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09 September 2024

In Singapore, plenty of companies, including big-name foreigners, operate in the semiconductor value chain. AEM Holdings stands out as a home-grown player and it counts Temasek Holdings as its No.1 shareholder. This was the company, the only one, that Indian Prime Minister Narendra Modi visited on 5th Sept, the second day of his 2-day official visit to Singapore. L-R: AEM non-executive chairman Loke Wai San | India PM Narendra Modi | Singapore PM Lawrence Wong | AEM CEO Amy Leong | Singapore Minister for Home Affairs and Minister for Law, K Shanmugam. AEM supplies chip-testing equipment to Intel Corp and, increasingly from end of 2024, to top global fabless customers which it has won over after much validation tests. AEM has recently affirmed its projection of  triple-digit millions in revenue from new customers in 2025 as production of their AI chips start. After his visit to AEM, PM Modi posted on X:

On its LinkedIn page, AEM posted: "It was exciting as we showcased our leading-edge Burn-in, Final Test, and System Level Test systems powered by PiXL thermal management technology during the tour.

"We are proud to play a pivotal role and serve as a critical node in the global semiconductor value chain. Hosting these esteemed dignitaries was a proud moment for AEM, reinforcing our commitment to driving innovation in the semiconductor industry."

To recap the significance of new customers in 2025, here's an illustration with text from AEM's 1Q2024 business update: 

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08 September 2024

THE CONTEXT • That bar of Cadbury and Toblerone at the supermart has cost more. Producer Mondelez said it raised chocolate prices up to 15% last year and was considering additional price hikes in 2024.   • Similarly, for Nescafe, as coffee bean prices have risen. These are not isolated examples. Throughout the food industry, higher coffee and cocoa ingredients (chart below) have translated into higher prices of end-products.  • There's usually a time lag between higher end-product prices and raw ingredient price hikes. That's why gross margins of Singapore-listed Delfi and Food Empire get compressed initially but can be expected to normalise later.  At this juncture, analysts are adjusting stock recommendations based on the margin impact, as typified by UOB KH's reports recently on Delfi and Food Empire. See excerpts below.... • In the case of Food Empire, analysts and investors are yet to comprehend how an unusual but significant entry of a strategic investor recently could lead to large benefits for the company. For more on Ikhlas Capital, see The Edge article.To recap, private equity fund Ikhlas Capital will inject US$40 million into a special purpose vehicle wholly-owned by Food Empire in exchange for 5-year redeemable exchangeable notes at 5.5% annual interest. Food Empire said on 20 Aug 2024 it will work with Ikhlas Capital "to develop the Group’s long-term ASEAN strategy with the aim of value creation for all stakeholders. "The Group will tap into Ikhlas Capital’s vast network to open doors to valuable partnerships and business opportunities in the region". Iklhas Capital, by the way, has exposure to the unusually structured takeover offer currently on the table for Singapore-listed Silverlake Axis.

Excerpts from UOB Kay Hian reports

Analysts: John Cheong and Heidi Mo

• Continued margin pressure from higher coffee prices. The global coffee market is expected to face further price increases next year.

The ongoing Russia-Ukraine conflict may also add to logistics and distribution costs.

FEH will need time to stabilise prices to maintain revenue and margins, which are partly determined by varying stock levels amongst retailers, before it can raise prices in the Russia market.

We therefore expect gross margins to remain muted at 29-30% for 2024-26.

• Leveraging on strategic partnership with Ikhlas Capital. FEH plans to increase leverage by issuing US$40m of five-year redeemable exchangeable notes at 5.5% annual interest with private equity fund manager Ikhlas Capital in the form of a special purpose vehicle.

Beyond capital injection for future expansion plans, management expects Ikhlas Capital’s local expertise and network in Southeast Asia to help the group accelerate growth and scale both regionally and internationally.

Ikhlas Capital chairman Nazir Razak (second from left) with Food Empire chairman Tan Wang Cheow (in jacket). Photo: LinkedIn
• Expanding manufacturing footprint; well-positioned to capture rising demand for instant coffee. FEH has announced plans to build a second snack production factory in Malaysia by 1H25, and its first coffee mix production facility in Kazakhstan by end-25.

According to Allied Market Research, the global instant coffee market is expected to grow at a CAGR of 6.4% to reach US$60.7b from 2023 to 2032, attributable to busier consumer lifestyles and changing consumer preferences.

By region, we note that Southeast Asia has the largest growth potential with a projected 3.7% CAGR to reach US$6b by 2029, while South Asia is the fastest growing at 6.7% CAGR to reach US$0.9b in the same year.

Given FEH’s growing market presence in these markets, we think that FEH is well-positioned to meet the rising global demand for instant coffee.

Full report here.

• Cocoa prices still above pre-pandemic levels... Cocoa futures continue to trade near US$9,800/tonne, around three times the price a year ago.

This is driven by persistent worries over tight supply and dry weather in the key producing regions of West Africa.

During the briefing, management shared that the current prices are unsustainable, and expects farmers to be encouraged to improve cocoa production.

Management is of the view that prices near US$4,000/tonne are likely fairer for stakeholders.

To safeguard its margins, Delfi has implemented pricing adjustments in May 24, reduced trade promotions and practiced tight operating cost management.

• …but margin contraction is imminent.  Additionally, it has a prudent practice of hedging its raw materials as far forward as possible. However, we note that any future price increase would depend on competition and overall market condition.

With cocoa prices having maintained elevated levels ytd, we opine that margins will continue to face pressure.

• Continuing to make strategic investments and launch new products. Delfi continues to invest in initiatives aimed at building its brands and strengthening routes-to-market, recognising these efforts as strategically crucial for long-term growth.

It has also committed to US$25m-30m in capex spend for capacity expansion in 2024.

Additionally, management may consider pursuing inorganic growth via acquisitions.

Full report here.

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05 September 2024

THE CONTEXT • Singapore-listed ComfortDelGro has an unquenchable appetite for overseas business as its latest inroad into the Australian market shows. • Its 8-country footprint encompasses Sweden, UK, Ireland, Australia, New Zealand, China, Malaysia, and Singapore. It operates buses, taxis, coaches, trains, ambulances and rental vehicles. •  ComfortDelGro's latest triumph is in winning a A$1.6 billion contract to operate buses in Victoria, Australia. A listing of the places that ComfortDelgro's operations extend to in Australia (below) illustrates the penetration of its network. • CGS-CIMB's latest report rates the stock (market cap: S$3.1 billion) an "Add" with a $1.70 target price. Read more below....

Excerpts from CGS-CIMB report
Analyst: ONG Khang Chuen, CFA

■ CD’s bus tender wins in Victoria, Australia will grow its footprint there by 30%. The contracts worth A$1.6bn commence in Jul 2025F and run for 10 years.  COMFORTDELGRO Share price:  $1.42 Target:  $1.70 ■ We expect minimal impact to recurring EPS from these contract wins; though CD will record a one-off gain of S$14m from the sale of its bus depots. ■ We reiterate our Add call with a TP of S$1.70, based on 16.2x FY25F P/E. Aside from buses, ComfortDelgro also operates train services. In Singapore, SBS Transit, a 74.4% subsidiary of ComfortDelGro, operates the North-East MRT Line and the Downtown Line. Photo: Company

 ● ComfortDelgro (CD) announced today (4 Sep 2024) that it has been awarded 3 bus contracts in Victoria, Australia, valued at A$1.6bn (S$1.4bn) in total. These contracts will commence in Jul 2025F and will run for 10-year terms.

● With the latest win, CD not only retains its existing contracts but also expands its services in the west and northwest regions. This signifies a 30% growth in CD’s Victoria public bus operation which will account for 20% of Melbourne’s metropolitan network, according to CD.

● CD will acquire an additional 86 buses, bringing its total fleet for Melbourne metropolitan contracts to 369. The financing for the buses and depots included in the new tenders will be provided as part of the contracts, and CD expects a full transition to zero-emission bus (ZEB) operations prior to the conclusion of the contract term.

● In addition, as a result of these contract wins, CD will transfer ownership of existing bus depots, leading to a one-off gain from the sale amounting to S$14m.

● Despite the increased routes, we think the impact on recurring EPS from this contract win will be minimal, as CD has previously indicated that margins could be slightly compressed (compared to previous round of tender) due to competitive pressure.

● Nevertheless, we think the sustained momentum in securing overseas contracts could bode well for CD’s share price.

In the past two years, CD has successfully secured tenders in Australia, which include the retention and expansion of metropolitan Sydney services, the retention and expansion of Outer Metropolitan NSW services, and growth in its Darwin public bus services portfolio.

Full report here

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Leong Chan Teik

03 September 2024

Across the Causeway is a thriving oil & gas industry, where oil majors are busy producing and exploring for oil. The offshore support vessels (OSV) needed are in short supply, as a result of a lack of newbuilding after an oil crisis and during the pandemic, hence the elevated charter rates that owners now can command. That's evident in the profitabilities of various OSV companies listed on Bursa Malaysia. Over on the Singapore Exchange is one such company, Nam Cheong Ltd, which serves Malaysia's national oil company, Petronas, and several oil majors operating in Malaysian waters. Nam Cheong's stock came out of a trading suspension in March this year following a restructuring exercise that extinguished about half of its debt. Two quarterly results so far this year have catalysed a re-rating of the stock. The stock has braved heavy selling by key creditor RHB Bank. To put it another way, keen investors (perhaps Malaysian fund managers) have absorbed the large volumes of stock sold by RHB and likely other creditors. (See also: NAM CHEONG: Will stock re-rate when creditor finishes selling down shares?) More recently, investors have re-rated the stock -- from 17 cents 2 months ago to 36 cents currently -- after its sterling 1H2024 results were released on 13 Aug 2024. The income statement contains a number of one-off items related to the restructuring, as highlighted in the graphic below:

It's no surprise to anyone keeping track of the OSV market that Nam Cheong said in its 1H2024 results release that it had experienced "improved daily charter rates and higher vessel utilisation of larger vessels".

Other OSV owners have been happily reporting the same news.

And Kenanga Research in Malaysia, which has been covering Bursa-listed Keyfield International, said in a Aug 2024 report: 

Nam Cheong in its 1H2024 results release holds the same outlook, and it cited a Business Times report:

"The rise in offshore activities, coupled with the tight supply of offshore support vessels, is expected to support the improvement in daily charter rates in 2025." 

Nam Cheong, despite its 100% rise in the past 2 months, trades at quite a bit of discount to its peers in Bursa (see table).

Kenanga estimates their average PE at around 14X.

A back-of-the-envelope calculation indicates Nam Cheong trades at 2.8X this year's earnings (excluding one-offs).

While many Bursa companies with OSV business in addition to other business segments, Keyfield Interntional is a good comparable to Nam Cheong as the former is also primarily an OSV owner. 



Net profit estimate for Nam Cheong excluding one-offs (refer to first graphic on this article):
1H24: RM146 m - RM23.4 m - RM9.3 m = RM113.4 m
2H24F: Similarly but add in an extra quarter of finance cost = RM113.4 m - RM7.5 m = RM106.3 m
Total pre-tax: RM113.4 + RM106.3 = RM 219.7 m 
After 24% corp tax = RM167 m
= S$50 m.
PE = 2.8x

Keyfield Interntional has a market cap of RM1.9 billion (or S$570 million) while Nam Cheong, S$142 million. 

If Nam Cheong were to trade at Keyfield's PE ratio, its market cap would be similar to Keyfield's.

Nam Cheong, however, has certain negatives: It has RM500 m (S$150 m) debt which it has to repay as a first priority under the restructuring agreement, so no dividend can be declared.

Debt-free Keyfield, on the other hand, has been paying dividends. 

2H2024 is expected to be just as buoyant for OSV companies, if not more, as daily charter rates are expected to rise, according to Kenanga.

Risks include a fall in oil prices, higher operating costs and a reduction in capex of oil majors.

Overall, the OSV market is expected to grow, driven by the increasing demand for energy and the expansion of offshore wind projects.