Ahead of the Trump-Xi meeting during the G20 summit this month which promises potential of easing trade frictions between the two largest economies, sentiments in the markets had clearly turned for the better. Along with the recovery of regional equities, the Straits Times Index has also gained 5.1 percent to reach a high of 3,116.39 two weeks ago, standing firm above the 3,000 psychological support level. Some people believe counters that rebounded strongly at the onset of a recovery tended to be the outperformers when the markets continued surging. Hence, we have identified three mid-cap stocks that had jumped more than 10 percent, digging deeper to see if there are further upsides.
Trading at $0.725 a share as at 2 November 2018, UMS Holdings (UMS) had rebounded 12.4 percent from its closing price at $0.645 on 30 October 2018.
According to its latest 2Q18 report, UMS registered a 13.9 percent decline in revenue to $72.7 million, attributable to lower semiconductor sales. However, net profit grew 14.3 percent to $25.9 million because of improved gross material margins as well as savings from other expenses including upkeep of machinery and rental expenses.
We continue to like UMS’s healthy balance sheet and high dividend yield. As at 30 June 2018, UMS held cash balances of $22.1 million while unsecured short-term bank borrowing stood at $10.6 million, translating to a net cash position of around $11.6 million. Furthermore, overall financial health is also in good shape with the group’s benign debt-to-equity ratio at 0.16 times.
UMS distributed $0.01 a share in each of the first two quarters in FY18, equivalent to the amount paid out last year. Using FY17 payout of $0.06 and the group’s last traded price of $0.715 as at 12 November 2018, this represents a very attractive yield of 8.4 percent.
In the mid-to-long term, SEMI, the global industry association representing the electronics manufacturing supply chain, forecasted that worldwide sales of new semiconductor manufacturing equipment would increase 10.8 percent in 2018 and 7.7 percent in 2019, growing to $62.7 billion and $67.6 billion respectively. In view of this trend, UMS is also optimistic of remaining profitable despite its softening revenue.
BreadTalk gained 10.5 percent closing at $0.95 on 2 November 2018 from trading at $0.86 a share on 30 October 2018.
Although the group’s 9M18 revenue inched up by 1.2 percent to $455 million, net profit sank 62.5 percent to $6.3 million in the absence of capital gain from the divestment of TripleOne Somerset coupled with higher distribution and selling expenses, administrative expenses and interest expenses.
Notably, BreadTalk’s borrowings had surged 38.7 percent from $183.3 million as at December 2017 to $254.3 million as at September 2018 in order to fund its capital expenditure requirements. Consequently, interest expenses more than doubled in 9M18 to $7.3 million compared to a year ago, consuming about 25.9 percent of the group’s earnings before interest and tax. Interest coverage ratio has also dropped sharply from over nine times in 9M17 to less than four times in 9M18.
We are disappointed that BreadTalk did not declare any dividends in the first and third quarter this year, when it had previously paid out $0.02 and $0.01 (before stock split) in 1Q17 and 3Q17 respectively. This implies that a dividend reduction for the total payout this year would be very likely.
We believe that short-term earnings volatility may be expected, as BreadTalk strives to streamline its operations while positioning itself for longer term and more sustainable growth.
Genting Singapore’s (Genting) share price recovered 9.3 percent to $0.945 on 2 November 2018 from closing at $0.86 on 30 October 2018.
The group’s 9M18 results reported a 29.3 percent growth in net profit to $605.2 million on the back of a 3.4 percent increment in revenue to $1.9 billion, despite the absence of the disposal gain of its interest in an integrated resort in Korea. This was mostly due to an improvement in operating margins arising from productivity initiatives as well as a more subdued impairment on trade receivables.
Genting’s balance sheet continued to remain healthy. With liquid cash of $3.9 billion as at 30 September 2018 and total borrowings of around $1 billion, the group stood in a net cash position of $2.9 billion. Moreover, debt-to-equity ratio is also robust at only 0.25 times.
Genting distributed $0.015 of interim dividend in 2Q18, equivalent to the amount it had paid out in the previous corresponding quarter. With such a strong balance sheet and healthy cash flows, we believe that the group is more than capable of paying at least $0.02 of final dividend again this year just like what it had did in 4Q17. This would represent a decent yield of 3.7 percent based on Genting’s market price of $0.94 as at 12 November 2018.
Potential catalysts to boost Genting’s share price higher include the successful bidding of operating rights to run integrated resorts in Japan.