After every company reported their Q1 results, DBS Research relooked at its recommendations to highlight the companies that could provide investors with alpha.
Here are three small/mid-caps that DBS Research recommends from its universe of coverage.
1. CDL Hospitality Trusts
While the Singapore market is yet to recover, DBS believes that CDL Hospitality Trusts (SGX: J85) offers investors a compelling return on investment. With its Singapore portfolio heavily discounted, its current share price seems to suggest that patient investors could be rewarded upon an eventual upturn in the sector.
CDL Hospitality Trusts announced its agreement to purchase the Lowry Hotel in Manchester, the UK for £53.8M, inclusive of stamp duty and fees.
The Lowry Hotel, a five-star luxury hotel, is located close to the city centre of Manchester and is in the vicinity of office developments, retail malls and entertainment hubs.
Given that Manchester is a city with higher than average GDP growth (2.9 percent in 2016 versus 1.8 percent for the rest of the UK) and high demand from football-related travel since two leading football clubs are located in the city (Manchester United and Manchester City), DBS believes that The Lowry Hotel is a shrewd buy.
Moreover, major development projects including the expansion of rail and airport infrastructure as well as significant mixed-use redevelopments (N.O.M.A and St John’s quarter projects) are already underway, which should improve the city’s future economic growth prospects.
Overall, DBS opines that the acquisition will add a buffer to the earnings of CDL Hospitality Trusts, given the headwind from Singapore and Maldives market.
Among the hospitality REITs in Singapore, CDL Hospitality Trusts remains as one of the cheapest REIT in the current investment climate.
According to DBS, this discount is unwarranted, given the quality of CDL Hospitality Trusts’ portfolio and long-term track record. Furthermore, CDL Hospitality Trusts has an attractive dividend yield of 6.4 percent, based on its current 90 percent payout ratio.
DBS Research: CDL Hospitality Trusts (SGX: J85) – BUY, Target Price $1.75
2. MM2 Asia Limited
One of the highlights for MM2 Asia Limited (SGX: 43D) this year is the listing of UnUsUal on the Catalist board. Since its IPO, UnUsUal has made gains of 170 percent at its recent high.
Moving forward, DBS believes that UnUsUal’s valuation could be taken higher on the back of higher margins from its core business. As such, DBS incorporated a higher valuation for mm2 Asia, which is the parent company of UnUsUal.
Apart from the ‘UnUsUal’ boost, DBS foresees growth in mm2 Asia’s core business to continue at a CAGR of 52 percent. This is supported by the increase in movie productions, expansion into the Chinese market and further contributions from UnUsUal.
An upside to earnings could come from undertaking more projects, especially in China where the market size is much bigger and budgets are often much higher.
On the other hand, mm2 Asia’s cinema arm is also doing well in building a recurring income base for the group.
DBS Research: MM2 Asia Limited (SGX: 43D) – BUY, Target Price $0.70
3. Singapore O&G
Singapore O&G Limited (SGX: 1D8) was singled out by DBS for its positive organic and inorganic growth prospects.
With the commencement of its paediatrics division, there could be opportunities for Singapore O&G to offer complementary services like IVF, child care and imaging.
DBS expects the Singapore O&G management to seek new opportunities into new specialisations and/or new markets to further expand the businesses.
If Singapore O&G manages to expand into higher-margin complementary specialised services, it could add further upside to its share price.
Regarding the core business of Singapore O&G, DBS believes that a few other key catalysts could push its O&G stock price higher.
The first catalyst is better than expected growth from its cancer and dermatology divisions. Second, DBS opines that there could be a better-than-expected improvement in margins.
DBS Research: Singapore O&G Limited (SGX: 1D8) – BUY, Target Price $0.80