Simons Trading Research

Author: simonsg   |   Latest post: Fri, 13 Dec 2019, 4:31 PM


Manulife US REIT - Moving Into the Next League; Top BUY

Author: simonsg   |  Publish date: Fri, 13 Dec 2019, 4:31 PM

  • Keep BUY with new target price of USD1.10 from USD1.00, 10% upside plus 6% yield.
  • MANULIFE US REIT (SGX:BTOU), one of our Top Picks, has outperformed YTD +30%, vs S-REITs Index +17%
  • Key reasons: continued momentum in US office demand, lower interest rates, strong earnings track record and better investor education.
  • With the recent index inclusion increasing stock liquidity and visibility, we expect trading yield discount (c.150bps higher than office S-REIT peers) to narrow further. Post rally, valuations remain reasonably attractive at 1.2x P/BV.

Recent Acquisitions and Organic Rent Growth to Drive DPU in 2020

  • In FY19, Manulife US REIT made two accretive acquisitions of Centerpointe, Virginia and 400 Capitol, Sacramento which provide better income/tenant diversification and drive inorganic DPU growth.
  • Overall portfolio rents are still 5-15% below the market barring Michelson, where negative rental reversion is likely to persist, aiding in organic rent growth.
  • For 2020-2021, 7% and 6% of leases by gross income are due for renewal. We expect positive mid-single digit rental reversions. Additionally 95% of leases have an in-built rent escalation of 2% pa.

Potential Upside From Tax Structure Rollback and Recent Index Inclusion

  • Manulife US REIT is currently awaiting the finalisation of the proposed US tax regulations, which we expect to be announced by 1H20. If there are no additional changes to the proposed draft regulations, the REIT will be able to roll back its existing tax structure to IPO tax structure. This will help in avoiding the income tax paid at its Barbados entity, and result in additional tax savings of 1.5% pa, thereby lifting distributions.
  • The stock’s recent inclusion into the FTSE EPRA NAREIT Global Developed Index has helped raise visibility among institutional investors and improve liquidity, which should aid in further yield compression in our view.

US Office Outlook Remains Positive; Co-working Makes Up < 2% of Total

  • Based on Jones Lang LaSalle (JLL) latest US office sector report, office rents continue to remain on an uptrend, increasing 0.9% q-o-q in 3Q19. The report also noted that continued flight to quality will keep top-end options limited despite a high supply pipeline.
  • While co-working sector experience tapering office growth continued, demand from high-growth tech, creative, and life sciences tenants continued to drive occupancy gains. We also note that supply ahead in Manulife US REIT’s submarket remains limited.
  • Overall, co-working spaces still account for only < 2% of MUST’s portfolio, thus we see limited impact from the potential fallout of co-working operators for now.

DPU and Target Price Adjustments

  • We revise our FY20F-21F earnings by 1-2% by fine-tuning our interest cost and tax. Our COE is also lowered by 40bps to 7.8% with recent index inclusion increasing liquidity and visibility, as we roll forward our DDM valuation to next year.

Source: RHB Invest Research - 13 Dec 2019

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Rex International - Near First Oil Production, Backed by Huge Cash War Chest & Assets

Author: simonsg   |  Publish date: Thu, 12 Dec 2019, 12:51 PM

  • REX INTERNATIONAL (SGX:5WH) has proven its ability to create substantial value from its recent divestment of two Norwegian assets to Lundin Norway for US$45m and its remaining assets could be worth more vs its book value. Rex International targets to achieve first oil in Oman by 1Q20 and we expect a strong cash flow if production drilling is successful.
  • Also, Rex International has a strong net cash balance of S$89.5m, forming 41.5% of its market cap.
  • We initiate with a BUY and SOTP-based target price of S$0.218, implying 1.1x 2020F P/B.

Investment Highlights

Deeply undervalued given first oil prospects and strong balance sheet.

  • In the recent SGX Market Updates, Rex International is highlighted as one of the SGX Stocks with Consistent Momentum in Recent Years.

Source: UOB Kay Hian Research - 12 Dec 2019

Labels: Rex Intl
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HongKong Land - Low Valuation Limits Downside Risk

Author: simonsg   |  Publish date: Wed, 11 Dec 2019, 12:50 PM

  • Reversionary growth for Central office portfolio to moderate as the market there has peaked out.
  • Despite challenges surrounding its Central portfolio, low valuation cushions downside risk.
  • Negatives largely discounted, maintain BUY with US$6.64 Target Price.

Negatives Largely Discounted

  • HONGKONG LAND (SGX:H78) is trading at a 56% discount to our current appraised NAV, near the low end of its historical trading range. The challenging office and retail markets are expected cloud HongKong Land’s rental income growth outlook. However, the current low valuation, which has factored > 30% fall in commercial prices in its Central portfolio, should provide a support to its share price. Hence we keep our BUY call with US$6.64 Target Price.

Central Portfolio Facing Challenges

  • According to JLL, the office vacancy in Central has increased to 3.3% in Oct-19 from Jun-19’s 2.3%. This has resulted in office rentals falling 3.8% in 3Q19, and should weigh on HongKong Land’s future reversionary growth.
  • HongKong Land’s Central retail portfolio is effectively fully occupied and base rental reversions had been positive reflecting the general increase in rents over the past few years. Nonetheless, the impact from the current social unrest in Hong Kong is yet to be reflected.

Improving Sales From China

  • Attributable contracted sales in China more than tripled to US$566m in 3Q19 as a result of more property launches and changes in product mix. Cumulative contracted sales for 3Q19 reached US$1.2bn, up 50% y-o-y. As of Sep-19, sold but unrecognised sales reached US$2bn, of which 40% will be booked before end-20.
  • While its China property business should add momentum to its earnings growth, this may not necessarily translate into higher valuation for the stock in the short-term given the risk inherently perceived by the market on the China property development sector.


  • Our Target Price of US$6.64 is based on a target discount of 45% to our Dec-2020 NAV estimate.

Key Risks to Our View

  • Any deterioration in leasing demand for office in Central and Singapore could drag HongKong Land’s earnings. Slow demand and property market cooling measures could adversely affect residential sales earnings from China. Cap rate expansion could lead to lower property valuations.

Source: DBS Research - 11 Dec 2019

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Yangzijiang Shipbuilding - Recovering Its Gleam

Author: simonsg   |  Publish date: Wed, 11 Dec 2019, 12:49 PM

  • Heading into 2020, the two key catalysts for Yangzijiang Shipbuilding's share price outperformance is the return of the company’s chairman and new-order wins, in our view. We believe that both should occur in the next 3-4 months and thus re-iterate our BUY rating and target price of S$1.46.
  • Yangzijiang Shipbuilding’s current P/B of 0.63x remains inexpensive given that it is a 25% discount to its 5-year historical mean of 0.84x.

What’s New

Operationally solid.

  • While there is no definitive timeline for the return of YANGZIJIANG SHIPBUILDING (SGX:BS6)’s chairman, we point out that the company remains operationally solid with gross-profit margin in 3Q19 expanding 0.8pp y-o-y to 19.5%, while core shipbuilding margin remained robust at 14%. At present, we maintain our 2020 and 2021 gross margin estimates at 17.5% and 17% respectively.
  • Yangzijiang Shipbuilding’s CEO (and the chairman’s son) has many years’ experience in the shipbuilding industry and has been a steady hand since he was appointed CEO in March 15.

New shipbuilding orders for Yangzijiang Shipbuilding have mildly disappointed in 2019.

  • However, we remain confident that in the near to medium term, the International Maritime Organisation (IMO) 2020 regulations will lead to new orders for the company. We point out that there are 184 LNG-fuelled ships currently on order, which is more than the 170 vessels in operation globally, as the impending IMO regulations encourage shipowners to take on the upfront costs of investing in cleaner-fuel vessels vs installing scrubbers.
  • While scrubbers cost less, evolving IMO and country regulations may render some scrubber technology obsolete in the near term. Thus, we believe that there is meaningful upside for Yangzijiang Shipbuilding if the shipbuilding industry continues its move towards clean-fuel vessels, as more countries globally enact Emission Control Areas (ECAs).

A spare Rmb4.2b sitting in the bank.

  • As at end-3Q19, Yangzijiang Shipbuilding had net cash of Rmb4.2b, part of which we believe could be used to pay a special dividend. (Yangzijiang Shipbuilding Dividend History)
  • During its 3Q19 results briefing, Yangzijiang Shipbuilding had stated that it would look to scale back some capex in 2020; thus use of funds will likely decline y-o-y. In addition, it appears that the company will continue to scale back on its debt investments by Rmb1b-2b during the current quarter.
  • In 2020, Yangzijiang Shipbuilding may also engage in M&A; however the company is more likely to use its own stock as payment given that it has bought back 23m shares in 2019. Taken as a whole, Yangzijiang Shipbuilding’s use of funds will not be onerous in 2020 and thus a special dividend could be paid out, in our view.

Stock Impact

What is IMO 2020?

  • The IMO will enforce a new 0.5% global sulphur cap on fuel content starting from 1 Jan 20 – this is a material decrease from the present 3.5% limit. The global fuel sulphur cap is part of the IMO’s response to heightened environmental concerns. Thus, the shipping industry will have to deal with both the upcoming 0.5% sulphur cap, and also the existing 0.1% sulphur cap in designated ECAs.
  • While shipowners can continue using high-sulphur fuel oil (HSFO), they will have to install on-bard scrubbers to clean their vessel’s emissions. The other alternative would be to use LNG-powered vessels.

Globally we have seen a better supply/demand balance in shipping-capacity growth in recent years due to more prudent orders.

  • Thus, the shipping industry will likely be able to cope with any slowdown in global economic growth in 2020 due to US-China trade tensions or Brexit impacts. As an example, global bulk carrier orders as a percentage of total deadweight tons have come down across Capesize, Panamax, Handymax and Handysize vessels. However, we note that in 2020 and 2021, new orders will less likely be predicated on global trade outlook but rather the need to adhere to ever more stringent emission requirements.
  • In addition, we believe that a better supply/demand balance in global shipping capacity could encourage shipowners to order cleaner fuel vessels compared to a state of oversupply.

The impact of IMO regulations on fuel demand will be material

  • The impact of IMO regulations on fuel demand will be material, and in the medium term is likely to make shipowners change the dynamics of their fleet.
  • According to Wood Mackenzie, demand for very low sulphur fuel oil (ie 0.1% sulphur content) will increase significantly from 2020 onwards, while distillate demand is also forecast to materially grow.
  • Interestingly, LNG is not expected to play a major role in the shipping industry. In our view, these developments will have positive ramifications on Yangzijiang Shipbuilding in the medium to longer term as a ‘shake out’ in the shipping industry develops.

Earnings Revision / Risk

  • None.

Valuation / Recommendation

  • We re-iterate our BUY recommendation on Yangzijiang Shipbuilding and price target of S$1.46/share which is in historical P/B of 84x.
  • Yangzijiang Shipbuilding’s P/B has rebounded from its trough of 0.52x recorded in late-Aug 19 and is now at 0.63x, which is still a 25% discount to its 5-year average. We note that this is also a discount to its regional shipbuilding peers in Korea which trade at an average of 0.7x P/B and have an average net debt/equity of over 52%, vs Yangzijiang Shipbuilding which is in a net cash position.

Share Price Catalyst

  • New ship-building order announcements.
  • News that the chairman is no longer assisting in the Chinese authorities’ investigations.

Source: UOB Kay Hian Research - 11 Dec 2019

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Wilmar International - Good Story to Continue Into 2020

Author: simonsg   |  Publish date: Tue, 10 Dec 2019, 6:12 PM

  • We upgrade Wilmar's target price to S$4.75 after rolling over our valuation to 2020 EPS. 9M19 earnings beat consensus estimates and led to a consensus earnings upgrade. The earnings momentum will continue into 2020 with 12% y-o-y net core profit growth.
  • Tropical oils may see weaker margins as feedstock prices increase, but this would be offset by a better performance from the oilseeds & grains segment.
  • Maintain BUY. Target price: S$4.75 (previous: S$4.40).

What’s New

Best performing year since 2009.

  • Ytd, Wilmar's share price has risen by about 35.7%. This is the best performing year since 2009. The listing of its China operation under Yihai Kerry Arawana (YKA) is not the sole factor that contributed to the performance; the good earnings for 9M19 also came as a surprise to the market and led to earnings upgrades.

2020 performance to be driven by oilseeds & grains.

  • We expect 12% net profit growth for 2020 with bulk of the growth to come from oilseeds & grains. 2020 will see the return of this division as the main earnings contributor (43% of 2020F PBT vs 34% of 2019F PBT). The earnings growth will be driven mainly by better margins and expected higher sales volume from recovery of soymeal demand and growth from rice & flour.
  • China’s demand for soymeal is expected to increase y-o-y as the hog population is expected to recover from its low in 2019. As highlighted by Bloomberg recently, China plans to reinvigorate its own hog production, and aims to increase domestic supply to 80% of normal levels by the end of 2020, according to Yang Zhenhai, head of the Animal Husbandry Bureau at the Ministry of Agriculture and Rural Affairs (report published 28 Nov 19).
  • Tropical oil’s contribution is expected to decline on the back of lower margins due to a surge in feedstock prices. Good risk management will help to mitigate the impact.

YKA IPO on track for 1Q20.

  • Based on the update from the 3Q19 results briefing, management has guided that the listing of YKA likely to take place in 1Q20. Although this is a slight delay as compared with our earlier expectation of early-Dec 19, it should not be a concern.
  • Based on YKA’s financial summary disclosed in Jul 19, 2018 PATAMI was Rmb5,128m or US$732m (US$1:Rmb7). Based on our estimates, 2019 YKA contribution is likely to be around US$670m-690m, which is not substantially lower y-o-y. Furthermore, we expect better earnings from China in 2020 with the recovery of soybean crushing margins on the back of better soymeal demand.

Stock Impact

Tropical oils performance likely to be dragged down by weaker margins.

  • PBT contribution from tropical oil is expected to drop to 40% of 2020F PBT from 46% of 2019F PBT. We are expecting marginal increase in sales volume, given that palm oil supplies from Indonesia and Malaysia are likely to be tighter than 2019.
  • Downstream margins for 1H20 would be challenged because the increment in refined product prices is lagging behind the surge in CPO prices. For example, palm olein exports price on 5 Dec 19 reported by MPOB went up by 27% from 31 Sep 19, vs 34% increase in CPO price.

Beneficiary of higher biodiesel mandate in Indonesia.

  • Wilmar International (SGX:F34) is the largest palm-base biodiesel producer in Indonesia (and globally as well). Hence, the 2020 B30 mandated biodiesel volume allocated to Wilmar has increased by 40.5% to 3.09m kl from 2.20m kl (inclusive of the additional allocation for B30 trial run for Nov and Dec 19). The biodiesel sales volume is expected to contribute approx. 10% of Wilmar’s 2020 tropical oil sales volume, which is up from ~7% for 2019F.

China business goes far beyond soybean crushing.

  • In our previous note dated 14 Nov 19, we highlighted that Wilmar’s oilseeds & grains operation is no longer solely concentrating on soybean crushing. Making reference to the three charts in attached PDF report, China’s soymeal demand declined by 6.3% y-o-y for the period of Oct 18/Sep 19 and Wilmar’s soybean crushed volume for 9M19 based on market data was down by 28% y-o-y.
  • Compared with the 28% decline in soybean crushing volume, Wilmar’s 9M19 oilseeds & grains manufacturing sales volume declined by 2.1% y-o-y only. This clearly shows that Wilmar is no longer highly dependent on soybean crushing, and that its rice and flour sales volume are growing faster to compensate for the decline in sales of soymeal.

Earnings Revision / Risk

  • No change to our earnings estimates. We forecast core net profits of US$1,205m, US$1,348m and US$1,443m for 2019-21 respectively.

Valuation / Recommendation

  • Maintain BUY and with higher target price of S$4.75 (previous: S$4.40), as we roll over valuation to 2020F PE and reflects a blended 23x 2019F PE for China operations and blended 11x PE for non-China operations.

Share Price Catalyst

Good 4Q19 results announcement.

  • 4Q19 results will be driven by strong consumer products performance given an earlier Chinese New Year for 2020 and better oilseeds crush margins.

Share price re-rating from listing of YKA.

  • With its strong market positioning and branding in China, we expect YKA’s share price to perform well upon listing. This could lift trading sentiment on Wilmar as well. Post listing of YKA, we expect Wilmar to declare a special dividend, which could lift dividend yield by 2-2.5ppt on top of the expected 1.5% yield from the annual dividend.
  • Our current SOTP valuation is based on 2020 earnings. Every increase in multiple by 2 (eg from 26x to 28x) in PE for YKA’s food products will add S$0.20 to our target price.

Source: UOB Kay Hian Research - 10 Dec 2019

Labels: Wilmar Intl
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Sheng Siong Group - More Stores to Come; Maintain BUY

Author: simonsg   |  Publish date: Tue, 10 Dec 2019, 2:45 PM

  • Sheng Siong remains one of our Top Picks for 2020. We believe its growth story remains intact. New store openings and market share gain should continue to drive earnings next year.
  • Currently, Sheng Siong has more or less secured two new stores. Housing Development Board also still has at least six new commercial units for tenders set aside for supermarkets in FY20.
  • Reiterate BUY, new target price of SGD1.39 from SGD1.32, 13% upside and 3% FY20F dividend yield.

New Store Openings Are Key Drivers to Earnings Growth

  • SHENG SIONG (SGX:OV8) opened 6 new stores in FY19 (5 in Singapore and 1 in China), bringing its total store count to 61 (59 in Singapore, 2 in China).
  • We note that retail sales for supermarkets and hypermarkets in Singapore have been fairly flattish this year. Sheng Siong was able to generate 11% y-o-y growth in 9M19 revenue, solely due to new stores opening. SSSG was slightly negative at 0.5%.
  • Moving into 2020, we believe the industry growth will remain tepid due to uncertainties in the macro-economic environment. However, Sheng Siong should be able to prop up earnings growth with its continued store expansion strategy.

Expected New Stores

  • Sheng Siong has secured one new store on Marsiling Drive, which is set to open in 1Q20. It also announced a SGD29.5m acquisition of a commercial premise in Aljunied for an additional store. We expect the completion of the property purchase to done in 1Q20, as well. The commercial unit has a GFA of 2,717sqm. It is currently owned by Dairy Farm (SGX:D01) and occupied by a Giant supermarket.
  • As Sheng Siong’s typical size is 8,000-10,000sq ft, we think group could lease out part of the space for rental income. Besides these two stores, HDB still has at least 6 new commercial units set aside for supermarkets in FY20F. As such, we think there are still opportunities for the group to expand further in 2020.

Market Share Gain From Competitors

  • With an increasingly challenging operating environment in Hong Kong, we believe Dairy Farm will be focused on improving its profitability in ASEAN. As such, we think Dairy Farm is unlikely to bid aggressively for new stores next year. Sheng Siong could stand to gain in market share, as Dairy Farm continues on its store rationalisation plan next year.

Changes to Our Forecasts

  • We raise our next year’s new store assumption from two to four units. This raises our FY20-21F earnings by 1-2% and our Target Price to SGD1.39 from SGD1.32.
  • Maintain BUY.

Source: RHB Invest Research - 10 Dec 2019

Labels: Sheng Siong
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