Compiled by Anita Gabriel
ST ENGINEERING | BUY
TARGET PRICE: $4.15
MARCH 12 CLOSE: $3.43
Maybank Kim Eng, March 12
After three lacklustre years due to tough market conditions and restructuring costs, growth catalysts are falling in place.
Aerospace MRO (Maintenance, Repair & Overhaul) is witnessing green shoots from the recovery in global trade, some capacity rationalisation and growth in the global aircraft fleet while recent acquisitions hold growth promise.
Land Systems, unshackled from the prior drag of China units, holds growth promise in the autonomous mobile robot market with its Aethon (Unlisted) acquisition.
Prospects for Marine remain challenging in the near-term but cost rationalisation has been largely completed and an oil price recovery may alleviate the situation sooner than expected.
STE's core-value proposition is offering tailored customer solutions using its deep pool of engineering and technological expertise in multiple sectors.
Management's focus on forging greater integration across what have historically been silo-like divisions is a big positive.
This initiative could surprise on the upside on revenue (cross-selling) and cost synergies (central procurement, standardised systems) in coming 2to3 years.
We raised our target price by 31 per cent to $4.15 due to forecast revisions and the change in our valuation methodology to discounted cash flow (previous target price based on 18 times FY17 earnings per share) at 8.1 per cent WACC (weighted average cost of capital).
The top two risks to our forecasts are a material downturn in aerospace and further write-offs in marine.
DAIRY FARM INTERNATIONAL HOLDINGS | BUY
TARGET PRICE: US$9.54
MARCH 12 CLOSE: US$8.09
DBS Group Research, March 12
We maintain our "Buy" rating on Dairy Farm (DFI), but lower our sum-of-the-parts-based target price marginally to US$9.54 (S$12.55).
FY17 core profit growth was within expectations, led by strong contribution by Yonghui.
We see growth driven on two fronts, namely better margins from operationally-led store efficiencies, and earnings growth from Yonghui.
Current share price ex-Yonghui values DFI's core business at just 17 times forward price-earnings, below the regional peer average and its nine-year historical average forward PE of 24 times.
While consensus is negative on DFI, we are positive that new CEO Ian McLeod and his initiatives to improve performance of the stores will pay off over the next few years.
We see earnings turnaround ahead as a stock catalyst. We believe successful implementation of strategies by the CEO will be key to earnings recovery.
We value DFI's core business at US$7.70 based on DCF (discounted cash flow) and the 20 per cent stake in Yonghui based on the market value of US$2.28 and net debt of US$0.45 per share.
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