Broker's Digest: ARAHT, SGX, Pan-United Corp, SIA, Credit Bureau Asia

DBS Group Research is keeping its “buy” call on ARA US Hospitality Trust (ARAHT) with an unchanged price target of 70 US cents (90 cents) as recent data shows a front-loaded recovery unfolding as the summer holiday season works its magic.

In a June 14 report, analysts Geraldine Wong and Tabitha Foo write: “ARAHT’s US hotel portfolio is best poised among the S-REITs to ride on this uptrend, with a turnaround in profits likely to be unveiled in the upcoming quarters. This is on the back of an uplift in revenue per available room (RevPAR) which we think will drive a share price re-rating.”

“We believe that ARAHT will likely see an uplift in RevPAR ahead as we turn more positive on travel demand and on the back of inflationary pressures as well as higher willingness to spend,” they say, adding that they are bullish about the trust’s top and bottom lines for the second quarter of 2022.

The analysts also say the trust is set to achieve operational breakeven. Data and analytics insights firm STR’s weekly US hotel tracker shows occupancy at a pandemic-level high of 70%, with daily rates rising back to normalised levels. With pricing power now back in the hands of hoteliers, about 95% of hotels are at least at breakeven, with three-quarters turning in profits.

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“With travel demand looking more optimistic than expected, we see the potential for ARAHT to increase room rates,” say the analysts.

According to Wong and Foo, ARAHT’s portfolio of select-service hotels is well situated in well-vaccinated states and poised to capture the reopening on all fronts, including leisure demand (22% exposure), airport demand (20%), and corporate demand (36%).

Meanwhile, the trend of “bleisure” is on the rise as many are extending work trips for leisure, especially in an era of hybrid working. In addition, the trust’s lean towards the select-service model is expected to ensure profitability. Select-service hotels have proven to be more efficient and profitable as they clock in gross operating profits of 51.6% as compared to 39.3% for full-service branded hotels.

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“ARAHT’s select service offering has proven to be more financially lean, and a potential revenue upside this summer break will likely flow through to net income,” write the analysts. — Samantha Chiew

Singapore Exchange
Price target:
RHB Group Research ‘neutral’ $10.40
UOB Kay Hian ‘hold’ $9.55

Market statistics show improvement

Analysts are staying neutral on Singapore Exchange (SGX) after the group released its May market statistics on June 10.

Last month, SGX reported total securities market turnover of $28.59 billion over 19 trading days, down 5.55% y-o-y but up by 12.46% m-o-m. Securities daily average value (SDAV) fell 6% y-o-y but rose 18% m-o-m to $1.51 billion.

Thanks to the strong m-o-m improvement in May’s figures, RHB analyst Shekhar Jaiswal now sees SGX’s year-to-date securities market turnover ahead of his full-year estimates at $1.28 billion, compared to his FY2022 ending June forecast of $1.22 billion.

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“Broad optimism over China’s economic recovery and higher volatility in global markets translated to a sustained rise in SGX’s derivatives trading activity, with derivatives daily average volume (DDAV) at 1.17 million (+23% y-o-y, +13% m-o-m),” he writes in his June 14 report.

In FY2022, Jaiswal expects SGX to post profit and ebitda of $447 million and $625 million respectively, higher than the consensus estimates of $436 million and $606 million respectively.

"As our revenue estimate is in line with that of the consensus, we believe the street may be factoring in higher operating costs for FY2022. We keep our estimates unchanged, as costs could surprise on the upside,” says Jaiswal, who is keeping his “neutral” call on SGX with a target price of $10.40.

At UOB Kay Hian, analyst Llelleythan Tan is also maintaining his “hold” recommendation on SGX with a higher target price of $9.55 from $9.33 previously. The revised target price is being pegged to the same FY2022 P/E multiple of 23.7x, +1 standard deviation of SGX’s historical forward P/E.

“Currently trading (24.1x FY2022 P/E) at +1 standard deviation of its historical mean, we reckon that SGX is fully valued at current price levels and we do not see a major potential upside,” says Tan.

According to Tan, SGX’s y-o-y decline in its SDAV was expected despite new IPOs like Nio registering the highest trading volume upon introduction. Hence, Tan is estimating SDAV to “hit a floor” from October to December in 2QFY2023, barring any unexpected surge in trading volatility.

“Driven by increased demand for risk management, record-high currency trading volumes for April and May have surpassed expectations, with currency trading volumes [in January to May] up 12.0% y-o-y,” he says. “Supply chain disruptions, concerns facing China’s recovery and macro-economic uncertainty have also led to a surge in commodity trading volumes.”

As a result, Tan is raising his patmi forecasts for the FY2022, FY2023 and FY2024 by 2% to 4% to $431.1 million, $486.3 million and $539.0 million respectively, on the back of higher growth assumptions in SGX’s FICC segment.

“We are becoming more optimistic that competition in the China A50 Index futures market would be muted moving forward. We think significant revenue from new initiatives such as SGX’s Forex Electronic Communication Network would take time to gestate, and major success from these initiatives could re-rate SGX to trade at levels similar to peers’ average (28.2x),” he adds. — Felicia Tan

Pan-United Corporation
Price target:
PhillipCapital ‘buy’ 68 cents

Construction recovery quickens

With the construction sector recovery gaining pace, demand for ready-mixed concrete (RMC) will drive Pan-United Corporation (Pan-United) into a net cash position by 1HFY2022 ending June, says PhillipCapital Research senior analyst Terence Chua, who has kept a “buy” call on Pan-United while increasing his target price to 68 cents from 46 cents previously.

“With an approximately 40% market share in the industry, we continue to see Pan-United as a key beneficiary of the construction sector recovery. Pan-United’s batching plants still have the capacity to take on a 10%–15% increase in RMC demand in Singapore,” writes Chua.

According to data from the Building and Construction Authority (BCA), demand for RMC in the first three months of 2022 was 5% higher than the same period in 2021. The construction recovery remains on track with progress payments billed for 2021 at 32.5% higher than 2020. Contracts awarded for the first three months of 2022 were also 33.2% higher than in 2021.

The price of RMC has also risen by 8.4% from December 2021 to April this year, driven by a combination of higher raw materials costs and demand.

The construction recovery is ahead of Chua’s expectations. “We upgrade the forecast of total RMC volume to 13.5 million cubic metres for 2022 compared to 12.8 million cubic metres previously. With the construction sector recovering at a faster pace in the first quarter of the year than we expected, we upgrade our forecast of total RMC volume for the year.”

He adds: “We expect construction demand to remain robust for the next few years, supported by strong demand for public housing and the backlog of projects from Covid-19 delays.”

Chua is raising FY2022/FY2023 earnings by 35%/26% respectively on account of the higher demand for RMC brought about by the construction recovery.

At the same time, the analyst expects manpower tightness at Pan-United to have been fully resolved and staffing can be ramped up for the group to meet the rising demand in the coming few years, thanks to Singapore’s borders gradually reopening and work permit holders returning.

That said, supply-chain disruptions and volatile freight costs squeeze margins. The analysts continue to watch for receivables risk in the sector amid rising RMC prices.

In the near term, projects in the pipeline that will likely support the group’s growth are the Singapore Science Centre’s relocation, the Toa Payoh integrated development, Alexandra Hospital redevelopment, Bedok’s new integrated hospital, Phases 2–3 of the Cross Island MRT Line and the Downtown Line’s extension to Sungei Kadut.

“With an approximately 40% market share in the industry, we continue to see Pan-United as a key beneficiary of the construction sector recovery. Pan-United’s batching plants still have the capacity to take on a 10%–15% increase in RMC demand in Singapore,” writes Chua. — Jovi Ho

Singapore Airlines
Price target:
CGS-CIMB Research ‘hold’ $5.75

Multiple risks clouds revenue growth

CGS-CIMB Research analyst Raymond Yap has kept a “hold” rating on Singapore Airlines (SIA) as he sees the airline’s high fares, elevated market share and strong demand being offset by the risks of high oil prices. He has also lowered his target price of $5.75 from $5.92 previously, after cutting his earnings per share (EPS) estimates for FY2023 ending March 2023 to FY2024 and applying a lower FY2023 P/B of 0.95x, which is SIA’s mean since 2011.

The lowered EPS estimates were due to the analyst’s higher price assumptions for spot jet fuel, from US$120 ($167.15) per barrel to US$135 a barrel for the FY2023, and from US$95 per barrel to US$110 per barrel for the FY2024.

“We have also assumed higher yields to partially compensate for the higher fuel cost assumptions,” Yap writes in his June 13 report.

With higher food and fuel prices and higher global interest rates eating into consumers’ spending power, the analyst posits that overseas discretionary leisure travel could suffer in the future.

In addition, if the world enters into a recession a rising and consumer spending falls, air cargo demand may also decline as well.

“As SIA’s competitors ramp up their capacity deployment in the future, SIA’s heightened market share could fall back down to 2019 averages,” says Yap. “This may cause the current high airfares to moderate, even if jet fuel price levels remain elevated.”

While SIA is 40% hedged at Brent price of US$60 per barrel until June 2023, Brent is already at US$125. Furthermore, the airline is exposed to the jet fuel crack spread, which has widened from US$2 per barrel a year ago to US$38 per barrel now.

Nevertheless, the analyst sees that SIA is in a very strong revenue position as it had kept virtually all its pilots throughout the pandemic and is now able to roll out flights quickly.

As at May 13, SIA’s three-month forward booking profile now covers 48% of available seat capacity, just 5% points lower than for May 13, 2019. Three months earlier, the negative gap was wider at 19% points.

Yap’s analysis also suggests that SIA may be keen to redeem half of its $9.7 billion mandatory convertible bonds (MCBs) within the next two to three years, before their yields rise from 4% to 5% per annum, as it is holding too much cash in his view, with a net debt position of only 8.5% as at March 31 as compared to 32% as at Dec 31, 2020.

“Redeeming part of the MCBs will reduce SIA’s shareholders’ equity and make SIA’s P/B valuations look more expensive, which is another downside risk factor for investors to consider,” the analyst writes. — Chloe Lim

Credit Bureau Asia
Price target:
CGS-CIMB Research ‘buy’ $1.20

Digital banks kick off new revenue stream

CGS-CIMB Research analyst Andrea Choong has kept an “add” rating on Credit Bureau Asia (CBA) with an unchanged target price of $1.20.

This comes on the back of two digital wholesale banks (DWB) launching in Singapore: Green Link Digital Bank (GLDB) under the Greenland Financial consortium being the first on June 3 and ANEXT Bank by Ant Group with its soft launch on June 6.

GLDB will focus on integrating technological solutions to supply chain financing for small and medium enterprises (SMEs), while ANEXT aims to serve local and regional micro and SMEs engaging in cross-border operations for global expansion.

Including the digital full banks (DFBs), Grab and Singtel’s GXS Bank and Sea’s digital bank and Trust Bank, the number of bureau numbers in Credit Bureau Singapore (CBS) will rise to 36 once these banks are approved to commence operations by the Monetary Authority of Singapore (MAS).

As CBS drives the lion’s share of CBA’s revenues, additional bureau members offer scope for incremental revenue contribution based on the volume of credit enquiries from these banks and portfolio risk reviews the banks undertake, Choong observes.

“That said, we highlight that most of the incremental income will stem from DFBs given their focus on retail banking as compared to DWBs,” says the analyst. “Further, the ramp-up of operations will depend on the types of products offered such as credit cards that garner larger volumes compared to unsecured retail loans or mortgages, and value proposition with rates or user experience.”

Choong’s scenario analysis for incremental revenue to CBA from DFBs for new credit enquiries assumes that the DFBs augment the number of credit and charge card holders in the industry by approximately 2%–10% by lending to the unbanked and underserved segments. “This could raise CBA’s revenue by approximately 3%–6% by end of FY2026 ending December 2026,” writes Choong.

Credit enquiries for other retail products and data packets to DWBs priced at higher rates could also lead to further revenue streams for CBA, says the analyst.

“We expect earnings visibility for CBA to emerge only in the medium term once the banks firm up their growth strategies,” writes Choong.

Overall, Choong sees growth prospects abound for CBA, in light of licensing processes to collect and use commercial credit information from FIS and regulation of “buy now pay later” providers by MAS, though she notes that these initiatives will take time to materialise. — Chloe Lim