Cromwell European REIT
Price targets:
DBS Group Research ‘buy’ EUR 2.10
RHB Group Research ‘buy’ EUR 2.15
FY2022 exceeded estimates
Analysts have kept their “buy” calls on Cromwell European REIT after the REIT reported a distribution per unit (DPU) of 17.189 Euro cents (24.557 cents) for the FY2022 ending Dec 31, 2022, 1.3% higher y-o-y. DBS Group Research analysts Dale Lai and Derek Tan note that the REIT’s FY2022 DPU exceeded their estimates. They add that the REIT, which posted strong rental reversions of 5.7% in FY2022 and a record-high portfolio occupancy of 96% during the year, had resilient metrics underpinned by organic income growth. “The REIT has been an active asset recycler, driving portfolio yields and optimising returns to unitholders,” the analysts write.
On navigating the slowing European economy, Lai and Tan says the REIT’s focus in Italy, France and the Netherlands will “result in more resilience” in the future as their properties in these countries have relatively better fundamentals “as evidenced by [the analysts’] site visit”.
“The consumer price index (CPI)-pegged rental escalations in place for its leases will drive steady organic income growth,” they write. In their report dated Feb 27, the analysts add that the REIT’s pivot to logistics properties could drive yield compression. “Faced with a slowing economy and weakening Euro, Cromwell European REIT’s ytd 40% decline in its share price appears to have priced in most of these risks. Yields have expanded to +1 standard deviation above normal to 8%, which we believe is attractive.”
“The REIT’s pivot to focus more on the logistics sector is expected to drive earnings resilience. Thus, given its improved earnings visibility and growth profile, we expect a compression in yields,” they add while keeping their target price at EUR2.10.
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Meanwhile, RHB Group Research analyst Vijay Natarajan has kept his target price of EUR2.15, noting that the REIT’s FY2022 results were “good” and met his expectations,“ he writes. “Despite challenging market conditions, occupancy rose to a record high, coupled with positive rent reversions reinforcing managers’ superior leasing abilities and under-rented nature of its assets.”
“We like Cromwell European REIT’s proposed portfolio reshaping strategy via divestments of non-strategic assets and recycling proceeds into higher-yielding development project pipeline and enhanced logistics exposure,” adds Natarajan. — Felicia Tan
Sats
Price target:
CGS-CIMB Research ‘add’ $3.10
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
Attractive buying opportunity
CGS-CIMB Research analysts have maintained their “add” rating for Sats with a lower target price of $3.10 from $3.21 previously, with the upcoming completion of the Worldwide Flight Services (WFS) acquisition set to remove share price “overhang”.
In their report dated Feb 22, analysts Tay Wee Kuang and Lim Siew Khee say that Sats’ launch of its $798.8 million equity fundraising provides attractive buying opportunities during the rights trading period, given the potential share price weakness.
Sats is tapping shareholders to raise $798.8 million via a rights issue to help fund the $1.82 billion acquisition of WFS by issuing 363 million new shares at $2.20 each, offered at a 16% discount to the theoretical ex-rights price (TERP). Entitled shareholders will be allotted the rights to subscribe to 323 rights shares for every 1,000 existing shares held on March 2.
Sats’ largest shareholder Temasek has undertaken to subscribe for its pro-rata entitlement (39.68%) of the rights. The remaining portion of the equity fundraising has been fully underwritten by Sats’ financial advisors and managers of the equity fundraising, namely DBS Bank, Bank of America, Citi, Oversea-Chinese Banking Corporation (OCBC) and United Overseas Bank (UOB).
The acquisition of WFS is expected to be completed by April 3, as Sats announced that it had obtained all regulatory approvals for the acquisition as of Feb 20. “If the acquisition is completed by April 3, as the company expects, SATS would be able to consolidate WFS’s financial results from 1QFY2023 and 1QFY2024.
This aligns with the analysts’ expectations, which they have accounted for in their FY2024 to FY2025 estimates. They expect revenue to exceed $5 billion — a 151% jump — and net profit to increase by 4% to $111.4 million in FY2024 post-acquisition, with WFS contributing an estimated $3 billion in revenue and $4 million in net profit. This represents an EPS dilution of 21% in FY2024 due to the expanded share base from the rights issuance.
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Their previous DCF based target price of $3.21 had assumed a rights issuance of 314 million at $2.55 per share, a 15% discount to the thenshare price of $3. “We cut our DCF-based target price to $3.10 due to the larger rights issuance and the lower subscription price of $2.20,” added the analysts.
They also foresee share price weakness in the near term, trending towards the TERP of $2.62, which implies an FY2025 P/E of 16.6 times, almost 1 standard deviation below its pre-Covid-19 five-year mean of 20 times, which the analysts find attractive. Their re-rating catalyst is a higher contribution from WFS, while downside risks include the inability to refinance outstanding debt from WFS upon consolidation and a slowdown in global cargo volumes. — Bryan Wu
ARA US Hospitality Trust
Price target:
DBS Group Research ‘buy’ 55 US cents
‘Best poised’ to ride US travel demand
DBS Group Research analysts Tabitha Foo, Geraldine Wong and Derek Tan are keeping their “buy” call on ARA US Hospitality Trust with an unchanged target price of 55 US cents (74.17 cents) as they see the trust having a “break out” year ahead.
“With the pent-up travel demand likely to sustain into 2023, ARA Hospitality Trust is well positioned to capture the recovery with its pricing power, leaner operating model, and positive operating leverage,” the analysts write. They also see the trust, a portfolio comprising 36 Hyatt and Marriott-branded hotels across the US, as being the “best poised” among S-REITs to ride the uptrend in the country’s travel demand.
On Feb 23, the trust reported a distribution per share (DPS) of 1.627 US cents for the 2HFY2022 ended Dec 31, 2022, 4.6 times higher y-o-y. The trust’s FY2022 DPS of 3.054 US cents aligned with the analysts’ expectations. ARA US Hospitality Trust’s FY2022 net property income (NPI), which grew by 66.4% y-o-y to US$41.4 million, also exceeded the analysts’ expectations.
“We believe the market severely underestimates consumers’ desire to travel and ARA Hospitality Trust’s recovery potential. Despite recessionary fears, we also believe that the worst is truly over and that ARA Hospitality Trust will continue to deliver robust operating metrics, with corporate travel the next swing factor, to catalyse a share price re-rating,” the analysts add. They have cut their DPS estimates for FY2023 by 10% to 4.59 US cents due to lower margins and higher capital expenditure (capex) reserves.
Further to their report, the analysts like the trust’s portfolio optimisation strategy, seeing it underpins long-term growth. “ARA Hospitality Trust actively manages its portfolio by divesting underperforming assets and redeploying capital into acquisitions with strong underlying market fundamentals. Its maiden acquisition of three Marriott-branded hotels has exceeded expectations in terms of recovery and sets the stage for future acquisition targets,” the analysts write. “We see this as a testament to the manager’s asset management strategy and is key to building a more diversified and resilient portfolio primed for long-term growth.”
At its current unit price levels, ARA Hospitality Trust is trading at an “attractive” 0.5x P/NAV against dividend yields of 11.9% and 13.8% for FY2023 and FY2024, respectively. Key risks against their positive outlook include a lower-than-expected surge in travel demand in the future and higher cost pressures. — Felicia Tan
AEM Holdings
Price target:
DBS Group Research ‘sell’ $2.00
Testing times ahead
DBS Group Research analyst Ling Lee Keng and the rest of the brokerage’s Singapore research team have downgraded AEM Holdings to “sell” from “buy” as they see “testing times” ahead for the group.
AEM had reported a 30% y-o-y decline in its earnings of $43.9 million for the 2HFY2022 ended Dec 31, 2022, on Feb 24. “Weak outlook and poor visibility of key customer demand beget uncertainty for AEM. The outlook for its key customer could continue to be gloomy given weakness in the PC market and consumer electronics alongside the risk of recession, which could slow spending on data centres,” writes the team. “Macroeconomic headwinds could also affect Intel’s cash-generating abilities to finance its aggressive capital spending plans, which could run the risk of order deferments.”
Further to its downgrade, Ling and the team have lowered their earnings estimates for FY2023 to FY2024 by 42% and 37%, respectively, due to a “sluggish outlook” for its key customer. The reduced earnings estimate also comes from AEM’s revenue guidance of $500 million, which came in lower than expected.
The team has previously lowered its target price to $2 from $3.19. “We rolled over our valuations to nine times FY2023 to FY2024 earnings, slightly below the historical mean. AEM is trading above +1 standard deviation of its historical mean, and we expect further share price weakness given a much poorer outlook.”
Despite the downgrade, Ling and the team see a brighter outlook for AEM and the semiconductor industry. AEM, a pioneer in providing system-level test (SLT) solutions, is one generation ahead of its competitors, writes the team.
“Given its technological superiority, we believe AEM is well positioned to ride on the growing SLT market that has benefitted from the increased complexity of chips and increased test coverage requirements, alongside the need for advanced heterogeneous packaging,” it adds.
Due to the digitalisation push, the semiconductor industry is also “well poised” for growth “McKinsey projects that the semiconductor industry will become a trillion-dollar industry by 2030. Industry megatrends such as artificial intelligence, 5G and the Internet of Things will pave the way for test growth spending owing to higher test volumes and times. Longer test times would also require more of AEM’s components due to wear and tear.” — Felicia Tan
CapitaLand Investment
Price targets:
Maybank Securities ‘hold’ $3.65
OCBC Investment Research ‘hold’ $4.25
DBS Group Research ‘buy’ $4.25
China’s reopening a boost for CapitaLand Investment
Analysts are neutral on CapitaLand Investment (CLI) following its latest results from FY2022 ended Dec 31, 2022. The results saw earnings of $861 million, down 36.2% y-o-y, on lower divestment gains and lower fair value gains from the revaluation of its investment properties. Revenue was 25% higher y-o-y at $2.88 billion, boosted by higher contributions from fee income-related business (FRE) and real estate investment business (REIB).
As of the end of 2022, CLI’s funds under management (FUM) stood at $88 billion.
CLI plans to pay 12 cents per share and a special dividend-in-specie of 0.057 CapitaLand Ascott Trust (CLAS) units valued at 5.9 cents per share, bringing the total dividend to 17.9 cents.
With that, Maybank Securities has downgraded its call on CLI to “hold” from “buy” with a lower target price of $3.65 from $4.30. “While we like CLI’s restructuring story and the execution so far, at current valuations, risk-reward is more balanced and hence the downgrade from ‘buy’,” says analyst Krishna Guha, who is upbeat on the group’s steady fee business and growing lodging business.
CLI divested $3.1 billion of assets, meeting its annual target, at a 12% premium to book, or about 89% of divested assets are retained as FUM. Gearing is 0.52 times (de-consolidated 0.4 times). “Capital recycling will be challenging and may pick up in 2H2023. This is reflected in our FY2023 patmi forecast, which is 38% below consensus due to lower portfolio and revaluation gains assumption,” adds Guha.
Management’s focus is more on seeding opportunistic funds in the current environment. With FUM and room key count close to stated targets, Guha believes that focus will likely shift to quality of growth, improving profitability and better disclosures, especially for lodging.
As for OCBC Investment Research, the research team keeps its “hold” recommendation and $4.25 fair value estimate on CLI as it has “emerged as a more nimble and resilient entity following its strategic restructuring, and we believe it would operate with a more asset-light business model with a strong focus on recurring income streams.”
They are also positive about the group’s lodging management business which was impacted by the pandemic but is now seeing a more meaningful recovery.
On the outlook, the research team believes that China’s reopening can drive CLI’s recovery efforts, while FRE growth is set to accelerate from hereon. The group is also stepping up its recycling efforts, with about $10 billion of pipeline assets to divest and half of it potentially in China.
DBS Group Research, meanwhile, has maintained its “buy” recommendation but dropped the target price of $4.25 from $4.30. Analysts Derek Tan and Rachel Tan are positive on the group’s FY2022 core patmi and expect brighter prospects for FY2023. “We see upside from the stock largely coming from earnings CAGR of 8% (8% upside) and P/E multiple re-rating towards 18 times (peer average) for its fund’s management business (7% upside),” say the analysts.
They see China reopening as a boost for the group’s malls and operations, with close to 36% exposure there. Additionally, the pent-up travel demand from travellers is expected to boost the operational performance of Ascott.
“On top of a robust growth in operational footprint to 160,000 units by end 2023, we see a turnaround in cashflows from FY2023 onwards,” said the analysts, who view the resumption of FUM growth as a re-rating driver.
”After a quiet 2022 with the market and interest rate volatility, the calmer markets and improving investor sentiment towards redeployment into Asia’s real estate markets present opportunities for CLI to tap,” they add. Higher FUM growth from $88 billion (as of Dec 31, 2022) to its target of $100 billion through either M&A, REIT acquisitions or launch of new funds will be key drivers to enhance its recurring income and is a catalyst to the stock price. — Samantha Chiew
