Singapore small cap stocks: Which ones should you invest in?
PropNex, Koufu, Sunpower, Silverlake Axis and Food Empire are among analysts’ top small cap equity picks for the rest of 2020.
Singapore small cap stocks, defined by the Singapore Exchange (SGX) as stocks with a market capitalisation of between S$100 million and S$1 billion, are among some of the most popular assets every year, thanks to their low entry points and high returns.
In the first eight months of 2020, small cap firms comprised over a third of Singapore’s 30 most actively traded stocks, based on the latest data provided by SGX, Bloomberg and Refinitiv.
In this article, we highlight eight small cap stocks currently most favoured by investment analysts.
Last traded price (04/09/20)
Share price target
|Silverlake Axis (SGX: 5CP)||S$0.31||S$0.395||27.4%|
|PropNex (SGX: OYY)||S$0.58||S$0.70||20.7%|
|Koufu Group (SGX: VL6)||S$0.675||S$0.795||18.7%|
|Sunpower Group (SGX: 5GD)||S$0.55||S$0.805||46.4%|
|CSE Global (SGX: 544)||S$0.50||S$0.60||20%|
|Food Empire (SGX: F03)||S$0.61||S$0.80||31.1%|
|UMS Holdings (SGX: 558)||S$1.00||S$1.28||28%|
|Frencken Group (SGX: E28)||S$0.995||S$1.27||28.6%|
Silverlake Axis (SGX: 5CP)
Share price target (average): S$0.395
Estimated upside from last traded price: 27.4%
Software company Silverlake Axis is among CIMB and DBS analysts’ top small cap equity pick in recent times.
CIMB and DBS analysts raised their share price targets on software company Silverlake Axis recently.
CIMB upgraded their stock rating to an ‘add’ (equivalent to a ‘buy’) alongside a higher share price target of S$0.39 per share (up from S$0.26 previously).
Analysts stated that they ‘believe the worst is over’ and see a recovery in the firm’s full-year earnings for fiscal 2021.
They also noted that while the Silverlake Axis’ core net profit of 143 million ringgit (S$47 million) was below expectations at 85% of forecast, it was still able to grow its order book with smaller enhancement projects.
Meanwhile, DBS researchers raised their price target to S$0.40 a share, citing the expectation of better earnings in 2021 due to a healthy project pipeline.
Nevertheless, it should be noted that total dividend payout ratio for 2020 was 40%, versus 60% in 2019.
PropNex (SGX: OYY)
Share price target (average): S$0.70
Estimated upside from last traded price: 20.7%
CIMB bumped up their price target on real estate agency PropNex to S$0.708 – up from S$0.625 a share, based on an average of 10x FY2021 full-year P/E valuation.
They also reiterated a buy call on the stock, after raising their full-year earnings per share (EPS) estimates for the firm by 13% to 16.8% for FY2020 to FY2022.
Analysts posited that PropNex’s income from higher-yielding marketing services are expected to remain high on the back of increased market share (commission income from project marketing services spiked up 148% in the first half of 2020).
However, they noted that downside risks include ‘protracted market recovery due to a weak macroeconomic outlook’.
Meanwhile, UOB also raised its target price to S$0.69 a share, raising their 2020 net profit by 6%. This factors in roughly S$1.8 million in government grants and rental rebates.
Share price catalysts include ‘positive newsflow on new launches and take-ups’, they added.
Koufu Group (SGX: VL6)
Share price target (average): S$0.795
Estimated upside from last traded price: 18.7%
CIMB provided the most bullish price target for food court chain Koufu Group.
Analysts rated the stock an ‘add’ (buy) alongside a best-case price estimate of S$0.86 on the stock, citing it as one of their top small-cap picks for the rest of 2020.
UOB maintained a buy’ on the stock, but raised their price target to S$0.78 from S$0.69 previously.
They stated that ‘compared to its local peers, Koufu has the highest return on equity, lowest gearing and has the highest profitability’.
They further noted that a ‘significant’ quarter-on-quarter improvement in earnings in the second half of 2020, ‘led by gradual sales recovery and additional government areas’ is expected.
Still, the analysts estimate that second half earnings this year will decline by 7.6% year-on-year due to travel restrictions, WFH measures and lower seat capacity.
Sunpower Group (SGX: 5GD)
Share price target (average): S$0.805
Estimated upside from last traded price: 46.4%
Both DBS and UOB raised their price targets on energy solutions provider Sunpower Group by 41% and 4.5% respectively.
Despite the smaller increase, UOB was much more bullish, rating the stock a buy and a target of S$0.92 a share.
The analysts wrote that Sunpower posted ‘robust results’ in the first half of 2020, with net profit coming in 56.3% higher over the second half of 2019 on the back of China’s economic reopening.
Looking forward, they posited that a resumption of full GI (green investments) production and further ramp-up of existing GI projects will continue to drive earnings growth from the second half of 2020 onwards.
On the other hand, DBS has a lower best-case scenario price case of S$0.69, stating that ‘the worst appears to be over’ for Sunpower as China’s economic activities resume.
However, they noted that unfavourable changes in the regulatory environment, a resurgence of Covid-19, as well as a steep rise in coal prices could pose risks to their view.
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CSE Global (SGX: 544)
Share price target (average): S$0.60
Estimated upside from last traded price: 20%
DBS, the most optimistic of the lot, raised its price target for CSE Global from S$0.54 to S$0.61 earlier last month, after the company’s net profit exceeded expectations.
They raised their FY2020/2021 full-year earnings by 16%/13% on the back of higher EBIT (earnings before interest and taxes) margins.
They also believe that the outlook for the oil and gas segment is ‘brighter’, with oil prices stabilising at around US$40 (S$54.50) per barrel and economies gradually lifting lockdown measures in late 1H20.
‘Furthermore, with its Mining & Mineral generating substantially higher EBIT margins as it begins to scale up, and with potential opportunities from its new strategic investor, Heliconia, we are positive on CSE’s outlook,’ they wrote.
RHB researchers also raised targets to S$0.60, envisioning an 11% with an annual dividend yield of around 5% in 2020.
Their price case is based on higher earnings forecast of 9% for FY2020 and 7% for FY2021.
Food Empire (SGX: F03)
Share price target (average): S$0.80
Estimated upside from last traded price: 31.1%
Food and beverage (F&B) manufacturer Food Empire Holdings received a high-end price target of S$0.85 from UOB’s equity team, which represents an over 40% upside.
UOB noted that the group’s latest earnings came in above estimates. As such, they expect the next two quarters to be better as we believe that the worst is over for Food Empire’s key markets as lockdown measures in core markets ease, especially Russia.
Furthermore, analysts believe the group’s sales ‘should be more resilient against an economic slowdown given that its products are consumer staples with relatively inelastic demand’.
Meanwhile, RHB analyst Juliana Cai wrote that she prefers F&B producers like Food Empire which ‘have strong market share in their respective product segments and core markets’.
She priced the stock at a S$0.75 target and buy rating, envisioning an upside of nearly 25% and forward P/E ratio of 12.1x.
Nevertheless, she noted that while the consumer staples sector is now recovering, challenges still remain in terms of consumer spending.
UMS Holdings (SGX: 558)
Share price target (average): S$1.28
Estimated upside from last traded price: 28%
With a dividend yield of 4.5% already this financial year (2020) and at least one more sum to be proposed, the final dividend yield for 2020 could wind up close to FY2018’s yield of 5.5% (up from 2019’s 3.5%).
CIMB analyst William Tng (share price target of S$1.10 from S$0.96 previously) wrote that the growth outlook for UMS’ earnings in the next three years appears positive, thanks to its main customer Applied Materials’ own ‘bright’ prospects.
As such, he raised UMS’ FY2020-2022 earnings per share forecast by 8.8% to 17.8%.
DBS’ Lee Keng Ling wrote that UMS’ potential dividend yield of 5% is attractive based on a S$0.06 dividend forecast.
She raised her price target to S$1.37 (up from S$1.04) per share while maintaining a ‘buy’ rating.
Frencken Group (SGX: E28)
Share price target (average): S$1.27
Estimated upside from most recent price: 28.6%
Manufacturing solutions provider Frencken Group was among UOB brokers’ top small-cap equity picks in August.
Analyst John Cheong gave the stock a ‘buy’ call and a price target of S$1.37, stating that Frencken’s latest earnings (second quarter of FY2020) were in line with expectations.
He noted that despite supply chain disruptions in the first half of 2020, the group’s semiconductor segment was still able to achieve a strong increase in revenue (+73.6% year-on-year).
Additionally, Cheong wrote that ‘the 19% retracement in share price since the beginning of August presents a good buying opportunity’.
‘At the current price, the stock trades at 8.7x 2021F PE (price to earnings ratio) which compares favourably to the current peers’ average of 12.9x,’ he said.
Meanwhile, CIMB upgraded the stock to an ‘add’ from ‘reduce’, on the belief that the 22% decline in Frencken’s share price since 13 August 2020 means valuations are now more attractive and reasonable.
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