ppt in Nov cy - UOB-Kay Hian

Stock Picks

Loke [email protected]

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Content

1. Valuetronics (Conviction Pick!)

2. Lian Beng

3. Centurion

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Valuetronics

Price = S$0.435Market Cap = S$165m2015 Dividend yield = 8.3%2015 P/E =6.1x

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Valuetronics

Electronic Manufacturing Services provider established in 1992• Engineering Design & Development • Product Design & Deployment • Plastic Injection Moulding• Tool Design and Tool Fabrication • Metal Stamping & Machining • Printed Circuit Box Assembly and Box Build Assembly • Supply Chain Management

Serving 2 major segments• Industrial & Commercial Electronics (ICE)• Consumer Electronics (CE)

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Valuetronics

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Valuetronics

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Valuetronics

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ValuetronicsWhy invest in Valuetronics?1) A near 100% cash-backed company by 2017?

0.286108.7604.0Net Cash and AFS assets0.04115.5 86.4 AFS assets0.24593.2517.7 Net cash

(0.1)(0.7)Debt93.3 518.4 Cash

S$/shareS$mHK$mAs at 30 Sep 15

*SG$:HK$=0.18Source: UOB Kay Hian, Valuetronics

As at 30 Sep 15,NAV = HK$2.11

= S$0.384

AFS assets: • Consist of bonds, of which over 90% are invested are in US$

denominated, with the remaining in RMB. • Average maturity of the bonds < 3 years• Bonds of companies in Asia pacific from different sectors such as

REITS and banks

We believe this should be the share price floor

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Valuetronics

0.0083.217.8

(4.9)22.7

1HFY15

0.24290.7504.0(1.9)505.80.0360.07026.4146.6

(29.9)176.6

FY15

0.04718.099.9

(20.7)120.6

1HFY16

0.2380.1110.122net cash/share 85.539.943.9net cash S$m

475.1221.5243.7Net cash HK$m(2.9)(0.1)(20.0)Borrowings HK$m477.9221.6263.7Cash HK$m0.0360.0140.031Dividend S$/share0.1410.0210.098FCF S$/share50.87.435.1FCF S$m

282.141.2195.3Free Cash Flow (FCF) HK$m

(20.8)(17.9)(44.6)CAPEX HK$m303.059.2239.8

Operating Cash Flow HK$m

FY14FY13FY12


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Valuetronics

0.2420.2380.1110.122net cash/share 90.785.539.943.9net cash S$m504.0475.1221.5243.7Net cash HK$m(1.9)(2.9)(0.1)(20.0)Borrowings HK$m505.8477.9221.6263.7Cash HK$m0.0360.0360.0140.031Dividend S$/share0.0700.1410.0210.098FCF S$/share26.450.87.435.1FCF S$m146.6282.141.2195.3

Free Cash Flow (FCF) HK$m

(29.9)(20.8)(17.9)(44.6)CAPEX HK$m176.6303.059.2239.8

Operating Cash Flow HK$m

FY15FY14FY13FY12


Despite paying out generous dividends, Valuetronics has managed to double its cash pile from FY12-FY15.

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0.0360.0360.0360.0360.0360.0140.031DPS (S$)0.3620.3300.3020.2740.2430.1130.122

Net cash + AFS/share (S$)

0.0430.0430.0430.0320.0060.002-AFS/share (S$)0.3190.2870.2590.2420.2380.1110.122net cash/share (S$)0.0680.0640.0640.0700.1410.0210.098FCF/share (S$)

2018F2017F2016F2015201420132012FY

*SG$:HK$=0.18, We had assumed dividend payouts in our net cash + AFS (S$) in FY16-FY18F.Source: UOB Kay Hian, Valuetronics

Assuming no dividends payoutBy FY17, Valuetronics will have net cash + AFS/share = 0.274+0.064+0.064

= S$0.402Current share price = S$0.435

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2) Concerns of declining LED segment overblown

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Valuetronics

-35%

Poor market sentiments and Concerns over declining LED segment

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ValuetronicsValuetronics has 2 segments1) Industrial & Commercial Electronics (ICE) – higher profit margins ,

exhibited very good growth, diversified customer base PROFIT FROM ICE SEGMENT HAS GROWN AT AN IMPRESSIVE FY12-15 CAGR OF 29.1%.

84

108

151

180

0

20

40

60

80

100

120

140

160

180

200

FY12 FY13 FY14 FY15

Profit before tax (HK$m )

ICE CAGR: 29.1%

Source: UOB Kay Hian, Valuetronics

Management continues to remain optimistic of growth of the ICE segment in FY16.-1QFY16 ICE revenue rose 11.2% yoy mainly due to increased demand from existing customers

-Valuetronics has reached the final stages of contract negotiation with a customer

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ValuetronicsValuetronics has 2 segments1) Industrial & Commercial Electronics (ICE) – higher profit margins ,

exhibited very good growth, diversified customer base

2) Consumer Electronics (CE) – lower margins than ICE segment, customer concentration risk (90% of sales comes from a single customer)a. LED lightings – declining sales due to intense competition (about 50% of

CE revenue)b. Consumer lifestyle (eg. Electronic shavers) – relatively stable (about

50% of CE revenue)

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Valuetronics


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P ro f it be fo re t ax H K$m

C o n s um er e lec tr o n ic s I n u d u s tr ia l Co n s um er E lec tr o n ic s

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Valuetronics


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C o n s um er e lec tr o n ic s I n u d u s tr ia l Co n s um er E lec tr o n ic s

In FY12 CE forms 73% of profit

By FY15 CE forms 45% of profit

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ValuetronicsLED segment will continue to be a drag on the group’s performance•We believe it is of declining significance

53% 52% 58% 63% 65% 70% 76% 79%

19% 19%17%

15% 17%20%

28% 29% 25% 22% 17% 10.0%21% 19%

2%3%

0%

10%20%

30%40%

50%

60%70%

80%90%

100%

1QFY15

E2Q

FY15E

3QFY15

E4Q

FY15E

1QFY16

E2Q

FY16E

3QFY16

F4Q

FY16F

ICE Consumer lifestyle LED

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147.9 149.2

126.8138.2

148.0

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

2014 2015 2016F 2017F 2018F

HK$m

Profit to owners

ValuetronicsFinancials Forecast CE revenue to drop 71%

in FY16 as the LED segment decline in significance.

We forecast revenue from the ICE segment to grow 20%,15% and 10% in FY16-FY18F respectively driven by increased demand from existing customers and new customers in the pipeline.

Valuetronics has secured a new automotive customer which has started to contribute to ICE segment in 2QFY16. ICE segment grew 27.7% in 2QFY16.

2 new customers are also expected to contribute to Valuetronics from 2QFY17.

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ValuetronicsPut things into perspective…

2.66.1 0%2.96.7 -10%3.37.6 -20%3.8 8.7 -30%

ex-cash PEPEYoy decline in FY15 EPS

2.1FY15F ex-cash and AFS PE2.6

FY15F ex-cash PE

6.1 FY15F PE6.1 FY15F PE

666cash and AFS as % of mkt cap56%

cash as % of mkt cap

*Based on ending net cash balance as at 2QFY16 of S$0.245/share (not inclusive of AFS investments). Assumed share price of S$0.435

*Based on share price of S$0.435

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2) Concerns of declining LED segment overblown

3) 8% dividend yield

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Valuetronics

0.070 0.136 0.020 0.094 SGm/FCF/share

8.3%8.3%3.3%7.0%5.8%2.9%1.9%3.2%Dividend yield0.036 0.036 0.014 0.031 0.025 0.013 0.008 0.014 Dividend in S$

0.200.200.080.170.140.070.050.08Dividend HK$50.0%49.3%36.5%46.6%40.9%41.9%30.0%30.6%payout ratio0.072 0.073 0.039 0.066 0.062 0.030 0.027 0.046 EPS S$

0.40.4060.2190.3650.3420.1670.150.255EPS HK$FY15FY14FY13FY12FY11FY10FY09FY08

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ValuetronicsBUYTarget Price:S$0.54Upside: 24.6%

0.542 TP8.3 Peers average PE

0.065 0.364 FY17 EPSS$HK$

Our target price has an implied ex-cash FY17F PE of only 4.5x.

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Valuetronics

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Lian Beng

Price = S$0.51Market Cap = S$260m2015 Dividend yield = 5.9%2015 P/E =3.7x

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Lian Beng

4 Main business segments1) Construction

2) Property Development

3) Construction-related business (Engineering, leasing of construction machinery, supply of ready mixed concrete, supply of Asphalt)

4) Investment holdings (eg. Rental income from investment properties)

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Lian BengOne of Singapore’s largest and leading construction groups. BCA A1 graded Main contractor

ESTABLISHED CONSTRUCTION TRACK RECORD

Ngee Ann PolytechnicNgee Ann Polytechnic Phase IV Expansion Programme - Erection & Completion of Proposed 4/6 Storey Teaching Block on Lots 3PT 113, 229PT, 1968PT & 1969PT Mk 5 Clementi Rd * As Main Sub-Contractor

Housing & Development BoardBuilding works at Punggol West Contract 1 (Total: 559 dwelling units) (Contract No: P/159/00)

Land Transport AuthorityProposed Queensway / Commonwealth Avenue Road Interchange - Contract No: C3214

Marina Bay Sands Pte LtdMarina Bay Sands Integrated Resort Development - Package 2109 -Construction Contract for Hotel Substructure Works

Nanyang Technological UniversityProposed erection of a three-storey building with a basement Multi-Purpose Hall for Nanyang Technological University at Nanyang Avenue

CustomerPast projects*

* List is not exhaustive. Source: Lian Beng, UOB Kay Hian

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Lian BengWhy invest in Lian Beng?1) Bulging property development portfolio with locked in sales

BULGING PROPERTY DEVELOPMENT PORTFOLIO WITH LOCKED-IN SALES

Source: Lian Beng, UOB Kay Hian

62.74.1 93%65%IndMandai Foodlink

4.2 56%40%Retail & OfficeHexacube

23.8 96%50%Resi & ComMidtown Residences/ The Midtown

0.8 32%10%Resi & ComFloraville/Floraview/Floravista

14.7 100%15%Resi & ComKAP & KAP Residences

3.3 86%10%Resi & ComNEWest

11.8 78%50%ResiSpottiswoode Suites

Est profit attributable to Lian Beng that is yet to be recognised% soldStakeType

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33 37 3745

5732

5127

-

10

20

30

40

50

60

70

80

90

100

FY14 FY15E FY16F FY17F

S$m

Property development profitsAdjusted Core Net profit to owners


Source: UOB Kay Hian

Support the income ofLian Beng as it grows its core profit

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2) Building its recurring income and a strong free cash flow

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Lian BengWhy invest in Lian Beng?2) Building its recurring income and a strong free cash flow

Construction

Supply of ready mixed concrete

Supply of asphalt

Leasing of construction equipment- eg. Gondolas, generators, external scaffolds

Rental income from investment properties

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GROWING RECURRING INCOME AND CASH FLOW

18-28

The workers’ dormitory at Mandai (55% owned) is currently operating at near full occupancy and is expected to contribute S$6-7m/year of net rental income.

Recently acquired freehold property in Melbourne, Australia, to contribute about A$1.3m/year from 2HFY16.

Tampines Industrial Crescent (30% owned) has been fully leased out, and we estimate it to contribute S$3m/year of rental income to Lian Beng from FY16.

The worker’s dormitory at Jalan Papan (49% owned) will come on stream from FY17, and we estimate it will contribute an additional S$5m-7m/year of rental income to Lian Beng

12-20Rental income (Worker’s dormitories + Tampines Industrial Crescent + Prudential tower)

3-4Leasing of equipments

Plant still in initial stages of commencing operationn.a.Supply of Asphalt

3-4Supply of RMC

CommentsEst. FY16-FY17/18profit (S$m)Business segment


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-5.0

10.015.020.025.030.035.040.045.050.0

2014E 2015E 2016F 2017F

S$m

Rental income from investment propertiesRMCleasing of equipConstruction


Forecast -Contributions from equipment leasing, RMC and construction business to remain relatively stable.

-Bulk of the profit growth to be driven by highly recurring rental income from investment properties (eg. Jalan Papanworker’s dormitory)

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2) Building its recurring income and a strong free cash flow

3) Consistent dividend payout and share price support from daily buybacks

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Lian BengWhy invest in Lian Beng?3) Consistent dividend payout and share price support from daily buybacks

0.016

0.02

0.0125

0.0225

0.030

0

0.005

0.01

0.015

0.02

0.025

0.03

0.035

2011 2012 2013 2014 2015

S$

5.9% dividend yield

Based on share price of S$0.51

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Lian BengWhy invest in Lian Beng?3) Consistent dividend payout and share price support from daily buybacks

In Oct-Dec 14, Lian Beng repurchased 19.6m shares (about 3.7% of total outstanding shares) at S$0.60-0.68/share under its share buyback programme.

Recently, Lian Beng has re-initiated their buyback programmeFrom 21 May 15- 19 Jun 15, Lian Beng repurchased 2.6m shares from the market at S$0.51-0.56/share

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Summary1. Bulging property development portfolio with locked in sales2. Building its recurring income and a strong free cash flow3. Consistent dividend payout and share price support from daily buybacks

Lian BengBUYTarget Price:S$0.81Upside: 58.8%

0.81

(0.27)Less 25% Conglomerate discount

1.079Total

PV of profits surplus (discount rate: 8%)0.005RNAV premium of Jalan Papan dormitory

PV of development profits surplus (discount rate: 8%)

0.11Development profits

As at 31 Aug 150.964Net asset value

CommentsPer share (S$)


Lian Beng is currently trading at 0.6x P/B, with a FY15 dividend yield of 5.9%

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Lian Beng

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Centurion

Price = S$0.41Market Cap = S$310m2014 Dividend yield = 3.7%2014 P/E = 7.0x2015F P/E =9.8x

CenturionOne of Singapore largest operators of workers’ dormitories

150,300Total

16,800Wee Hur

18,000JYC NCL

19,500MES

21,000Averic

7,900 beds in Jalan Papan under construction

35,500Centurion

39,500Vobis

CommentsNo. of bedsOperator

Source: Respective companies, foreignworkerdormitory.com, UOB Kay Hian

Centurion

Workers’ quarters on farms

Purpose-built dormitoriesConverted industrial premisesQuarters on construction sites

HDB flats (only for Malaysian construction work permit holders)private residences.

Options available

Centurion

4,100 (completed in Jul 15)

30 years (wef 2013) 100%

WestliteWoodlands

7,900 (under construction)

23 years (wef2015)51%Jalan Papan

Near 100%6,300Freehold45%Westlite Mandai

>85%8,6003+3+3 years

(wef 2008) 100%Westlite Tuas

Near 100%8,60060 years

(wef 1998) 100%Westlite TohGuan

Occupancy rateNo. of bedsYears lease% ownedName of Dormitory

Source: Centurion

CenturionRevenue sources:•Leasing of dormitories and •Leasing of surrounding commercial spaces (such as canteens, provision shops and barber shops)

Limited credit risk:• 1-2 years of lease agreements with companies charging them on a per unit (bed) basis. •Collect rental deposit of 2-4 months•Subsequent rentals made payable monthly in advance.

Main costs of operation: •Maintenance costs eg. cleaning, pest control and security•Entertainment expenses eg. Organise festivals

CenturionStudents’ dormitory (Defensive business segment)

1) RMIT Village (Australia)• Student accommodation with a capacity of about 456 beds

• 5-minute tram ride or a 10-minute walk to RMIT University and is just across the road from the University of Melbourne.

Source: GOOGLE MAPS, UOB Kay Hian, housing.rmit.edu.au


1) RMIT Village (Australia)

A steady source of tenants•70%: RMIT University; 30%: University of Melbourne•100% occupancy for last 3 years•Positive rental reversions annually

Room for expansion. Car park building ( 2,050sqm of freehold land ) next to RMIT VillageLooking to redevelop it


1) RMIT Village (Australia)

5881.62230 (est)2,050Redevelopment of carpark

5883.224564,000RMIT Village

Derived monthly rental/bed (S$)

Annual net profit (S$m)

No. of beds

Land size (sqm)


2) UK dormitories (1,906 beds)

CenturionWhy invest in Centurion?

- Most of the negatives have been factored in?

Concerns about industry oversupply

CenturionWhy invest in Centurion? Concerns about oversupply over amplified


73% of total new beds coming into the market are temporary dormitories

As such, we believe the government can easilycontrol the number of dormitories in the market should there be an oversupply.

The leases for 30.000-40,000 temporary beds are expiring in the next few years.

If not renewed, the removal of these temporary beds could also help ease the supply gut.

Centurion


30 years (wef 2013) 100%Woodlands site


23 years (wef2015)51%Jalan Papan

Near 100%6,300Freehold45%Westlite Mandai

>85%8,6003+3+3 years

(wef 2008) 100%Westlite Tuas

Near 100%8,60060 years

(wef 1998) 100%Westlite TohGuan

Occupancy rateNo. of bedsYears lease% ownedName of Dormitory

Source: Centurion

Most of Centurion’s dormitories are permanent.


Aggressive tender bids of >S$150/bed/month vs current market rental rates of S$300/bed/month

Have not included construction cost

Short lease term

Limits these new entrants ability to engage in aggressive pricewars

CenturionWhy invest in Centurion?Concerns about oversupply over amplified

Introduction of supportive measures for purpose built dormitories•Increased crackdown on unauthorised dormitories:

From Dec 14-Mar 15, the Singapore Civil Defence Force cracked down on 68 unauthoriseddormitories that either failed to meet fire safety standards or were illegal. This came on the back of two fire accidents at Geylang in Dec 14 and Apr 15 that killed six foreign workers.

• Freeze on temporary dorms in 12 estates URA issued a circular in Nov 14, stating that it will no longer allow new temporary dormitories to be built in 12 industrial estates, due to the “significant strain on existing infrastructure”.



- Still a highly recurring business model (and cash flow generative too)



- Still a highly recurring business model (and cash flow generative too)

- Value unlock in the future?o Spin off?

o Earlier in Jan 15, Centurion tried to explore a REIT listing for its workers accommodation assets. However it failed as the SGX responded that the proposed listing would be considered a chain listing under the listing rule. Hence Centurion has decided to defer and reconsider the proposed REIT listing at a later stage.

o Disposal of properties?


2) UK dormitories (1,906 beds)

Rising institutional interest in student accommodation assets in UK- According to CBRE, investment in UK student accomodation exceeded £2b for the third consecutive year, reaching £2.37b (+7.7% yoy) in 2014. - A shift in investor profiles for these assets, with the recent acquirers coming from institutional investors such as La Salle, Henderson and Blackrock.

2015 is set to be another record year for the UK student housing market with investment expected to hit a record £3.3b in 1Q15. Some of the recent transactions include:

a) In Mar 15, Canada’s biggest pension fund, Canada Pension Plan Investment Board (CPPIB), acquired Liberty Living (which holds 16,700 rooms in 40 residences across UK) for about £1.1b.

b) In Mar 15, The Carlyle Group sold its Pure Student Living (which holds 2,170 rooms across five prime central London sites, catering to the upscale market) to LetterOne Treasury Services for £532m.

c) In Mar 15, Round Hill Capital LLC sold its Nido portfolio (2,375 beds in London’s King’s Cross, NottingHill and Spitalfields neighbourhoods) for £600m.

Centurion

Expect adjusted net profit to grow as Centurion’s portfolio of beds expand

Expect the impact from the renewal of the Tuas dormitory in 2017 to be partially offset by contributions from newly completed dormitories such as Jalan Papan

Adjusted net profit to owners

19.1

48.5

34.640.8 43.2

-

10.0

20.0

30.0

40.0

50.0

60.0

2013 2014 2015F 2016F 2017F

S$m

17.3Development profit

Centurion

Drop in 3Q15 net profit due to- higher financing cost for the UK student dormitories, Westlite Woodlands, and the MTN note issued in Jul 15.

9M15 net profit formed 76.9% of our full year forecast.

7.4

9.3

15.824.6

3Q15

-7%7.9Net profit to equity owners

-5%9.8Profit before tax

+10%14.4Gross profit+18%20.9Revenue

Yoy % change3Q14S$m

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Summary1. Concerns about industry oversupply over amplified2. Still a highly recurring business model3. Potential value unlock in the future?

CenturionBUYTarget Price:S$0.66Upside: 61.0%

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Centurion

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