United Overseas Bank
Price target:
CGS International ‘neutral’ $32
Roll-off in Citi integration costs positive for earnings
The Singapore research team at RHB Bank Singapore is remaining “neutral” on United Overseas Bank U11 (UOB) with a higher target price of $32 from $30.10, following a meeting with UOB’s management. The higher target price comes after the team has rolled its valuation forward to FY2025.
In its July 23 note, the team think UOB’s 2QFY2024 ended June patmi could ease q-o-q provided trading and investment (T&I) income normalises from the high levels seen in 1QFY2024.
“The roll-off in Citi integration costs in 2HFY2024 is positive for earnings, and efforts to build up the wholesale platform look to be bearing fruit,” says the team.
That said, the team notes that investors will focus on dividend yields following the ongoing interest downcycle for the bank’s dividend per share (DPS) growth.
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Furthermore, UOB’s preference to retain capital for growth could cause yields and DPS growth lag peers.
In 2QFY2024, the RHB team sees “mixed” trends. “We gathered that loan growth momentum was surprisingly resilient in 2Q, thanks to broad-based growth,” the team writes.
Furthermore, the bank’s net interest income (NII) should be “decent” on a q-o-q basis for the 2QFY2024 due to support from its net interest margin (NIM) from efforts to lower deposit costs. On a y-o-y basis though, NII is expected to come in “slightly lower” on lower NIM, the team notes.
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They add: “We understand that the reduction in deposit rates has not had a major impact on UOB’s deposit market share so far and, for now, no decision has been made on whether to undertake another round of rate cuts.”
As for non-interest income, the team expects a healthy fee income while overall operating income is set to dampen resulting from the normalisation of T&I income.
With UOB’s 1QFY2024 T&I income standing at $522 million and, based on the guided run rate of $350 million - $400 million per quarter, non-interest income and operating income growth may soften ahead.
Despite this, UOB’s asset quality continues to hold up and the bank has yet to note any adverse developments.
While UOB’s integration of Citi Thailand has seen some teething issues, management believes the issue can be resolved fairly quickly. Management has also made no change to its core cost income guidance of 41%–42%.
The team also adds that UOB’s digital platform for wholesale business is “starting to bear fruits”.
Launched for the rest of the region two years ago, the digital platform should be positive for UOB’s current account savings account (casa) momentum.
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Amid an elevated rates environment, UOB’s casa deposits were up 12% as at end 1QFY2024, with a casa ratio of 50.6% compared to 4QFY2022 casa ratio of 47.5%.
“The focus ahead is on revenue generation, e.g. growing trade loans, which should also bring in ancillary revenue streams such as foreign exchange and cash management,” adds the team.
They also note that capital management for UOB seems unlikely at this juncture due to the bank’s preference to continue building up its common equity tier-1 (CET-1) ratio, which sat at 13.9% in 1QFY2024.
This could narrow the gap with peers, with CET-1 ratios of 14.7%–16.2%, and retain the bank’s capital for future growth opportunities.
UOB has since cited a CET-1 comfort level of 13.5%–14%, which it sees as sufficient to support risk-weighted assets growth of 7%–8% and a 50% dividend payout ratio. However, it adds that it will reconsider its capital management theme in the face of weaker-than-expected growth. — Ashley Lo
Dyna-Mac
Price target:
Maybank Securities ‘buy’ 62 cents
To gain from FPSO strong demand
Maybank Securities analyst Jarick Seet has raised his target price estimate on Dyna-Mac to 62 cents from 52 cents. Seet had previously raised his target price to 52 cents in his last report, dated June 19, from 46 cents.
Dyna-Mac is a global provider of engineering, procurement and construction (EPC) services to the world’s energy market. The company has two fabrication yards in Singapore totalling 140,000 sqm.
“With its positive profit alert, we continue to believe we were too conservative with Dyna-Mac’s margins,” the analyst writes in his July 19 report.
On July 5, Dyna-Mac said it expects to report a “significant improvement” in its net profit for the 1HFY2024 ended June 30 from a year before.
Dyna-Mac says the net profit increase is mainly due to the completion of major projects, improved productivity, and higher revenue.
With Dyna-Mac’s order book doubling to $896 million and its new land expansion of 50%, Seet expects the company to execute its orders faster. Seet believes builders of floating production storage and offloading (FPSO) vessels enjoy better prices for each newly built FPSO. As such, Seet believes this should flow down to players like Dyna-Mac, leading to better margins for the company’s new orders won. The analyst now estimates Dyna-Mac’s module business to see a higher gross margin of 19% compared to 17%.
Dyna-Mac’s new substantial shareholder, Hanwha Aerospace & Ocean, should be a “positive addition” as well, Seet says. “Hanwha Ocean may be on a global expansion drive as it looks to grow its footprint in marine energy solutions and shipbuilding,” the analyst notes.
Seet has kept his “buy” call on Dyna-Mac because he expects the company to benefit from the current strong demand for FPSOs. He adds that the company’s shares should also re-rate further as it executes its larger-size contracts and achieves higher profitability.
“Dyna-Mac is a key beneficiary of the multi-year FPSO upcycle and remains one of our top picks in the small and mid-cap space,” he writes.
The company’s zero debt and net cash of $128.5 million on its balance sheet could fund inorganic growth to speed up its earnings rate, Seet adds.
With the tailwinds in the oil & gas (O&G) sector now, the analyst is forecasting an earnings CAGR of 30% in the next two years despite Dyna-Mac being loss-making in FY2020.
Seet is also anticipating the company’s revenue to grow by some 20% yearly over the next two years.
“[Dyna-Mac’s] revenue more than doubled since its current management joined the company in FY2020,” he says. “[The company] turned around from a loss of $58.4 million in FY2020 to a profit of $13.4 million in FY2022. [It is in a] strong net cash position with no debt.”
Seet has increased his patmi estimates by 37% for FY2024 and 38% for FY2025. Dyna-Mac will report its results for the 1HFY2024 after trading hours on Aug 6. — Felicia Tan
Sheng Siong Group
Price target:
Citi Research ‘buy’ $1.68
Upgraded for ‘quality’ wins and resilient inflation
Citi Research analyst Chong Zhou has upgraded Sheng Siong to “buy” while increasing his target price to $1.68 previously, following “quality” tender wins and resilient inflation in Singapore. Zhou has taken over coverage of the stock from analyst Luis Hilado, who rated Sheng Siong “sell” with a target price of $1.43 as at July 16.
Since late February, the analyst notes that the stock has corrected –5.8%, a –14.8% underperformance compared to the Straits Times Index (STI), which is up 8.7%.
“While some of the original concerns remain valid, we believe the potential outweighs the risk given the recent positive developments,” says Zhou in his report dated July 21.
Following the release of four additional tenders by the Housing Development Board (HDB) in 2Q2024, Sheng Siong secured three out of the four new tenders, with two currently operating within the same period.
“Under expectations that the remaining store will open shortly as well, Sheng Siong would have opened at least five new stores in FY2024, well exceeding their [annual] target of three,” Zhou writes.
In response, the analyst has upgraded his estimate for the group’s number of new store openings in FY2024 from three to six, given Sheng Siong’s new tender wins alongside the potential win of at least one additional tender win.
Additionally, Zhou notes that Sheng Siong is set to benefit from the resilience of Singapore’s core inflation.
“Singapore core inflation remains at 3.1% for the third consecutive month in May, landing us back exactly where we started in January 2024,” he adds.
Core inflation is expected to stay on a “gradual moderating” trend over the rest of the year, with a significant decrease in 4Q2024, according to the Monetary Authority of Singapore (MAS).
Given the current expectation of a gentler-than-expected disinflation trend, the group is positioned to benefit from the delay of the reversal of consumer downtrading, such as dining in.
The analyst also notes that house brands, which currently enjoy a 10% - 15% higher margin than national brands, have increased from 7% to 8% of total revenue, an estimated 3% increase from pre-Covid-19 levels.
The analyst expects a stronger performance for Sheng Siong in 2HFY2024, based on new store wins in 2Q2024 that are expected to mature over the next few quarters.
“The new stores will take time to mature and reach their full revenue potential as time is needed for people living in the neighbourhood to change their shopping behaviour,” adds Zhou.
That said, the non-extension of goods and service tax (GST) absorption and the lack of return discount provided for community development council (CDC) purchases by the group may drag Sheng Siong’s 2QFY2024 performance.
Following these developments, the analyst has increased his FY2024 revenue and patmi forecast by 3.6% and 4.5% respectively.
Similarly, Zhou’s estimates for FY2025–FY2026 earnings are up an estimated 6%.
At its current share price levels, Zhou sees this as a “good time” to accumulate shares in Sheng Siong.
“Given the recent positive developments, we believe Sheng Siong is likely undervalued due to overcorrection and cheap valuation compared to its peers,” he says.
Based on Sheng Siong’s last-closed price of $1.47 on July 19, the counter is trading at –2.3 standard deviations (s.d.) below the mean, compared to the benchmark STI’s –0.9 s.d. below its mean. — Ashley Lo
Singapore Technologies Engineering
Price targets:
CGS International ‘buy’ $5
RHB Bank Singapore ‘buy’ $5
Target price upgraded for ‘defensive dividends’ and ‘strong profit growth’
RHB Bank Singapore analyst Shekhar Jaiswal is rolling forward his valuation for Singapore Technologies Engineering S63 (ST Engineering), not only for its “defensive dividends” of 4 cents per quarter and “strong profit growth” but on recent announcements.
One such announcement is the development of a “highly secure and AI-ready data centre” in Jalan Boon Lay, which will cost $120 million and be ready by 2026.
The data centre will be ST Engineering’s fourth in Singapore. According to a June 25 announcement, the seven-storey facility is designed to meet international cybersecurity standards and standards for responsible AI development. It aims to attract customers by prioritising security and sustainability.
The data centre will achieve a high Power Usage Effectiveness (PUE) of 1.25, exceeding the BCA-IMDA Green Mark Platinum standard of 1.3. It will also have sustainability features like solar panels covering 2,400 sq m.
The data centre, estimated to cost $120 million over the next three years, will expand ST Engineering’s total IT capacity to over 30 megawatts (MW) across four Singapore locations.
ST Engineering’s commercial aerospace (CA) business, one of its three business segments, is also receiving a boost. The CA business has entered into a two-year agreement (with an extension option) to provide module repair offload support for CFM LEAP-1A and LEAP-1B engines for Safran Aircraft Engines (Safran).
ST Engineering is also expanding its Leading Edge Aviation Propulsion (LEAP) engine capabilities, including the addition of LEAP-1A engine testing services expected by 3Q2024. It will also support Safran with LEAP-1B engine maintenance offload services and existing support for CFM56-5B, CFM56-7B and LEAP-1A engines.
According to Jaiswal, there is growing demand for maintenance, repair and overhaul (MRO) services as the number of LEAP engines that power the Airbus A320neo and Boeing B737 MAX family of aircraft, grows.
The LEAP engine has a “substantial” backlog of over 10,600 engines, indicating continued growth in the industry, says Jaiswal.
ST Engineering will report its 1HFY2024 ended June results on Aug 14 before the market opens. “We remain upbeat on ST Engineering for its defensive dividends and strong profit growth, aided by continued growth and margin improvement in CA and a strong recovery in the urban solutions and satcom (USS) segment,” says Jaiswal.
In a July 22 note, Jaiswal maintains his “buy” call with a higher $5 target price from $4.50. The target price includes a 4% ESG premium based on RHB’s proprietary methodology.
Similarly, CGS International Research analysts Kenneth Tan and Lim Siew Khee have raised their target price to $5 from $4.36 while staying “buy” on ST Engineering.
In a July 19 note, Tan and Lim say investors are “increasingly appreciating” ST Engineering’s double-digit core earnings per share (EPS) growth potential for FY2024-2025.
“We believe the outlook for aerospace remains healthy, driven by higher value/volume of MRO works as older aircraft remain in service for longer periods due to issues with new generation engines and delays in new aircraft deliveries and improved passenger-to-freighter (PTF) profitability as ST Engineering improves on conversion efficiency.”
For the defence segment, the CGSI analysts think ST Engineering should benefit from multi-year rearmament trends as countries ramp up defence spending amid rising global geopolitical uncertainties.
“New growth opportunities could come from large foreign artillery ammunition contracts, which are currently enjoying elevated global demand (particularly in Europe) amid the restocking of ammunition stockpiles, in our view.”
For the USS segment, CGSI thinks the pause of New York’s congestion pricing project has little impact at 1% of their FY2024-2026 EPS. “We expect longer-term growth will still come from upgrading of US tolling infrastructure and potential cross-selling of tolling solutions into Southeast Asia.” — Jovi Ho
