Ascott Residence Trust
Price target:
DBS Group Research “buy” $1.30
Longer term stay portfolio weighs in
DBS Group Research has kept its “buy” call and $1.30 target price on Ascott Residence Trust (ART) as its strategy of shifting towards the so-called “longer-stay” portfolio of properties starts to gain traction.
The longer-stay segment, which refers to student accommodation and other longerterm lease properties, makes up around 17% of ART’s assets under management. Yet, they contributed around 28% of its gross profit for the 1QFY2022 ended March 31.
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The bulk of ART’s properties remains serviced apartments where average tenancy tends to be much shorter and has been hit over the past couple of years because of the pandemic.
In 1QFY2022, longer-stay properties enjoyed an occupancy rate of above 95% and a rental growth rate of 5%.
ART plans to further increase the size of longer-stay properties from the current range of 15%–20%, to 25%–30%.
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However, others have noticed the appeal of longer stay properties too. According to DBS, no thanks to interest from other institutional investors, this property segment has seen a further compression of cap rates.
For example, Blackstone’s privatisation of American Campus Communities, the largest student accommodation REIT in the US, was at an exit cap of about low 4%.
Last year, ART’s purpose-built student accommodation and multi-family assets in the US have seen cap rates down by between 50 to 100bps since their initial acquisition cap rate of 5%.
Having said so, ART is improving as a whole. In its recent operational update for 1QFY2022, ART reported that its portfolio RevPAR was up 22% y-o-y to $67 even as the Omicron impact was felt towards the earlier part of the quarter.
The gain was partly driven by strong pentup demand in March, particularly in the UK, US, Japan and Australia.
Other upbeat operating updates include a healthy 85% occupancy enjoyed by ART’s co-living brand property lyf one-north, which opened just last November.
This quick ramp-up is “in line with a tightening market for serviced residences asset offering in Singapore that we have been seeing,” says DBS.
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According to DBS, “green shoots” in this coming quarter will include US properties enjoying a lift in the coming spring break months.
Also, in Japan, leisure demand is returning with “Go To Travel” reintroduced and potential international border reopening, all of which will spell positive news for the top travel destination.
In the UK, ART’s properties are seeing sustained demand for business and corporate bookings.
DBS notes that ART’s gearing remains healthy at 37.8%, and low cost of debt of 1.6%. Its average cost of debt will potentially see an increase of 10 to 15 basis points in the upcoming refinancing exercise. DBS estimates that every 10 basis points increase in interest rate will trim 0.5% off DPU. — The Edge Singapore
Singapore Telecommunications
Price target:
CGS-CIMB “add” $3.30
Regional digital banking business shaping up
CGS-CIMB analysts have reiterated their “add” call and $3.30 price target on Singapore Telecommunications following the telco’s win for one of the five digital banking licences in Malaysia as part of a consortium with Grab Holdings and Kuok Brothers.
GXS, a 60-40 Grab-Singtel JV already holds a digital banking licence in Singapore awarded in late 2020. GXS holds a 55.45% stake in the consortium that also includes Kuok Brothers. This gives Singtel an effective stake of 22.2% in the consortium, which is only likely to commence operations after going through a period of “operational readiness” over the next one to two years.
In their April 30 note, CGS-CIMB analysts Foong Choong Chen and Sherman Lam Hsien Jin describe this win as a “positive development” for Singtel, as it marks a meaningful regional digital banking business in the making.
Besides Singapore and most recently, Malaysia, Singtel-Grab had in January this year entered Indonesia’s financial services sector by taking a 32.5% stake in Bank Fama International.
They do not expect the venture in Malaysia to “contribute much” to Singtel’s FY2022 to FY2024 earnings given the three-to-five-year foundational phase and subsequent costs to drive customer acquisitions. Singtel has a March year-end.
“On the other hand, the low minimum capital requirements for (the digital bank) suggest that Singtel’s portion of the investment will be relatively small in the initial years and can be comfortably funded by internal cash and its asset recycling initiatives, in our view,” state Foong and Lam.
Citing what happened in South Korea, the CGS-CIMB analysts estimate that the five licence winners might win a 2% market share in loans by end of 2027, worth some RM51 billion ($10.7 billion). If they can win over the previously underbanked and underserved segments, that might bring the total to RMB103 billion.
Assuming the Grab-Singtel venture wins a quarter share of this market, it could build a loan book of some RM26 billion and a book value of RM3.8 billion by the end of 2027.
By applying a price to book value of 0.5x, the Grab-Singtel digital bank in Malaysia may have a value of some RM19 billion by end of 2026, which, given Singtel’s effective stake of 22.2%, will translate into 7 cents per share.
If added to the Singapore digital bank’s assumed value of 30 cents per share and 8 cents for Indonesia, the CGS-CIMB analysts estimate that Singtel’s regional digital banking business can add 30 cents to its sum of the parts valuation in three to four years.
“We have not factored this in as investors may not ascribe much value to it until operational indicators are available and Grab-Singtel is closer to unlocking GXS’s value,” add the analysts. —The Edge Singapore
Venture Corp
Price target:
Maybank Securities “buy” $21
CGS-CIMB “add” $23.32
Off to a good start this year
Analysts from both Maybank Securities and CGS-CIMB have kept their positive views and target prices on Venture Corp after its 1QFY2022 ended March earnings that beat expectations, chalking up what has been described as “a good start” to the year.
In 1QFY2022, the leading manufacturing services company reported earnings of $84 million, up 28.6% y-o-y. Revenue in the same period was up 29.5% y-o-y to $889.3 million.
Notably, operating margins have improved to 11.5% for 1QFY2022 versus 10.9% for 1QFY2021, despite inflationary pressure that has been hurting businesses in general.
“We think that this is due to higher economies of scale, product mix and continued good cost control and productivity improvements,” writes CGS-CIMB’s William Tng in his April 29 note.
Citing customers’ orders and forecasts, Tng notes that Venture anticipates a steady demand outlook across its various technology domains in the current FY2022. Recent new product launches by its customers have been successful, the company notes.
Tng believes that with Venture’s strength in R&D, it has also been able to mitigate supply chain disruptions and expand its capabilities to fulfil more orders.
“Although the operating environment remains uncertain, Venture remains optimistic about its long-term prospects as the group has gained good traction in selected ecosystems and has become a leading technology partner of choice for many global players,” says Tng, who has kept his “add” call and $23.32 target price.
“Going forward, Venture intends to continue investing to participate in new fast-growing technology domains,” he adds.
In his May 1 note, where he has kept his “buy” call and $21 price target, Maybank Securities’ Lai Gene Lih describes Venture as riding on a post-Covid recovery.
“We see earnings recovery this year towards pre-Covid levels as a catalyst, as this narrative contrasts other tech plays globally where demand slowdown is a key concern,” says Lai. For FY2019, the last full year before the pandemic, Venture recorded earnings of $363 million.
Lai notes that Venture is enjoying broad-based revenue growth momentum although advanced payments and healthcare and wellness are the customer segments that stood out in 1QFY2022.
Nevertheless, the company has cautioned that its near-term operating environment will remain uncertain.
“Amid a still strong demand backdrop, some ways to mitigate supply-side challenges include holding higher levels of inventory to ensure availability of components and component redesign,” says Lai. — The Edge Singapore
