Small Caps: Net cash companies will survive Covid-19

Excerpts from CGS-CIMB report

Analysts: William TNG, CFA, NGOH Yi Sin, ONG Khang Chuen, CFA

Covid-19 outbreak has raised concerns that SMEs (Small Medium Enterprises) and even bigger companies will face a liquidity crunch as business dwindles on efforts to contain the outbreak.

We see value emerging in the manufacturing sector as all our covered companies are in a net cash position.

China Sunsine/Valuetronics are both debt-free with 89%/88% of their share prices backed by net cash.

On valuation grounds, we upgrade China Sunsine (trading at trough P/BV) and Fu Yu (7.8% dividend yield) from Hold to Add.

In Fu Yu’s case, 1 s.d. below P/BV of 0.69x (FY15-20F) translates into S$0.15, a level that may not be reached as dividend yield then would be 10.6%.

GFC trough valuations suggest more downside for Valuetronics, but its c.9% yield underpins our Hold call.

The most geared small caps under our coverage are Centurion, BRC Asia and Japfa, all of whom we believe will be able to weather the downturn given their positive cash flow generation.

We are more concerned about Yongnam and mm2, thus downgrading both from Add to Hold.

We cut our EPS forecasts for YNH due to our expectation of a slower ramp-up of strutting projects, and mm2 on core production delay, concert cancellation and recent entertainment ban.

Potential cash flow stress is a key risk to watch out for. We see limited downside for YNH given its orderbook recovery from a multi-year low and valuation close to its trough P/BV, while there is still value in mm2’s assets with restructuring as a potential catalyst.

Hence, both our recommendations favour a Hold rather than Reduce.

Jumbo is also downgraded from Add to Hold due to the impact from measures by the government to minimise the spread of Covid-19.

The small-caps sector trades at a CY21F P/E of 10.7x. Key risk is the negative impact from the Covid-19 outbreak.

Small-cap names outside our coverage with net cash accounting for more than 50% of its current market cap, profitable and cash generative for the past three years include 1) Chuan Hup Holdings, 2) Innotek Ltd, and 3) Duty Free Intl.

Companies with FY19 net gearing of more than 200% (Figure 12) include Aspial and Del Monte Pacific.

Full report here.