Alpha Picks: Add Frencken And Lendlease REIT, Remove Singtel And Singpost
Our Alpha Picks outperformed the STI by 0.8ppt in May 22, declining by 2.9% mom vs
the STI’s decline of 3.7%. For Jun 22, we add Frencken due to its attractive valuations
and Lendlease REIT due to its organic growth from its new asset Jem. We have
removed Singpost due to persistently high air freight rates. In addition, we have taken
profit on SingTel as it has been a solid contributor to our portfolio performance.
WHAT’S NEW
• Outperforming in May. Although our Alpha Picks portfolio fell 2.9% mom in May 22, it
nevertheless outperformed the STI’s 3.7% decline. Key stocks that outperformed for us were
Venture (+7.4% mom), Thai Bev (+2.3%) and Keppel (+0.3%) while mm2 (-13.8% mom) and
Singtel (-6.5%) underperformed.
• Adding Frencken and Lendlease REIT. For June, we add Frencken as we view its current
valuations as being inexpensive, trading at 2022E PE and EV/EBITDA of 7.5x and 3.4x
respectively along with a prospective 4% yield. Lendlease REIT has been added as we like
its organic growth from its new asset Jem, as well as its exposure to sequentially higher
tourist arrivals which will benefit its Orchard Road asset.
• Taking out Singtel and Singpost. We have taken profit on Singtel as it has done well for
us, up 5% since inception into our portfolio. While we remain bullish on Singpost in the
medium term, we have removed it as air freight rates have not shown signs of dropping and
appear to remain elevated instead in the near term.
Frencken Group – BUY (Clement Ho)
• Growth across most but the automobile segment. Frencken Group’s (Frencken) 1Q22
revenue of S$198.4m (+9.3% yoy) was led by growth from the semiconductor (+15.5% yoy),
analytical & life sciences (+16.7% yoy) and industrial automation segments, while sales in
the medical segment remained relatively stable. However, the automobile segment (-10.7%
yoy) was impacted by constrained customer demand as a result of: a) semiconductor chip
supply chain challenges, and b) disruptions arising from the Russia-Ukraine conflict, which
hosts assembly plants for automobile components ranging from electrical cables to catalytic
converters and seatbelts.
• Continued growth in the semiconductor segment to buffer automobile slowdown. We
expect the semiconductor sub-segment to contribute 39% of 2022 revenue, an increase
from 38% in 2021 (2020: 30%). The relatively more profitable semiconductor segment is
anticipated to help bolster a sufficient buffer for the group amid the volatile period that the
automobile industry is undergoing.
• Maintain BUY with a target price of S$1.63, pegged to 10.4x 2022F PE, or Frencken’s
historical mean PE range, as we believe the global automobile industry will face an extended
period of slow production amid adjustments in the global supply chain. We maintain the view
that the current forward PE valuation of 7.7x for Frencken is attractive due to its diverse
stream of revenue sources, which would help the company stand out amid a volatile macro
environment.
SHARE PRICE CATALYST
• Events: a) Higher-than-expected factory utilisation rates, b) better-than-expected cost
management.
• Timeline: 6+ months.
Lendlease Global Commercial REIT – BUY (Jonathan Koh)
• Maximising returns from JEM. JEM attracts shopper traffic of 22m per year due to an
attractive mix of anchor tenants, such as IKEA, FairPrice Xtra, Don Don Donki, H&M, and
UNIQLO. It provides organic growth from positive rent reversion and annual rental escalation
of 3.2%. Management plans to unlock additional NLA at level one (4,600sf) and basement
one (850sf) to cater for demand for more retail space.
• Welcoming tourists back to 313@Somerset. Visitor arrivals to Singapore have increased
43% mom to 294,304 in Apr 22 (19% of pre-pandemic levels). The return of tourists in 2H22,
which typically accounts for 20-25% of shopper traffic, would restore shopper traffic at
313@Somerset back to pre-pandemic levels. Construction for the redevelopment of Grange
Road Car Park into a multi-functional event space had commenced at end-21. The event
space is expected to be operational by early-23 (18 months to complete).
• Reiterate BUY. Our target price for LREIT of S$1.01 is based on DDM (cost of equity:
6.25%, terminal growth: 1.2%).
SHARE PRICE CATALYST
• Events: Reopening of Singapore’s international borders with the vaccinated travel
framework (VTF) would bring tourists back to 313@Somerset.
• Timeline: 6-12 months.
AEM Holdings – BUY (Clement Ho)
• System-in-Package design shift to revolutionise semiconductor manufacturing. Key
customer Intel Corporation’s (Intel) March IDM 2.0 strategy is a major bet that future demand
and profitability lie in the packaging of modular dies (or chips), known as “tiles”, which can
squeeze more compute within a single package. Driving towards that goal, Intel intends to
build new fabrication plants (fabs) for these new “tiled” chips, and is expected to outsource
the production of certain modules. Existing capacity has also been earmarked for the
foundry services market.
• Sustained demand for AEM’s total portfolio. Intel’s decision to maintain old fabs and build
new ones means that AEM will enjoy: a) steady demand for its consumables and services,
b) recurring but cyclical demand for equipment upgrades at Intel’s old fabs, and c) demand
for new equipment to test the new “tiled” chip products. That said, AEM provides mainly
backend test equipment, where demand typically comes 6-9 months following the installation
of front-end equipment at the new fabs. Additionally, management expects engagements
with 10 of the top 20 global semiconductor companies to result in meaningful revenue
contributions in 2H22 and beyond.
• Acquisition of CEI to lead to cost savings. We further estimate AEM to generate
meaningful cost savings at the gross level of S$5.6m-9.0m a year, by in-sourcing some of its
production activities to CEI Limited (CEI). At the entity level, CEI is expected to also
contribute S$4.0m a year of incremental net profit to the overall group. We believe our
estimates are conservative as we have not factored in further upside from capacity
expansion in CEI’s box-build business.
• Maintain BUY. We value the company at S$5.60/share, implying 15.6x 2022F earnings. Our
valuation is at a premium to the Singapore peer average forward PE of 10.1x. More direct
competitors listed in the US and Japan trade at an average of 18.8x forward earnings.
SHARE PRICE CATALYST
• Events: a) Higher-than-expected revenue growth rates, b) better-than-expected cost
management, and c) earlier-than-expected integration synergies with CEI.
• Timeline: 6+ months.
Keppel Corp – BUY (Adrian Loh)
• Landmark merger. Keppel Corp’s (KEP) and SMM’s merger announced on 27 Apr 22 has
been gestating for a long time. In our view, the merger benefits both parties, both in the short
and long term. For KEP, the divestment of Keppel Offshore & Marine (KOM) will allow it to
focus more on asset-light and/or recurring-fee businesses.
• Value accretion in place. KEP’s shareholders will realise approximately S$9.4b over time,
comprising of: a) S$4.1b as consideration for the divestment of its legacy rigs and
associated receivables, b) S$4.9b as the pro forma estimate of the value of KOM, and c)
S$500m in cash from KOM to partially redeem certain perpetual securities previously issued
to KEP. The transaction for KEP is more complicated relative to SMM’s given that KEP’s
includes a transaction for its legacy rigs.
• Maintain BUY. We value KEP at S$10.11 using a SOTP valuation methodology. Given the
relatively more complex nature of the transaction, it may take time for the value of the
merger to be realised; however, we believe that KEP’s share price will react positively
heading into the completion date in 4Q22.
SHARE PRICE CATALYST
• Events: a) Completion of merger with SMM and divestment of legacy rigs, and b) further
divestment of non-core assets for capital recycling purposes.
• Timeline: 6+ months.
SIA Engineering – BUY (Roy Chen)
• An immediate beneficiary of increasing flight activities. SIA Engineering Company’s
(SIAEC) line maintenance service (about 50% of its pre-COVID-19 revenue) would
immediately benefit from airlines’ increasing flight activities at Changi Airport, which we
believe would outpace the expected passenger volume recovery.
• Positive core profit around the corner. Within our Singapore aviation coverage space,
SIAEC is likely the first to regain positive core net profit (ie excluding government grants).
The consistent narrowing of core net losses over the past five quarters is an encouraging
sign.
• We rate SIAEC as a BUY with an FY23 DCF-based target price of S$2.80. SIAEC is our
top sector pick.
SHARE PRICE CATALYST
• Events: a) Faster-than-expected earnings recovery from resumption of regional and global
air travel, and b) resumption of dividend payment.
• Timeline: 3-6 months.
Venture – BUY (John Cheong)
• VMS anticipates a robust demand outlook. In its 2021 results, Venture Corporation (VMS)
highlighted that it expects a robust demand outlook based on customers’ orders and
forecasts across various technology domains. Positive market momentum is also visible
across instrumentation, test and measurement, networking and communications. In the list
of VMS’ customers that we track, all the customers are guiding for revenue growth for 2022.
More importantly, we believe VMS could capture higher growth than its customers’ revenue
growth, given its ability to provide customised solutions for new product launches and
entrance into new high growth domains including semiconductor and electric vehicles.
• Easing of border restrictions globally should help improve component shortages. In
Feb 22, Hon Hai, the biggest assembler of iPhones, highlighted that a major improvement in
part shortages is likely in the first quarter, with “overall supply constraints” set to ease in the
second half of the year. In addition to this, the further easing of border restrictions globally
should help to improve the component shortage issues, from easier access to labour and
reduction of air freight rates.
• Positive signal from recent share purchases of the Executive Chairman. On 8 Nov 21,
Mr Wong Ngit Leong, the Executive Chairman and largest shareholder of VMS, acquired
200,000 shares at S$18.73/share. Previously, his acquisition of 566,300 shares at an
average price of S$14.45/share from Jul-Sep 17 turned out to be a strong positive signal as
VMS’s share price hit an all-time high of S$29.50 in Apr 18.
• Attractive valuation at 13x 2022F ex-cash PE. Our target price of S$22.80 is pegged to
19.5x 2022F earnings, +1SD above its forward mean PE. At the current price, VMS offers an
attractive dividend yield of 4.5%.
SHARE PRICE CATALYST
• Events: a) Better-than-expected earnings or dividend surprise, and b) potential takeover.
• Timeline: 3-6 months.
MM2 – BUY (Llelleythan Tan)
• Cinematic recovery. Domestic cinema attendance is poised for recovery as Singapore
completely removed capacity limits in cinemas starting 26 Apr 22. Heading into the June
school holidays, a strong line-up of blockbuster movies has been planned with highly
anticipated blockbuster movies helping to boost ticket sales. Dining-in and F&B consumption
in cinemas, which are large and vital contributors of revenue, have also been permitted in
both Singapore and Malaysia
• Robust core production pipeline. Over the next 2-3 years, mm2’s core production pipeline
remains sizeable, amounting to S$150m-190m. Currently, the group has over 30 projects
that are in various stages of development, production and distribution. As production of
films/tv series ramps up in FY22, mm2 is set to produce and distribute highly anticipated
titles in new and existing markets.
• Restart of live in-person concerts. In-person concerts/shows have resumed as more
countries gradually ease restrictions. Unusual Entertainment (Unusual) has already started
producing sold-out shows and concerts in 1HFY22 and is expected to reveal more concerts
in 2H22. The recently-announced Justin Bieber concert was sold out in one day, implying
strong pent-up domestic demand for live in-person concerts.
• We have a BUY rating on mm2 with a target price of S$0.115 which is based on an
SOTP valuation, with: a) the core production business at 11.4x (7x) FY22F EV/EBITDA, in
line with larger peers, b) the cinema business at 7.4x (7x) EV/EBITDA, in line with larger
peers, and c) Unusual (UNU SP) and Vividthree (VTH SP) at market value.
SHARE PRICE CATALYST
• Events: a) Film production delivery, b) full-easing of COVID-19 measures, and c) spinoff of
the cinema business.
• Timeline: 3-6 months.
CapitaLand Investment – BUY (Adrian Loh)
• Exciting growth in its fund management platform. CapitaLand Investment (CLI)
has >S$120b in AUM which makes it one of the largest real estate invesment managers in
Asia. Of this, S$86b are funds under management (FUM) and the company has plans to
grow this to over S$100b by 2023/24. We forecast FUM fee income to grow at a 13% CAGR
over 2021-24. In addition, the company has >S$10b in assets that it will look to monetise in
the next few years. We have a BUY rating on CLI with an SOTP-based target price of
S$4.13.
• Strong operational numbers in 1Q22. CLI’s solid 1Q22 revenue growth of 23% yoy to
S$665m displayed the strengths of its fee-related earnings as well as the resurgence of its
lodging business. The company’s outlook for 2022 remains strong with China potentially
providing more earnings certainty should COVID-19 restrictions be lifted.
• Lodging – potentially a major earnings driver for CLI in 2022. While this business
experienced difficult operating conditions in 2021, we highlight that 1Q22 saw a turnaround
with CLI witnessing a 34% yoy increase in revenue per available unit (RevPAU) to S$71 in
1Q22 (1Q21: $53). This was led by Europe (+167% yoy) and Singapore (+40% yoy) with
only China stagnating.
SHARE PRICE CATALYST
• Events: Evidence of earnings growth in the lodging business and growth in FUM at Apr 22’s
business update.
• Timeline: 3-6 months.
Aztech – BUY (John Cheong)
• Optimistic on 2022 business outlook, backed by robust orderbook. Aztech is optimistic
on its 2022 business outlook as it expects its operations to benefit from: a) healthy global
demand for IoT and data communication products, b) improving vaccination rates against
COVID-19. To date, 98% of Aztech’s employees in China had been fully vaccinated and
46% have received their third dose. In Malaysia, its manufacturing facility is back to
operating at 100% workforce after achieving a plant-wide vaccination rate of 100% with
close to 17% of eligible workforce being vaccinated with the third dose, and c) recording a
robust orderbook of S$762m as at 22 Feb 22, which is 22% higher than its 2021 revenue,
indicating a strong revenue growth for 2022.
• Easing of border restrictions globally should help improve component shortages. In
Feb 22, Hon Hai, the biggest assembler of iPhones, highlighted that a major improvement in
part shortages is likely in the first quarter, with “overall supply constraints” set to ease in the
second half of the year. In addition to this, the further easing of border restrictions globally
should help to improve the component shortage issues, from easier access to labour and
reduction of air freight rates. Malaysia reopened its border with Singapore on 1 Apr 22 which
is positive news for Aztech’s Johor plant.
• China’s operations remain intact. Aztech has resumed full operations in its Dongguan
plant on 21 Mar 22, after a closure for six days for all staff to undergo the PCR test. We
understand that Aztech’s facilities are currently enjoying high utilisation rates and it is
managing the components shortages well on the back of: a) leveraging the strong brand
name of customers, b) maintaining its good long-term relationship with suppliers, and c)
modifying the product designs to switch reliance to parts that are more readily available.
• Attractive valuation. We do not believe that Aztech’s 2022E PE of 7.4x is justified given
that its peers are trading at above 10x. We continue to like Aztech as it is a proxy to highgrowth IoT products, where we believe orders are just starting to ramp up in 2021 and would
sustain into 2022. Maintain BUY. Target price: S$1.55.
SHARE PRICE CATALYST
• Events: a) More order wins, b) better-than-expected cost management, and c) earnings or
dividend surprise.
• Timeline: 2-6 months.
Thai Beverage – BUY (Llelleythan Tan)
• Complete removal of COVID-19 tests. Shortly after scrapping the need for a negative predeparture PCR test in Apr 22, Thailand eliminated on-arrival testing for all vaccinated
travellers from 1 May 22 onwards. The minimum insurance coverage required was also
further reduced from US$20,000 to US$10,000. In Vietnam, the country has fully reopened
its international borders since 15 Mar 22, with only one negative PCR (72 hours predeparture) or ART test (24 hours pre-departure/upon arrival) required before entering the
country quarantine-free.
• Transition to endemic living. With the removal of the “Test & Go” Scheme starting 1 May
22, the cancellation of the “Thailand Pass” registration scheme is expected to take place
next on 1 Jun 22, streamlining the travel process for international travellers. Thailand’s
authorities announced plans to debate allowing the kingdom’s nightlife industry to reopen
fully and legally which would lead to a revival in the country’s bustling nightlife and alcohol
consumption volumes.
• Recent 1HFY22 core earnings were above expectations with revenue up 9% yoy and
core PATMI growing 13% yoy, forming 57.2% and 56.1% of our full-year estimates
respectively. The company declared a similar interim dividend of Bt0.15 per share (1HFY21:
Bt0.15), representing a 1HFY22 earnings payout ratio of 23.1%. The strong 1HFY22
outperformance was largely driven by a robust 2QFY22, with strong yoy contributions from
the beer, non-alcoholic beverages (NAB) and food segments, backed by the full reopening
of Thailand’s international borders as well as the easing of social distancing measures.
Maintain BUY with an SOTP-based target price of S$1.05.
SHARE PRICE CATALYST
• Events: a) BeerCo IPO, and b) potential spin-off listing, and c) full reopening of bars in
Vietnam and Thailand.
• Timeline: 6+ months.
Oversea-Chinese Banking Corporation – BUY (Jonathan Koh)
• Three-year strategy refresh. Oversea-Chinese Banking Corporation (OCBC) plans to tap
on four growth drivers: a) rising wealth in Asia through hubs in Singapore and Hong Kong, b)
ASEAN-China trade and investment flows, c) new economy and high-growth industries, and
d) transition to a sustainable low carbon world. It will invest to strengthen its comprehensive
regional franchise and accelerate digital transformation. Management aims to achieve
growth at CAGR of above 10%.
• Guidance for 2022. Management guided mid-to-high single-digit loan growth for 2022. NIM
is expected to be stable at 1.50-1.55%. Credit costs are expected to be 22-25bp (2021:
29bp). Management estimated that every 100bp increase in local interest rates will lead to
NIM expansion of 18bp.
• Benefitting from higher interest rates. Fed Funds Rate is expected to reach 1.9% by end22, which implies about six hikes totalling 175bp in 2022 (one of the hikes could be 50bp).
We expect NIM to be unchanged at 1.55% in 2022 and expand 15bp to 1.70% in 2023.
• Maintain BUY. Our target price of S$14.88 is based on 1.2x 2023F P/B, derived from the
Gordon Growth Model (ROE: 9.8%, COE: 8.25%, growth: 0.5%). In our view, its 2022 P/B is
very inexpensive at 1.04x.
SHARE PRICE CATALYST
• Events: a) OCBC’s dividend yield improving from 4.5% for 2022 to 4.8% for 2023, and b)
OCBC expected to benefit from NIM expansion in 2H22.
• Timeline: 6-12 months.
Ascott Residence Trust – BUY (Jonathan Koh)
• The seventh consecutive quarter of sequential recovery. RevPAU maintained an
upward trajectory and increased 22% to S$67 in 1Q22, powered by higher occupancy and
higher average daily rates. Countries with large domestic markets, such as the US, the UK,
Japan and Australia, registered the strongest recovery especially in Mar 22.
• Value creation through asset recycling. Ascott Residence Trust (ART) divested six
properties at an average exit yield of 2% and total proceeds of S$580m. The capital freed up
was reinvested in 11 yield-accretive rental housing and student accommodation properties
for total consideration of S$780m and an average EBITDA yield of 5%. ART’s longer-stay
assets currently account for 17% of assets under management (AUM). Occupancy for its
student accommodation properties was close to 100%.
• Setting sights on a higher goal. Management plans to raise the asset allocation target in
longer-stay assets by 10ppt from 15-20% to 25-30% in the medium term.
• Reiterate BUY. Our target price of S$1.32 is based on DDM (cost of equity: 6.25% and
terminal growth of 1.8%).
SHARE PRICE CATALYST
• Events: a) Easing of travel restrictions and reopening of borders globally, and b) yield accretive acquisitions in the student accommodation and rental-housing space.
• Timeline: 6-12 months.
Genting Singapore – BUY (Vincent Khoo, Jack Goh)
• Market will eventually price in 2022-23 recovery. Genting Singapore (GENS) is a major
direct beneficiary of Singapore’s COVID-19 national vaccination programme and reopening
of the economy. We believe that valuations will partially factor in GENS’ return to prepandemic earnings dynamics. We have a BUY rating on GENS with a target price of S$1.08
which implies a 2022E EV/EBITDA of 8.8x, or -0.5SD to its historical mean.
• Towards restoration of normalcy. While Singapore has transitioned to its COVID-19
Resilience Phase since Nov 21, the nation has further relaxed some of its cumbersome
standard operating procedures (SOP) and Resorts World Sentosa (RWS) has been allowed
to operate with higher gaming capacity since Dec 21. We expect more inbound travel in
1H22 which will eventually benefit GENS as international patronage rebounds.
• Significantly better capital management moving forward. With GENS finally dropping its
decade-long pursuit of clinching a pricey Japan integrated resort (IR) concession, and with
no new compelling projects to consider, management is targeting to enhance capital
management and to develop a dividend policy. Theoretically, the scope of the company’s
capital management can be significant, considering its net cash of S$3.3b (27 S
cents/share) and that post-pandemic EBITDA is largely sufficient to fund its S$4.5b RWS 2.0
expansion.
• Lush prospective yields. We expect GENS’ dividend yield to normalise to 4.7% in 2023,
assuming revenue and cash flows recover back to pre-pandemic levels, and that GENS
restores its 2019 dividend payout level of 4.0 S cents.
SHARE PRICE CATALYST
• Events: a) Wide dispensation of COVID-19 vaccines which will allow herd immunity, b)
initiation of more Vaccinated Travel Lanes between Singapore and neighbouring countries,
and c) appealing 2023 yield of >4%.
• Timeline: 3-6 months.
