Excerpts from analyst's report
UOB Kay Hian analyst: Brandon Ng, CFA
|Using Valuation Screens To Pick Potential Winners
Key Picks are Centurion, Singapore O&G and Valuetronics
Using our in-house guidelines, the research team picked up three stocks that could be a winner in the next 12 months. Centurion’s management is conducting share buybacks at current price, Singapore O&G’s (SOG) recent acquisition of the practice of Dr Joyce Lim will put SOG on a new growth trajectory and Valuetronics’ valuation is backed by net cash position of S$0.29/share.
» We use a simple valuation screen to sieve out potential winners. We are limiting the Small-Mid cap (SMC) definition to companies that have more than S$100m market capitalisation but less than S$1b with average daily trading value of S$250,000 for the last three months. These criteria have yielded us 84 companies as compared with the total number of listed companies at 717. Applying simple PE ratio, P/B ratio and dividend yield screens, we pick out names that stand out based on their unique value preposition.
» Why the limitations? We define SMC as a company with market capitalisation of between S$100m and S$1b and that has resulted in 219 potential companies, more than 30% of the total listco. However, we also view trading liquidity in the stock as one of the important criteria for our investors as this would allow them to: a) accumulate a meaningful stake in a SMC company, and b) exit a position with the most optimum price possible. Hence, these companies must have at least S$250,000 worth of average daily trading value for the last three months.
» Beyond the simple ratios. Applying PE ratio, P/B ratio and dividend yield to select stocks is a straightforward methodology to pick stocks but we think investing one’s money should be slightly more sophisticated than that. We need to understand fully the inner workings of the business model, numerous meetings with the management so as to unravel its unique value preposition for our investors.
» Not all apples are the same. Within the 24 unique names that came out of the three categories (Top 10 each), UOB Kay Hian has coverage on nine of these companies. While other companies trading at a depressed valuation may be due to weak earnings outlook, corporate governance, or lack of corporate access, we will continue to look for winners to the best of our abilities for investors to put their money to work.
» Centurion Corp (CENT SP/BUY/S$0.405/Target: S$0.66)
Centurion is trading at 0.7x FY16F P/B and 8.3x FY16F PE. Centurion has recently repurchased its shares from the market at an average price of S$0.42/share. With the exception of Westlite Woodlands (TOP in Jul 15), Centurion’s workers’ dormitories continue to enjoy very robust occupancy rates of more than 90% with sustained rental rates at S$250-300/bed/month. 25-30% of its earnings are derived from the highly defensive student accommodation business. Centurion has four student dormitories (three in the UK, one in Australia) which have typically maintained near-full occupancy rates in the last few years and enjoyed positive rental reversions annually. (Loke Chunying)
» Valuetronics – (VALUE SP/BUY/S$0.42/Target: S$0.54)
Valuetronics is trading at a compelling ex-cash FY16F PE of 3.0x with a dividend yield of 8.3%. Valuetronics's current net cash and holdings in short-term investable grade is worth S$0.286/share. The company has been generating S$0.07-0.12/share of free cash flow annually in the last two years, which could see its share price floor rise over time. In the light of the recent takeover offers, investors may be taking a re-look at Valuetronics as a potential takeover candidate. (Brandon Ng)
However, there is one company under our coverage that could be a winner but is not within the valuation screens - Singapore O&G.
» Singapore O&G Ltd – (SOG SP/BUY/S$0.70/Target: S$0.90)
SOG’s recent acquisition of the practice of Dr Joyce Lim will put SOG on a new growth trajectory. This will enable SOG to expand its offering of services complementary to women’s healthcare. Dr Joyce also holds one of the difficult-to-obtain licenses that allow her to train other aesthetic professionals who can eventually serve its patients at its eight clinics across Singapore. After accounting for the new shares issued for the acquisition, we estimate a post-acquisition fully diluted EPS enhancement of 27-29% and a conservative target price of S$0.90, based on a 20% discount to Raffles Medical. (Andrew Chow).
Full report here.