Brief Equities Bottom-Up: Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering and more

In this briefing:

1. Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering
2. Company Visits: Berli Jucker, M Visions
3. Best World (BEST SP): BT Article, Franchise and KOL
4. Krung Thai Bank: Not as Cheap as It Looks
5. DoubleDragon Properties (DD PM): From Overhyped to Undervalued; Multi-Bagger in the Making?

1. Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering

Yokogawa Electric is one of the world’s leading suppliers of distributed control systems (DCS) used in the LNG, oil & gas, petrochemical and other industries. It is particularly strong in LNG, having provided control systems for dozens of liquefaction trains, LNG carriers and re-gasification plants.

Unlike Chiyoda Corporation (6366 JP) and JGC (1963 JP), which depend on a small number of large engineering, procurement and construction (EPC) orders, which can be as large as ¥500 billion, Yokogawa only rarely receives an order as large as ¥10 billion and most of its orders are less than ¥1 billion. It is geared primarily to ongoing investments and operating expenditures in its user industries, less exposed to highly variable orders for large LNG and other engineering projects, and relatively immune to cost overruns and other problems at projects gone wrong.

Margins have expanded over the past several years due to a combination of restructuring and technological advance. Unprofitable non-core businesses have been abandoned or sold, high-wage domestic employees retired, and administration, manufacturing and logistics rationalized. Enterprise and robotic process automation (RPA) software have been introduced and an Industrial Internet of Things (IIoT) cloud computing platform is under development.  Top-line growth has been slow, but the operating margin has risen from from 5.0% in FY Mar-12 to 8.0% in FY Mar-18, and should reach 10% in FY Mar-21, in our estimation.

At ¥2,215 (Wednesday, March 13 closing price), the shares are selling at 23x our EPS estimate for FY Mar-19 and 20x our estimate for FY Mar-21. Projected EV/EBITDA multiples for the same two years are 9.8x and 8.2x. These and other projected valuation multiples are above their recent historical averages, but indicate upside potential of 20% or more if the anticipated upturn in new LNG investments materializes. Investors willing to take on more speculative risk should look at Chiyoda and JGC.

2. Company Visits: Berli Jucker, M Visions

We visited one big-cap stock, Berli Jucker, and one pip-squeak recent IPO M Vision today. A couple of highlights:

• Slow revenue growth at BJC at under 5% largely driven by Big C (hypermarket), but earnings growth was strong at 28% mainly due to lower cost of palm oil in the snack business.
• Good progress in Vietnam with expansion of the bottle capacity this year and SABECO increasing purchases of bottles.
• Overall unimpressed. The company isn’t expecting to grow revenues more than 9% this year, and many of the cost cuts we saw in 2018 are clearly one-offs. Higher oil prices are likely to lead to rising palm oil prices this year too, since the two commodities are linked through substitution effect.
• MVP underwent a bad year on the profit level, but their various businesses, at least on the top line level, looks like it could recover quickly this year.

3. Best World (BEST SP): BT Article, Franchise and KOL

Best World International (BEST SP) share price has been hammered due to the recent article in Business Times, although the company has addressed them one by one. The annual meeting that recently took place in their office in Singapore shed some light on the seemingly “new but not so new” franchise business model in China. The company also has started to engage Key Opinion Leaders (KOL) aka social media influencers as part of their social selling campaign. 

4. Krung Thai Bank: Not as Cheap as It Looks

Originally, Krung Thai Bank Pub (KTB TB) struck us as interesting. A solid PH Score™, reasonable franchise valuation and P/Book, and a low RSI.

However, further due-diligence shows a somewhat stagnant and eroding operation.

• Headline profitability improvement is unrelated to efficiency or to operational advances.
• Cost growth is fast outpacing a declining top-line.
• Interest income has actually fallen for each of the last 3 years.
• The bank is being squeezed on margin despite keeping interest expenses unchanged.
• Non-interest expenses soared by 26% YoY.
• The bottom line (and profitability) was flattered by varied low quality items as well as much lower loan loss provisions, but still remained well above comprehensive income.
• Asset Quality is also concerning (despite lower loan loss provisions) given the sharp rise in loss (especially) and substandard loans as well as the amount of Special Mention Loans on the Balance Sheet. This means provisioning of problem loans may not be sufficient.
• Liquidity: Deposits are also declining, pushing up the LDR.

5. DoubleDragon Properties (DD PM): From Overhyped to Undervalued; Multi-Bagger in the Making?

This Insight was written by Nicolas Van Broekhoven and Lloyd Moffatt.

What is an Orphan Stock?

An attractively valued company with a minimum market cap of USD $1 billion but no sell-side coverage.Doubledragon Properties (DD PM) meets those criteria.

Why Read This Report?

Learn about the Philippines youngest self-made billionaire*, Edgar ‘Injap’ Sia,  how he created one of the largest fast-food chains (Mang Inasal) in the country and successfully sold it to Jollibee Foods (JFC PM) for over USD$100 M.

After selling Mang Inasal in 2010, Sia started building DoubleDragon (DD) as he joined hands with Tony Tan (founder of Jollibee Foods (JFC PM) ). DD was listed in 2014 at a market value of USD$85 M (PHP2/share) and reached a market cap of over USD$3 B USD two years after listing (PHP70/share).

DD’s valuation mid-2016 was overhyped and overvalued.

From mid-2016 to late 2018 the share price fell by approximately 75%. Last year the stock bottomed at PHP17.2 despite fundamentals improving drastically between 2016 and 2018.

We value DD on a blended a) P/E multiple and b) Cap Rate basis.

DD recently traded around PHP 22/share and is currently valued at 9.5x FY20 P/E, a steep discount to its industry peers. Assuming the company achieves PHP10.8 B in recurring revenues by FY20 the market is currently valuing the company at a 21% Cap Rate vs 7% for its primary peer Sm Prime Holdings (SMPH PM). DD should trade at a discount to SM (long track record, higher liquidity, included in PSE index) but the gap is too wide.

We argue DD should trade at a) 15x P/E and b) 10% cap rate. Combining the two valuation methods we arrive at a blended Fair Value of PHP 40.31/share, or 83% upside from current levels.

The founders control 70% of the company and expect to grow the current USD$1.2B market cap exponentially the coming 3-5 years. DoubleDragon is a potential multi-bagger in the making.

1. FY18 results publication by early April 2019
2. Delivery of 100 operating CityMalls by FY20
3. The passing of workable REIT law
4. Delivery of PHP5.5B FY20 profit target
5. FCF inflection point coming closer in FY20
6. Re-discovery by sell-side firms as index inclusion looms
7. Visibility into FY21-FY25 dividend potential

Footnote: *Injap was reported as having USD$1 B in assets by Forbes in 2017, as the share price of DD has fallen we estimate this has dropped to approximately USD$ 400-500 M, which would still rank him among the top-25 wealthiest individuals in the Philippines.