Our portfolio recorded a simple average return of 1.1% m-o-m while the FSSTI was unchanged in March 19.
Within our portfolio, CSE Global has been the star outperformer for the past three consecutive months.
We are refreshing our picks by adding in ST Engineering, SPH and newly-initiated Koufu.
On the other hand, we remove CSE Global and Memtech International.
Most of our picks recorded a flat performance in March with the bottom of the list being the small-cap manufacturing picks (MEMTECH INTERNATIONAL LTD (SGX:BOL) and FU YU CORPORATION LTD (SGX:F13)). The only exception was CSE GLOBAL LTD (SGX:544), which delivered a strong return of 12.5% after reporting better-than-expected 2018 full-year results and an announcement of the acquisition of RSC Telecommunications (RSC) which will deepen their footprint in Australia.
Overall, our portfolio recorded a simple average return of 1.1% m-o-m while the FSSTI was unchanged. See Performance of Straits Times Index & Constituents in March 2019.
Adding in STE, SPH and newly-initiated Koufu.
We add in SINGAPORE TECH ENGINEERING LTD (ST Engineering, SGX:S63) as we see the latest acquisition of Newtec to be highly strategic, for it will propel ST Engineering’s own Satcom business into the broadcast and consumer space in Europe.
As for SINGAPORE PRESS HOLDINGS LTD (SPH, SGX:T39), we opine its defensive portfolio transition is underappreciated and the recent acquisition of student accommodation is a good start to building a counter cyclical business.
We also add in newly-initiated KOUFU GROUP LIMITED (SGX:VL6) as we believe the market has overlooked its growth potential and highly-defensive business model.
Removing CSE Global and Memtech.
We remove CSE Global to lock in a solid 30.5% gain since its introduction in May last year.
On the other hand, while we think prospects for Memtech International should improve in 2Q19, we remove it given the lack of near-term catalysts.
ST Engineering’s latest acquisition of Satcom company, Newtec, should springboard its satellite communications (Satcom) capability in the broadcast & consumer space where the latter's technology has been critical in providing real-time content. Industry sources have estimated that Satcom demand is expected to grow by 10-15% CAGR over the next 10 years. The acquisition is immediately accretive and Newtec generated S$26m in EBITDA in 2018.
ST Engineering has guided that 2020's net earnings should rise by under S$10m, while 2021's net earnings should rise by greater than $10m.
A good start in building a counter-cyclical business. SPH acquired its first student accommodation portfolio of 14 assets in Sep 18, and this marks its first foray into a scalable defensive business. Based on a research from Savills, student accommodation has demonstrated a counter-cyclical nature, as the yields for the assets inched up during 2008-09 to approximately 6.5%. Student numbers also typically increase in the event of an economic slowdown and a weaker labour market.
acquisition of accommodation assets for S$321m that generates an attractive 6.3% net yield, which is further amplified by the low interest rate in UK.
With a loan-to-value ratio of 55-65%, the cash on cash yield is nearly 10%.
Defensive cash cow backed by strong brands and leading market position. Koufu runs highly defensive food court and coffee shop businesses, and is focused on providing competitively priced meals transacted in cash terms. Its outlet and mall management business has seen consistently high occupancy of at least 93% in the last three years. Koufu intends to distribute at least 50% of its profits for 2018 and 2019, which is sustainable given strong cash flow generation. This could translate into a potential dividend yield of 3.9% for 2019.
We think net profit could grow in the double digits starting 2019 with completed enhancement initiatives of Rasapura Masters, a pipeline of five new food courts, and a faster rollout of R&B and Super Tea which are popular among the younger crowds. Beyond Singapore, Macau will be its overseas expansion springboard which is already contributing 9% of the group revenue.
Disposal of central kitchens should unlock S$10m in value. Koufu owns two central kitchens at 18 and 20 Woodlands Terrace. We estimate the eventual sale of these properties could bring in S$10m and unlock gains of up to S$8m, which should bump up dividends.
Benefit from recovery in office rents. Grade-A core CBD office rents increased 14.9% to S$10.80psf pm in 2018. With limited upcoming supply of office space within the core CBD, we expect CapitaLand Commercial Trust to achieve positive rental reversion for AST2 in 1H19 and CapitaGreen in 2H19.
CBD Incentive Scheme. Over the longer term, CBD Incentive Scheme under Master Plan 2019 will moderate the supply of office space within the CBD due to conversion to residential and hotel usage.
CapitaLand Commercial Trust plans to add scale and depth to its presence in Germany. It completed the acquisition of 38-storey grade-A freehold commercial building Gallileo in Frankfurt’s banking district for €356m (S$540.7m) in Jun 18. There are opportunities to expand to other gateway cities in Germany, such as Berlin, Munich, Hamburg and Dusseldorf. CapitaLand Commercial Trust intends to cap exposures to overseas markets at 20% of deposited properties.
Event: Recovery in office rents, more acquisitions in Germany.
We continue to favour SATS for its regional exposure to Asia’s passenger traffic growth and cargo volume growth. As at 9MFY19, revenue at operating regions grew 7.8% during 9MFY19, with the bulk of growth coming from emerging markets, including China and India. While cargo growth is likely to weaken in 1H19, we believe the impact to earnings will be buffered by growth in the non-aviation food solutions business.
SATS generated a 20% yoy rise in operating cash flow for 9MFY18. Recurring FCF (which includes dividends from associates) rose 61% y-o-y. Thus, we believe that SATS could raise final dividend by 1 S cent to 13 S cents (total 19 S cents).
Announcement of new central kitchens in China.
High and sustainable dividend yield, cheap EV/EBITDA. Fu Yu offers a high and sustainable dividend yield of 8.5% for 2019, and we expect this to increase to 9.0% in 2020, on the back of improving net profit, FCF, and strong net cash position of S$80m/S$0.11 per share. In 2018, Fu Yu raised its interim dividend for the first time in three years, and we expect further increases.
low-hanging fruit from the savings of three cofounders’ remuneration, estimated to be around S$2.3m-3.0m p.a. or 20-27% of 2018 net profit.
Catching up with peers in hikes for dividend payout. OCBC aims to provide steady and sustainable dividends. Management plans to maintain dividend payout ratio at 40-50% of core earnings (2017: 37.7%, 2018: 40.6%), which can support growth of 6-7% for risk weighted assets (RWA) and 10-12% for total assets. Given that CET-1 CAR at 14.0% is above the target range of 12.5-13.5%, we expect OCBC to improve dividend payout ratio towards mid-40%, bringing DPS to 50 S cents and dividend yield to 4.5% for 2019.
Implementing IRBA for OCBC Wing Hang. OCBC plans to implement an internal ratings-based approach (IRBA) to compute RWA for OCBC Wing Hang. OCBC Wing Hang’s RWA intensity was higher at 64% for 2017 vs 50.7% for OCBC on a group-wide basis. We estimate OCBC would be able to reduce its RWA by 4% if OCBC Wing Hang lowers its RWA intensity to 50% under IRBA, and this would further improve OCBC’s CET-1 CAR by another 0.6ppt. The exercise would further increase OCBC’s CET-1 CAR, thus enhancing its capacity to pay more dividends.
Event: Further increase in dividend payout in 2019. Implementation of IRBA at OCBC Wing Hang.
* Alpha Picks denotes a timeframe of 1-3 months and not UOBKH’s usual 12-month investment horizon for stock recommendation.