PhillipCapital has replaced Thai Beverage Public Co with Del Monte Pacific in its current list of “Absolute 10 Model Portfolio”. For analyst Vivian Ye, her pick of Del Monte Pacific is based on how the consumer foodstuff maker took a turn for the better as the result of a restructuring exercise.
Back in 2014, Del Monte Pacific acquired its current US subsidiary, which focused mainly on producing low-margin canned food for the likes of Walmart or Costco. In 2018, a new management team chose to transform the business. They closed down loss-making operations and significant restructuring costs had to be booked till FY2020.
However, as the company shifts towards a higher-margin business of selling products under its own brand and introduces new products catering to modern lifestyles such as healthy snacks, Del Monte’s overall earnings have improved tremendously.
For its 1HFY2022 ended Oct 31, 2021, it reported earnings of US$30 million ($40.5 million), almost twice that of the whole FY2021. Meanwhile, Del Monte was able to keep its market leadership position in the Philippines, its core market. For certain key categories such as packaged pineapples and tomato sauces, the company’s market share is north of 90%, says Ye, who has a “buy” call and 62 cents price target on this stock.
Ye was speaking at a webinar held on Jan 15 where the research team presented their current stock picks for the year. Del Monte Pacific was the only new addition as the team holds fast to the remaining nine of the picks.
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Paul Chew, the team leader, sees transport operator ComfortDelGro Corp as a recovery play. Due to prevailing work from home practices and a collapse in international visitors, the company has been hit on multiple fronts. The stock was one of Chew’s picks last year.
However, as Chew himself readily points out, ComfortDelGro was the second-worst performer among all 30 STI component stocks last year. “Well, we still like it,” says Chew, who has a “buy” call and $1.80 target price on this stock.
For one, despite the pandemic, the company’s net cash has increased from around $70 million before the outbreak to almost $400 million now, partly lifted by various government grants and subsidies as well as a cut in its capital expenditure that was in line with lower ridership. Chew anticipates a recovery in ridership numbers next.
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Citing Google mobility trends, which tracks the location and movement of mobile users, 2021 was a year of “on and off” lockdown measures which resulted in a “tough” year for ComfortDelGro. “Our expectation is that compared to last year I think the lockdowns in 2022 will be less or none at one,” says Chew, adding that when a certain level of passenger volume returns, the company can enjoy strong operating leverage. “For us, this is our recovery play when transportation and economic activity returns to Singapore,” he adds.
DBS Group Holdings is included in the brokerage’s model portfolio for both its earnings growth prospects and dividend potential. The pick is mainly premised on how closely tied interest rates are with margins. An increase of 10 basis points in interest rates could raise the bank’s earnings by between $180 million and $200 million, estimates analyst Glenn Thum, who has an “accumulate” call and $35.90 target price on the stock.
Furthermore, with credit upgrades and a general improvement in the economy, the bank is seen to write back a bigger sum of provisions made previously. And as more wealth is created from buoyant markets, that is good news for the bank’s wealth management business which generates an income fee. “The consistent momentum in the wealth management segment will support a more stable income,” says Thum.
More good news is in the fact that the bank has no exposure to real estate loans in China, despite its growing presence in Hong Kong and the Mainland. “With its capital position and liquidity well above regulatory requirements we believe that DBS has sufficient provisions to write out the current economic uncertainties,” says Thum, adding that special dividends in the coming quarters might be possible.
Keppel Corp has two catalysts to spark off further upside for the stock, says analyst Terence Chua. Keppel is bidding for Singapore Press Holdings whose shareholders are set to weigh Keppel’s offer versus one made by a consortium formed by Mapletree Investments, CLA Real Estate and Hotel Properties, which has tabled a more compelling offer.
If the deal with Keppel is terminated, the latter is set to enjoy a break fee of around $30 million. A conclusion of this takeover bid will help remove the “overhang” that is now weighing on Keppel’s shares, says Chua, who has a $7.07 target price on the stock.
The other catalyst is from the divestment of Keppel’s own assets, including those in the offshore and marine (O&M) business. In an announced plan, Keppel says it expects to receive some $500 million in cash from Sembcorp Marine for its O&M business if the transaction is completed. According to Chua, part of this $500 million will be used to invest in new growth areas while a portion will be set aside as a special dividend.
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Meanwhile, the O&M industry, battered for years because of low oil prices, is set to benefit from an upturn that has already been underway since last year. Oil prices are now double that from their lows. “We believe this presents a real opportunity for Keppel and SembMarine to reach a deal,” says Chua.
To be sure, serviced apartment owner Ascott Residence Trust has suffered since the pandemic started as the international travel and hospitality industry collapsed.
However, if one were to drill deeper, Ascott REIT benefits from its relatively high proportion of around 70% of its properties located within countries with relatively large domestic markets, which are not as badly affected given how domestic travel has recovered much more than international travel, says analyst Natalie Ong.
Furthermore, Ascott has a growing proportion of longer-term assets versus those catering to short stays by business travellers. These rental housing properties and student accommodation assets enjoy “very high occupancy” even during the pandemic and give “high earnings visibility” to how much rental can be collected. “So even as international borders reopen, we expect Ascott should outperform its peers,” says Ong, who has a $1.19 target price on the stock.
Ong likes Frasers Centrepoint Trust (FCT) too. This REIT specialises in owning a portfolio of malls in the suburban areas that are typically adjacent to transport hubs such as train stations and bus interchanges.
And, of course, with the housing heartlands in the vicinity, these malls are not as exposed to international visitors. As befitting malls serving the heartlands, some 54% of its gross rental income come from tenants providing “essential services” such as F&B, groceries, daily necessities versus, say, the Orchard Road malls skewed towards luxury goods. “This has helped FCT’s tenant sales outperform the retail sales index in the last 12 months out of 18,” notes Ong, who has a target price of $2.83.
Furthermore, the suburban malls are starting to see positive rental reversions already versus the downtown malls, which got to offer lower rates to hold on to tenants instead.
Over the long run, with Singapore getting more “decentralised”, a lot more business activities will be dispersed through out various suburban centres, which means the catchment size of suburban malls will keep growing, says Ong.
Ong also likes City Developments (CDL) and she has a target price of $9.19. The property and hospitality giant is seen to benefit from both the recovery in the hospitality industry and a favourable property upcycle.
The company has a development pipeline of around 2,000 residential units. She believes “inventory risk” is low as it has a good mix of mass-market developments, luxury projects in the central region to units and its own redevelopment projects such as Fuji Xerox Tower. These give CDL higher margins compared to land acquired from the state.
The anticipated recovery for its hospitality business is seen to lift its earnings as well, as travel gradually resumes.
The third reason Ong likes CDL is the company’s asset monetisation ability. Specifically, it is reportedly launching a commercial REIT that holds assets in the UK. The exercise, if and when completed, will help unlock $400–$600 million in capital for CDL.
Another pick is HRnetGroup, which is a relatively unknown brand but actually one of the largest recruitment agencies in Asia outside Japan. The company is riding on improvements in the job markets.
Firstly, there is a “big rebound” in the number of vacancies to be filled, in what can be described as a “cyclical uplift”. Also, higher wages means higher income for the company as commissions are pegged to the salaries of the jobseekers. “We are expecting record profits for HRnet,” says Chew.
For instance, in 1HFY2021 ended June 30, 2021, earnings were already up around 70% or 40%–50% y-o-y, excluding oneoff items. “If anything, 2021 will be a record year for them,” says Chew. In addition, the company’s balance sheet is “very strong”, with net cash of around $300 million equivalent to almost 40% of its market value.
And the company, given its established network and ties with hiring companies, has a huge base of recruiters who can help meet new competition.
As for Q&M Dental Group (Singapore), the stock has enjoyed earnings growth from providing Covid-related testing services, which is on top of its core dental business. While it was not as active adding new clinics and dentists, Chew expects the company to open at least 20 new clinics this year in Singapore.
By doing so, it will grow their footprint by around 20% which will help drive revenue growth. “Although they’re the largest in Singapore, they only have 10% market share which we think they’re looking to expand it much, much more aggressively,” says Chew.
Chew also favours Asian Pay Television Trust as a yield play. As a business trust, APTT is able to pay a distribution that exceeds its profit, as the cash flow is sufficient for a payout of more than 7%.
Chew notes that a “huge part” of APPT’s cost comes from depreciation and amortisation, which is a drag on earnings but not free cash flow, which is more than three times higher than the payout.
“So, there’s more than enough to cover (the payout),” says Chew, who has an “accumulate” call and 15 cents target price on this counter.
