Foreign Equities

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BREADTalk Group Ltd
Target price: S$2 BUY
OSK-DMG RESEARCH (Sept 8): BreadTalk, the most successful food and beverage retailer in Singapore, has its ubiquitous brands found in every corner of the island. It also owns one of the largest bakery chains in China, with a presence in 57 cities. Over the last decade, the company has built up scale, and we believe it is now on the cusp of reaping this advantage to achieve profit growth. Most of its brands are well known and are market leaders in their respective categories. For example, the company’s new joint venture with Minor International will be a key driver for its expansion in Thailand, especially for its Din Tai Fung franchise.

Since listing in 2003, its outlets have grown at an unprecedented pace to 850 from 28 in 11 years. We believe capital expenditure and start-up costs have weighed down on profitability, and a moderation of these expenses as well as greater business scale in China will improve its net margin from 2.5% currently.

We initiate coverage with a “buy”. Our S$2 target price is based on 7.5 times FY15F EV/Ebitda, a methodology we believe better reflects underlying cash earnings. Our SOP cross-check, which leans heavily on the replacement cost for its retail network, derives a value of S$1.76 per share.

Robinsons Retail Holdings Inc
Target price: PHP91 BUY
MAYBANK ATR KIM ENG RESEARCH (Sept 8): We raise our target price for Robinsons Retail Holdings (RRHI) by 17.4% to PHP91 as we roll over our valuation to FY15F. This is based on the 12.7 times EV/Ebitda average of retailers in the region. It takes into account RRHI’s significant cash and liquid investments that reached PHP27 billion in 1HFY14, equivalent to around 30% of its PHP91 billion market capitalisation.

RRHI’s share price recently took a beating, shedding as much as 6% since Aug 20. We believe it was dragged down by the 19% share price drop of competitor Puregold Price Club Inc as investors were disappointed with the interim results. Puregold’s earnings dropped 12% y-o-y in 2QFY14 and 6% in 1HFY14. Sales climbed but margins were squeezed due to competitive pricing pressures.

We note that unlike Puregold and SM Retail, RRHI posted healthy interim results. Net income grew 46% y-o-y in 2QFY14 and 26% in 1HFY14 on the back of higher revenue and better gross profit margins. We believe RRHI’s strong 1HFY14 performance to be sustainable. RRHI’s share price has shown signs of recovery of late. It rebounded strongly last Friday, up 4.4%. Still, upside potential is substantial, at 36%.

Khon Kaen Sugar Industry pcl
Target price: THB18 BUY
UOB KAY HIAN RESEARCH (Sept 8): We expect Khon Kaen Sugar Industry (KSL) to post softer 3QFY14 results because of lower income and higher expenses. Quarterly earnings may have peaked in 2QFY14 but FY14 earnings should still grow y-o-y, thanks to higher sugar sales volume. The earnings momentum should continue into FY15 on rising sugar prices and sales volume.

Sales may increase 54% q-o-q to 200,000 tons (2QFY14: 140,000 tons). The average sale price of raw sugar could remain steady at 18.5 US cents/lb. However, gross margin may drop from 35% in 2QFY14 to 26% in 3QFY14 as the sugar business has lower margins than that of the power business and ethanol trade.

KSL said some customers have delayed their orders from 3QFY14 to 4QFY14 after global sugar prices for Oct 14 dropped to 15.6 US cents/lb due to a larger-than-expected output from Brazil. Note that every 1 US cent change in global sugar prices will affect KSL’s bottom line by 3.75%.
Maintain “buy” and target price of THB18, pegged at two times FY15F price-to-book or its five-year mean.

PT Indofood CBP Sukses Makmur Tbk (ICBP)
Target price: IDR12,300 BUY
BUANA CAPITAL RESEARCH (Sept 8): We initiate coverage with a “buy” rating and a target price of IDR12,300, based on 26 times 2015F PER. ICBP is the market leader for packaged food products. Despite the recent rise in costs, its strong noodle business should cushion the pressure and its newly launched beverage business will enhance future growth.

As the market leader for noodles in Indonesia (72% of market share), ICBP will be able to maintain its pricing power and provide sustainable profitability. The weakening wheat price — a drop from US$761 per bushel in May to US$535 per bushel in early September — bodes well for ICBP’s noodle business. For FY14-15F, we expect noodle sales volume to grow 2% to 3% and the average sale price to rise 10% y-o-y to maintain its Ebit margin at 14% to 15%.

The lucrative beverage segment will help ICBP achieve its objective, generating a sustainable double-digit growth with a balanced portfolio of 50% noodles and 50% non-noodle products.

In 2QFY14, ICBP’s beverage revenue grew to IDR507 billion on the back of strong sales growth. As a result, beverage revenue contributed 6% of total revenue versus 4% in 1QFY14. We forecast beverage revenue will reach IDR2 trillion as targeted by management.

800 Super Holdings Ltd
Target price: S$0.67 TRADING BUY
PHILLIP SECURITIES RESEARCH (Sept 9): Three new contracts that will commence this year did not fully contribute in FY14 (ended June 30), but will do so from 2HFY15F onwards. The partial contribution for FY14 already resulted in strong y-o-y growth for 800 Super.

Despite the recent run-up in share price for 800 Super following its FY14 results announcement on Aug 26, the market still does not fully appreciate the impact the three contracts will have on its FY15F results and the new elevated level of earnings in the coming years. The company has effectively expanded its market share for public cleaning services.

We believe the impact has yet to be fully priced in and has about 80% more upside to go.

We rationalise that eight times FY15F PER is a bargain price to pay for a profitable, recession-proof business model, with core business revenue visibility for the next six to seven years and a growth track record. Accordingly, we issue a “trading buy” rating on 800 Super, with a target price of S$0.67.

United Overseas Bank Ltd
Target price: S$23.55 HOLD
CIMB RESEARCH (Sept 8): We attended the UOB Malaysia (UOBM) Corporate Day in Kuala Lumpur. UOBM is the top foreign bank in Malaysia by market share of loans (5.1%) and deposits (4.6%), and ranks seventh overall in Malaysia behind the local banks, with a network of 45 branches. UOBM is the biggest contributor to the group outside Singapore at 15% of FY13 PBT.

UOB’s competitive strategy has always been to expand with its clientele across the region, and UOBM’s is no different. In a market where it is difficult to compete with local and global banks, UOBM has found a niche in the small and medium enterprise space — an area in which it still sees growth potential.

We previously downgraded UOB from “hold” to “reduce” before the 2QFY14 results as its valuations were the most expensive among the Singapore banks, yet its growth profile was the weakest. Its premium valuations were largely achieved due to concerns over the other banks’ rising China exposure, which was not sustainable. After a disappointing set of 2QFY14 results, its valuations look more palatable now at 1.36 times 2014 price-to-book value for a 12% return on equity, hence our upgrade back to a “hold”.

Our Gordon Growth Model-based target price remains unchanged at S$23.55, being 1.4 times 2014 price-to-book. UOB remains our least preferred stock among the Singapore banks.

Sino-Thai Engineering & Construction pcl (STEC)
Fair price: THB29.70 OUTPERFORM
KASIKORN SECURITIES (Sept 8): We upgrade STEC from “neutral” to “outperform” with a new fair price of THB29.70, up from THB22.70, based on a 4.83 times price-to-book multiple. We roll over STEC’s fair value to end-2015.

Given the brighter outlook for the construction business, we believe that STEC should be one of the prime beneficiaries as it is the only pure contractor among its peers. Recently, STEC was trading at 4.63 times its current book value. We pick STEC as our top buy as we believe that the return of investment cycle should boost STEC’s momentum the most. We are also convinced that STEC’s price performance should ride this positive momentum.

STEC’s business status is promising as its current backlog is still high at THB45.8 billion, or around two times its 2013 total revenue, and its balance sheet is solid with a net cash position and THB6 billion cash on hand.

In our view, STEC’s healthy balance sheet and its net cash on hand, which is equal to THB2.86 per share, should allow it to trade at a high premium compared with its peers. We see STEC being well prepared to cope with the volatile construction business by maintaining its conservative financial stance.

OUE Hospitality Trust
Fair value: S$0.85 HOLD
OCBC INVESTMENT RESEARCH (Sept 9): We expect OUE Hospitality Trust (OUEHT) to benefit from a seasonally higher hospitality demand in 2H14. A check on the preliminary hotel statistics published by the Singapore Tourism Board painted an improved hospitality outlook in July — revenue per available room (RevPAR) grew 5.4% m-o-m to S$223.4 while the average occupancy rate increased to 90% from 84.9% in June. While international tourist arrivals to Singapore declined 2.5% for the first seven months of 2014, we note that the number of arrivals in July represented a 19.2% m-o-m jump to 1.4 million. More importantly, arrivals from Asia registered a 16.7% m-o-m increase in July. Given that Asia formed around 74% of Mandarin Orchard Singapore’s customer profile for 1H14, we believe OUEHT is likely to put on a better showing in 2H14 should the demand be sustained.

For 1H14, distribution per unit amounted to 3.32 cents, meeting 49.5% of our full-year distribution projection. While 2Q14 RevPAR of S$242 missed its prospectus forecast of S$258, we understand that this was partly due to the accelerated renovation schedule in the quarter to capture the expected uptick in hospitality demand in 2H14.

There is no change to our fair value of S$0.85. Maintain “hold” as OUEHT appears to be fairly priced at current level.

This story first appeared in The Edge weekly edition of Sept 15-21, 2014.