Excerpts from analysts' report
DBS Vickers analysts: Janice CHUA, YEO Kee Yan, LING Lee Keng + Singapore Research Team
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Top 10 Stock Picks
China Merchant (Price: S$0.99, TP: S$1.54)
We like China Merchants Holdings (Pacific) for its stable earnings outlook, as a pan-China toll roads operator, and potential acquisition-driven expansion, given its strong China Merchants Group parentage. The recently completed Jiurui Expressway acquisition and proposed acquisition of three toll roads in Guangxi Zhuang Autonomous Region should help propel the Group’s top and bottom lines in the medium to long term, and possibly pave the way for CMHP to seek a dual-listing in HK in the future. The stock offers an attractive dividend yield of 6.5%, and our TP of S$1.54 is based on DCF.
Frasers Commercial Trust (Price: S$1.52, TP: S$1.79)
FCOT’s portfolio enjoys high occupancy of 96.5% and a long WALE of 3.9 years. In addition, >30% of leases have annual rental escalations of c.3%, which provides in-built income growth. With no debt expiring until FY17, and close to 80% of interest costs hedged into fixed rates, the Trust is well positioned to ride out the economic downturn in Australia, as well as near-term interest rate volatility. FCOT offers investors compelling dividend yields of 6.6-6.9%.
M1 (Price: S$3.33, TP: S$3.60)
Mobile data re-pricing is expected to benefit M1 as 61% of its postpaid customers are on tiered data plans (vs 58% in 2Q14) with 22% of users exceeding their data bundles. The continued adoption will be crucial in supporting M1’s postpaid ARPU. On the entry of a fourth telco, we assumed 100% probability and modelled 10% adverse impact on M1’s revenue in 2022. The stock offers attractive yield of c.6%.
Sheng Siong (Price: S$0.835, TP: S$0.91)
We believe that SSG will deliver higher margins as fresh product sales mix improves over time. SSG is on course to open four new stores this year (ahead of our expectation), bringing its store network to 38 in 2H15. Longer-term growth opportunities lie in China. New income stream in FY15F will come from its newly acquired property in Tampines. Supermarket businesses are non-cyclical and therefore provide stable earnings and dividends to shareholders. SSG offers an attractive dividend yield of about 4%, as it pays out 90% or more of its earnings as dividends.
Mapletree Greater China Commercial Trust (Price: S$1.00, TP: S$1.12)
MAGIC will benefit from positive outlook for Festival Walk on the back of continued interest from new brands and limited exposure to Chinese tourists. Over 4QFY15 (FYE Mar15), the trust achieved healthy rental reversions, up 22% for Festival Walk (Retail) and 30% at Gateway Plaza. Meanwhile, 4Q15 tenant sales at Festival Walk jumped 11% y-o-y with footfall registering a 7% increase. Going forward, despite an expected decline in the number of mainland Chinese tourists to HK on the back of tighter visa restrictions, Festival Walk should continue to do well as it is positioned as a suburban mall, and has limited exposure to mainland tourists (estimated 11-13% of its sales).
ST Engineering (Price: S$3.26, TP: S$3.80)
ST Engineering is a proxy to recovery in US, as about 24% of total sales is derived from the US. A stronger US dollar is also positive to STE's earnings. Orderbook of about S$12.2bn remains relatively stable and covers close to two years of revenue and secures visibility. We expect earnings performance to improve in FY15 after a weak FY14. Attractive dividend yield of around 4.6% remains the key positive support for the stock, and is underpinned by strong operating cash flows and a healthy balance sheet (net cash of around S$713m as of end-1Q15).
SIA (Price: S$10.95, TP: S$12.80)
SIA‘s ROE has been low, averaging 3.5% in the last 5 years, hit by high fuel cost, low yields and intense competition in the industry. With net cash of S$3.9bn, there is potential upside to ROE from optimisation of its capital structure. Near term, fuel savings would kick in and drive SIA’s earnings performance in future quarters, raising ROE to 5.8% in FY16. We project SIA to pay out DPS of 40Scts for FYE Mar 16, given the improved profit outlook and its strong cash position. This equates to c. 60% payout and translates to a decent dividend yield of 3.4%. Potential upside could come from capital reduction or bonus dividend payout. SIA’s share price has lagged behind its regional peers due to the drag on earnings from fuel hedging losses. Share price should re-rate as benefits from the lower cost of fuel flows through its earnings. 
Del Monte (Price: S$0.37, TP: S$0.50)
Following the acquisition of US-based Del Monte Foods Inc. (DMFI), DMPL has posted two consecutive years of losses arising from transaction charges, acquisition-related expenses, and high interest expenses amid a softening US business. These are now behind us and we expect DMPL to post a turnaround in FY16F to register a net profit of US$52m. We expect re-rating and valuation discount gap against peers to narrow as performance materialises. We currently peg its S$0.50 TP to a conservative 12x PE. Risks exist but low valuation for a well-known brand seems too attractive to ignore.
CapitaLand (Price: S$3.35, TP: S$4.11)
CAPL, positioned mainly in Tier 1/2 cities in China, expects a steady return in buyers and is looking to launch close to c.7,600 units to capture the recovery in price trend. With 45% of its assets in China, Capitaland is a clear proxy to benefit from the easing monetary policy in China. Management has highlighted opportunities within its integrated developments across its key markets of China and Singapore. Its ongoing retail mall developments remain on track to complete over 3 years, and will underpin a steady growth in recurring earnings. We believe that 2015 is an appropriate time for the company to look at asset recycling of some of the stable assets (Westgate Mall, CapitaGreen upon TOP and retail malls in China) in its portfolio to its REITs to optimize capital values and lock in gains. This should also help to close the gap between share price and RNAV. The stock is undervalued, with upside to its ROE from value unlocking and recycling.
Fraser Centrepoint Ltd (Price: S$1.75, TP: S$2.36)
FCL has good brand visibility and strong market niche in core markets in Singapore, China and Australia. 59% of its revenue is recurring, with a longer term target of 60% - 70%. It enjoys strong income visibility from locked-in sales from development projects, with 15% of its assets in China. With a stable of listed REITs which are trading at/above NAVs, we believe that its asset recycling strategy will be a key driver for NAV growth. The group has a good portfolio of stabilised assets in hospitality, office and retail sectors which can be sold to its REITs. The group has proposed the sale of 357 Collins Street to Frasers Commercial Trust. Stock is undervalued, trading at 0.7x P/BV.
