Local Equities

AEM Holdings (Sept 18: $1.21)

MAINTAIN BUY. As a result of stronger-than-expected momentum, AEM has raised FY2019 revenue guidance for the third time this year. FY2019E revenue guidance is now $285 million to $305 million, up from $265 million to $280 million. We believe our new revenue estimate is conservative as AEM has received $280 million of orders year to date to be fulfilled by the end of the year. The increase in guidance is driven by stronger-than-expected order momentum of HDMT and STHI test handlers, owing to the rising significance of system level test at the customer. In response, we raise FY2019E earnings by 10%. Although FY2020-FY2021E earnings are largely unchanged, we continue to see upside from new projects. Price target of $1.50, based on 3.2x (previously: 3x) blended FY2019-FY2020E P/BV. FY2020 guidance, when released in January to February 2020, should give us a stronger basis to forecast contributions from the hybrid project and Huawei. Strong 2020E orders are a catalyst for the stock, while a key risk is a sharp drop in the demand of the key customer’s chips. — Maybank Kim Eng (Sept 16)

Fu Yu Corp (Sept 18: 22.5 cents)

MAINTAIN BUY. Fu Yu continues to put in effort to optimise its operations. Three key initiatives that will lead to cost savings and growth include: (a) liquidation of a loss-making joint venture (JV) in Malaysia, (b) lease renewal for its Singapore plant, and (c) closure of its Shanghai factory. Fu Yu estimates the one-time expense for the Shanghai plant closure at $5.5 million and this could drag 3Q2019 net profit into a loss. However, we think the share price could be supported by a higher dividend of 1.7 cents for 2019 (2018: 1.6 cents), which will not be cut due to the one-off expense. Fu Yu offers a high and sustainable dividend yield of 7% for 2018 and we expect this to increase to 7.4% in 2019 on the back of improving net profit, free cash flow (FCF) and strong net cash of $82.4 million (11 cents a share) as at 2Q2019. Price target of 28.5 cents, based on 5.7x 2019F EV/Ebitda, pegged to peers’ average. It implies 2019F dividend yield of 7.4% and ex-cash PER of 7.7x. — UOB Kay Hian (Sept 16)

Keppel DC REIT (Sept 18: $1.97)

MAINTAIN BUY. Keppel DC REIT (KDCREIT) has proposed two acquisitions in Singapore. The first is for a 99% interest in Keppel DC Singapore 4 (KDC SGP 4) at an agreed property value of $384.9 million. This works out to an expected stabilised net property income (NPI) yield of 7.5%. The second proposed acquisition is for 1-Net North Data Centre at an agreed value of $200.2 million. Expected initial NPI yield is attractive at about 9%, and the property has a triple-net master lease with 16.8 years remaining. We are positive on this proposed deal, given that it will consolidate KDCREIT’s positioning in the Singapore data centre market. Despite funding these acquisitions largely with equity, KDCREIT’s pro forma FY2018 DPU is expected to be accretive at +9.4%, or +12.4% if tax transparency is granted on KDC SGP 4. Furthermore, KDCREIT’s pro forma aggregate leverage is expected to decline from 31.9% to 30.3% post-completion. After adjustments, our dividend discount model-derived fair value estimate increases from $1.93 to $2.08. We recommend unitholders to subscribe for the preferential offering. — OCBC Investment Research (Sept 17)

Mapletree Industrial Trust (Sept 18: $2.40)

HOLD. Mapletree Industrial Trust (MIT) announced that it has formed a 50:50 JV with its sponsor Mapletree Investments for the acquisition of 10 powered shell data centres from Digital Realty for a purchase consideration of about US$557.3 million ($774.2 million). At the same time, this JV has also formed an 80:20 JV with Digital Realty for the co-investment in three fully fitted hyperscale data centres (turnkey portfolio) for a purchase consideration of US$810.6 million. Separately, MIT has launched a private placement exercise to raise gross proceeds of at least $350 million. The indicative issue price is between $2.211 and $2.265, representing discounts of 2.8% to 5.1% to MIT’s last closing price prior to the announcement. The bulk of the gross proceeds will be used for the aforementioned acquisitions, with the remaining acquisition cost to be funded by debt. On a pro forma basis, MIT’s FY2019 DPU and NAV are expected to increase 3.5% and 3.3% respectively, while pro forma aggregate leverage will increase from 33.4% to 38.5%. Fair value estimate of $2.29. — OCBC Investment Research (Sept 17)

Sembcorp Industries (Sept 18: $2.18)

BUY. Sembcorp Industries’ profits are largely dependent on the energy business, which looks positive from the India power market outlook. The energy business contributed 1H2019 net profit of $177 million (+14% y-o-y), or 93% of Sembcorp’s overall net profit. Sembcorp’s India power business accounted for 18% of overall group profit. Urban business accounted for 9% of 1H2019 group net profit. Subsequent 2H2019 earnings should be well supported by a strong Vietnam order book and expected recognition of income from the sale of residential developments in China. The bulk of the value is derived from the energy business (59% share), with subsidiary Sembcorp Marine taking another significant 35% share. A 20% conglomerate discount is also factored in. Price target of $2.68, 21% upside plus 2% yield. Price target implies a FY2020F PER of 9.9x, about one standard deviation (SD) below the five-year historical average of 13.4x. Catalyst to its share price includes news flow on order wins by Sembcorp Marine. — RHB Research (Sept 18)

Sheng Siong Group (Sept 18: $1.14)

MAINTAIN SELL. Supermarket sales bucked the declining trend again as sales in July rose 0.8% y-o-y, recovering together with medical goods and toiletries (+1.9%) sub-index. But as the rebound was due to the low-base effect (July 2018: -3.4%, 7M2018: -1.0%), plus we have yet to see a sustained substitution effect from purchasing ready meals (meals prepared in restaurants, fast food outlets, hawker centres and so on) to home-cooked meals, we think it is too early to call for a recovery in demand for supermarket goods. Although consumers held back spending on retail discretionary items, this cautious behaviour has yet to translate into poorer F&B sales. We make no changes to our forecasts as we have adjusted for stronger new stores contribution in the near term. We remain negative on such long-term catalysts. DCF-based price target unchanged at 96 cents. — Maybank Kim Eng (Sept 12)

Singapore Tech Engineering (Sept 18: $3.96)

MAINTAIN OUTPERFORM. We hosted Singapore Tech Engineering (STE) on a non-deal roadshow in the UK, where CEO Vincent Chong highlighted progress in achieving strategic targets and expressed confidence in driving earnings growth. Management believes that STE is gaining traction in SmartCity solutions, as reflected by its growing order book, particularly from overseas contracts. The expected completion of Newtec’s acquisition in 4Q2019 could further enhance its Satcom capabilities. International defence represents a significant opportunity, and its contract with the US Navy for 1+2 Polar Security Cutters worth up to $2.6 billion validates STE’s track record. The integration of MRA Systems is tracking well with expectations, and its earnings could grow further with ramp-up of A320neo deliveries and synergies from providing maintenance, repair and overhaul services. Despite investments to drive earnings growth, management remains committed to DPS of 15 cents. Price target of $4.60. — Credit Suisse (Sept 13)

UnUsUaL (Sept 18: 28.5 cents)

BUY (initiating coverage). UnUsUaL is an Asian concert promotion and event production leader. It has grown since listing into an entity with FY2019 earnings of $13.2 million (compound annual growth rate (CAGR): +53%). Given more entertainment opportunities ahead, this should help grow a conservative FY2020F-FY2022F net profit after tax CAGR of 20%. Its share price has also corrected significantly to a reasonable valuation. UnUsUaL has a scalable business model. It can leverage strong relationships with various artistes, and is able to host concerts in various venues globally, especially China. Despite a weak 1Q2020, the company is likely to enjoy a strong 2Q2020F, and an even stronger 3Q2020F due to the pipeline ahead. The group is looking to acquire similar businesses in Malaysia and Taiwan — that is, similar firms with good track record, profitable and accretive to it immediately. UnUsUaL is also trading at a much lower multiple when compared with larger global peers, which makes it an attractive target. Price target of 42 cents, 50% upside. — RHB Research (Sept 17)

Wilmar Int’l (Sept 18: $3.84)

MAINTAIN BUY. The disappointing result in 2Q was caused by low crush margins due to reduced pig stocks in China and implicitly a lower demand for soybeans, owing to the African swine fever. Moving into 3Q, a stronger feed demand from the poultry and aqua sectors should partially offset the reduced demand from the pork sector as consumers substitute pork meat with other sources of proteins. We think the additional 5% tariff on US soybeans implemented on Sept 1 would not have any significant impact on Wilmar as the group has been purchasing Brazilian soybeans since the initial 25% tariff introduced in July 2018. We remain upbeat on the stock, as we believe the worst is behind us, while the outlook for 2H2019 looks rosier on the back of improving soybean crush utilisation and increasing crude palm oil (CPO) prices. The upcoming China IPO would continue to support the share price in the near term. Price target of $4.50, 17% upside and about 3% dividend yield. — RHB Research (Sept 13) E