Broker's Digest: Tech manufacturers, Wilmar, Japfa, FEHT, iFast Corp, SIA

In its July 29 report, the research team from UOB Kay Hian notes that companies servicing the semiconductor and auto industries are clear beneficiaries, given the industry tailwinds.

“The semiconductor industry is riding on a strong uptrend, with significant demand for semiconductor chips arising from 5G-related spending and the growth of data,” states the research team.

“Demand has shown resilience despite being impacted by supply chain disruption from global lockdowns related to the Covid-19 pandemic.”

Given how they “are serving the right industries and have better chances of earnings beat”, UOB Kay Hian’s top picks are UMS Holdings, Innotek and Aztech Global, with target prices of $1.92, $1.20 and $1.86 respectively.

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“Particularly, the upcoming 2QFY2021 results from Aztech, UMS, and Innotek could surprise on the upside as demand for their end-products continues to benefit from resilient demand,” writes the team.

Furthermore, unlike other sectors which faced low demand in the pandemic, factories for these tech manufactures have been kept busy in 2QFY2021, “supported by positive and expansionary” policies.

In June, the semiconductor segment grew 28.2% y-o-y, led by demand from cloud services and 5G markets, while the output of machinery and systems expanded 28.6% y-o-y on the back of higher output of semiconductor and industrial process equipment.

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The strong demand is expected to translate to increased factory utilisation rates, driving positive operating leverage for the tech-related manufacturers.

But they expect competition to stay rational among the suppliers, given the elevated capacity utilisation rates across the semiconductor industry.

For Aztech, UOB Kay Hian highlights that the firm’s manufacturing plant in Dongguan, China was not affected by the recent Covid-19 outbreak and its Malaysian plant only faced “limited” impact from the country’s movement control order. It is also phasing out low margin products to free up more capacity for better-margin products.

Aztech’s customer demand and order book remain robust, with the company continuing to see robust orders from its key customers and orders lasting until 2022. In addition, Aztech is working on several new products with its key customer, with production commencing in 3QFY2021.

“Compared with larger competing manufacturers, Aztech has advantages in its ability to provide more dedicated services and work closely with the design team of its key customer,” the team notes.

As for UMS, it is enjoying support from the global chip shortage situation brought about by rising consumer demand for electronic products and supply disruption.

UMS’s key customer is chip-making equipment producer Applied Materials, which, in its 2QFY2021 earnings on May 21, notes that its customers, for the first time, have provided capital-spending guidance for multiple years ahead, which will be a leading indicator for demand sustainability.

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“This augments our thesis that the ongoing massive capex spending and supercycle in the semiconductor industry will bode well for UMS, lifting overall factory utilisation rates and revenue above the $200-million mark for the first time in 2021.”

UMS is also poised for an earnings upside surprise if factory utilisation rates remain elevated throughout the year.

The team reveals, “a sensitivity analysis shows that for every 5% increase in sales from our estimate, the expected rise in net profit will be 7% due to the impact of positive operating leverage.”

Last but not least, UOB Kay Hian has a positive outlook on Innotek, given its venture into the EV and parts assembly business, as well as its exposure to the automotive industry in China.

In InnoTek’s recent 2020 annual report, it highlighted that its China’s auto division is experiencing great change, with a clear shift towards electric vehicles (EV). InnoTek’s precision metal components division also serves EV manufacturers.

However, as the industry evolves holistically towards charging stations and infrastructure support, InnoTek says it will seek to deepen its value proposition with existing customers and acquire new customers.

This means moving beyond single-part manufacturing to parts assembly, and the company has secured initial orders of the latter and expects orders to increase as it establishes its foothold within the segment.

Furthermore, the UOB Kay Hian team thinks the company is set to benefit from a strong recovery in China’s auto sales. “China has successfully contained the Covid-19 outbreak, which has led to a surge in passenger vehicle (PV) sales back to pre-Covid-19 levels”, they point out.

Furthermore, China’s Association of Automobile Manufacturers estimates March auto sales at 2.38 million units, up 67% y-o-y and 64% m-o-m, and 1Q2021 PV sales should reach 6.34 million units, up 73% y-o-y.

Besides Innotek, UMS and Aztech, UOB Kay Hian also gave “buy” ratings for Venture Corp, Nanofilm Technologies International and Frencken Group, with target prices of $23.47, $5.51, and $2.13 respectively. — Lim Hui Jie

Wilmar International
Price target:
RHB “add” $5.75
CGS-CIMB “buy” $6.15

Analysts positive on Wilmar as subsidiary files for IPO in India

Analysts from RHB Group Research and CGSCIMB Research have maintained their “add” or “buy” calls and target prices on Wilmar International as its 50%-owned subsidiary Adani Wilmar (AWL) prepares to list on the BSE and National Stock Exchange of India.

CGS-CIMB’s Ivy Ng and Nagulan Ravi maintained their target price of $6.15, while RHB’s Singapore research team gave a target price of $5.75.

The proposed IPO will comprise the issuance of new shares by AWL for an amount of up to INR45 billion ($819 million), and will not have any secondary listing.

The proceeds from the IPO will be used for expansion of AWL’s existing manufacturing facilities and developing new manufacturing plants, repayment and prepayment of borrowings, strategic acquisitions and investments, as well as general corporate purposes.

RHB is of the view that this development is “positive” for Wilmar, saying that the listing can boost Wilmar’s share price by 20 cents per share. This is if it trades on par with its Indian fast-moving consumer goods (FMCG) peers of an average 40 times P/E.

They highlight though, that Wilmar will not be receiving any proceeds directly from this IPO as this does not involve the selling of shares by the existing shareholders. Furthermore, its stake in AWL will be diluted depending on how many shares are issued.

However, the team thinks that Wilmar will benefit from the enlarged value of AWL post-listing, as well as higher earnings potential from the expansion plans using the IPO proceeds. In Wilmar’s annual report, its 50% stake in AWL currently stands at US$226.7 million, while the IPO is expected to raise US$600 million.

Furthermore, they note that FMCG companies in India trade at high P/Es. “Indian FMCG firms trade in a 20-65 times P/E range with a simple average of 42 times. Based on AWL’s latest 2020 net profit of US$93 million and applying 40 times P/E, this could add an additional 19 cents to Wilmar’s share price based on its 50% stake and excluding the new share issuance,” the analysts write.

As for CGS-CIMB’s Ng and Ravi, they also take the view that this is a positive development. While broadly agreeing with the view above, they also add that AWL’s listing will allow Wilmar to unlock value for shareholders, as the group could benefit through higher earnings growth prospects from AWL as it raises funding to accelerate its growth and earnings.

The analysts note that there is a potential upside of US$2.6 billion (or 56 cents per share, according to the higher end of their sensitivity analysis on AWL’s market valuation) to their SOP valuation for Wilmar. They currently value AWL at 1 times price to book value (P/BV). — Lim Hui Jie

Japfa
Price target:
UOB Kay Hian “hold” 77 cents
CGS-CIMB “add” $1.06

Analysts cut target prices for Japfa, UOB Kay Hian downgrades to ‘hold’ on uncertain outlook

Analysts have cut target prices for Japfa following the release of its 1HFY2021 ended June results on July 29.

UOB Kay Hian analyst John Cheong has also downgraded his call to “hold” in an August 2 research note, while CGS-CIMB Research analyst Tay Wee Kuang has maintained his “add” call.

While Japfa’s 1HFY2021 core net profit was in line with Cheong’s estimates, he anticipates more uncertainties for Japfa in 2HFY2021, especially for its Indonesia poultry and Vietnam swine segments, due to the worsening Covid-19 situation, which could impact average selling prices (ASPs).

Weaker ASPs for the Indonesia poultry and Vietnam swine segments had led to respective declines of 25% and 34% q-o-q in the segment’s core patmi for the 2QFY2021.

However, he notes that Japfa’s China dairy segment continued to deliver a stable performance during the quarter and anticipates this to continue. “ We expect the China dairy segment to continue to perform well as the raw milk shortage may last for another 2–3 years as more independent dairy farmers give up cow-raising,” he says.

Cheong has cut his FY2021 and FY2022 EPS by 16% and 14% respectively, reflecting the weaker ASPs for the Indonesia poultry and Vietnam swine segments.

His target price has been lowered to 77 cents, down from $1.17 previously, based on his sum-of-the-parts valuation. “We reduced the PE multiple for Indonesia poultry and Vietnam swine from 10 times (long-term mean) to 8 times (–1 standard deviation below mean) to reflect a more uncertain outlook,” he says.

CGS-CIMB’s Tay has a more sanguine take on Japfa’s results, noting that volumes across all business segments grew y-o-y and q-o-q, contributing to improved sales turnovers. He also points out that Japfa’s lower margins, driven by higher operating costs and normalised ASPs, were within his expectations.

However, he expects margin compression in FY2021–2023, noting that the worsening Covid-19 situation in Indonesia has cast demand uncertainties in 2H2021, while the Vietnam swine segment is expected to continue having lower margins as the industry recovers from supply shortages in the aftermath of African Swine Fever.

Nonetheless, he reiterates his “add” call for Japfa. While his forecasts are unchanged, he has a lower target price of $1.06 based on 10 times FY2022 EPS, slightly lower than its five-year historical average of 10.8 times. Upside risks include better margins while downside risks include extended losses from Falcon and worsening margins. — Atiqah Mokhtar

Far East Hospitality Trust
Price target:
Maybank Kim Eng “buy” 70 cents

Better second half seen

Maybank Kim Eng analyst Chua Su Tye has kept his “buy” call and 70 cents target price on Far East Hospitality Trust (FEHT).

For 1HFY2021 ended June, FEHT’s DPU was up 6.8% y-o-y to 1.1 cents but down 1% over the preceding 2HFY2020, excluding distribution top-ups.

Revenue in the same period dropped by 6.1% to $41.6 million and net property income down 6.2% to $36.2 million, as room rates eased.

FEHT’s portfolio of 13 properties has a total of 3,143 hotel rooms and serviced residence units as at Dec 31, 2020, valued at some $2.53 billion.

In his July 30 note, Chua expects FEHT to see a better second half, with its hotel occupancies cushioned by isolation demand in 3Q, while RevPAR should rise towards the year-end.

“It remains our preferred play in a (slow) sector recovery, with the high proportion of minimum fixed rent from its master leases offering downside support amid soft RevPAR growth,” he says.

FEHT, according to Chua, now has a gearing of 41.3% as at June, down from 41.6% as at the end of March. Given the 45% cap on gearing, FEHT has the room to borrow up to $290 million to fund growth.

“We believe management could prioritise a redevelopment (at Village Residence Clarke Quay) ahead of acquisitions in the near term. Possible government plans, to rezone the asset and lift GFA, from a proposed integrated development, are currently being explored, with details expected by end-2021,” writes Chua.

For now, Chua is keeping his DPU forecast for FEHT at 2.4 cents for the whole of FY2021, an increase from 1.7 cents paid for FY2020.

He notes that FEHT is now trading at an undemanding valuation of just 0.7 times price to book, and has a 27% upside to his 70 cents target price.— The Edge Singapore

iFast Corp
Price target:
CGS-CIMB “add” $12.50

Hong Kong eMPF project being finalised

CGS-CIMB Research analyst Andrea Choong has upgraded her recommendation on iFast to “add” from “hold” just seven days after her downgrade on July 27.

This comes after the group announced, on July 31, that it has finalised its prime subcontractor contract with PCCW Solutions for Hong Kong’s electronic Mandatory Provident Fund Platform (eMPF) project.

iFast’s service agreement with PCCW entails a seven-year maintenance period from FY2023, notes Choong. It is expected to have a “very material” financial impact during the period.

iFast says it aims to provide further guidance growth on the contract by end FY2021.

As no specific details have been revealed yet, Choong has based her earnings assumptions on available data reported on Bloomberg.

“We think that iFast’s service agreement with PCCW could result in additional [around] $10 million in annual net profit during the seven-year maintenance period beginning FY2023, assuming 20 basis points (of HK$1.2 trillion or $208.65 billion MPF assets under management or AUM) in annual fees, 30% share in fees and 15% net profit margin. The eMPF contract may be extended by 1-3 years, boosting sequential earnings,” she writes.

On this, Choong has also upped her target price estimate on iFast to $12.50 from $8.31, the second increase in her estimate in seven days.

“An upside risk is winning a digital banking licence in Malaysia while a downside risk is widening losses in China.” — Felicia Tan

Singapore Airlines
Price target:
UOB Kay Hian “hold” $4.85

Upgrade on narrowing losses

UOB Kay Hian analyst K Ajith has upgraded his call on Singapore Airlines (SIA) to “hold” from “sell” previously after the airline posted y-o-y narrower losses of $409 million for the 1QFY2022 ended June.

The airline, which also registered 38% narrower q-o-q losses is deemed as a “key positive” to Ajith, but remains “in line with [his] expectations”.

“Adjusted book value per share, assuming full conversion of mandatory convertible bonds (MCB) and other convertible bonds, stood at $3.39, down from S$3.60 as at end FY2021,” he writes in an Aug 2 report.

In its results release, SIA posted a $171 million q-o-q decrease in its operating loss, excluding fuel hedges and mark-to-market charges. This compares to the airline’s guidance that there was a cash burn of about $100 million to $150 million per month in February.

“Thus we estimate that SIA’s cash burn would have narrowed down by between 33–50% monthly,” notes the analyst.

To this end, Ajith has increased his target price estimate to $4.85 from $4.15 previously.

“In modelling SIA, we have factored in $6.2 billion in mandatory convertible bonds (MCB) as shareholders equity, but have excluded that in our valuation. We raise our fair value price-to-book (P/B) valuation multiple to 1.15 times FY2022 and FY2023’s average vs 1.0 times previously. The change in valuation multiple is to factor in improved sentiment towards border reopening over the next quarters,” he writes.

That said, he does not see many changes in the airline’s circumstances yet.

“Very little has changed following the release of [SIA’s] full-year results. There is not much optimism on borders reopening, but the slower pace of vaccination rates at other Asian cities, effectively means that SIA has to add capacity carefully, factoring in both inbound and outbound demand as well as the potential for incremental bellyhold cargo revenue on such flights,” he notes.

The airline is, overall, less likely to add capacity to Southeast Asia given its slow vaccination rates.

“For 2QFY2022, SIA expects to add 33% of pre-pandemic capacity, which is at a similar level to that of 1QFY2022. SIA also stated that it has the means to add 50-60% of pre-pandemic capacity given that crew are on standby,” he says.

The airline’s pax yields, which remain elevated, are likely to normalise in the coming quarters. Cargo yields, on the other hand, are likely to remain firm in the FY2022 due to a shortage in bellyhold capacity.

Strong PMI and sea port congestion would be used to fund capex, he says.

On the lower pax yields, Ajith has raised his loss assumptions for the FY2022 by 46%.

A gradual relaxation of travel restrictions, he says, is an upside factor to the airline’s shares. — Felicia Tan