Broker's Digest: ComfortDelGro, Koda, Japfa

Analysts remain upbeat on ComfortDelGro (CDG)’s prospects even after the transport operator was displaced by Emperador as a constituent on the benchmark Straits Times Index (STI) on Sept 1.

CDG entered into the STI as a constituent on July 28, 2010. The recent update now marks the end of its tenure on the index. Following the news, shares in CDG opened three cents lower or 2.14%, to $1.37, one of its lowest levels since January.

“While [the] STI exclusion could put pressure on CDG’s near-term share price, we see support at $1.36, based on 13.1x FY2023 P/E (2 standard deviations or s.d. below its five-year historical mean),” write CGS-CIMB Research analysts Lock Mun Yee, Lim Siew Khee and Ong Khang Chuen in their strategy flash note dated Sept 2.

The analysts have kept their “add” call on CDG with an unchanged target price of $1.75 as they expect the transport operator to see a recovery in their earnings in the coming quarters.

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The analysts note that the expected recovery will be due to the improved monetisation of its Singapore taxi business, higher rail ridership and increased charter activities on the back of the return in tourism.

CDG’s dividend yield of 5.9% is also deemed “attractive”, they add. Furthermore, the analysts at CGS-CIMB are estimating CDG to achieve an earnings per share (EPS) growth of 27% y-o-y in the FY2022, with its key geographies returning to a “new normal” after the reopening from the pandemic.

The team at DBS Group Research are also keeping their recommendation unchanged at “buy” with the same target price of $1.95. This is given CDG’s intact fundamentals, an improving outlook and the upside from easing Covid-19 restrictions and improving mobility.

See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries

The counter’s removal from the MSCI in May 2020 first saw a knee-jerk reaction from market watchers. The share price bounced back a week later. The DBS team believes a similar trend could follow.

CDG’s shares fell 7.7% — from $1.55 to $1.43 — upon its removal from the MSCI at the closing on May 12, 2020. The share price bounced up by around 12% to close at $1.60 a week later, higher than the $1.55 before the announcement.

“With this removal, we expect an immediate knee-jerk reaction to CDG’s share price should it follow a similar trading pattern. There have been expectations and talks of this removal for a while now given CDG’s market cap hovering around the bottom of the 30 constituents,” the analysts write.

“With this removal now a ‘certainty’, we take an opposing view given that it is a ‘removal’ of an overhang. While there could be a near-term knee-jerk weakness in share price due to rebalancing by index funds, the downside is likely to be confined within the coming few weeks, in our view,” they add. “We also highlight a possibility to bottom fish near or around Sept 19, when the constituent change takes effect.” — Felicia Tan

Koda
Price target:
PhillipCapital ‘neutral’ 50 cents
SAC Capital ‘buy’ 64 cents

Near-term demand lull

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Analysts are less optimistic about Koda as they expect a demand lull in the near-term. The research team at PhillipCapital has downgraded Koda to “neutral” from “buy” while slashing its target price to 50 cents from $1.10.

The new target price is pegged to an FY2023 P/E of 5x ex-cash, in tandem with Koda’s historical P/E ex-cash. The new valuation is lower than the previous P/E of 7x due to the slowing earnings as Koda’s customers deal with the higher-than-expected inventory.

“We expect 1HFY2023 to be challenging. Customer inventories in the US are elevated and at record levels. With consumers shifting spending to services and discretionary spending shrunk by inflation, furniture demand is expected to remain weak,” the team writes in a Sept 4 report. It adds that it expects Koda to turn more cautious on new projects such as sofa manufacturing on the back of a less confident outlook.

The PhillipCapital team says the lower net cash of US$0.4 million ($0.56 million) on Koda’s balance sheet, down from the US$11.8 million in the year before, following the purchase of a property in Tagore Lane. “Of the $13.8 million in gross debt, around 80% is long-term,” they add.

While Koda’s patmi of US$5.7 million ($8 million) for the FY2022 ended June was down by 37.6% y-o-y, the company’s FY2022 patmi — excluding the losses from the fire incident at Koda’s Vietnamese plant — stood within PhillipCapital’s expectations.

Meanwhile, SAC Capital analyst Lim Shu Rong has slashed her target price to 64 cents from $1.14 but has kept a ‘buy’ call, adding: “The group faces weaknesses in its main end customer markets, North America and China. Customers from [the] North American region account for 80% of its original design manufacturing (ODM) sales, while [around] 90% to 95% of its retail footprint (number of stores) are in China. Furniture demand is expected to soften in both countries.”

In the US, Koda’s new home sale units have also declined 38% ytd. The country’s 30-year fixed mortgage rate has soared to 5.55% from 2.87% a year ago, further eroding US buyers’ affordability.

“Koda’s immediate concern lies with inventory glut issues that US retailers are facing. US June retail inventories for furniture have grown 14% ytd. Inventories to sales ratio also rose to 1.69x, compared to 1.53x in January,” Lim adds. “ We expect to see a decline in orders placed to Koda as their customers focus on clearing their excess inventories first.”

Separately, furniture sales in China are affected by the country’s property market crisis and lockdowns, which have dampened consumer sentiment. Still, Lim sees a bright light in Koda’s sales at its local Commune outlets, and the analyst expects sales at these outlets to improve in the 1HFY2023 from the festive sales at the year-end.

The start of Singapore’s GST hike on Jan 1, 2023, could also bring forward higher value purchases. Lim has lowered her topline and bottom line estimates for FY2023 by 16%. Her lower target price is pegged to an FY2023 EV/ebitda of 2.4x at Koda’s pre-pandemic level. — Felicia Tan

Japfa
Price target:
CGS-CIMB Research ‘add’ 81 cents

Profitability ahead

CGS-CIMB Research analyst Tay Wee Kuang has maintained his “add” call on Japfa, anticipating improved profitability as average selling prices (ASPs) recover and raw material prices peak.

In his Sept 1 note, Tay says Japfa is likely to benefit from a continued recovery in demand for various animal proteins — especially given that the critical Asean economies it operates in are expected to see healthy GDP growth above 5% in 2022. “ASPs have also improved to healthier levels that should stave off ongoing cost pressures from high raw material prices for key animal feed ingredients,” he adds.

CGS-CIMB’s sum-of-parts-based target price of 81 cents is unchanged. However, it is cognisant of the six-month validity of the listing application for its China dairy subsidiary AustAsia Investment Holdings on the Stock Exchange of Hong Kong (HKEX), which will expire on Sept 29 and needs to be renewed.

Tay highlights that in the latest data provided by Japfa, prices of broiler and day-old chicks (DOCs) in Indonesia remained resilient in July following a seasonally weaker 2QFY2022 due to lower demand post-Aidilfitri in Indonesia. This dispels CGS-CIMB’s concerns over the weak DOC prices in May, which could have impacted future broiler prices.

“Although prices of soybean meal, a key feed ingredient, is back to an all-time high, we think that profitability for Japfa’s Indonesia poultry business should remain intact with better ASPs and similar cost base compared to 1QFY2022, the previous high for raw material prices,” says Tay.

The recovery of Japfa’s animal protein — others (APO) has been a drag on earnings as the resurgence of African Swine Fever in Vietnam in late 4QFY2021, leading to weak swine prices that extended into 2QFY2022. This exacerbated the impact of cost inflation from higher feed and biosecurity costs.

However, swine prices have rebounded in 3QFY2022, with a quarter-to-date ASP of VND67,000 ($3.99) per kg. This price rebound supports a turnaround in APO profitability in 2HFY2022 and should also benefit Japfa as one of the most cost-efficient farmers in the industry.

For its China dairy business, the resilient raw milk prices at above RMB4.10 ($0.83) per kg — and higher sales volume in 1HFY2022 from better milk yields and a larger dairy herd population — have helped to partially offset the impact of rising costs of feed ingredients such as alfalfa. “Further rises to alfalfa costs could wear down the resilience of the China dairy business,” says Tay. — Khairani Afifi