The Edge Singapore Thu, May 26, 2022
Sheng Siong Group
Price target:
RHB Group Research “buy” $1.78
Inflation to give Sheng Siong a boost
RHB Group Research analyst Jarick Seet believes that Sheng Siong will be a beneficiary of the current rising inflation. Consumers may release some pent-up demand for dining out, but after the reality of inflation sets in, life will return to “normal”. Seet believes that the stock is well-positioned as a “value-for-money” supermarket chain, which will be its selling point to be a key beneficiary of this normalisation.
He also views the stock as a defensive option, especially in such a volatile market condition. In his May 24 note, Seet upgraded the stock to “buy” from “neutral” with a higher target price of $1.78 from $1.51.
“We believe that inflation will likely outweigh the negative impact of the economic reopening, as reality is apt to sink in once the euphoria related to travel and the reopening of F&B and leisure outlets is over,” says Seet.
Thereafter, more people are likely to stay home and have more home-cooked meals, which is a more economical option.
In addition, Seet believes that Sheng Siong could raise prices to pass on costs while preserving margins — something it has achieved in the past. In fact, this might turn out to be a net positive for the company, as the increase in the cost per item will lead to a larger net spend per customer. “Sheng Siong may maintain its gross profit margin, while widening its net profit margin, looking ahead,” adds Seet.
Meanwhile, for the past two years, the group has seen the supply of new HDB commercial space being affected for various reasons, although this is expected to improve gradually. In 2021, the company secured leases for three stores.
Sheng Siong is expected to open three to five new stores yearly over the next three to five years, focusing on areas where it does not have a presence.
“We expect the rise in inflation to be a positive for Sheng Siong, which will help to mitigate any dampener stemming from Singapore’s border and economic reopening. Inflation should also boost its topline,” says Seet, who has lifted FY2022 ending December patmi forecasts by 17%. — Samantha Chiew
UG Healthcare
Price target:
PhillipCapital “buy” 32 cents
CGS-CIMB “add” 42 cents
Rosy outlook ahead
Analysts are positive on UG Healthcare Corp (UGHC) following its latest 3QFY2022 ended March results, even though its earnings dropped 68.9% y-o-y to $10.7 million while revenue was down 31.2% y-o-y to $64.3 million, no thanks to lower selling prices.
UGHC says the impact was mitigated by its ownbrand manufacturing (OBM) model, as it produced higher volume on its own at 3.4 billion pieces of gloves per year. “The ramp-up of our productivity in the second quarter (October–December 2021), following the temporary closure and 60% manpower capacity in the first quarter (July–September 2021), allowed us to record higher revenue sequentially in 3QFY2022,” says Lee Jun Yih, executive director and finance director of UG Healthcare.
Despite the lacklustre 3QFY2022 ended March 2022 results, CGS-CIMB Research is keeping its “add” call with a target price of 42 cents. According to analyst Ong Khang Chuen, the group’s OBM business model is bearing fruit. The management has also noted that with free on board (FOB) pricing falling to about US$22 ($30) to US$23 per carton, distribution margins are still stronger than pre-pandemic levels.
Meanwhile, UGHC’s new capacity will be commissioned gradually from May onwards. But labour shortage may be a constraint on the pace of production ramp, hence Ong has cut FY2022 EPS forecast by 7.1% on lower volume assumption.
“Nevertheless, we continue to believe that with a significantly expanded production scale and strengthened customer base in end-markets, UG Healthcare can achieve much stronger financial performance compared to pre-Covid levels even as glove pricing fully normalises in the upcoming quarters,” adds Ong.
PhillipCapital too is reiterating its “buy” recommendation on UG Healthcare with a target price of 32 cents. On a q-o-q basis, analyst Paul Chew noticed that gross margins are starting to stabilise after a euphoric 58% in FY2021.
Chew warns of aggressive competition from Chinese manufacturers, which suggests excess capacity or inventory. As such, Chew expects the group to look to outsource their nitrile customer orders from these lower-cost factories. The low prices will allow the distribution business to enjoy attractive margins. UG Healthcare has built up a distribution network, namely in Europe, for nitrile gloves. The new plant will raise the production capacity of latex gloves and support earnings in FY2023. According to Chew, the major challenge in FY2023 will be cost pressures from higher minimum wages (effective May 1) and the increase in gas tariffs.
“After four quarters of falling glove prices, we believe stability has started to creep in. UGHC’s new capacity, flexibility to outsource and strong branding and distribution network in emerging markets will allow the company to stabilise earnings,” says Chew.
However, Chew is remaining cautious on the group’s labour issues, which the group’s ability to ramp up production will highly depend on. — Samantha Chiew
ST Engineering
Price target:
RHB Group Research “buy” $4.80
A defensive stock amid uncertain economic outlook RHB Group Research Shekhar Jaiswal has kept a “buy” rating on ST Engineering with a target price of $4.80.
For 1QFY2022 ended March, ST Engineering reported in-line revenue of $2 billion, some 13% higher y-o-y, with all segments — commercial aerospace (CA), urban solutions and satcoms (USS) and defence & public security (D&PS)— booking growth.
ST Engineering’s CA revenue rose 22% y-o-y to $674 million, while USS revenue increased 12% y-o-y to $297 million. Within the CA segment, its airframe maintenance, repair and overhaul (MRO) business has seen an almost full recovery from 80% capacity utilisation in 3QFY2021.
Demand for passenger-to-freighter (P2F) services also remains strong — with Airbus A330 P2F conversion slots booked until 2026 and the A320/A321 P2F conversion slots booked until 2025.
“Increasing the scale of operations should boost its P2F profitability, as ST Engineering will double its P2F aircraft induction this year,” says Jaiswal, who is also expecting nacelle production to ramp up for the rest of 2022.
The D&PS segment’s revenue was $1.1 billion, up 9% y-o-y, at 25% of Jaiswal’s 2022 estimate.
For 1QFY2022, ST Engineering reported $2.4 billion worth of order wins in 1QFY2022, up 54% y-o-y.
Additionally, the consolidation of recent acquisition TransCore from March 17 onwards contributed $1.6 billion of orders to ST Engineering’s total orderbook, at a record $21.3 billion.
In addition, ST Engineering issued US$1 billion ($1.37 billion) bonds, with US$700 million due in 2027 and US$300 million due in 2032 and has managed to lower its weighted average cost of borrowing undertaken to acquire TransCore to 1.8% per annum, due to the favourable settlement of Treasure Locks gains of US$91 million, which will be amortised over the period of the bonds. “We remain upbeat on it delivering defensive growth, aided by a gradual revival in the aerospace business,” writes Jaiswal. — Chloe Lim
