Brokers' Digest: CapitaLand Ascendas REIT, UOL Group, AEM Holdings, Keppel Corp, Sheng Siong Group

CapitaLand Ascendas REIT (CLAR) boasts “solid” reversions but its high funding costs are a drag, say CGS-CIMB Research analysts Lock Mun Yee and Natalie Ong.

While Lock and Ong are maintaining “add” on CLAR in an Aug 1 report, the CGS-CIMB analysts have a relatively conservative target price of $3.06, unchanged from their previous note.

On July 31, CLAR reported revenue of $718.1 million for 1HFY2023 ended June, up 7.7% y-o-y, while net property income (NPI) increased 6.7% y-o-y to $508.8 million due to contributions from new acquisitions made in FY2022 and 1HFY2023.

However, income available for distributions fell 1% y-o-y to $327.5 million, impacted by higher interest costs. CLAR’s 1HFY23 distribution per unit (DPU) of 7.72 cents was 2% lower y-o-y.

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Portfolio occupancy stood at 94.4% at end-1HFY2023, with the decline in US occupancy offset by higher take-up in Australia.

Meanwhile, portfolio rental reversion was healthy at 18% and 14.2% in 2QFY2023 and 1HFY2023, note Lock and Ong.

Singapore logistics and life sciences spaces were its best performing segments, with reversions of 39.1% and 17.9% respectively.

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CLAR has 6.9% and 16.4% of portfolio leases expiring in 2H2023 and FY2024 respectively, mainly from business spaces in Singapore, the US and Australia. With its strong 1HFY2023 performance, CLAR raised its guidance for FY2023 rental reversion to be in the “positive high single-digit range”.

In addition, gearing declined to 36.7% as at June 30 from 38.2% on March 31, following equity fundraising of $500 million in May.

In terms of outlook, CLAR said on July 31 that it has turned more cautious owing to the more challenging near-term macro environment which may impact its tenants’ businesses and its operating costs.

Lock and Ong retain their DPU estimates of 16 cents for FY2023 and FY2024. “We continue to like CLAR for its diversified and resilient portfolio and healthy balance sheet. Potential catalysts include faster-than-expected global recovery and accretive new acquisitions. Downside risks include a protracted economic downturn that could adversely impact its ability to price rents for positive reversions, and inability to tap acquisition growth opportunities due to the high interest rate environment.”

Meanwhile, RHB Bank Singapore analyst Vijay Natarajan is maintaining a “buy” but with a lower target price of $3.20, down from $3.25 previously. The target price includes an 8% ESG premium, based on RHB’s proprietary methodology.

Similarly, Natarajan points to higher interest cost assumptions in his Aug 1 note. Year to date, average interest costs rose 80 basis points (bps) to 3.3% and the cost is expected to rise marginally higher in 2HFY2023 as some 13% of its debts get refinanced later this year.

Approximately 82% of CLAR’s debt is currently fixed, which mitigates the rising rates as every 50 bps rise results in 1% DPU impact. “Based on an internal valuation, there were no significant changes in the overall value of its portfolio, with a slight uptick in Singapore and the UK, offsetting a slight weakness in the US,” says Natarajan.

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Adjusting for higher interest cost assumptions, Natarajan “fine-tunes” his FY2023 and FY2024 DPU down 1% and 3% to 16 cents for both years.

DBS Group Research analysts Dale Lai and Derek Tan have the highest target price on CLAR among houses here, at $3.40.

Lai and Tan justify their “buy” call with news that a potential acquisition in Europe is nearing completion. The acquisition will be in a key gateway city, in an existing asset class of logistics and data centres, of $200 million in value and with initial NPI yields of 7%.

CLAR also announced the redevelopment of 5 Toh Guan Road East asset to a modern ramp-up warehouse facility with a 71% higher gross floor area and greener specifications. The estimated cost of the asset enhancement initiative is $107.4 million with return on investment in the 6%-7% range.

In addition, CapitaLand announced on June 26 a $1.37 billion life sciences and innovation cluster named Geneo. The project’s largest property is 1 Science Park Drive, set to open in 2025.

1 Science Park Drive comprises three Grade-A office buildings linked by an event plaza, offering some 112,600 sq m of work space and 3,600 sq m for retail. It is a 66:34 joint venture between the unlisted CapitaLand Development and CLAR.

Due to the timing difference between the May fundraising and the acquisition in Europe followed by the redevelopment, Lai and Tan have revised downwards their DPU forecast by 0.6% over the next two years to 14.8 cents.

“However, once the redevelopment of 5 Toh Guan Road East and 1 Science Park Drive are completed in FY2025, we expect CLAR to report DPU CAGR of 2.6% from FY2025 onwards. In our projections, we have also accounted for 80 bps increase in borrowing costs over the next two years. As such, a better-than-anticipated acquisition yield in Europe, or a slower-than-anticipated increase in financing costs will lead to upside to our revised estimates,” write Lai and Tan.

In 1HFY2023, CLAR completed three accretive acquisitions here with an aggregate purchase consideration of $514.9 million. The acquisitions were a high-tech industrial property at 622 Toa Payoh Lorong 1 ($104.8 million), a cold storage facility at 1 Buroh Lane ($191.9 million) and The Shugart, a business park property at 26 Ayer Rajah Crescent ($218.2 million).

In April, CLAR divested KA Place, a high-specification industrial building in Singapore, for $35.4 million, a 55% premium to its market valuation.

The REIT’s portfolio of 230 investment properties was worth $17.0 billion as at June 30. This comprised $10.7 billion (63%) of properties in Singapore, $2.5 billion (14%) in the US, $2.3 billion (14%) in Australia and $1.5 billion (9%) in the UK and Europe.

According to the manager, same-store valuation, excluding the three acquisitions, was stable at $16.4 billion. — Jovi Ho

UOL Group
Price target:
OCBC Investment Research ‘buy’ $8.26

Active capital recycling initiatives a plus

OCBC Investment Research (OIR) analysts are keeping “buy” on UOL Group with a fair value estimate of $8.26, highlighting the company’s resilient Singapore residential portfolio.

The analysts note that UOL has been active on capital recycling activities over the past few months. Its proposal of the en bloc purchase of the freehold Meyer Park Condominium for $392.2 million is progressing, as the Strata Titles Board has issued an order of sale on July 30. This paves the way for the deal to be completed, the analysts add.

UOL also announced on July 11 that it had been awarded a 99-year integrated residential and commercial site at Tampines Avenue 11 at a tender price of $1.2 billion. This is part of a 50:50 joint venture (JV) with CapitaLand Singapore Ltd.

On the divestment front, UOL entered into a sale and purchase agreement for the disposal of its entire stake in its 542-room PARKROYAL on Kitchener Road hotel for a consideration of $525 million. This is 24.1% above the freehold property’s valuation as at December.

The company believes this would be a good opportunity to unlock the value of its investment at an attractive price, given expected divestment gains of $446.2 million. Post-divestment, the pro-forma accretion to UOL’s FY2022 net tangible assets (NTA) per share would be 4.2%, the analysts point out.

For 2023, the analysts forecast private residential price growth of up to 3%, while private new home sales would range between 6,000 to 6,800. UOL’s recent Pinetree Hills project launched in mid-July sold only 149 units as at July 30, or 29% of the total 520 units in the project at an average selling price of $2,367 per sq ft, based on data extracted from URA Realis.

“Better fortunes likely exist for UOL’s hotel operations in the near term, especially in Singapore, where industry revenue per available room (RevPAR) growth has been robust. 1HFY2023 RevPAR jumped 50.5% y-o-y to $213.6, although we note that monthly y-o-y growth has been moderating, partly due to low base effects wearing off,” the analysts add.

OIR expects UOL’s financial position to remain healthy, as it has been able to balance its investments with divestments. In terms of valuation, UOL is trading at consensus 12-month forward P/B of 0.53x, which is 1.1 standard deviations below its 10-year average of 0.62x.

Based on OIR’s revalued net asset value estimate of $14.37, UOL’s discount stood at 51.6%, which the analysts believe reflects risks of additional property tightening measures by the Singapore government should home prices continue to run ahead of economic fundamentals. — Khairani Afifi Noordin

AEM
Price targets:
Maybank Securities ‘hold’ $3.90
KGI Research ‘buy’ $4.15

Negatives fully priced in

Maybank Securities’ Jarick Seet has upgraded his call on AEM to “hold” from “sell” previously with the semiconductor solutions provider having cleared an “overhang” after reaching a settlement with Advantest for US$20 million ($26.62 million). Seet has also increased his target price to $3.90 from $2.72 previously as he rolls over his P/E ratio to 12x of AEM’s FY2024 earnings.

“We think the market has already priced in a weak 2QFY2023 and FY2023 and will now focus on AEM’s prospects ahead,” he writes.

“While we believe AEM’s negatives have been fully priced in, we are still waiting for more clarity on 2024 orders and the strength of a potential rebound in the semiconductor sector,” he adds.

According to him, the US$20 million settlement — in regards to a thermal component used in Advantest’s 5037 product — should be “positive” for AEM as there will be no other payments related to the matter, which allow AEM to operate and market its new generation of active thermos interposer without “hindrance”.

The settlement fee will be paid out in two instalments — US$9 million in 3QFY2023 ending September and US$11 million in 3QFY2024 — but will be recognised in the profit and loss provisions for FY2023.

While Maybank’s Seet has lowered his forecasted earnings for FY2023 by 34.5% to factor in these provisions, he believes the settlement will further cement AEM’s place as a leader in the active thermo interposer segment. “Designs of new generation circuits will be all owned by AEM and won’t have any contest by Advantest, which will be positive for AEM’s prospects,” he says.

More immediately, he expects a “dismal” 2QFY2023 for AEM, with weaker demand from customers to result in a y-o-y decline of 57% to revenue and earnings of $160 million and $18 million, respectively.

Seet’s upside risks for AEM include revenue expansion from securing new customers or a wallet expansion and increased orders from existing customers, synergistic and accretive acquisitions, as well as positive customer-related news flow that could catalyse improved orders for the company.

On the other hand, order cancellations, delays and earnings misses, and emerging technology from rivals that could erode AEM’s competitive position would be downsides for the company.

The team at KGI Research is similarly optimistic on AEM after its key customer Intel, showed signs of an early recovery. On July 27, Intel reported its results for the 2QFY2023 ended June, with revenue beating estimates at US$12.9 billion ($17.26 billion) despite the 15% y-o-y decline.

KGI Research has kept its “buy” call with an unchanged target price of $4.15. — Bryan Wu and Felicia Tan

Keppel Corp
Price targets:
CGS-CIMB Research ‘add’ $8.70
DBS Group Research ‘buy’ $8.30
UOB Kay Hian ‘buy’ $9.09

Analysts cheer Keppel Corp’s ‘solid’ 1HFY2023 results

Analysts from CGS-CIMB Research, DBS Group Research and UOB Kay Hian are all keeping their respective “add”, “buy” and “buy” calls on Keppel Corporation following the group’s results for the 1HFY2023 ended June 30. The analysts have also kept their target prices unchanged at $8.70, $8.30 and $9.09 for CGS-CIMB, DBS and UOB Kay Hian respectively.

On July 27, Keppel reported record-high earnings of $3.6 billion as it booked gains of $3.3 billion from the disposal of its offshore and marine (O&M) unit in 1HFY2023.

Excluding the discontinued O&M operations, Keppel’s net profit stood at $445 million, which came in line with analyst expectations from all three brokerages.

For CGS-CIMB’s Lim Siew Khee and Kenneth Tan, Keppel’s net profit of $445 million stood at 45% of their FY2023 estimates. “We give credit to the infrastructure segment as net profit rose 109% y-o-y to $291 million, lifted by strong integrated power and recurring income,” they write in their July 28 report.

“Profit contribution from [Keppel’s] energy as a service (EaaS) was not disclosed but the contracts momentum has been strong with year-to-date (ytd) wins of $1.2 billion in Singapore, Vietnam, and Thailand,” they add.

The analysts believe Keppel’s earnings could be stronger in the 2HFY2023 thanks to more deals and earnings for its EaaS segment, in particular, to be “more material” from FY2024 onwards.

That said, the key highlight to Lim and Tan was Keppel’s special dividend-in-specie (DIS) of one Keppel REIT unit for every five Keppel shares. The DIS, in addition to the group’s interim cash dividend of 15 cents, is to celebrate its 55th anniversary.

The proposed distribution is pending approval from Keppel’s shareholders at an extraordinary general meeting (EGM) to be held. Should the proposed distribution go through, Keppel’s stake in the REIT will be reduced to around 37.1%.

“We were positively surprised by the 55th anniversary DIS of 18.4 cent Keppel REIT shares per Keppel share. Including [its] interim distribution per share of 15 cents, [Keppel’s] 1HFY2023 yield [is] at 4.8%,” write the CGS-CIMB analysts.

They add: “We think Keppel is advancing to become a global alternative real asset manager, [although] downside risks [are a] weak macro [environment] that weakens fund performance and slows the pace of capital recycling.”

DBS’s Ho Pei Hwa has also viewed the special DIS of Keppel REIT units as a positive factor, in addition to its “promising earnings growth” ahead.

The analyst has projected Keppel’s core earnings, excluding the sale of its O&M unit, to grow at a CAGR of 12% in the next two years.

“[This is likely to be] driven largely by an expanding funds under management (FUM) base under asset management from $50 billion as of end-FY2022 towards $80 billion,” Ho writes.

“In the medium term, Keppel aims to double its FUM to $100 billion by FY2026 and quadruple to $200 billion by FY2030, which we estimate can add $4/share to our current target price,” she adds. “In addition, property and land sales in China/Vietnam look set to recover following their reopening.”

Referring to Keppel’s 1HFY2023 net profit, which stood in line with her estimates, Ho notes that the group’s earnings quality has “improved dramatically”. For the six-month period, the group’s contribution from its recurring income business to its overall profit jumped from 25% to 40% before Vision 2030 to around 60% in FY2022.

“The trend should continue with a concerted effort made to pivot away from order book-based revenue to income from fees and its portfolio assets (real estate, infrastructure, and digital assets). While its return on equity (ROE) at [around[ 9% remains far behind its target of 15%, we look forward to FUM growth and turnaround of property business to drive returns towards this target in the medium term,” Ho writes in her July 28 report.

Like CGS-CIMB’s Lim and Tan, Ho looks forward to a “better” 2HFY2023 from Keppel with a “potential conclusion of asset management deals and divestments”.

Ho is also very buoyant about the group’s prospects, noting that it offers investors a “unique and unrivalled proposition as a global asset manager with developer and operator capabilities in real estate and green industrial space (energy, environment and infrastructure).”

“We believe that Keppel’s strong engineering/construction roots and track record in capital management positions it well to grow as a global asset manager,” she says.

However, she warns that a slower-than-expected FUM growth, revaluation loss and the impairment of non-core assets could pose downside risks to her forecasts.

Finally, UOB Kay Hian’s Adrian Loh also liked Keppel’s “solid set” of results for the 1HFY2023, which came within his expectations.

“The two key highlights were the continued strength in its infrastructure business which saw a doubling of its segmental net profit, as well as the DIS of Keppel REIT,” says Loh in his July 28 report.

“The company guided for increased transaction newsflow in 2HFY2023 for its asset monetisation programme which could be a key share price driver,” he adds.

Like his peers, Loh is upbeat about Keppel’s goal to become a group that is more asset-light with a solid recurring earnings stream.

“[The group], post the Keppel O&M divestment… should eventually achieve its 15% ROE target versus 8.3% in 1HFY2023,” he says.

“In the near term, we believe that the market will focus on Keppel’s asset monetisation announcements as this could bolster earnings in 2HFY2023 and into FY2024,” he adds. — Felicia Tan

Sheng Siong Group
Price targets:
CGS-CIMB Research ‘add’ $1.88
DBS Group Research ‘hold’ $1.76
Citi Research ‘buy’ $1.92

Mixed outlook after 2QFY2023 results

DBS Group Research analysts have downgraded Sheng Siong Group to “hold” with a lower target price of $1.76 on possible near-term headwinds, such as slower store growth, high labour cost and sticky elevated utility cost.

This follows the company’s 2QFY2023 ended June results announcement. Based on the recent analysts’ briefing, the DBS analysts believe they have been too overly optimistic about their earlier FY2023/FY2024 assumptions.

For one, there is a surprise spike in labour costs of $4.6 million in 2QFY2023 versus a $1.5 million increase in 1QFY2023. Sheng Siong clarified that this was due to significant salary increases to retain and attract workers, instead of a one-off bonus payout.

“Based on our estimate, we believe labour cost will increase by about 5%, amounting to $10 million annualised increase versus our initial assumption of about $5 million labour cost increase,” the analysts add.

DBS has assumed Sheng Siong’s labour cost to increase by $10 million and $6 million respectively in FY2023 and FY2024.

Utility expenses will also remain high in FY2024. DBS’s initial thesis suggested that utility expenses should see a substantial drop in line with the price decline for natural gas from Indonesia, which is a key input cost for electricity in Singapore. Instead, electricity prices have ticked higher while gas prices continue to decline.

Sheng Siong is currently negotiating its electricity contract renewal, hinting that renewal rates could only be slightly lower than current rates, the analysts highlight.

They assume the utility cost to remain flat y-o-y in FY2024, expecting the limited cost savings from new contract renewal to be offset by higher utility spend from new stores.

Additionally, the company noted that the tender process for this year seems to be slower than in previous years. While it has submitted a bid for tender in May, the result has yet to be announced. There has also been no news to date regarding when the six HDB leases will open for tender, the DBS analysts point out.

“We assumed three new stores for FY2023 and FY2024. Given the current tender progress, we believe the entire tender process could be significantly delayed. In addition, we are cognisant of the recent NTUC FairPrice’s aggressive bid for the Punggol Drive outlet, which could be an early indication of aggressive subsequent bids. Accordingly, we cut our store count growth forecast to one and two for FY2023 and FY2024 respectively,” they add.

Citi Research analyst Jame Osman expects Sheng Siong’s new store opening momentum as well as a focus on expanding its higher-margin house brand products portfolio to drive its earnings performance in FY2023, given the near-term cost challenges around higher utilities and staff expenses.

He notes that Sheng Siong is targeting to open three to five new stores over the next three to five years. For FY2023, Citi forecast a 25,000 sq ft in gross floor area additions. Osman keeps his “buy” rating on Sheng Siong with a target price of $1.92.

CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan note that Sheng Siong has opened one store in Kunming, China, so far this year. The analysts maintain their new store opening forecast at four for FY2023, although they think this could be backloaded.

The analysts have reiterated their “add” call on Sheng Siong with a target price of $1.88. They continue to like the counter as a defensive play amid the current backdrop of elevated inflation and economic slowdown. — Khairani Afifi Noordin