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Thursday, November 19, 2015

Singapore Smallcaps - Subdued quarter

■ Subdued quarter. Only two smallcaps beat expectations.
■ Revenue environment was tough. Exporters benefited from stronger US$.
Our top smallcap picks are GL Limited, Tianjin Zhongxin Pharmaceutical Group and Venture Corporation.
3Q15 performance
Only two out of the 18 smallcaps under our coverage reported results above expectations. Six smallcaps reported results that were below our expectations while the remaining 10 stocks reported in-line results.
Key recommendation changes post 3Q results were:
1) Upgrade of Boustead to Add,
2) Upgrade of Yoma to Hold, and
3) Downgrade of China Merchants to Hold.
FX was a saviour
Year-on-year, the revenue environment was tough. Only five smallcaps reported doubledigit yoy revenue growth; the rest reported sales decline or weak revenue growth. Foreign exchange gains were evident in export-oriented stocks. For example, FX gains accounted for 40% of Innovalues’s 3Q15 pre-tax profit and 43% of Riverstone’s 3Q15 pre-tax earnings.
Top pick 1: GL Limited
The recent unfortunate terrorist attacks in Paris could have some short-term negative impact on the European hospitality industry. GL Limited may see some near-term impact from potentially slower tourist arrivals. Analyst Roy Chen sees every 1% drop in room occupancy potentially lowering his FY6/16F EPS forecast by c.3% (FY6/17F EPS by c.4%). However, this is only a short-term hiccup.
Top pick 2: Tianjin Zhongxin Pharmaceutical Group
Reflecting management’s concern on the uncertainty relating to the government’s procurement policy for pharmaceutical products, analyst Roy has cut his FY15-17 earnings forecasts to factor in the margin pressure. The group’s expansion plans remain on track and Roy estimates that the investments will generate operating profit of Rmb120m-160m p.a. in FY18 onwards.
Top pick 3: Venture Corporation

The completion of the amortisation of intangibles frees Venture’s P&L statement from a S$16.8m amortisation burden in FY17. The company remains in net cash position and we expect it to maintain its base DPS of S$0.50. With limited capex and no satisfactory acquisition targets, shareholder pressure for a higher payout could increase. However, Venture needs to factor in working capital requirements in its dividend decision. (Read Report)

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