Excerpts from UOB KH report
Notable outperformers include Food Empire (+25.5% mom), Innotek (+12.9% mom) and Yangzijiang (+8.6% mom) while our short call on SIA (+21.2% mom) and Thai Bev (-10.9% mom) worked against us.
For Mar 21, we add Frencken and China Sunsine while removing First Resources and BRC Asia.
• In-line performance for Feb 21. Our portfolio rose 1.4% mom in Feb 21 vs the FSSTI’s gain of 1.6% mom. Notable outperformers include Food Empire (+25.5% mom), Innotek (+12.9% mom) and Yangzijiang (+8.6% mom). New entrants to our portfolio last month did well, with Innotek up 12.9% mom and GHY rising 7.4% mom.
• Adding Frencken and China Sunsine. We like Frencken as its 2H20 results showed strong earnings momentum and margin expansion on the back of robust demand for semiconductor components. In our view, this should lead to higher ROEs for the company in 2021.
For China Sunsine, its 2H20 results were compelling, showing that it is benefiting from its increased capacity as well as higher ASPs, thus allowing it to capture the recovery in China’s auto industry.
• Removing First Resources and BRC Asia. While construction activities have improved, we remove BRC Asia from our portfolio given the lack of near-term catalysts. We also remove First Resources at this juncture as 1H21 earnings momentum will be uninspiring in our view, given the company’s guidance that, prior to recent CPO price increases, it had sold a meaningful amount of its 1H21 production.
• Gaining from higher capacity and elevated ASPs. The good set of results was attributed to management’s perseverance with continued investments to expand capacity over the past few years, despite the downward trend in rubber accelerator prices.
The move is now paying off, with market share for Sunsine more entrenched, alongside rising demand for new vehicles in China.
Furthermore, ASP of rubber accelerators, the main earnings driver for Sunsine, has continued to gain ground, in tandem with aniline, the major feedstock for rubber accelerators, due to higher crude oil prices. The average price of aniline has risen an estimated 17% qtd as at 25 Feb 21 to Rmb8,372/tonne, a 29% sequential increase over 4Q20’s average.
• Good proxy to recovering China auto sector. Sunsine derives the bulk of its sales from China (2020: 69%, 2019: 61%), which has been strengthening since Mar 20.
The Chinese economy is seeing robust growth due to government stimulus measures.
• Maintain BUY with an unchanged target price of S$0.58. We keep our valuation peg at 3.5x EV/EBITDA, +1SD of its 5-year average.
The target price implies a 2021F PE of 9.6x and ex-cash of 4.1x.
This represents a steep discount to larger peers, which are trading at 7.7x forward EV/EBITDA and 15.3x 2021F PE.
Full report here.