18 November 2013

Small Cap Weekly

billion&below my2cts

♦

Super Group’s sell-down presents buying opportunities. What about the rest of the consumer staples? (Pg 2)

Model Portfolio

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Portfolio performance: -0.2% WoW, +23.0% YTD Best performer: Ezion (+2.4% WoW), Eu Yan Sang (+2.0%) Worst performer: Osim (-2.7%) Changes to portfolio: None (Pg 3)

Source: Company

Reports Recap Super Group, which launched its TV commercial ‘What a smile tastes like’ earlier this year, had little to smile about last week. See ‘my 2cts’.

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Past week’s key reports: NeraTel, Silverlake Axis, Bumitama Agri, AusGroup, Super Group (Pg 4)

Analysts’ Diaries

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A peek at what’s keeping our analysts busy over the next few weeks. (Pg 5)

#1 Small Cap Research #1 Most Improved #2 Most Independent

Terence Wong, CFA +65 6232 3896 [email protected]

See important disclosures at the end of this report

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billion&below 18 November 2013

my2cts The latest results season, which is coming to an end, threw out some surprises. One of the biggest disappointments was probably instant coffee maker Super Group (BUY, SGD3.99). It reported 3Q13 recurring profit of SGD18m (-1% y-o-y, 7% q-o-q) that was below our estimated SGD22m, mainly dragged down by lowerthan-expected branded consumer sales in Myanmar and Philippines. We lower our FY13F/14F earnings estimates by 5% and 6% to SGD80m and SGD97m respectively. Fortunately for our investors, we have been the least optimistic in the market. Some of the analysts were estimating that earnings will be more than 20% higher than ours. There was massive dumping of the stock, with the stock price diving over 30% within two days. Our regional head of consumer research Tan Han Meng made a timely upgrade of Super following that at SGD3.05. We quickly hosted a conference call with the management and clients following the upgrade. Within the last two trading sessions, the stock has regained some of its losses, popping up by 15% to SGD3.50. In our view, Super has a well-diversified revenue mix from China, Indonesia, Malaysia, Myanmar, the Philippines, Singapore and Thailand. With an estimated 12% market share, we believe the company will continue to benefit from growing instant beverage consumption in the region. Over the past decade, it has achieved 16% revenue CAGR to SGD519m and 33% profit CAGR to SGD79m as at endFY12. It also has net cash of SGD87m as of September 2013. Other than Super, we also upgraded Parkson Retail Asia (BUY, TP SGD1.28), a regional department store operator with presence in Malaysia, Vietnam, Indonesia, Sri Lanka and Myanmar. Its margins were better than we had expected, which suggests a return to the growth momentum in the next few quarters. Its share price has corrected 31% since we downgraded the stock and we now believe its riskreward tradeoff has improved. Generally, I have stopped being a fan of the consumer staples sector for over a year now. The stocks, however, continued to sizzle as investors lapped it up due to its defensive characteristics – steady demand and decent yields. But the rapid rise in these stocks kills off the latter merit, as most no longer boast palatable yields. And I am not only talking about the bigger and more prominent names like Petra Foods and Super Group, but also the smaller ones like Japan Foods (Not Rated) and Soup Restaurant (Not Rated). Within the consumer sector, I continue to prefer the discretionary stocks like OSIM International (BUY, TP SGD2.60) over some of the staples which have remained stubbornly high. We recently sent our analysts from four countries to visit OSIM stores and they came back confident that the company will do well, especially with the launch of its new product – uInfinity.

See important disclosures at the end of this report

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billion&below 18 November 2013

Model Portfolio ♦

It was a quiet week for my Model Portfolio, which ended flat. Offshore & Marine counters Ezion Holdings and Nam Cheong released stellar results over the past week.

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Ezion reported solid 3Q13 net profit of USD38.2m (+137% y-o-y) thanks to higher revenue from service rigs and logistics support operations in Australia. We maintain our FY13-15F EPS estimates pending an update with management. The strong set of results reaffirmed our BUY rating on the stock. Our SGD2.65 TP is based on 16x blended FY13/14F EPS.

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Nam Cheong posted a 3Q13 PATMI record of MYR58.7m (+86% y-o-y) – driven by its historic MYR1.7bn orderbook on hand, with shipbuilding gross margins surprising on the upside at 22.8% (2Q13: 17.3%). Thus, we increase our top-of-street FY13F/14F/15F estimates by 4/7/5% and raise our TP to SGD0.41 (from SGD0.39). One of our Top Picks, NCL combines 39% growth, 25% ROE, low 0.12x net gearing and healthy cashflow on an undemanding 7x FY14F P/E.

Return Summary

Since Purchase

Ytd

WoW

130.2%

23.0%

-0.2%

STI

5.2%

0.3%

0.8%

FSTS

-1.1%

2.8%

-0.8%

Portfolio

See important disclosures at the end of this report

% Change

3

billion&below 18 November 2013

Reports Recap NeraTel: (BUY, TP SGD0.80) Edison Chen ([email protected]) NeraTel, a premier solutions provider and systems integrator, is mainly engaged in the design, engineering, sales, distribution, installation, servicing and maintenance of telecommunication systems and information technology networks.

11 Nov

Reason for report: Results Key points: NERT’s 3Q13 results were below expectations, with SGD3.3m earnings (-42.1% y-o-y) booked on the back of SGD50.1m in revenue (+4.0% y-oy) as costs soared. This was further dragged down by deferred recognition of some orders and revenue this quarter. Valuation/Recommendation: Reiterate BUY, but with a lower SGD0.80 TP (11.4x blended FY13/14 P/E), as we had been overly optimistic on its short-term revenue growth.

Silverlake Axis (BUY, TP SGD1.00) Edison Chen ([email protected]) Silverlake Axis (SILV) is a leading software services and solutions provider in the banking industry. The company has more than 100 clients in Asia, including 40% of the top 20 banks by size in South-East Asia.

12 Nov

Reason for report: Results Key points: Silverlake Axis (SILV)’s 1QFY14 results were in line, with PATAMI surging 29% y-o-y to MYR51.1m on the back of MYR101.4m revenue. Its outlook is bright given its fast replenishment of orders and potential customers. Valuation/Recommendation: Reiterate BUY, with a higher SGD1.00 TP (from SGD0.89), based on DCF valuation (WACC: 9.5%, terminal growth rate: 5.0%). The counter is trading at an attractive 4.6% yield.

Bumitama Agri (Buy, TP SGD1.18) Singapore Research ([email protected]) Bumitama Agri (BAL) is a high-growth oil palm plantation company with all its plantations in Indonesia. It has 113k ha of nucleus planted area. The group, which was listed on the Singapore stock exchange on 12 April 2012, started initial planting in 2004 with 5,023 ha of nucleus area.

13 Nov

Reason for report: Results Key points: Bumitama Agri (BAL) remains one of our favourite plantation stocks. Although its production growth this year came in below expectations, the weakness is likely to be temporary as the age profile of its trees is supportive of strong doubledigit growth. The group’s FY14 P/E, at 13x, is inexpensive and will contract further over time. Valuation/Recommendation: Maintain BUY, with our TP slightly raised to SGD1.18 (from SGD1.16).

AusGroup (Sell, TP: SGD0.24) Lee Yue Jer ([email protected])

14 Nov

Reason for report: Results Key points: AUSG reported a dismal AUD15.1m loss in 1Q14 that knocked off 9% of its book value in that quarter itself. In recognizing some additional costs for its loss-making contracts, the company had breached its debt covenants. It is now “reviewing options” to replace its existing borrowings. AUSG’s weak orderbook and high overheads are likely to give rise to more losses. Valuation/Recommendation: Maintain SELL, with a lower SGD0.24 TP

Super Group (Buy, TP: SGD3.99) Tan Han Meng, CFA, CPA ([email protected]) Super Group is a key South-East Asian instant coffee player offering some 200 products under more than 10 brands. It commands an estimated 12% market share in a combined SGD1.9bn market which includes Malaysia, Myanmar, Singapore and Thailand.

See important disclosures at the end of this report

15 Nov

Reason for report: Update Key points: We held a conference call with Super’s management to update RHB-OSK|DMG clients in view of recent volatility in its shares, which prompted us to upgrade the counter to BUY. Despite the headwinds in 3Q13, we believe that Super’s strategies will position the company as a dominant instant beverage player that is benefitting from growing consumption in Asia. In this report, we summarise the takeaways. Valuation/Recommendation: Upgrade to BUY

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billion&below 18 November 2013

Analysts’ Diaries Event Analyst Marketing

Company Regional Coal & Mining (Shekhar Jaiswal)

Date 18-20 Nov (JKT) 21-22 Nov (BKK) 26-27 Nov (HK)

Corporates Company visit

Results

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Regional Consumer (Tan Han Meng) Regional Consumer (Tan Han Meng) Regional Coal & Mining (Shekhar Jaiswal) Venture NDR (Edison Chen) Swissco Uni-Asia King Wan Marco Polo Marine

18 - 22 Nov (UK) 12 - 13 Dec (TYO) 19 - 20 Dec (TYO) 22 Nov (SG) 19 Nov 21 Nov 21 Nov 27 Nov

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DMG & Partners Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage DISCLAIMERS This research is issued by DMG & Partners Research Pte Ltd and it is for general distribution only. It does not have any regard to the specific investment objectives, financial situation and particular needs of any specific recipient of this research report. You should independently evaluate particular investments and consult an independent financial adviser before making any investments or entering into any transaction in relation to any securities or investment instruments mentioned in this report. The information contained herein has been obtained from sources we believed to be reliable but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Opinions and views expressed in this report are subject to change without notice. This report does not constitute or form part of any offer or solicitation of any offer to buy or sell any securities. DMG & Partners Research Pte Ltd is a wholly-owned subsidiary of DMG & Partners Securities Pte Ltd, a joint venture between OSK Investment Bank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad (the merged entity is referred to as “RHBIB” which in turn is a whollyowned subsidiary of RHB Capital Berhad) and Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited. DMG & Partners Securities Pte Ltd and their associates, directors, and/or employees may have positions in, and may effect transactions in the securities covered in the report, and may also perform or seek to perform broking and other corporate finance related services for the corporations whose securities are covered in the report. This report is therefore classified as a non-independent report. As of the day before 18 November 2013, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd, do not have proprietary positions in the subject companies, except for: a) RH Petrogas b) Nil As of the day before 18 November 2013, none of the analysts who covered the stock in this report has an interest in the subject companies covered in this report, except for: Analyst Company a) Nil b) Nil DMG & Partners Research Pte. Ltd. (Reg. No. 200808705N) Kuala Lumpur

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RHB OSK (China) Investment Advisory Co. Ltd. (formerly known as OSK (China) Investment Advisory Co. Ltd.) Suite 4005, CITIC Square 1168 Nanjing West Road Shanghai 20041 China Tel : +(8621) 6288 9611

RHB OSK Indochina Securities Limited (formerly known as OSK Indochina Securities Limited) No. 1-3, Street 271 Sangkat Toeuk Thla, Khan Sen Sok Phnom Penh Cambodia Tel: +(855) 23 969 161 Fax: +(855) 23 969 171

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