Simons Trading Research

Author: simonsg   |   Latest post: Mon, 6 Jun 2022, 4:02 PM


ST Engineering - Signs 5-Year Engine Maintenance Deal; BUY

Author: simonsg   |  Publish date: Fri, 10 Jun 2022, 4:01 PM

  • ST Engineering has signed a 5-year deal with Safran Aircraft Engines (SAE) to provide engine maintenance (shop visit) offload for the CFM56-5B and CFM56-7B engines. As these engines are used on narrow body aircraft, we believe the agreement will allow ST Engineering to benefit from the expected revival in global air travel. We believe it should be able to deliver defensive earnings growth, aided by revival in the aerospace business.
  • Key catalysts: Sustained strong contract wins, a faster revival in the aerospace business.
  • BUY, S$4.80 target price, 16% upside with ~4% yield.

Aircraft Engine Maintenance Agreement With SAE

  • ST Engineering (SGX:S63) will provide engine maintenance (shop visit) offload for the CFM56-5B and CFM56-7B engines. The CFM56-5B engine was originally designed to power the A321 (Airbus 321) aircraft, but now can power every model in the A320 family. Similarly, the CFM56-7B engine powers the Boeing 737 (B737) Next Generation-600, -700, -800 and -900 aircraft. Both these aircraft are of narrow-body types, and are the workhorses of most global airlines for short-to medium-haul distances.
  • ST Engineering’s engine maintenance, repair and overhaul facilities in Singapore and China have a combined annual capacity of over 450 engines, and a track record of redelivering over 1,500 CFM56 engines.
  • Earlier, ST Engineering expanded its CFM engine capability with the setting up of quick-turn services for the LEAP-1B engine, which powers the B737 Max. This multi-year agreement should allow ST Engineering to benefit from the expected pick-up in engine MRO activities, as air travel recovers from the pandemic.

Record-high Orderbook Lends Revenue Visibility

  • ST Engineering reported the last nine months of 2022 (or 94% of our revenue estimate).

Earnings Growth and Sustainable Yield

  • ST Engineering has productivity.
  • Our S$4.80 target price for ST Engineering includes an 8% ESG premium over the fair value of S$4.45.

Source: RHB Invest Research - 10 Jun 2022

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MM2 Asia - FY22 Growing Immunity to COVID-19, Recovery on Track

Author: simonsg   |  Publish date: Fri, 10 Jun 2022, 3:59 PM

  • mm2 Asia reported headline PATMI loss of S$35.8m in FY22, narrowing from its S$90.8m loss from FY21. FY22 revenue grew 50.2% y-o-y as the group’s business operations recovered. The cinema and concert segments have reached inflection points where business is ramping up while the core production business experiences growing demand.
  • mm2 Asia is exploring options to refinance its maturing debt which may include an IPO/divestment of its Cathay cinema business. Maintain BUY.

MM2's FY22 Results: PATMI Loss Narrowed as Singapore Reopens

  • mm2 Asia (SGX:1B0) reported FY22 revenue and PATMI loss of S$113.0m and S$35.5m respectively, below our FY22 revenue expectations of S$130.8m and S$5.9m PATMI loss. However, excluding goodwill impairments of around S$15.5m, FY22 core PATMI loss would have been around S$20.0m, a sharp improvement from the S$50.8m core PATMI loss in FY21.
  • For 2HFY22, revenue (+20.6% y-o-y) and PATMI loss (+61.7% y-o-y) improved sharply as Singapore and Malaysia started to partially relax their COVID-19 restrictions.

Main Beneficiary as COVID-19 Becomes Endemic

  • mm2 Asia’s sharp rebound was largely boosted by strong contribution from the cinema business as COVID-19 restrictions were fully relaxed in Apr 22. Backed by the blockbuster Spiderman: No Way Home, record-high cinema ticket sales led to a robust recovery in the cinema segment.
  • Also, coupled with easing COVID-19 restrictions and international borders reopening, the group’s regional core production business have started to ramp up as demand starts to pick up. Moving forward, upcoming concerts in Singapore are expected to aid in mm2 Asia’s recovery due to strong pent-up demand for live concerts.

Core Business: Rebound Underway

  • For FY22, revenue from the core production business grew 39.1% y-o-y, beating our previous expectations of 37.4% y-o-y growth. However, EBIDTA fell by 14.4% y-o-y, missing our expectations of a 15.9% y-o-y growth. We reckon this was due to higher operating and manpower costs arising from operating under COVID-19 restrictions.
  • As more countries start to further relax COVID-19 restrictions and reopen their respective international borders, growing regional demand is expected to underpin a strong recovery for this segment.
  • Over the next 2-3 years, mm2 Asia’s core production pipeline remains sizeable at S$150m-190m. Currently, the group has over 30 projects that are in various stages of development, production and distribution. Coming off its success from Ah Girls Go Army, mm2 Asia is set to distribute Ah Girls Go Army 2 on 16 Jun 22, which is expected to perform well domestically. Also, we believe that the group’s track record in quality production will see its core production business sought by global streaming channels, with the release of its highly anticipated More Than Blue: The Series well-received on Netflix.

Cinema: Reached Inflection Point

  • Revenue and Spiderman: No Way Home also boosted revenue in 2HFY22. With upcoming highly anticipated films such as Thor: Love and Thunder, Black Panther: Wakanda Forever, and Avatar 2 that will be shown throughout FY23, we expect revenue and profitability for the cinema segment to reach near pre-pandemic levels in FY23.

Concerts: Sold Out Within Hours

  • As Singapore only fully relaxed COVID-19 restrictions in Apr 22, physical concerts were still on pause for 2HFY22. UnUsUaL (SGX:1D1)’s held its first live major concert on 28 May 22 for Taiwanese Singer A-Lin, which Eric Chou set to perform in FY23, we reckon that the concert segment would return to profitability in FY23, reversing past two years of losses.

Fund Raising and Debt Restructuring

  • To fund a post-COVID-19 recovery, mm2 Asia raised S$19.5m via tagged to Cathay once it becomes an associate company.

Mm2 - Earnings Forecast Revision & Recommendation

  • Cut earnings by S$4m and S$6m for FY23 and FY24 respectively, on the back of lower gross restructuring as well as rolling over our valuation to FY23F.
  • Catalysts: Film production delivery, spin-off of cinema business.

Source: UOB Kay Hian Research - 10 Jun 2022

Labels: MM2 Asia
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Yangzijiang Financial - Undervalued Gem Carved Out With Strong Catalyst From Share Buyback

Author: simonsg   |  Publish date: Thu, 9 Jun 2022, 4:01 PM

  • Yangzijiang Financial is trading at an attractive level and valuation, at around 25% below its first day IPO opening price and about 50% discount to its book value of S$1.08. Having S$4.2b of debt investments, Yangzijiang Financial had a solid earnings track record of S$321m-345m in 2019-21, implying a P/E ratio of about 6x and dividend yield of above 6%.
  • Based on Yangzijiang Financial’s historical mean P/B of 0.84x pre-split, this implies an intrinsic value of S$0.91.
  • Yangzijiang Financial’s P/B is trading at a large discount vs peers.
  • Catalyst: Share buyback.

Solid Track Record of 9-15% Pre-tax ROA Since 2011

  • Yangzijiang Financial (YZJFH, SGX:YF8)’s primary business consists of its debt investment business which invests excess cash into short-term loans and fixed interest debt instruments, generating recurring income. From 2011-21, Yangzijiang Financial’s investment business has generated an impressive return track record of 9-15% pre-tax ROA.
  • After the restructuring, Yangzijiang Financial has plans to recycle its investment principal from matured loans into its investments management business. Around 95% of Yangzijiang Financial’s S$3.9b in debt investments is expected to mature by end-22.
  • Yangzijiang Financial has completed the acquisition of a CMS-licensed fund named GEM Asset Management (GEM) in Singapore, which has provided investment management and advisory services for US$2.4b of assets since establishment. Also, Yangzijiang Financial intends to set up and provide fund/wealth management services to third-party investors.

Strong Sign of Confidence From Share Buyback and Insider Purchases

  • Yangzijiang Financial held an extraordinary general meeting on 8 Jun 22 and successfully obtained shareholders’ approval for a share buyback mandate. The proposed mandate would authorise Yangzijiang Financial to purchase shares of up to 10% of its own issued ordinary share capital.
  • The rationale for the share buyback is to give management the flexibility to increase shareholder value and improve the return on equity when appropriate. As Yangzijiang Financial is trading at a huge discount to book value, the start of an aggressive share buyback after 8 Jun 22 could be a key catalyst for Yangzijiang Financial.
  • In addition, Yangzijiang Financial’s CEO and its independent directors have acquired a total of 1.7m shares at an average price of S$0.57/share in May 22, indicating their confidence in the company.

Attractive Valuation With Huge Upside Potential Vs Historical and Peers’ Valuations

  • With zero debt and about S$4.2b of discount compared with the peers’ valuation of 0.5-2.1x 2021 P/B (excluding outliers).

Targeting to Grow in New Markets and Sectors

  • Yangzijiang Financial has identified Singapore business and the fund/wealth management business.
  • Yangzijiang Financial has plans to diversify into new asset classes such as private debt, mezzanine financing and REITs, diversifying away from its concentration in fund investments. Some sectors and themes earmarked for investment include late-stage companies, ESG, new economy and real-estate such as data centres and purpose-built student accommodation.

Debt Investments Generated Recurring Income With Solid Track Record

  • Accounting for 84-95% of Yangzijiang Financial’s overall generating longer-term and recurring revenue.
  • As of end-21, debt investments made up 70% of Yangzijiang Financial’s net tangible assets which the groups plans to pare down to below 50% and 30% at end-22/23 respectively.

Strong Balance Sheet Consisting Mostly of Short-term Debt Investments

  • Yangzijiang Financial has a strong balance sheet with net asset value of S$4.2b, consisting mostly of short-term debt investments at amortised cost (S$3.5b). As of 2021, the borrowers of Yangzijiang Financial’s debt investments are from diverse industries including manufacturing (37%), real estate (24%), services (15%) and wholesale/retail (10%).
  • To safeguard Yangzijiang Financial’s interest in the event of default, it has obtained collaterals from the end-borrowers through third-party financial institutions for the majority of the loans. Such collaterals are project specific and cannot be used for any other purpose. As such, Yangzijiang Financial is the ultimate beneficiary of the collaterals.
  • Debt investments with collaterals have loan-to-value of an average of 46.09% from their borrowers (implying collateral coverage ratio of 1.96x).

Investment Management

  • Shifting away from its core debt business, Yangzijiang Financial seeks to achieve capital appreciation and investment income from both public and private markets. This includes investing across a broad spectrum of assets such as funds, growth equity, mezzanine financing, private investment in public equity deal and real estate.
  • Besides Singapore, Yangzijiang Financial also aims to diversify its portfolio away to the Asia Pacific emerging markets and global developed markets. As of end-21, the segment consists of twelve fund investments managed by 12 general partners in China, with deployed capital of around RMB4.6b.

Source: UOB Kay Hian Research - 9 Jun 2022

Labels: YZJ Fin Hldg
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Valuetronics - the Worst Should be Over; Upgrade to NEUTRAL

Author: simonsg   |  Publish date: Wed, 8 Jun 2022, 4:02 PM

  • Valuetronics (SGX:BN2) endured an expected tough FY22 (Mar), with revenue and PATMI falling 11.1% and 39.3% y-o-y mainly due to lower contribution from the industrial and commercial electronics (ICE) segment, higher component prices, as well as increased labour and operating costs.
  • Despite these issues persisting, ICE should rebound from newly acquired customers. Hence, we upgrade our call as we think the worst may be over, albeit, headwinds still ahead.
  • Upgrade Valuetronics to NEUTRAL from Sell, with new DCF-backed target price of S$0.53, 0% downside.

Supply Issue and High Costs to Persist

  • Component supply problem which has resulted in extreme price surges, prolonged order lead times, frequent delivery delinquency, and consequential productivity losses will likely continue to persist.
  • Management guided to continue to proactively mitigate the adverse impact by identifying alternative parts and reengineer products to lower cost while leveraging on Valuetronics’s supply chain knowledge to identify new sources of supply. However, GPM will likely continue to remain pressured in the near term.

ICE Poised for Growth But Consumer Electronics (CE) Will Likely Decline

  • In FY22, ICE declined mainly due to a significant drop in sales from its automotive customer, which switched its production to another vendor in North America, while component shortages also affected the order fulfilment of certain customers. However, we believe all is not lost going forward as Valuetronics has been preparing for the trial production for newly acquired customers in this segment including a hardware provider customer for retail chain stores and a customer providing cooling solutions for high performance computing environments. These customers are expected to contribute positively in FY23F. However, the CE segment will likely decline due to lower forecasts from customers and the component shortage issue.
  • All in, we still expect the effect to be a net positive as the ICE segment yields better margins and profitability.

Source: RHB Invest Research - 8 Jun 2022

Labels: Valuetronics
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Singapore Exchange - Strong Monthly Performance as Trading Volatility Remains Elevated

Author: simonsg   |  Publish date: Wed, 8 Jun 2022, 4:00 PM

  • In Apr 22, SGX saw sustained growth in DDAV as trading volumes for both equity-linked and forex derivatives rose, driven by uncertainty caused by the Ukraine-Russia conflict. SDAV continued its downtrend while commodity volumes normalised from recent monthly highs.
  • Upcoming interest rate hikes are expected to suppress SDAV while boosting interest income.
  • In our view, SGX remains fairly valued at current price levels, with limited upside. Maintain HOLD.

Decline in Securities Volume

  • Despite the benchmark STI Index being the strongest performing developed-market benchmark globally for 4M22, SGX (SGX:S68)'s securities daily average volume (SDAV) continued its decline in Apr 22 to S$1.3b (-1.1% y-o-y, -18.2% m-o-m). The lower m-o-m performance could be attributed to three fewer trading days in Apr 22 and coming off monthly highs in Mar 22.

Derivatives Outperform

  • SGX's derivatives daily average volume (DDAV) surged to 1.1m contracts in Apr 22 (+25.1% y-o-y, -6.5% m-o-m), driven by uncertainty from the ongoing Ukraine-Russia conflict.
  • On 26 April, DDAV rose to an all-time high of almost 3m contracts. Total equity index futures surged (+23.3% y-o-y, -17.8% m-o-m) while FTSE China A50 Index volumes skyrocketed (+37.3% y-o-y, -17.9% m-o-m) as SGX’s commanding market share continued to hold up well against HKEX’s MSCI China A50 Index futures.
  • Other equity index futures such as FTSE Taiwan Index (+7.4% y-o-y, -11.5% m-o-m) and FTSE Nifty 50 Index (+14.5% y-o-y, -9.3% m-o-m) also outperformed.

Commodities Stable While Forex Outperforms

  • SGX's total forex futures volumes grew 27.0% y-o-y, the highest since Mar 21 as both INR/US$ futures (+8.6% y-o-y, +2.3% m-o-m) and US$/CNH futures (+58.0% y-o-y, -0.8% m-o-m) surged with the latter increase being attributable to the increasing adoption of CNH as a safe haven currency.
  • SGX's total commodity derivatives volumes softened m-o-m as market volatility normalised from recent monthly highs but was largely stable y-o-y. Iron ore futures (+3.4% y-o-y, -49.0% m-o-m) climbed while forward freight agreement softened (-16.9% y-o-y, -41.6% m-o-m) amid macro uncertainties.

Impact of High Inflation and Interest Rate Hikes to Trading Activities

  • Facing record-high inflation, the Fed has indicated multiple upcoming interest rate hikes for the upcoming Jun/Jul 22 Fed meetings. Looking back, periods of high inflation and corresponding interest rate hikes have historically supressed SDAV levels as investors anticipated lower corporate earnings, forming a SDAV floor at around S$1b post-hikes.
  • As of end-Apr 22, SGX's SDAV is currently at S$1.25b, implying that we expect a 15-20% drop in SDAV levels before seeing any potential rebound in trading activity. This is in line with our expectations as we had already expected SDAV to soften from elevated levels in Feb 22 and Mar 22 (1Q22), driven by the Ukraine-Russia conflict. Thus, as the cash equities segment historically accounts for 35-40% of SGX’s annual revenue, we expect revenue from this segment to moderate going forward, and drag down SGX's overall revenue and earnings.

Boost in Treasury Income

  • In May 22, the Fed raised the benchmark interest rate by 50bp to curb record-high inflation. As rates increase, we expect higher treasury income to follow suit and there should be a significant boost some time in 2HFY23/1HFY24, given that there is usually a lag of 6-9 months.

SGX - Earnings & Recommendation

  • No changes to earnings estimates trade at levels similar to peers’ average (28.6x).
  • Key catalysts:
    • Secondary listings of foreign listed entities.
    • Longer-than-expected period of trading volatility.

Source: UOB Kay Hian Research - 8 Jun 2022

Labels: SGX
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Centurion Corp - Positive Outlook Ahead; Keep BUY

Author: simonsg   |  Publish date: Tue, 7 Jun 2022, 12:13 PM

  • Centurion Corp (SGX:OU8) reported encouraging 1Q22 revenue numbers, surging 47% y-o-y, driven by new capacity and business streams from Quick Build Dormitories (QBD) and on-board centres in Singapore, as well as a healthy recovery in occupancy in student accommodation business in the UK and Australia.
  • We raise our FY22F PATMI forecast for Centurion by 13% to factor in a faster recovery due to waning COVID-19 restrictions globally which lifts our DCF-backed target price for Centurion to S$0.43.

Demand for Dormitories Likely to Increase

  • In Singapore, Centurion managed to secure a master lease from JTC Corporation to operate four QBDs adding 6,400 beds in FY2020 with half of them commencing in 2020 while the other two commenced in 2Q21 and 4Q21.
  • Centurion also secured contracts to manage two Migrant Worker Onboarding Centres (MWOC) that commenced operations in 1H 2021 which should further expand its revenue streams. We expect occupancies to recover gradually from the recovery of migrant workers in the construction, marine, and process industries. We also expect rental rates to remain resilient for 2022.

Student Accommodation Rebounded Strongly

  • Centurion's student accommodation business in 1Q22 grew 43% y-o-y to S$11m mainly due to the improvement in occupancy in the UK, Australia, the US, and Korea.
  • Centurion’s portfolio in the US comprises six freehold purpose-build student accommodations (PBSA), which are held under the Centurion US Student Housing Fund of which it holds 28.7% of the units in issue. The fund has commenced the sale process of its US assets, as management continues its strategic review of its portfolio assets to enhance value for shareholders.

Coast Is Clear With Undemanding Valuations

  • With construction it has positive prospects.
  • Using our in-house proprietary methodology, we derive an ESG score of 3.0, which is on par with the country median. As a result, we apply a 0% premium to our target price.
  • Maintain BUY rating on Centurion with a higher DCF-derived target price of S$0.43 from S$0.38, 19% upside and ~7% yield.

Source: RHB Invest Research - 7 Jun 2022

Labels: Centurion
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