
(2.5)
(0.4)
2.18
nm
(703.3)
0.0
0.0
0.0
-
-
0.06
0.0
0.0
nm
nm
0.0
0.0
0.0
-
-
Pre-tax Profit
6.23
14.9
15.4
147.2
3.6
Tax
(0.3)
(1.5)
0.46
(268.0)
(131.3)
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Minority Interest
0.0
0.16
0.0
nm
nm
Net Profit
5.96
13.6
15.8
165.7
16.7
Net profit bef Except.
5.96
13.6
15.8
165.8
16.8
EBITDA
7.32
15.9
16.5
124.7
3.6
Gross Margins
45.7
58.8
58.3
Opg Profit Margins
25.4
38.7
34.3
Net Profit Margins
17.4
34.5
40.9
Margins (%)
Source of all data: Company, DBS Bank
Company Guide
UMS Holdings
Gross Profit (S$ m)
CRITICAL DATA POINTS TO WATCH
103.3
Critical Factors
Higher fab equipment spending. As procurement of semiconductor
equipment tends to lag construction of new fabs/facilities by
chipmakers and foundries by 12-18 months, we believe that the new
construction of new 300mm fabs in 2015 and 2016 provides support
for more robust growth in equipment spending in 2017 and 2018.
The pick-up in key client Applied Materials’s and UMS’s orders in
recent quarters also confirm this.
Similarly, SEMI also predicts that fab equipment spending will reach
an industry all-time record of US$60.1bn in 2018.
97.4
88.6
73.8
102
88.9
66.9
56.4
59.0
44.3
29.5
14.8
0.0
2015A
2016A
2017A
2018F
2019F
Revenue Growth (%)
55.9
57.1
44.3
Riding on Applied Materials’s positive outlook; following firm
recovery, earnings could further grow at 8.3% CAGR over FY17-19F.
As a long-standing manufacturing partner to Applied Materials in the
manufacture of components for various semiconductor equipment,
and as the main manufacturer and sub-assembler of Applied
Materials’s flagship Endura deposition system, UMS naturally benefits
from the uplift in demand for Applied Materials’s higher-tech wafer
fabrication equipment.
Benefitting from the current semiconductor upcycle and recovering
strongly from the trough in FY16, UMS’s earnings grew c.30% y-o-y
to S$52m in FY17, and is set to grow further as it ramps up on its
higher-margin components business, and as cost and tax savings
arising from its Penang shift kicks in.
Strong cash flow generation underpins expectations of dividend of 6
Scts per share for FY17F. Despite operating in a highly cyclical
industry, the group’s strengths lie in its stable cash flow (even after
paying dividends) generation. Coupled with the current uptick in
orders and strong net cash position of c.8 Scts per share, allows the
group to finance upcoming capex needs internally, while providing
support for a 6-Sct dividend to be paid.
31.5
18.7
10
6.0
5
1.16
-6.8
2015A
-6.2
2016A
2017A
2018F
2019F
Operating Profit Margin (%)
35.29
34.3
34.6
34.6
2017A
2018F
2019F
6.7
6.7
2018F
2019F
30.7
28.2
28.23
21.18
14.12
7.06
0.00
2015A
2016A
Effective Tax Rate (%)
8.68
8.8
7.0
6.71
6.38
5.3
In the longer term, UMS’s diversification into other businesses could
also bear fruit. In 2017, UMS acquired a 51% stake in water and
chemical engineering solutions company, Kalf Engineering. Kalf has
secured seven projects worth approximately S$13m, which is
expected to contribute to the group’s performance in FY18F.
In 2016, the group also diversified into the aerospace components
via a 10% stake in All Star Fortress Sdn Bhd (ASF). While we think
that ASF is unlikely to be profitable within the next 2-3 years, risks
inherent in this diversification remains low given the small initial
investment. These investments should provide the group with
alternate growth opportunities in the medium-to-long term, and
provide diversification away from the cyclical semiconductor business.
3.5
1.8
0.0
2015A
2016A
2017A
Capex (S$ m)
11
11.1
10
8.76
8.9
6.7
4.4
4.46
2.68
2.2
0.0
2015A
2016A
Source: Company, DBS Bank
2017A
2018F
2019F
Company Guide
UMS Holdings
Appendix 1: A look at Company's listed history – what drives its share price?
Strong historical share price correlation between UMS and key client, Applied Materials
Source: Company, Thomson Reuters, DBS Bank
Meanwhile, Applied Materials’ share price is largely driven by order book and earnings projections
Source: Company, Thomson Reuters, DBS Bank
Company Guide
UMS Holdings
Balance Sheet:
Healthy balance sheet. UMS’s net cash position has
strengthened significantly, and has more than doubled from
S$15.3m at end-FY12 to S$40.6m in 4Q17. All else constant,
our projections show that UMS should be able to fund marginaccretive M&A opportunities, if any.
Leverage & Asset Turnover (x)
0.7
0.14
0.7
0.12
0.10
0.6
0.08
0.6
0.06
0.5
0.04
Share Price Drivers:
Acquisition of new clients. As part of its strategy, UMS has also
embarked on new customer acquisition efforts and is actively
seeking sustainable, margin-accretive opportunities outside of
the cyclical semiconductor industry.
If successful, this could accelerate earnings growth going
forward.
0.5
0.02
0.00
0.4
2015A
2016A
2017A
2018F
Gross Debt to Equity (LHS)
2019F
Asset Turnover (RHS)
Capital Expenditure
S$m
12.0
10.0
8.0
6.0
M&A opportunities. Following its recent 10% stake acquisition
in aerospace component manufacturer ASF, UMS continues to
be on the lookout for diversification opportunities (outside of
the semiconductor industry) with good long-term growth
potential. If successful, these new avenues of growth could
help drive further re-rating of the share price.
4.0
2.0
0.0
2015A
2016A
2017A
2018F
2019F
Capital Expenditure (-)
ROE (%)
25.0%
Potential takeover target. UMS only has one large shareholder
with a 20% stake. With the renewal of the Endura contract
providing good earnings visibility, consistently strong cash flows
and net cash of S$40.8m (and growing), we see UMS as an
attractive takeover target.
Key Risks:
Key client risk – Applied Materials. UMS's performance is
closely tied to that of Applied Materials. Management
estimates that between 80% and 90% of UMS’s revenues are
attributable to Applied Materials.
20.0%
15.0%
10.0%
5.0%
0.0%
2015A
2016A
2017A
2018F
2019F
Forward PE Band (x)
(x)
11.7
Disruptions to the relationship (i.e. loss of market share) or
weakness in Applied Materials’s end demand could
significantly weigh on UMS’s performance.
Underlying demand for semiconductor manufacturing
equipment. As demand for semiconductor manufacturing
equipment is largely driven by capex cycles of chipmakers and
foundries, an extension of the life cycle of existing systems or
slowdown in global economy could result in deferments in
their planned capital investments.
Company Background
UMS Holdings (UMSH SP) is an integrated OEM for front-end
semiconductor equipment manufacturing, providing both
component manufacturing and sub-assembly services, primarily
to key client, Applied Materials.
10.7
9.7
+2sd: 9.5x
8.7
+1sd: 8.2x
7.7
6.7
Avg: 6.8x
5.7
-1sd: 5.5x
4.7
3.7
Feb-14
-2sd: 4.1x
Feb-15
Feb-16
Feb-17
Feb-18
PB Band (x)
(x)
3.1
2.6
+2sd: 2.34x
2.1
+1sd: 1.8x
1.6
Avg: 1.26x
1.1
-1sd: 0.72x
0.6
0.1
Feb-14
-2sd: 0.17x
Feb-15
Source: Company, DBS Bank
Feb-16
Feb-17
Feb-18
Company Guide
UMS Holdings
Key Assumptions
FY Dec
2015A
2016A
2017A
2018F
2019F
Gross Profit (S$ m)
Revenue Growth (%)
Operating Profit Margin
(%)
Effective Tax Rate (%)
Capex (S$ m)
66.9
1.16
30.7
6.71
4.46
56.4
(6.2)
28.2
8.68
2.68
88.9
55.9
34.3
6.38
8.76
97.4
10.0
34.6
6.70
11.0
102
5.00
34.6
6.70
10.0
Income Statement (S$m)
FY Dec
2015A
2016A
2017A
2018F
2019F
111
(44.2)
66.9
(32.8)
34.1
2.51
0.0
0.13
0.0
36.8
(2.5)
0.0
0.0
34.3
34.3
44.1
104
(47.8)
56.4
(27.0)
29.4
(4.7)
0.0
0.15
0.0
24.7
(2.1)
0.0
0.0
22.6
22.6
30.0
162
(73.6)
88.9
(33.2)
55.7
(0.4)
0.0
0.0
0.0
55.2
(3.5)
0.32
0.0
52.0
52.0
59.6
179
(81.3)
97.4
(35.6)
61.8
(0.4)
0.0
0.48
0.0
61.9
(4.1)
0.32
0.0
58.1
58.1
68.9
188
(85.4)
102
(37.3)
64.9
(0.4)
0.0
0.52
0.0
65.0
(4.4)
0.33
0.0
61.0
61.0
72.2
1.2
24.5
24.8
37.6
(6.2)
(31.9)
(14.0)
(34.1)
55.9
98.4
89.7
130.3
10.0
15.7
11.0
11.6
5.0
4.8
5.0
5.0
60.2
30.7
30.9
17.8
16.6
17.7
75.1
NM
54.1
28.2
21.7
11.8
10.8
11.7
114.0
NM
54.7
34.3
32.0
25.7
22.2
24.2
57.7
55,695.0
54.5
34.6
32.5
25.5
21.3
23.4
55.4
NM
54.5
34.6
32.5
23.9
20.2
22.2
52.7
NM
Revenue
Cost of Goods Sold
Gross Profit
Other Opng (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Preference Dividend
Net Profit
Net Profit before Except.
EBITDA
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins & Ratio
Gross Margins (%)
Opg Profit Margin (%)
Net Profit Margin (%)
ROAE (%)
ROA (%)
ROCE (%)
Div Payout Ratio (%)
Net Interest Cover (x)
Source: Company, DBS Bank
Company Guide
UMS Holdings
Quarterly / Interim Income Statement (S$m)
FY Dec
4Q2016
1Q2017
Revenue
Cost of Goods Sold
Gross Profit
Other Oper. (Exp)/Inc
Operating Profit
Other Non Opg (Exp)/Inc
Associates & JV Inc
Net Interest (Exp)/Inc
Exceptional Gain/(Loss)
Pre-tax Profit
Tax
Minority Interest
Net Profit
Net profit bef Except.
EBITDA
2Q2017
3Q2017
4Q2017
34.2
(18.5)
15.6
(6.9)
8.67
(2.5)
0.0
0.06
0.0
6.23
(0.3)
0.0
5.96
5.96
7.32
41.8
(20.3)
21.4
(8.1)
13.4
(1.0)
0.0
0.07
0.0
12.4
(1.3)
0.0
11.2
11.2
13.6
42.7
(20.9)
21.8
(8.1)
13.8
(1.2)
0.0
0.0
0.0
12.6
(1.3)
0.19
11.5
11.5
13.6
39.3
(16.2)
23.1
(7.9)
15.2
(0.4)
0.0
0.0
0.0
14.9
(1.5)
0.16
13.6
13.6
15.9
38.7
(16.1)
22.5
(9.3)
13.3
2.18
0.0
0.0
0.0
15.4
0.46
0.0
15.8
15.8
16.5
30.9
(16.9)
10.1
(12.2)
22.3
85.9
54.5
87.5
2.3
0.2
2.9
2.8
(7.9)
16.4
10.6
18.1
(1.7)
3.6
(13.0)
16.8
45.7
25.4
17.4
51.4
32.1
26.7
51.1
32.2
26.9
58.8
38.7
34.5
58.3
34.3
40.9
2015A
2016A
2017A
2018F
2019F
Net Fixed Assets
Invts in Associates & JVs
Other LT Assets
Cash & ST Invts
Inventory
Debtors
Other Current Assets
Total Assets
34.8
0.0
84.1
38.9
37.4
12.4
0.0
208
31.7
0.0
83.2
42.6
31.7
20.9
0.0
210
38.8
0.0
87.7
59.6
49.6
23.4
0.0
259
42.3
0.0
87.7
92.1
40.1
24.4
0.0
287
44.6
0.0
87.7
121
37.4
25.6
0.0
316
ST Debt
Creditor
Other Current Liab
LT Debt
Other LT Liabilities
Shareholder’s Equity
Minority Interests
Total Cap. & Liab.
0.0
9.76
1.98
0.0
1.42
194
0.0
208
0.25
16.6
2.21
0.0
1.68
189
0.0
210
19.0
18.1
3.29
0.0
4.99
215
(1.3)
259
19.0
19.1
4.15
0.0
4.99
241
(1.6)
287
19.0
20.1
4.36
0.0
4.99
270
(2.0)
316
38.0
38.9
41.5
103.4
351.0
0.5
7.6
4.4
CASH
CASH
N/A
22.7
33.9
42.4
58.4
113.4
297.5
0.5
5.0
3.3
CASH
CASH
1,077.5
14.9
51.7
40.6
49.8
91.3
214.4
0.7
3.3
2.1
CASH
CASH
46.1
15.2
41.2
73.1
48.8
92.0
221.8
0.7
3.7
2.8
CASH
CASH
57.9
15.2
38.6
102
48.7
92.2
182.1
0.6
4.2
3.4
CASH
CASH
52.6
14.4
Growth
Revenue Gth (%)
EBITDA Gth (%)
Opg Profit Gth (%)
Net Profit Gth (Pre-ex) (%)
Margins
Gross Margins (%)
Opg Profit Margins (%)
Net Profit Margins (%)
Balance Sheet (S$m)
FY Dec
Non-Cash Wkg. Capital
Net Cash/(Debt)
Debtors Turn (avg days)
Creditors Turn (avg days)
Inventory Turn (avg days)
Asset Turnover (x)
Current Ratio (x)
Quick Ratio (x)
Net Debt/Equity (X)
Net Debt/Equity ex MI (X)
Capex to Debt (%)
Z-Score (X)
Source: Company, DBS Bank
Company Guide
UMS Holdings
Cash Flow Statement (S$m)
FY Dec
Pre-Tax Profit
Dep. & Amort.
Tax Paid
Assoc. & JV Inc/(loss)
Chg in Wkg.Cap.
Other Operating CF
Net Operating CF
Capital Exp.(net)
Other Invts.(net)
Invts in Assoc. & JV
Div from Assoc & JV
Other Investing CF
Net Investing CF
Div Paid
Chg in Gross Debt
Capital Issues
Other Financing CF
Net Financing CF
Currency Adjustments
Chg in Cash
Opg CFPS (S cts)
Free CFPS (S cts)
2015A
2016A
2017A
2018F
2019F
36.8
7.43
(2.8)
0.0
(4.9)
(0.7)
35.8
(4.5)
0.0
0.0
0.0
0.12
(4.3)
(25.7)
0.0
0.0
0.25
(25.5)
(0.5)
5.39
9.48
7.30
24.7
5.43
(2.7)
0.05
0.53
5.79
33.9
(2.7)
0.0
(0.9)
0.0
0.14
(3.4)
(25.7)
0.25
0.0
0.0
(25.5)
(1.3)
3.69
7.77
7.27
55.2
4.32
(2.1)
0.04
(18.4)
0.02
39.2
(8.8)
0.0
(0.1)
0.0
(2.1)
(11.0)
(26.8)
18.8
0.0
(0.4)
(8.5)
(2.8)
17.0
10.7
5.67
61.9
7.48
(3.3)
0.0
9.62
0.0
75.7
(11.0)
0.0
0.0
0.0
0.0
(11.0)
(32.2)
0.0
0.0
0.0
(32.2)
0.0
32.5
12.3
12.1
65.0
7.69
(4.1)
0.0
2.41
0.0
71.0
(10.0)
0.0
0.0
0.0
0.0
(10.0)
(32.2)
0.0
0.0
0.0
(32.2)
0.0
28.8
12.8
11.4
Source: Company, DBS Bank
Target Price & Ratings History
1.20
S$
1.00
5
4
0.90
0.80
23
0.70
0.60
0.50 1
Feb-17
Apr-17
Jun-17
Aug-17
Oct-17
Dec-17
Feb-18
Not e : Share price and Target price are adjusted for corporate actions.
Source: DBS Bank
Analyst: Carmen Tay
12- mt h
T arget Rat ing
Pric e
Dat e of
Report
Closing
Pric e
1:
01 Mar 17
0.54
0.58
BUY
2:
15 May 17
0.78
0.86
BUY
3:
23 May 17
0.90
1.07
BUY
4:
14 Aug 17
0.90
0.90
HOLD
5:
13 Nov 17
1.04
1.21
BUY
S.No.
1.10
Company Guide
UMS Holdings
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 28 Feb 2018 16:25:34 (SGT)
Dissemination Date: 28 Feb 2018 16:31:04 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated
corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)
redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or
warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without
notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific
investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees
only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial
advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit)
arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not
to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons
associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have
positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and
other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may
not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to
update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED
UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.
Company Guide
UMS Holdings
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s)
primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the
issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real
estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the
management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or
his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has
procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of
research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment
banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment
banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the
DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates do not
have a proprietary position in the securities recommended in this report as of 31 Jan 2018.
2.
Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research
Report.
Compensation for investment banking services:
3.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document
should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced:
4.
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other
investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1
An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of
which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person
accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2
Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a
new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term
does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new
listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Market Focus
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 8 Mar 2018 17:20:04 (SGT)
Dissemination Date: 8 Mar 2018 18:52:08 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated
corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)
redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or
warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without
notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific
investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees
only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial
advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit)
arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not
to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons
associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have
positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and
other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may
not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to
update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED
UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
Page 11
Market Focus
(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s)
primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the
issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real
estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the
management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or
his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has
procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of
research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment
banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment
banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the
DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), DBSV HK or their subsidiaries and/or other affiliates have
proprietary positions in Sheng Siong, Manulife US Real Estate Inv, CDL Hospitality Trusts, CapitaLand recommended in this report as of 31 Jan
2018.
2.
Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research
Report.
3.
DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued
share capital in Manulife US Real Estate Inv, CDL Hospitality Trusts, recommended in this report as of 31 Jan 2018.
4.
DBS Bank Ltd, DBS HK, DBSVS, DBSVUSA, DBSV HK, their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of
common equity securities of Manulife US Real Estate Inv, CDL Hospitality Trusts, as of 31 Jan 2018.
Compensation for investment banking services:
5. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past
12 months for investment banking services from Cityneon Holdings, mm2 Asia, Chip Eng Seng Corporation, APAC Realty Limited, Manulife
US Real Estate Inv, CDL Hospitality Trusts, CapitaLand as of 31 Jan 2018.
6.
DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of
securities for, mm2 Asia, Chip Eng Seng Corporation, APAC Realty Limited, Manulife US Real Estate Inv, CDL Hospitality Trusts, CapitaLand in
the past 12 months, as of 31 Jan 2018.
7.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document
should contact DBSVUSA exclusively.
1
An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of
which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person
accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2
Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a
new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term
does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new
listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Page 12
Market Focus
Directorship/trustee interests
8. Euleen Goh Yiu Kiang, a member of DBS Group Holdings Board of Directors, is a Non-Exec Director of CapitaLand as of 31 Dec 2017.
Disclosure of previous investment recommendation produced
9. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other
investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
RESTRICTIONS ON DISTRIBUTION
This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or
General
located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be
contrary to law or regulation.
Australia
This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd
(“DBSVS”). DBS holds Australian Financial Services Licence no. 475946.
DBSVS is exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001
(“CA”) in respect of financial services provided to the recipients. DBSVS is regulated by the Monetary Authority of Singapore
under the laws of Singapore, which differ from Australian laws.
Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong
This report has been prepared by a person(s) who is not licensed by the Hong Kong Securities and Futures Commission to
carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance
(Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Vickers
Hong Kong Limited, a licensed corporation licensed by the Hong Kong Securities and Futures Commission to carry on the
regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of
Hong Kong).
For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at equityresearch@dbs.com.
Indonesia
This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.
Malaysia
This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from
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and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any
of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek
to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also
have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and
other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR
Singapore
This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No.
198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the
Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign
entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial
Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert
Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons
only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from,
or in connection with the report.
Thailand
This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd.
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Market Focus
United
Kingdom
This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore.
This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised
and regulated by the Financial Conduct Authority in the United Kingdom.
In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and
associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any
form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at
persons having professional experience in matters relating to investments. Any investment activity following from this
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relating to investments should not rely on this communication.
Dubai
International
Financial
Centre
This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor,
Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank
Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for
professional clients (as defined in the DFSA rulebook) and no other person may act upon it.
United Arab
Emirates
This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined
in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes
only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell
any financial product. It does not constitute a personal recommendation or take into account the particular investment
objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment
adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the
information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This
report or any portion thereof may not be reprinted, sold or redistributed without our written consent.
United States
This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named
on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research
analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company,
public appearances and trading securities held by a research analyst. This report is being distributed in the United States by
DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional
Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may
authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should
contact DBSVUSA directly and not its affiliate.
Other
jurisdictions
In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified,
professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
Page 14
Market Focus
DBS Regional Research Offices
HONG KONG
DBS Vickers (Hong Kong) Ltd
Contact: Paul Yong
18th Floor Man Yee Building
68 Des Voeux Road Central
Central, Hong Kong
Tel: 65 6878 8888
Fax: 65 65353 418
e-mail: equityresearch@dbs.com
Participant of the Stock Exchange of Hong Kong
MALAYSIA
AllianceDBS Research Sdn Bhd
Contact: Wong Ming Tek (128540 U)
19th Floor, Menara Multi-Purpose,
Capital Square,
8 Jalan Munshi Abdullah 50100
Kuala Lumpur, Malaysia.
Tel.: 603 2604 3333
Fax: 603 2604 3921
e-mail: general@alliancedbs.com
INDONESIA
PT DBS Vickers Sekuritas (Indonesia)
Contact: Maynard Priajaya Arif
DBS Bank Tower
Ciputra World 1, 32/F
Jl. Prof. Dr. Satrio Kav. 3-5
Jakarta 12940, Indonesia
Tel: 62 21 3003 4900
Fax: 6221 3003 4943
e-mail: research@id.dbsvickers.com
THAILAND
DBS Vickers Securities (Thailand) Co Ltd
Contact: Chanpen Sirithanarattanakul
989 Siam Piwat Tower Building,
9th, 14th-15th Floor
Rama 1 Road, Pathumwan,
Bangkok Thailand 10330
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Fax: 66 2 658 1269
e-mail: research@th.dbs.com
Company Regn. No 0105539127012
Securities and Exchange Commission, Thailand
SINGAPORE
DBS Bank Ltd
Contact: Janice Chua
12 Marina Boulevard,
Marina Bay Financial Centre Tower 3
Singapore 018982
Tel: 65 6878 8888
Fax: 65 65353 418
e-mail: equityresearch@dbs.com
Company Regn. No. 196800306E
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