|CIMB||MAYBANK KIM ENG|
Unlocking value from mature China malls
■ CAPL is selling its stakes in 20 China malls, realising a net gain of S$75m.
■ Unlocking value of mature assets while reconstituting portfolio to tap future growth opportunities.
■ Maintain Add and TP of S$4.25.
Selling stakes in 20 China malls
● CAPL today announced it is selling its share of interest in 20 malls in China as part of its move to reconstitute its retail asset portfolio in China. The total agreed property value of Rmb8,365m (S$1,705.9m) is 6.7% higher than the Jun 17 valuation of Rmb7,842.2m (S$1,599.3m)
SPH REIT (SPHREIT SP)
A pedestrian first quarter
Results in line, maintain HOLD
We left our forecasts unchanged following SPH REIT’s 1QFY18 results, which were in line, with DPU flat YoY at S1.34cts. Its two commercial property assets remained fully occupied, while Paragon’s 10.6% rental reversion against earlier retail sales weakness reflects an expected slow recovery, despite more optimistic macros. We continue to see Paragon (82% of its AUM) as a good proxy into an earlier recovery for prime Orchard road rents. The share price continues to anticipate potential acquisition upside. We also see limited upside catalysts but some downside risk to our TP offset by the 5.2% yield. Maintain HOLD and SGD1.00 DDM-based TP (WACC: 6.9%; LTG: 1.5%).
Healthcare - Overall
Checking the pulse for 2018
■ Healthcare sector underperformed the STI in 2017, largely due to new hospitals.
■ We think such gestation costs are priced in, but expect sector sentiment to improve when these overseas hospitals stabilise, and stronger catalysts emerge.
■ Maintain Neutral; our top large and small cap picks are IHH and HMI, respectively.
■ Three main healthcare changes to watch for: opening of more public hospital beds, shift from hospital-centric model to primary care, and introduction of fees benchmark.
■ 2018F key theme lies in overseas execution, with M&As as the secondary theme as rising competition could drive industry consolidation.
Finally starting to move forward. Fu Yu announced on that it planned to spend S$20.3m to privatise 71%-owned Bursa-listed LCTH Corp (LCHT MK, Not-rated). This move follows a change of a major shareholder, Ng Hock Ching, who exited his >12% stake in the company last year. This sequence of events indicate to us that the company may be ready to embark on its next phase of growth, both organically and through M&A, with the S$92m cash on its balance sheet.
Fu Yu is one of the largest manufacturers of high precision plastic parts and moulds in Asia, with manufacturing facilities in Singapore, Malaysia and China. It began paying 1.5 SG cents dividend from FY15 onwards, translating to an attractive yield of 7.5%. Its net cash position of S$92m (12 SG cents/sh or 62% of its current market cap) may allow it to fund inorganic growth. Alternatively, it is an attractive privatisation candidate given its ability to generate healthy free cash flows every year.
Valuation & Action
Downside protected by >5% dividend yield. Overall, the risk-reward dynamics for Fu Yu is favourable to us given its attractive dividend yield, healthy balance sheet and recovering earnings growth. Free cash flow is enough to sustain its 1.5 SG cents dividend, which amounts to a total annual cash outflow of S$11m. Meanwhile, free cash flow generated averaged around S$18m per annum. Even if we were to account for a lower dividend of 1.0 SG cents due to the S$20m cash outflow to privatise LCTH this year, it would still offer a decent dividend yield of 5.0%.
Focusing on growth. Business is beginning to improve as it reported two consecutive quarters of QoQ earnings. It has highlighted the medical, green products and security sectors as potential growth opportunities. In addition, Fu Yu has made inroads into the automotive sector, which we believe may contribute more meaningfully over the next 2-3 years.
Competitive landscape remains challenging and may lead to margin erosion. Forex risk as around 80% of its sales are in USD while expenses are in USD (50%) and RMB, MY, SGD.
Focus on staying dominant in core cities
Maintain BUY and TP of S$4.35.
We continue to see value in CapitaLand Limited (CAPL) as we anticipate strong catalysts in the medium term to drive its share price higher. We believe that market has not factored in potential higher dividend payouts given the group’s upward trajectory in recurring earnings. Stock remains cheap at 0.8x P/NAV compared to sector’s average of 0.9x. BUY!
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