937 Brokers' Digest

The Russian ruble has appreciated some 15% against the US dollar over the last two months amid oil price improvements. RHB Group Research analyst Juliana Cai believes that this is a positive for instant coffee manufacturer and distributor Food Empire, as Russian business accounts for around 40% of its revenue.

Cai has kept her “buy” recommendation on Food Empire with a target price of 75 cents.

Given that Food Empire’s sales of goods are denominated in local currency while the bulk of raw materials are priced in US dollars, the strengthening of the Commonwealth of Independent States (CIS) currencies should help reduce gross margin erosion in 2QFY2020.

While the improving ruble should help support the company’s gross margins and minimise foreign exchange losses, she expects the 2QFY2020 results to still be soft due to the introduction of the non-working period in Russia from end March to mid-May, with only essential services opened as the Moscow and Saint Petersburg regions extended their lockdowns to May 31.

Food Empire had earlier said Russia’s sales were negatively impacted in April due to lower footfalls at retail stores.

“We believe sales for May will also remain soft before picking up in June in line with the gradual resumption of economic activities. We expect the same for Ukraine and Kazakhstan, as these two countries also began to gradually ease their restriction measures,” says Cai.

“We expect business to start picking up in June with the relaxing of the lockdown measures.” — Samantha Chiew

Dairy Farm International
Price target:
CGS-CIMB “Hold” US$5.45

Recovery from lockdowns prompts upgrade by CGS-CIMB

As most markets are now emerging from the Covid-19-induced lockdowns, Dairy Farm International’s near-term prospects are looking better, says CGS-CIMB analyst Cezzane See.

As such, she has upgraded Dairy Farm International to “hold” from “reduce”, and raised her target price to $5.45 from $4.38 previously.

The new target price is based on a price-to-earnings ratio (P/E ratio) of 20 times FY21F earnings per share (EPS), from an earlier valuation of 17 times.

At current levels, the negative factors that have dogged this stock — the Hong Kong street protests and the Covid-19 outbreak — have been largely priced in. According to See, there’s now more room for further optimism down the road.

“We would turn more positive on the stock on a meaningful recovery in Hong Kong’s economic conditions (amid sporadic ongoing protests) and tourist arrivals, especially from China (down 54% y-o-y in Jan 20 pre-Covid-19 outbreak and 99% y-o-y in Apr 20),” says See. She also sees Chinese visitors from the mainland as a key driver of Dairy Farm’s Hong Kong health and beauty segment, North Asia sales, and EBIT growth.

Dairy Farm has also announced its careful management of its capital expenditures (Capex) and working capital, as well as a sales agreement to divest 100% of Wellcome Taiwan to Carrefour in June.

“We think all these are steps to preserve its cash position. As such, its FY2020F DPS of US$0.21 should be intact, which at today’s close implies a dividend yield of 4.4%,” she adds. — Felicia Tan

Suntec REIT
Price target:
DBS "Buy" $1.81

Prospects to rebound as workers return to the office

With the Phase 2 reopening of Singapore’s “circuit breaker” measures anticipated to take place earlier than expected, DBS Group Research analysts Rachel Tan and Derek Tan are reiterating their “buy” call on Suntec REIT as the return of workers to their offices is likely to improve prospects for Suntec City Mall and the REIT’s office buildings.

At current levels, Suntec REIT is trading at just 0.7 times its net asset value, close to below one standard deviation. The analysts believe that the worst is over for Suntec REIT and expect a 13% upside. However, with softer economic conditions and the need to provide rental relief seen to hurt earnings, they’ve cut their target price to $1.81 from $2.15.

For 1QFY2020, its revenue fell 3% y-o-y to $87 million while net property income (NPI) fell 7% y-o-y to $54 million, driven primarily by a 10% y-o-y decline in NPI from the mall. The weak Australian dollar also affected earnings from Suntec’s Australian holdings, though earnings from 55 Currie Street in Adelaide have mitigated losses.

Distribution per unit (DPU) for 1QFY2020 fell 28% y-o-y to 1.76 cents due to lower contributions from operations affected by the Covid-19 outbreak and the circuit breaker measures that followed with Suntec REIT keeping 10% of distribution income and holding back capital distribution.

Relief measures for tenants now and towards the end of the year might result in a 15% drop in Suntec REIT’s net property income, estimates the DBS analysts.

Nevertheless, the REIT’s financial position is sound as its gearing remains within the 50% regulatory limit, although it has increased to 39.9% in 1QFY2020 from 37.7% in 4QFY2019 for new property developments and acquisitions in Australia, as well as due to a weakening of the Australian dollar.

“Management expects gearing to increase to 41.5% by end-1H2020 post the completion of acquisition of 21 Harris Street (in Sydney) on Apr 6 and 477 Collins Street (in Melbourne),” note the analysts. Going forward, management expects to maintain 40%-42% gearing levels with acquisitions and could explore possible divestments in order to further solidify its financial position.

Down the road, Suntec REIT can potentially grow by acquiring one of two office towers to be built at Park Mall, which it is redeveloping in a joint venture after selling it for $412 million in 4QFY2015. UBS will be the anchor tenant for the redeveloped property, providing steady income for Suntec REIT through a 30% stake it owns in the joint redevelopment venture. Its new acquisitions in Australia will also provide an earnings uplift in the medium-term. — Ng Qi Siang