942 Brokers' Digest

Despite the Covid–19 pandemic and US– China rivalry rattling markets in recent months, Maybank Kim Eng (MKE) analyst Gene Lih Lai has initiated a “buy” call on the technology hardware manufacturer Frencken. Quality growth and its relative insulation against geo–economic conflicts, he says, are likely to make it a good prospect for investors.

“Our “buy” on Frencken is premised upon exposure to structurally growing markets through blue-chip customers, earnings resilience despite a challenging business environment due to Covid–19 and US–China trade tensions and track record of margin improvement with room for more,” Lai says in his July 12 report. He has given the counter a $1.20 12–month price target with a 34% upside.

Frencken manufactures components and modules for a wide range of growth industries including 5G and artificial intelligence. In mechatronics, which consists of 82% of its revenue, it is often the sole supplier of certain parts to customers that are themselves market leaders such as ASML, Seagate, Thermo Fisher and Phillips.

Particularly in the mechatronics segment, Frencken’s products tend to be critical but are not core competencies of its customers, says Lai. Using Frencken’s services allows the customers to free up resources to maintain their market leadership.

Frencken is chosen as a supplier not just because of its engineering and manufacturing expertise, but also because of its experience in managing the supply chain for complex products. “Overall, we believe this boosts Frencken’s stickiness with customers,” he notes. Lai expects Frencken to tap into these relationships to introduce products with greater value–add, consequently further driving its margins. The firm has also been upgrading its equipment and that has resulted in better operating margins.

Moreover, he does not believe that Frencken will be unduly affected by Covid-19 despite present uncertainty. Much of demand–side disruptions has tended to arise from order or receipt delays rather than cancellations, key customers remain bullish about the future, believing that the resumption of elective surgeries and reopening of labs will lead to demand recovery. Frencken’s geographical and product diversity also shelters it from US–China trade tensions as its supply chains are relatively ring–fenced and China only accounts for 15% of its revenue.

“Currently, factories in Singapore, Malaysia and China have resumed normal manufacturing operations following the easing of government restrictions. In Thailand, the Netherlands, the US and Switzerland, operations are continuing as usual,” Lai says.

In addition, the firm’s strong balance sheet should help it tide over the cashflow pressure plaguing businesses during this pandemic. Lai sees Frencken’s net cash to equity to rise from 23% in FY2019 to 35% in FY2022 due to robust cash generation. He assumes a 30% dividend pay–out ratio as the firm’s free cash flow should be sufficient to cover its distribution per share.

Lai expects Frencken to become increasingly involved in new products across promising growth areas like semiconductors, analytical and medical products. In light of its strong execution track record, he expects Frencken to gain wallet share with its customers going forward, probably by providing new products with stronger value-add and enhanced margins. He also estimates a FY2021–2022 PATMI of 14% or higher against the Bloomberg consensus for the counter, arguing that the firm’s strong potential has often been overlooked by the market.

Though the firm’s net profit looks set to decline 11% y–o–y in FY2020 due to supply chain and order delays, Lai sees profits recovering by 18% and 10% y–o–y in FY2021 and FY2022 respectively on the back of revenue growth and margin expansion. Nevertheless, net margin estimates for FY2022 is estimated to come in at a disappointing 7.7%, with the firm already achieving a core net margin of 7.1% in FY2019 and maintaining significant room to further improve customer value–add. — Ng Qi Siang

Frasers Logistics & Commercial Trust
Price target:
CGS–CIMB “add” $1.43

“Stronger growth trajectory” seen post–merger: CGS–CIMB

Frasers Logistics & Commercial Trust (FLCT) is on a “stronger growth trajectory” following its merger in April with a stable and resilient portfolio backed by long weighted average lease expiry, say CGS–CIMB analysts Lock Mun Yee and Eing Kar Mei in a July 13 report. They have given FLCT an “add” call and raised the target price to $1.43, from $1.30.

“The successful merger of FLT (Frasers Logistics & Industrial Trust) and FCOT (Frasers Commercial Trust) on April 29 resulted in the formation of one of the largest diversified logistics/commercial SREITs, Frasers Logistics & Commercial REIT (FLCT),” note the analysts, adding that it is now the eighth largest Singapore REIT (S–REIT) by market cap with a capitalisation in excess of $4.1 billion.

Following the merger, FLCT’s investment mandate has also been expanded to include CBD commercial and office and business parks properties, in addition to industrial and logistics asset class. Now, with a wider investment mandate, FLCT should benefit from its robust expanded pipeline of right of first refusal assets, say the analysts.

As of last September, its expanded portfolio of $5.7 billion comprises logistics and industrial properties (59%) and commercial/ business parks assets (41%), spread across Australia, which accounts for 48% of assets under management (AUM), Europe, Singapore and the UK.

Its portfolio remains resilient even during the pandemic situation, with rental collection rate to date remaining high, notes CGS–CIMB. “We attribute this resilience to both tenant quality and trade sector mix.”

At end 2QFY2019–2020, the top 10 tenants comprising major MNCs or its affiliates account for 27.8% of FLCT’s logistics and industrial portfolio. By tenant sub–sector mix, 74.8% of the logistics and industrial portfolio comes from essential services, such as the logistics and consumer sectors.

That said, the impact of the lockdown in Australia and the “circuit breaker” measures in Singapore is likely to hamper the company’s newly consolidated commercial portfolio in the near term, say analysts.

With relief measures such as property tax rebates and rental waivers, however, the impact on the company is likely to be minimal, as retail contributions make up approximately 5% of enlarged portfolio revenue.

“More importantly, the larger and stronger inorganic growth prospects would more than compensate for the near–term slower retail contributions,” say Lock and Eing.

Post–merger, the FLCT’s gearing is expected to rise to about 37%. Blended debt maturity and interest cost could shorten and rise to approximately 2.9 years and 2.3% respectively, say the analysts. “However, we anticipate these changes to be temporary as FCOT had redeemed $159.5 million of its fixed rate notes on July 9.”

“In our view, we think these notes could likely be refinanced at lower than prevailing rates, thanks to the low interest rate regime.”— Jovi Ho

ARA US Hospitality Trust
Price target:
KGI Securities “Outperform” US$0.67

US Covid–19 cases accelerate but portfolio is resilient

Despite a recent spike in new Covid–19 cases in the US, ARA US Hospitality Trust has continued to be a favourite of KGI Securities. The brokerage points out that ARA can keep margins up, thanks to its defensive portfolio. This is due to the cost flexibility associated with the select–service and extended–stay sector.

ARA’s manager has also been “diligent” and “proactive” in implementing cost saving initiatives, saving up to US$143,000 ($199,232) a month as demand declines, it adds.

KGI has maintained its “outperform” rating for ARA with a 12–month target price of US$0.67. “We remain optimistic on ARA’s portfolio’s ability to outperform its peers due to the quality of its assets,” KGI analyst Amirah Yusoff writes in a note July 14.

In late June, new Covid-19 cases in the US peaked at 250,000 — especially in several states that were among the first to reopen earlier in the month. At the same time, revenue per available room (RevPAR) improved to –56.5% from a trough of –83.6% in mid–April.

ARA can recover more quickly than other hotels in international demand-driven locations as its revenues and guests are largely domestic-driven. The risk, however, is that the demand improvement may be insufficient to support a growth recovery in RevPAR, says Amirah. — Jeffrey Tan

Boustead Projects
Price target:
CGS–CIMB “add” 88 cents

Significant value despite slow recovery ahead

CGS-CIMB Research has maintained its “add” call on Boustead Projects (BP) with a lower target price of 88 cents, from 93.1 cents, after FY20 earnings of $23 million was just 90% of what’s expected.

While BP’s revenue surged 92.5% y–o–y to $426.2 million for 2HFY2020, BP suffered from lower gross margins on ongoing projects, and a lower quantum of cost savings from previously–completed projects. In order to conserve cash, BP has cut its FY2020 dividend payout to just 0.8 cents from two cents paid in FY2019.

As of end FY2020, the company is sitting on an order book of $496 million that is higher than the five–year average of $330 million. However, with foreign worker dorms in Singapore being the most affected by the Covid–19 outbreak, the construction industry in Singapore was put on hold for two months from April 7 to June 1, as part of the “circuit breaker” measures, causing slower construction progress. The analysts expect this to cause a 44% revenue drop in BP’s design-and-build segment for FY2021.

Analysts Ong Khang Chuen and Caleb Pang said they said they “expect a staggered return to normalcy post circuit breaker (CB), given labour constraints and new conditions for working in the post–CB era”. They also expect lower project margins in FY2021, given the need for additional safety measures in accommodation and transportation of workers.

Meanwhile, they are hopeful that a REIT listing from BP’s leasing segment in the near term is possible. “We think such a move could unlock significant value, as BP’s investment properties are accounted for at cost less depreciation,” adds Ong and Pang. They expect BP’s leasing segment to remain resilient in FY2021F as the majority of its industrial properties are single–tenanted and leased to blue chip multinational corporations.

This comes despite the analysts noting that BP’s rental collection rate remains high, but is actively working with a handful of tenants affected by Covid–19 to assist them with deferment of rental payments.

Due to overall slower progress completion and lower order win assumptions, the analysts have lowered FY2021–2022 earnings per share forecasts by 38% to 63%. But the stock’s current valuation of 0.55 times FY2020 RNAV is deemed as attractive. — Lim Hui Jie

Boustead Singapore
Price target:
CGS–CIMB “add” $1

Strong demand to drive growth

CGS-CIMB has kept its “add” call and target price of $1 on Boustead Singapore following FY2020 earnings that came in line with expectations. Its geospatial technology and energy–related engineering segments did well but somewhat offset by its property division, through 53% owned Boustead Projects.

The research house also has an “add” call on Boustead Projects but with a lower target price of 88 cents.

Unlike Boustead Projects, Boustead Singapore has managed to keep its FY2020 dividend per share at 3 cents.

The reason for the company’s strong performance in its geospatial technology segment was primarily due to a steadfast demand across Australia and Southeast Asia, which resulted in revenue and pretax profit growth of 12% and 9% y–o–y, respectively, in FY2020.

In a July 14 report, analysts Ong Khang Chuen and Caleb Pang writes: “Underpinned by government agencies’ increasing use of smart mapping technologies to combat the recent major crises, including Australia’s massive bushfires and global spread of Covid–19 (contact tracing, planning of emergency routes etc), we continue to expect a 7.5% pretax profit growth for the segment to $31.9 million in FY2021.”

As for the company’s energy–related engineering segment, pre tax profit for FY2020 surged six times y–o–y, despite the downturn in global crude oil prices. This is as Boustead executed on its strong order backlog.

“We see strong earnings visibility till end 1H2022, as the orderbook remained high at $279 million as of end FY2020 (end FY2019: $103 million), mainly made up of downstream oil and gas businesses (waste heat recovery units for LNG projects). We forecast an energy–related engineering segment to record a pretax profit growth of 61% y–o–y to $12.7 million in FY2021,” says Ong and Pang.

On the other hand, weaker project margins caused the company’s property segment to see a 23% y–o–y fall in pre tax profit. Although this segment’s orderbook remains healthy, the analysts have forecasted pre tax profit to further fall by 56% y–o–y in FY2021 due to a staggered return to normalcy for construction activities post circuit breaker.

“With lower profit assumptions from the property segment, we lower our FY2021–2022 EPS by 22%–24%,” says the analysts. — Samantha Chiew

Ascott Residence Trust
Price target:
DBS “buy” $1.10

Staycations may act as wanderlust substitute

DBS Group Research analyst Derek Tan has maintained his “buy” call on Ascott Residence Trust (ART) with a target price of $1.10 following its profit guidance on July 13.

On the back of global travel restrictions and the circuit breaker measures from April to June, which saw the suspension of non–essential services, ART says it expects its distributable income for 1H2020 to be reduced by 55%– 65% y–o–y from $74.6 million in 1H2019, and its distribution per unit (DPU) to decline by 65%–75% from 3.43 cents in 1H2019.

In the July 13 report, Tan says he is maintaining his full-year estimates for ART’s distributable income and DPU of $140 million and 4.52 cents respectively due to the recovery curve anticipated for 2H2020, even though the figures “may look high for now”.

He adds that the worst is “likely over” for the Trust since April, when 18 of its 88 properties were closed temporarily. On top of that, ART has a 68% and 20% exposure in the Asia Pacific and European markets, where international travel demand is expected to recover ahead of the US.

“We view phased reopening as a positive sign that most ART’s portfolio assets have attained at least a breakeven level of operations and the relaxation of mandatory hotel closures to be a positive sign within the respective markets,” says Tan.

“1H2020 results will likely represent a trough, and we do not see this being extrapolated for the full year,” he adds.

With the inclusion of assets from Ascendas Hospitality Trust, 45% of gross profit on a normalised basis will originate from 35 master leases and seven management contracts with minimum guaranteed income (MCMGI) assets, which will form some level of downside protection.

As such, Tan feels that ART’s master leases should be able to contribute some 1.9 to 2 cents to its overall DPU.

There may be downsides in the near–term due to rental assistance offered to master lessees based on government regulations or goodwill.

Looking ahead, ART may have to rely on staycations as a potential substitute to satisfy pent-up demands for travel due to ongoing international border closures.

However, as ART’s focus is on the service residence segment, staycations may “limit its profitability” from this trend.

Within Singapore, government hotel bookings for stay–home–notice residences may reflect occupancy strength in 2Q2020 but there may be a declining momentum for the rest of the year. — Felicia Tan