2 Promising Companies with Good Fundamentals that Underperform the Broader Market in May

Despite the traditional market myth of “Sell in May and Go Away”, the Straits Times Index (“STI”) has registered a resilient performance of just a slight decline of 1.68% in May 2021.

This performance has outperformed the corresponding figure in 2018 and 2019, where the STI witnessed a negative return of 5.41% and 8.31% respectively.

Despite the resilient broader market, some of the quality companies have seen a larger decline in its share price as compared to the STI.

In this article, we are going to talk about these 2 promising companies that underperformed the STI:

• Japfa Limited (SGX: UD2) (-5.43% Return in May)

• AEM Holdings Limited (SGX: AWX) (-9.63% Return in May)

1) Japfa Limited (SGX: UD2)

Headquartered in Singapore, Japfa Limited (“Japfa”) is a leading vertically integrated agri-food company listed on SGX since 2014. Established in 1971, the Group has grown into one of Asia’s leading low-cost producers of protein staples including poultry, beef, dairy as well as protein-based consumer products across fast-growing emerging Asian economies such as Indonesia, China, India, Myanmar and Vietnam.

Key Statistics

Latest Business Update for 1Q FY2021

For 1Q FY2021, Japfa’s revenue grew by 16.1% year-on-year to US$1.10 billion. The rise in revenue was mainly due to stronger performance from all its business segments, in particular its Animal Protein segment, which has seen the highest revenue growth.

With the topline growth, Japfa’s profit after tax surged 72.8% year-on-year to US$82.1 million. The higher profit growth was contributed by its Poultry and Dairy segment, while being partially offset by the decline in profit after tax for the Animal Protein segment.

Consensus Estimates

Based on the consensus estimates, analysts are giving a “Buy” call for Japfa, with a mean target price of S$1.19. Based on the share price of S$0.88, this translates into a potential upside of 35.26%.

For the past 1 month, analyst has reduced its target price, forecasted revenue and profitability marginally due to the potential risks faced by COVID19’s resurgence.

Management Outlook

Mr. Tan Yong Nang, Chief Executive Officer of Japfa, said:

“I am pleased with the results we delivered in 1Q2021 amid persisting challenges in the global economies due to Covid-19. In fact, rolling Core PATMI w/o Forex for the past 12 months ending 31 March 2021 hit at an all-time high since IPO. All three key profit pillars, Poultry-Indonesia, Swine-Vietnam and Dairy-China, continue to significantly contribute to the growth of both revenue and profits, confirming that we are able to make the most of our diversification strategy across proteins and markets. PT Japfa Tbk recorded a good performance on the back of stabilised poultry prices.

In 1Q2021, we have also achieved an important milestone with the successful issue of the first-ever sustainability-linked bond in the agri-food industry in the world. We are pleased with the positive response that our SLB received from the markets. The SLB is an additional catalyst to achieve our sustainability targets and an opportunity for our investors to partner with us towards a sustainable future.”

Conclusion

All in all, Japfa has delivered a set of strong results and management is optimistic about its future growth prospects. The negative 5.4% share price return could well be a minor correction after the 70% jump in the past 6 months.

2) AEM Holdings Limited (SGX: AWX)

AEM Holdings Limited (“AEM”) is a global leader offering application specific intelligent system test and handling solutions for semiconductor and electronics companies serving advanced computing, 5G and AI markets. These activities are carried out through AEM Holdings’ subsidiaries in Asia, Europe and North and Central Americas.

Key Statistics

Latest Business Update for 1Q FY2021

For 1Q FY2021, AEM’s revenue declined by 45.35% year-on-year to S$80.23 million. The decline was mainly due to a lower contribution from its Tools & Machine segment and Consumables & Services segment. However, the decline was partially offset by the revenue contribution from Contract Manufacturing segment.

With the drop in its topline, AEM’s net profit dropped by 63.07% year-on-year to S$13.34 million. Net profit margin for 1Q FY2021 also declined by 8.1 percentage points year-on-year to 16.5%, mainly due to a difference in revenue mix.

Consensus Estimates

Based on the consensus estimates, analysts are giving a “Buy” call for AEM, with a mean target price of S$4.82. Based on the share price of S$3.66, this translates into a potential upside of 31.73%.

For the past 1 month, analyst has reduced its target price, forecasted revenue and profitability by 6.39%, 8.28% and 15.26% respectively. This was mainly due to the lackluster financial performance for 1Q FY2021.

Management Outlook

The Group highlighted that with the completion of the acquisition of CEI Limited, its revenue guidance for FY2021 will be around S$460 million to S$520 million based on the sales order visibility and business outlook.

Overall demand in 1H FY2021 is expected to be lower with a strong recovery in 2H FY2021 through FY2022 as the Group’s next generation tools are phased into its customer’s High Volume Manufacturing sites globally. These new tools that are being delivered in 2H FY2021 and through FY2022 are highly differentiated tools for the high-performance computing segment.

Lastly, the Group will continue to strategically expand its presence and further establish its leadership in the industry through both development of in-house technological capabilities as well as through mergers and acquisitions.

Conclusion

AEM Holdings’ seemingly poor set of results has led to the share price returning -9.63% in the month of May. That said, according to its press release, the company expects a strong recovery in orders from 2H2021 through 2022 as their next generation tools are phased into customer’s High Volume Manufacturing sites globally.

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