950 Broker's Digest

ParkwayLife REIT (PLife REIT), which holds a portfolio of hospitals and nursing homes, is set to continue driving growth in asset recycling as it looks to build a potential third pillar in mature markets, says DBS Group Research. PLife REIT surprised the market when it was to be included in the FTSE EPRA Nareit Global Developed Index with effect from Sept 18, sending its share price above its pre-Covid-19 high of $3.74.

DBS analysts Rachel Tan and Derek Tan are maintaining their “buy” call on the REIT, with a 12-month target price of $4.

“Despite PLife REIT commanding a premium and maintaining its share price during the Covid-19 pandemic with its resilient earnings visibility, we believe that its indexation will increase its visibility to many institutional investors and index funds. Consequently, this will further validate its premium,” the analysts write in a Sept 4 note.

The first 15 years of the 15+15 years master lease for its three Singapore hospitals with its sponsor via Parkway Hospitals Singapore will be expiring on Aug 22, 2022, note the analysts. “We understand that discussions are currently underway. Our base case expectation is that the master lease will be renewed for the next 15 years, with the lease structure to be maintained.”

PLife REIT is seen to deliver steady distribution per unit (DPU) growth through its three-pronged growth plan, note the analysts, namely asset-recycling strategies, venturing into a new market (third pillar) and acquiring assets from its sponsor.

While asset-recycling activities for its Japan assets have been sporadic, the analysts believe that this will continue to drive growth given its successful track record. However, the timing of this exercise remains uncertain.

As its Japan assets have grown to a decent size, contributing about 40% of the PLife REIT’s gross revenue, the management believes that it is timely to look into building a third pillar for the company for its next growth phase, in addition to asset recycling and acquisition pipeline from its sponsor, say analysts.

In July, the manager of PLife REIT reported a DPU of 3.36 cents for 2QFY2020 ended June, up 2.5% y-o-y. Gross revenue for 2QFY2020 grew 4.9% y-o-y to $30.3 million, thanks to higher revenue from Singapore, Japan and favourable exchange rates. — Jovi Ho

Frasers Centrepoint Trust
Price target:
CGS-CIMB “add” $2.83

Higher DPU seen with full ownership of ARF
CGS-CIMB Research analysts Eing Kar Mei and Lock Mun Yee are positive on Frasers Centrepoint Trust (FCT) following its acquisition of the remaining 63.1% of PGIM Asia Retail Fund (ARF) on Sept 3.

“We like ARF’s malls as they are strategically located within five minutes walking distance of an MRT station,” say Eing and Lock in a report dated Sept 4, as they maintain their “add” recommendation on the stock with a higher target price of $2.83 from $2.78 previously.

“In addition, four of the five assets are situated in low retail space per capita regions while three of the five malls are dominant malls and hence face little competition in their respective areas,” they add.

While shopper traffic of FCT and ARF are still around 60% below pre-Covid 19 levels, tenant sales have recovered back to those levels.

The manager of FCT says the transaction is a “follow-through of our strategy to increase FCT’s stake in ARF”.

“We acquired the initial 17.1% stake in ARF in April 2019, followed by acquisitions of additional interest that increased FCT’s stake to the current 36.9% when the opportunity presented itself. The acquisition of the remaining 63.1% stake is the final step to carry that strategy to fruition,” says Richard Ng, CEO of the manager.

In the same statement, FCT also announced that it will be divesting Bedok Point for a sale price of $108 million.

Upon completion of the deal, FCT will become one of the largest suburban mall owners in Singapore, with a total of 11 retail properties in its portfolio, from seven previously. Its net lettable asset (NLA) will expand by 64% to 2.3m sq ft, its portfolio size will double to $6.65 billion.

“We expect the acquisition to further strengthen FCT’s resilience”, say Eing and Lock, while noting that Bedok Point, with its relatively lower occupancy rate and weaker rental reversions, has been one of FCT’s weaker assets.

Eing and Lock has thus raised their FY2021- 2022 distribution per unit (DPU) by 3%-4%.

“We expect FCT to see a faster recovery from the impact of Covid-19 than its peers. Covid-19 pandemic has heightened the importance of having a resilient portfolio which would further boost the profile of FCT which is the only pure suburban mall REIT in Singapore,” they add. — Felicia Tan

CapitaLand Mall Trust
Price target:
Maybank Kim Eng “buy” $2.35

Proposed merger with CCT to bring scale and benefits
Maybank Kim Eng’s Chua Su Tye has maintained his “buy” call on CapitaLand Mall Trust (CMT) with an unchanged target price of $2.35, in view of the latter’s proposed merger with CapitaLand Commercial Trust (CCT).

The proposed merger is planned to be undertaken via an acquisition of all the units of CCT by CMT under a trust scheme of arrangement.

Existing unitholders of CMT and CCT are expected to vote on the proposed transaction at an extraordinary general meeting on Sept 29. Chua continues to favour CMT because the scale benefits from the merger are unchanged.

Also, a more diversified portfolio and higher development headroom adds growth options, to support its portfolio remodelling over the medium term, he says.

Moreover, both CMT and CCT unitholders will enjoy a higher dividend distribution per unit accretion, thanks to the waiver of CMT’s acquisition fee.

“Merger merits unchanged,” writes Chua in his Sept 6 note. — Jeffrey Tan

Micro-Mechanics
Price target:
PhillipCapital “buy” $2.50

New growth drivers and higher dividends
PhillipCapital’s Paul Chew has upgraded Micro-Mechanics Holdings (MMH) to “buy” from “hold” after it posted strong 4QFY2020 profits 48% higher y-o-y to $3.9 million, thanks to improved margins that’s at the highest level in seven quarters. His new target price on the counter is $2.50, up from $1.60 previously.

Chew believes MMH was able to command better pricing power in 4QFY2020 as customers needed to create buffers in their inventory levels with worries over possible disruption to the supply chains, and highlighted a move in inventory levels from just-in- time (JIT) to just-in-case (JIC).

Chew also said after several years of development, the company has secured a “significant breakthrough in new front-end projects and customers” in the US and which will be a new growth driver. As such, he is raising his FY2021 earnings forecast by 25%.

In light of the strong showing, dividends were raised by 17%. The final MMH dividend for FY2020 was unchanged at five cents, but special dividends doubled to two cents.

Chew also said MMH has been paying special dividends for the past five years, and this “seems to be normal rather than special.” Therefore, the blended increase is 17%, and total dividends for FY2020 have increased by 20% to 12 cents. — Lim Hui Jie

Sembcorp Industries
Price target:
PhillipCapital “buy” $2.72

New focus on urban and energy with Sembcorp Marine decoupling

PhillipCapital has initiated coverage on Semb- corp Industries (SCI) with a “buy” call and a target price of $2.72, representing a 41.7% upside on the counter.

The call comes following the completion of the rights issue by Sembcorp Marine (SembMarine) after both companies announced the decoupling of their respective businesses on June 8.

“We believe the market could assign a 0.7x FY2021e P/BV for SCI (ex. SCM), a slight discount to their 10-year historical average of SCI (ex. SCM), which will give us $1.75/share,” writes analyst Terence Chua in his Sept 9 note.

“SCI shareholders will also receive 4.911 of SCM shares for every one share held. Based on SCM’s last closing price of 19.9 cents on Sept 7, SCI shareholders could receive a total of $2.72/ share ($1.75 + (4.911 x $0.199)),” he adds.

Furthermore, the brokerage expects a positive re-rating of SCI following the demerger as its profitability and return on equity (ROE) are estimated to improve to 7.6% and 9.6% respectively from 2.7% in FY2021.

“The deconsolidation of SCM will transform SCI into an energy and urban business. SCI will now be able to focus their resources on capturing growth opportunities in two of their key segments independently of SCM,” says Chua.

“Even though the conglomerate discount attached to SCI should narrow, we think this might take time as investor’s confidence in the management could take time to rebuild,” he adds.

The IPO of Sembcorp Energy India Limited (SEIL), flagged back in 2019, could also cement the value of SCI’s Indian business unit, which the brokerage estimates to have a value of about INR98 billion ($1.8 billion).

“As sole owner now, we believe SCI will have full flexibility to evaluate a full range of growth opportunities in the renewables segment, while at the same time evaluate the right equity window to list their India business more expediently,” says Chua.

“We expect SCI to see improved profitability and generate positive operating cash flow of $854 million and $1.2 billion for FY2021e and FY2022e respectively, which will strengthen their balance sheet and puts them in a good stead to ride out the current crisis,” he adds. — Felicia Tan

UG Healthcare Corp
Price target:
CGS-CIMB “buy” $4.80

The ‘it’ stock to watch
The best is yet to come for UG Healthcare, says CGS-CIMB Securities analyst Ong Khang Chuen, who is maintaining his “add” or “buy” call on the counter at a revised target price of $4.80, from $3 earlier. “We believe UG Healthcare Corp can record another 5x net profit jump in FY6/2021F, on the back of strong global glove demand due to the Covid-19 pandemic,” writes Ong in his Sept 7 note.

His optimism stems from expectations of an increase in the average selling prices (ASPs) of gloves — both at the manufacturing and distribution levels, higher sales volume and higher economies of scale.

Things are already looking up for UG Healthcare, with net profit for 2HFY2020 ended June coming in at $12.6 million. The latest results do not fully capture the increase in ASPs as glovemakers only increased prices in late April, observes Ong.

More recently, the company has increased ASPs by around 10% to 12% per month. This could translate to a 50% y-o-y surge in net profit of $15.7 million in 1QFY2021 ending September, he estimates.

Ong adds that an ever further increase in ASPs may well be around the corner if customers switch from nitrile to latex gloves, which have a shorter lead time.

With some 50% of UG Healthcare’s revenue coming from the sale of latex gloves, Ong says this spells good news for the company.

For now, it seems the company is reaping the fruits of its prior investments in building up its downstream distribution and proprietary brand.

At present, its downstream network can handle more than its manufacturing output volume, says Ong. He also estimates that some 20% of its FY2020 sales volume are from outsourced glove production.

The company now plans to expedite the expansion of its glove production capacity by 59% y-o-y to produce 4.6 billion pieces per annum by end June 2021, compared to the 3.2 billion pieces it previously announced.

Given UG Healthcare’s upcoming activity, Ong says the counter “remains [a] preferred pick among Singapore-listed rubber glove companies, due to its undemanding valuation of a 58% discount to the Malaysia-listed glove sector average of CY2021 Price-to-Earnings of 18.4 times”.

Its business model also enables it “to garner stronger ASP potential vis-à-vis its peers,” he adds. — Amala Balakrishner