City Developments
Price target:
DBS Group Research ‘buy’ $10.50
Potential to unlock hidden value
DBS Group Research analysts Rachel Tan and Derek Tan have maintained their “buy” call on City Developments (CDL) with a target price of $10.50 as they believe that its potential to unlock hidden value has yet to be priced in.
“CDL has quickened its pace to unlock the deep, hidden value of ‘legacy assets’ within its books via asset recycling or redevelopment, which presents a significant upside potential for NAV which we believe is yet to be priced in,” the analysts say.
The analysts also note that CDL and MCL Land’s executive condominium (EC) Copen Grand booking of units is set to start on Oct 22. This will be the first residential project launch after the government’s recent cooling measures announced on Sept 30. MCL Land is a wholly-owned subsidiary of Hongkong Land, a Jardine Matheson Group member.
Copen Grand will have 639 units across 12 blocks and will be located within the new 700ha new Tengah Town. The analysts highlight that buyers will have a first-mover advantage in the work-live-play precinct, with the authorities planning to build over 42,000 new homes with offices and supporting amenities in the medium term.
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Based on market chatter, the analysts understand that the show flat received less than 10,000 visitors on the first weekend of opening and accepted many e-applications. Having visited the show flat on a weekday, the analysts saw a very decent crowd constantly coming through, comprising some young couples and families.
They also note that the pricing of the EC is in line with the market with decent sizes. A five-bedroom premium unit, for example, is up to $1.88 million or $1,189 psf.
The analysts say that the launch of the Copen Grand EC will be keenly watched, given that it will provide the market how demand for homes may have changed after the recently announced measures which aim to curb the continued rise in property prices in the face of higher mortgage rates and economic uncertainties.
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That said, based on their estimates of the past four EC launches in the past two years, most of the projects have already been fully sold, with only North Gaia (launched April) still at about 29% sold as of end-Sept. This implies a strong inherent demand from households for this hybrid public-private housing asset class, the analysts add.
Meanwhile, CDL has recently been awarded a new EC site at Bukit Batok Avenue 5 at $626 psf per plot ratio, which is about 5% tad lower than the tender price for a recent EC site that was awarded to Qingjian nearby in Bukit Batok West Avenue 8.
CDL is currently trading at an attractive valuation of 0.8x P/NAV, below the low seen during the Global Financial Crisis. DBS’s target price of $10.50 is based on a 35% discount to RNAV, which implies 1x P/NAV, slightly above –0.5 standard deviation of its historical range. — Khairani Afifi Noordin
SATS
Price target:
UOB Kay Hian ‘buy’ $3.08
Buy at dip
UOB Kay Hian analyst Roy Chen has upgraded SATS to “buy” from “hold” previously after the airline ground handler and food catering services provider saw a sharp drop in its share price after announcing that it has proposed to acquire Worldwide Flight Services (WFS).
However, Chen has decreased his target price to $3.08 from $3.82 previously to factor in “very conservative” valuation metrics for WFS, due to the higher risk-free rates today (compared with when SATS negotiated the deal valuation), weakening global air cargo outlook in the near term (as highlighted by a few leading air cargo operators including FedEx and DHL), and the lack of financial details of WFS.
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Chen’s report dated Oct 19 comes after an investor meeting with SATS during UOB Kay Hian’s Asian Gem Conference on Oct 18. The meeting was attended by 19 institutional investors. At the meeting, SATS’s management shared more insights and answered more questions on the WFS deal.
On Sept 28, SATS announced its plans to acquire WFS, which is the world’s largest air cargo handling firm, for EUR1.19 billion ($1.64 billion) in cash.
Since SATS’s first trading halt on Sept 21 related to the WFS deal, SATS’s share price has declined 33% from $4.06 before the trading halt to $2.72, which is the company’s closing price on Oct 18, notes Chen.
“This is likely due to the market’s unfavourable view towards the deal and the weak sentiment towards the equity raising plan,” he says. “During this period, $1.5 billion worth of SATS’s market cap has been evaporated; this is equivalent to about 45% of WFS’s acquisition enterprise value of $3.1 billion”.
On the back of the sharp drop in its share price, SATS’s risk-reward profile is now more attractive in the analysts’ view, with the current share price suiting investors with a longterm horizon, Chen adds.
“Assuming SATS’s existing business is still worth the value as it was and attributing all market cap drop to the deal of WFS, the market is now effectively valuing WFS at an enterprise value of $1.6 billion (being transaction enterprise value of $3.1 billion less SATS’ market cap drop of $1.5 billion),” Chen writes.
“This means, if one buys SATS at the current price, he is effectively paying only 4.9x ebitda (based on WFS’s 12-month ebitda ended March) for the WFS deal, instead of the original transaction EV/Ebitda multiple of 9.7x,” he adds. “The effective 4.9x EV/ Ebitda looks attractive, considering that this is pre-synergy and WFS is the top global air cargo handler.”
Furthermore, the implied valuation of 4.9x EV/Ebitda is cheap, compared to the previous transactions made by SATS’s peers. The historical peer transaction range usually came at a range of 10.1x–10.7x. — Felicia Tan
CapitaLand Investment
Price target:
CGS-CIMB Research ‘add’ $4.59
Upside from travel recovery
CGS-CIMB Research analyst Lock Mun Yee has reiterated her “add” rating for Capitaland Investment (CLI) with an unchanged target price (TP) of $4.59.
In her report dated Oct 17, the analyst cites CLI’s “fiscal discipline” and “patience in capital deployment” even as the lodging management business continues to benefit from strong travel recovery.
Her valuation is based on the fact that CLI’s share price has declined 22% since its recent peak on Aug 10, with the stock currently trading at around a 1.1x P/NAV and at a 37% discount to her revalued net asset value (RNAV) of $5.10. Her unchanged TP of $4.59 is pegged to a 10% discount to Lock’s RNAV.
“Valuations are inexpensive and we believe that as CLI continues to lighten its balance sheet and accelerate the growth of its fee income business, there is room for a further re-rating of the valuation of its fund management business,” says Lock.
She notes that CLI has reiterated its target to deliver funds under management (FUM) of $100 billion by 2024, stressing adopting fiscal discipline and patient capital deployment amid the more volatile macro conditions.
Its balance sheet remains strong with a net debt-to-equity ratio of 0.51x and $7.4 billion of cash and undrawn facilities, Lock says. CLI also indicated it has potential debt headroom of $3.7 billion, based on a net debt/equity assumption of 0.7x, and potential deployable capital of $9.7 billion to reach its FUM target.
Lock explains that CLI intends to leave funding capacity for M&A opportunities, seeding of new funds and warehousing assets for its REITs, and maintain sufficient cash flow for dividends and share buybacks.
Meanwhile, she says that CLI will continue to focus on optimising returns via portfolio repositionings, such as asset enhancements and redevelopment activities, as well as tapping private equity opportunities through its diversified capital pool.
“Under its listed REITs platform, it will look to proactively manage its assets to incorporate sustainability in all aspects of the trust, maintain a disciplined acquisition strategy and be prudent in capital management,” explains the analyst.
“With its private equity fund management business, management indicated that there is still interest in real estate and alternative investments although FUM growth may be slower as investors remain cautious during this period of uncertainty. Nonetheless, CLI is well-positioned to tap diversified funding in Asia and globally, with its RMB onshore fund management licence and local strategy in Japan and Korea,” she adds.
In addition, Lock believes a strong recovery in global travel is likely to provide more tailwinds to the hospitality sector recovery and CLI’s lodging management business. That is why the group is maintaining its target of achieving 160,000 keys under management by 2023 and expanding its lodging product offerings.
With a large and diversified portfolio, she notes that CLI remains a play on megatrends, such as the recalibration of retail between digital and physical, evolution of the workplace, return of international travel, structural-demographic shifts and urban migration and data fragmentation and supply chain issues.
Key downside risks to her valuation include asset repricing, slower-than-expected scaling up of its FUM or a dampened real estate outlook that could hamper the pace of its capital recycling activities. — Bryan Wu
AEM Holdings
Price target:
CGS-CIMB Research ‘add’ $3.76
Targets slashed on order deferment fears
CGS-CIMB Research analysts William Tng and Izabella Tan have retained their “add” call on AEM Holdings as they see the company’s strength in system-level testing (handlers and complete testing solutions) as “intact”.
“[AEM’s] long-term prospects remain strong,” Tng and Tan write in their Oct 14 report.
However, the analysts have slashed their target price on the counter to $3.76 from $6.54 previously on the back of fears of order deferments.
Amid the news of US restricting exports of chips to China as well as reports of possible job cuts at AEM’s major customer Intel, AEM’s share price plunged by 21.5% to $3.25 on Oct 13 from $4.14 on Oct 7.
The potential loss of the China market due to the sales ban of Intel’s data centre-related chips is a concern, the analysts note.
With AEM’s Penang plant expected to come online between the end of October and early November and Intel’s new multi-phased production expansion in Penang expected to start in early 2024, Intel has leeway to defer its orders for test handlers (THs) from AEM.
“We assume that such a deferment could occur over the FY2023–FY2024 [end Dec 31] and hence cut our sales assumptions for AEM by 6.7%-7.1%, leading to [a] 11.2%–11.8% decrease in our earnings per share (EPS) forecasts,” Tng and Tan write.
In their view, if the semiconductor industry is heading for a decline in FY2023, AEM’s valuations could revert to its six-year (FY2017–FY2022) average P/E multiple of 8.0x.
“However, we opine that AEM’s patented TH technology warrants some premium. Hence, we now value AEM at 9.7x (0.5 standard deviations or s.d. above its six-year average) on our reduced FY2023 EPS forecast given possible order deferments,” the analysts write. “Previously, we used 14.9x (+2 s.d. above its six-year average).”
To them, stronger-than-expected orders from AEM’s major customers and earlier-than-expected success in securing orders from other potential customers are re-rating catalysts to its share price. In comparison, delivery delays and the loss of its sole supplier status which will affect AEM’s profitability, are downside risks.
On Oct 14, AEM lifted its revenue guidance for FY2022 to between $820 million and $850 million from its previous guidance of between $670 million and $720 million on the back of higher demand from its new and existing customers. — Felicia Tan
Mapletree Industrial Trust
Price target:
Citi Research ‘neutral’ $2.22
Downgrade amid rising US debt cost
Citi Research analyst Brandon Lee has downgraded Mapletree Industrial Trust (MINT) to “neutral” from “buy” as he sees “increasingly subdued” acquisition prospects for the REIT due to rising US debt cost.
MINT’s lack of asset purchases since May 2021 points to a challenging acquisition environment, notes Lee. This is due to negative cap rate spreads, adds Lee, citing US data centre yields of around 5% compared to the US dollar effective debt cost of about 5.2%–5.5%.
In Lee’s view, MINT’s acquisitions, which have averaged $0.9 billion a year from FY2017 ended March 2017 to FY2021, have been a key share price driver for the REIT.
“While the US overnight secured overnight financing rate (SOFR) and three-year swap rate have already expanded by 299 basis points (bps) and 324 bps respectively ytd ... the upward trajectory is likely to continue in the short-term, which will further dampen acquisition prospects,” Lee writes. Citi is forecasting the US Federal Reserve (US Fed) to hike rates by another 150 bps from 4Q2022 to 1Q2023.
“We see [a] remote near-term chance of MINT acquiring the right of first refusal (ROFR) pipeline of US data centres (valued at $1.1 billion) from its sponsor, with our estimates showing FY2022 pro forma DPU dilution of 1%–2% assuming 70/30 debt/equity funding structure (resulting in gearing of 42% from current 38.4%), 5% net property income (NPI) yield and 5.2%–5.5% debt cost,” Lee says.
In addition, the analyst expects MINT’s rent reversions in Singapore to slow as industrial rents tend to be flattish or may fall during economic slowdowns.
“With slowing Singapore GDP growth of 3.3%/2.0% in 2022/2023 (vs +7.6% in 2021), we forecast factory/ hi-tech/business parks (25%/22%/5% of MINT’s NPI) passing rent change of –3%/+2%/flat (with downside risk),” the analyst writes. “This suggests rent reversions could slow after three quarters of low-single-digit growth.”
Lee notes that the REIT may see a benign earnings growth trajectory with a three-year forward DPU CAGR of 1.5% due to higher US interest cost, with around 79% of MINT’s debt in US dollars. He says this may be mitigated by earnings upside from strength in the US dollar (as US data centres make up 48% of MINT’s NPI) and high DPU yield.
“We think net asset value (NAV)-accretive redevelopments (including potential conversion of aged US data centres to life science assets or participation in [MINT’s] sponsor’s Hong Kong data centre project) and asset sales (with the return of gains to unitholders) could be share price catalysts, but the timing of the execution is uncertain,” the analyst says.
Lee has reduced his target price estimate by 30% to $2.22, from $3.15 in his July 26 report, alongside a higher risk-free rate of 3.5% from 1.95% previously, as well as a higher cap rate of 6.3%, up 110 bps. His new target price implies a total return of 4% and a P/B of 1.2x, which is in line with the average P/B of 1.2x from FY2015 to FY2016 when no acquisitions were made by MINT.
He has also cut MINT’s DPU estimates for FY2023 and FY2024 by 1.5% and 6.1% respectively to 14.01 cents and 14.11 cents on higher debt cost. He also expects MINT to see lower NPI margins at 74% and 76% for FY2023 and FY2024 respectively, down by six and four percentage points.
Within the industrial Singapore REIT (S-REIT) sector, Lee has indicated his preference for CapitaLand Ascendas REIT. — Felicia Tan
