KGI Trading Ideas – Value Plays (JB Foods & Uni-Asia Group)
|Against a backdrop of slowing economic growth and earnings downgrades in 2019, we would prefer defensive assets (e.g., bonds), income stocks (e.g., Singapore REITs) and value stocks.
Two of our high-conviction small-cap value plays are JB Foods (JBF SP) and Uni-Asia Group (UAG SP).
Both of their share prices declined recently due to different factors, but which we believe presents a buying opportunity.
JB Foods produces these products and exports them to customers ranging from international trade houses to end-users such as F&B and confectionery manufacturers.
JBF is the second largest cocoa processor in Malaysia and the tenth largest in the world. Its shares declined by more than 10% following its 4Q18 results.
However, we are optimistic of its growth prospects in the long-term given its favourable position in the industry and its portfolio of stable blue-chip clients (e.g., Mars, Mondelez and Nestlé).
In the short-term, a key re-rating catalyst would be earnings growth in 2019F, driven by cocoa demand growth, as well as restrained cocoa processing capacity.
It is trading at only 5x 2018 P/E, a 45% discount to peers like Guan Chong (GUAN MK).
Its 0.6x net gearing (end-2018) provides it with expansion capabilities should demand growth come in faster than expected.
|UAG yesterday morning announced a placement of 5.52mn new shares at S$1.08 each, or a 10% discount to the VWAP on 25 March 2019. Its shares declined by as much as 10% in yesterday’s trading as investors may have perceived the placement as negative news. We believe otherwise.
UAG’s balance sheet remains healthy as net gearing has been improving YoY while operating cash flows have increased every year since 2014, such that it was able to increase FY18 dividends to 7.0 Sing cents, or an implied 6.3% div yield at its current share price.
“We reiterate our BUY call and fair value of S$2.07, and stand by our investment thesis of improving fundamentals. It is currently trading at only 0.3x 2019F P/B, 5.2x 2019F P/E and offers an attractive 5.5% div yield.”
-- Joel Ng,
head of research,
KGI Research Singapore
Instead, a key reason in our view for the placement is to broaden its shareholder base, as well as to improve the trading liquidity of the shares.
Therefore, we believe the current sell-off is an opportunity to accumulate shares before its 1Q19 results in the last week of April.