Brokers' Digest 957

Transformation gains traction
Dairy Farm International’s (DFI) multi-year transformation is “tracking well”. With better margins already seen in its 1HFY2020 supermarket business, the regional retail giant is poised for better operating efficiencies and thus a re-rating, say DBS Group Research analysts Alfie Yeo and Andy Sim in an Oct 23 note. They have kept their ‘buy’ call and US$4.44 ($6.04) target price on regional retail giant.

DFI, part of the Jardine conglomerate, runs over 6,400 supermarkets, hypermarkets, health and beauty stores and convenience stores across Asia. For 1H2020, its earnings dropped 35% y-o-y to US$115 million. While supermarkets have benefited from the Covid-19 lockdowns, Yeo and Sim note that DFI’s health and beauty business — which contributed nearly a third of total revenue in FY2019 — was hurt as it was heavily dependent on tourism traffic.

That said, the analysts expect supermarket sales to remain elevated despite moderating from the 1H2020 peak.

“In Singapore, we expect gradual easing of “circuit breaker” measures. This should keep levels of socialising and entertainment subdued as a good number of consumers continue to cook at home. These should keep supermarket sales robust on a y-o-y basis, even though sales are easing from the peak in 1H2020,” they add.

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In China, Yeo and Sim have lowered their estimates for DFI’s Chinese brand Yonghui on a combination of logistical problems caused by flooding in some provinces as well as losses from an online associate.

As a result, they have trimmed DFI’s FY2020-2022 earnings forecasts by up to 6%. “Nonetheless, we expect 4QFY2020 to resume a better momentum along with new store sales contribution, normalising traffic in physical stores, and the payoff of online sales promotional efforts,” say Yeo and Sim. — Jovi Ho

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CapitaLand Mall Trust

Price target:
CGS-CIMB “add” $2.13
OCBC “buy” $2.38
Maybank Kim Eng “buy” $2.35
RHB Securities “neutral” $2.03

Most analysts positive on CMT
Most analysts continue to advise investors to accumulate CapitaLand Mall Trust (CMT) following its 3Q and 9MFY2020 results ended Sept 30. But not RHB Securities’ Vijay Natarajan, who is keeping his “neutral” call and target price of $2.03.

The brokerage is warning that CMT’s rents will remain under “pressure”. It also points out that the trust’s key malls — Raffles City Singapore, Bugis Junction, Tampines Mall, Lot One Shoppers’ Mall and Bugis+ — saw significant rent declines.

Moreover, the impact of Covid-19 has been more severe on downtown malls as compared to suburban malls, due to a lack of tourists and work from home trends. “We expect rent reversions to be in the –5% to –15% range as maintaining a high occupancy is expected to be the key focus,” writes Natarajan in his Oct 26 report. In addition, CMT’s valuations are not compelling in his view as it is trading at book value.

However, CGS-CIMB Research’s Eing Kar Mei and Lock Mun Yee in their Oct 22 note, continues to call CMT an “add” albeit with a reduced target price of $2.13, from $2.26.

They believe that CMT has already priced in the near-term volatility. Furthermore, the benefits of CMT’s merger with CapitaLand Commercial Trust (CCT) into CapitaLand Integrated Commercial Trust (CICT) would be “felt in the longer run” when it delivers on accelerated growth prospects. “We look forward to the merged CMT-CCT entity (effective from Oct 21) which will commence trading as CICT on Oct 28,” the analysts note.

OCBC Investment Research has also kept a “buy” rating for CMT with a fair value of $2.38. The overall operating landscape remains challenging, but there are encouraging signs, such as improved momentum in sales for categories such as home furnishing and sporting goods. Tenants are also proactively rolling out new concepts, while CMT’s occupancy cost remains within its comfortable level of 18% to 20%, it says.

Some tenants have also expressed interest to expand, it adds, although this would likely happen only in late 2021 or 2022.

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OCBC notes that CMT’s higher DPU of 3.1 cents is positive. “Although this was a one-off boost, we view it as a signal that CMT is more confident in the outlook for it to release the bulk of its income previously retained,” the OCBC research team writes in their Oct 23 report.

Meanwhile, Maybank Kim Eng’s Chua Su Tye says CMT’s tenants’ sales have gained traction in the Phase Two reopening, which should underpin the recovery of its suburban assets. Together with CMT scale, this will help cushion its DPUs in FY2021-2022 against necessary tenant remixing at Raffles City and Clarke Quay in the near term, says Chua, who is keeping his “buy” call and $2.35 target price unchanged. “Spending is on the mend,” he adds. — Jeffrey Tan

Keppel Infrastructure Trust

Price target:
DBS Group Research “buy” $0.58

Dividends to stay stable
DBS Group Research’s Suvro Sarkar has maintained his “buy” rating on Keppel Infrastructure Trust (KIT), but with a slightly raised target price of 58 cents from 57 cents earlier. According to Sarkar, KIT is seen to maintain its record of steady DPUs in 2HFY2020, as distributable cash flows for the first nine months have provided a sufficient buffer.

Amid the pandemic, KIT’s assets have remained operational as essential services, demonstrating the resilient nature of the portfolio. For 3QFY2020, KIT’s EBITDA was up 7% y-o-y to $83 million but operational cash flows were down 16% y-o-y to $53.4 million, due to higher capex incurred in Australia.

Sarkar notes that distributable cash flows were down 27% q-o-q to $45.2 million, a result that was expected as cash flows in the previous two quarters had been higher than normal, owing to deferment of capex at Ixom and tariffs playing catch-up at City Gas.

In addition, overall 9MFY2020 distributable cash flows was $158.5 million, up 6% y-o-y — well above the payout requirement of $139.3 million and leaving a significant buffer for the future.
KIT’s distributable cash flows are in any case “largely immune” to economic cycles as most assets derive availability-based revenues, and no liquidity or solvency issues are forecast for the Trust in the near term, says Sarkar.

Furthermore, he believes that KIT is “sufficiently protected” from the troubles at Australian asset Basslink, which is in arbitration proceedings against its counterparties related to a six-month outage in 2016.

He expects that even in the worst-case scenario, KIT should not be liable to pay any damages as any claims against Basslink are ring-fenced at the Basslink level.

In any case, KIT does not depend on cash flows from Basslink for current distributions, and project loans are also non-recourse to KIT. DBS ascribes zero value to Basslink in their valuations for KIT. Therefore, “any negative newsflow from Basslink is an irritant at worst and would not affect KIT’s fundamentals,” they add. —Lim Hui Jie

Singapore Airlines

Price target:
UOB Kay Hian “buy” $3.94

Cargo operations could help boost SIA’s cash flow
UOB Kay Hian analyst K Ajith has upgraded Singapore Airlines (SIA) to “buy” with an increased target price of $3.94, from $3.53, as he feels its operations is “likely to gain momentum” in the next three months.

“Together with the government’s proposal to provide Covid-19 travel insurance, this reduces the risk profile of travellers. We are now more positive on cargo operations rather than the recovery in passenger traffic, especially from higher freight rates when the vaccine dissemination gets underway,” he says.

On Oct 20, the Singapore government announced that it will provide subsidies and insurance coverage for Singaporeans, permanent residents and long-term pass holders who develop Covid-19 symptoms within 14 days of their return.

“We believe this move will boost confidence in air travel, leading to more advance bookings and improving SIA’s cash flow,” Ajith adds. Following the announcement of the travel corridor with Hong Kong, Ajith believes Singapore will negotiate similar arrangements with Australia, China, Japan, Taiwan and Thailand.

The airline’s ramp-up of cargo operations is also likely to reduce core losses in 2HFY2021. “Presently, cargo operations account for al- most 80% of group capacity while load factors achieved a record high of 89% in Sept 2020, implying a shortage of cargo capacity,” he says.

“Even if more countries open their borders, we believe SIA will continue to add more cargo capacity by: a) converting some of Scoot’s A320 aircraft to carry cargo; and b) utilising SIA’s older B777-300 to carry dedicated cargo. We also believe cargo operations would be much more lucrative than passenger operations.”

“Scoot’s reconfigured A320 can carry almost 20 tonnes of cargo and current cargo rates are at US$5 ($6.79) to US$6 per kg, more than double of that in the previous year. Some industry experts believe cargo rates could go up to US$10 per kg once vaccines are moved via air,” he adds.

Ajith has identified three catalysts for the growth of SIA’s share price — the opening of borders between China and Singapore, the conversion of more passenger aircraft to carry cargo and the announcement of the Covid-19 vaccine.

“As demand for travel rises, ticket prices are likely to rise sharply. While it is impossible to accurately estimate the impact, we believe the upside risk is greater,” he concludes.

“We now value SIA at 0.9x (previously 0.8x) FY2020/2021 book value, according to the company, the same P/B valuation as Cathay Pacific Airlines. We have also factored in additional dilution arising from the issuance of new mandatory convertible bonds.” — Felicia Tan

Ascendas REIT

Price target:
CGS-CIMB “add” $3.20
Maybank Kim Eng “buy” $4
OCBC Investment Research “buy” $3.92

Analysts upbeat amid improved occupancy in 3Q
As Ascendas REIT (AREIT) has delivered better occupancy of 91.9% in 3QFY2020, analysts are positive on its prospects ahead. CGS-CIMB Research’s Lock Mun Yee and Eing Kar Mei have upgraded their call to “add” from “hold”, along with a higher target price of $3.20 from $3.12 previously. They expect AREIT to increase its FY2021-2022 DPU forecasts to factor in interest cost savings from the perpetual securities issued in September, and to also include new contributions from two Australian properties under development, scheduled to be completed over the next two years.

“AREIT’s share price had retraced by 13% over the past three months and offers attractive FY2021 yield of 5.1%,” the analysts write in their Oct 26 report.

Meanwhile, Maybank Kim Eng’s Chua Su Tye has kept his “buy” call and target price of $4 on the REIT. “Fundamentals remain strong, supported by scale, concentrated Singapore business parks portfolio, and DPU upside from further overseas diversification,” says Chua in his Oct 27 note.

Similarly, OCBC Investment Research has also retained its “buy” recommendation for AREIT with an unchanged fair value of $3.92.

The brokerage deems AREIT’s attractive distribution yield of 5.1% for FY2020 and 5.4% for FY21 as a “good entry point”. “We also see upside potential from inorganic growth opportunities ahead given AREIT’s healthy balance sheet and geographical reach,” the OCBC research team writes in an Oct 27 report. — Jeffrey Tan

Keppel DC REIT

Price target:
PhillipCapital “neutral” $2.91

Higher target price on pending acquisitions
PhillipCapital analyst Natalie Ong has maintained her “neutral” recommendation on Keppel DC REIT with a higher target price of $2.91 from $2.57 after incorporating $500 million of acquisitions for FY2021.

Ong says the maintained recommendation comes as she believes the market has priced in potential catalysts from acquisitions and the REIT’s inclusion in the Straits Times Index (STI).

“KDC REIT is trading at an all-time high and DPU yield of 3.1% to 3.6% for FY2020/2021 is not compelling,” she adds.

Keppel DC REIT declared a distribution per unit (DPU) of 2.357 cents for 3QFY2020 on Oct 22, primarily supported by the REIT’s new acquisitions. As such, Ong prefers Ascendas REIT, which she has rated “accumulate” with a target price of $3.63.

Globally, Ong sees demand for data centres, which is being driven by big data, 5G and cloud adoption. Singapore has also attracted Chinese tech companies looking to set up headquarters and operations in the country to perform big data analytics.

“We understand, however, that the Chinese tech players were unsuccessful in securing land from the government for data-centre development. Given the moratoriums on data centres in Singapore, we expect market rents to be bid up in the coming two years,” she says.

“While KDC REIT’s high portfolio occupancy of 96.7% and long WALE of 7.2 years translate to low expiries in 2021-2022 and leave little opportunity for positive rental reversions, many of its existing leases and co-location arrangements have built-in periodic rental escalations averaging 2% to 4% per annum,” she adds. — Felicia Tan