Broker's Digest: Dairy Farm, Hongkong Land, AEM Holdings and Credit Bureau Asia

RHB Group Research has downgraded Dairy Farm International to “neutral” from “buy”. This follows the retailer’s FY2020 ended December 2020 earnings released on March 11, where it posted 14% lower earnings of US$276 million ($371.4 million) compared to the US$321 million in FY2019, after being impacted by the Covid-19 pandemic.

Despite the downgrade, the Singapore research team at RHB has raised its target price estimate on Dairy Farm to US$4.78 from US$4.47, thanks to stronger than expected recovery momentum in 2HFY2020.

Dairy Farm owns and manages the 7-Eleven convenience stores in Hong Kong, Macau, Singapore and Southern China

Based on the same reason, the RHB team has raised its earnings estimates for FY2021 and FY2022 by between 4% and 8%. It has also introduced its earnings estimates for FY2023, which implies 5% growth. The brokerage’s new target price implies 21 times FY2021 earnings, which is above the stock’s five-year mean of 20 times.

“Looking forward, health & beauty (H&B) and the convenience store segments should see footfall pick-ups in view of Covid-19’s containment and inoculation plans in progress,” notes the team.

“That said, we believe most of the recovery prospects have been priced in, with the stock now trading at above its five-year mean following a decent run in share price year to date.” DBS analyst Alfie Yeo is more bullish on this stock as he kept his “buy” call but with a higher target price of US$5.02 from US$4.44, on the back of the earnings outperformance and higher than expected dividends totalling 16.5 US cents per share.

Yeo has raised his earnings forecast for FY2021 to FY2022 by 7%–8% due to a stronger outlook for its income from its associates and joint ventures, offset by a slightly lower operating margin outlook.

“We believe earnings recovery for Dairy Farm is in sight, with Covid-19 vaccines currently administered around the world,” he writes, believing the supermarket group to be “well-placed” for the recovery from the pandemic.

In addition, Yeo likes Dairy Farm for the longer term as its transformation efforts gain traction and yield results for its shareholders by delivering sustainable quality earnings. “As such, we believe earnings will recover over the next two years,” he adds.

The transformation efforts include the rolling out of customer loyalty/rewards programmes, pricing campaigns, accelerating digital change, refreshing IT systems, investment in e-commerce, rollout of house brands, and relaunch of Giant in Singapore with enhanced value proposition,” he notes, adding that the company can extract economies of scale in procurement, logistics and business processes.

Yeo notes that the stock, which is now trading at around 18.8 times FY2021 earnings, is –1.5 standard deviation off its historical mean. As such, valuations remain compelling with core earnings priced at less than 10 times forward pe.

For CGS-CIMB’s Cezzane See, Dairy Farm’s FY2020 earnings was above her expectations due to lift from one-off government grants. That said, she views the overall lower net profit as a “year to be forgotten” no thanks to weaker numbers from Hong Kong and Macau as tourists stayed away.

See has thus lowered her target price estimate to US$5.40 from US$5.50, still based on 22 times FY2022 earnings, close to –0.5 s.d. from its 13-year average mean. She has also lowered her EPS estimates for FY2021 and FY2022 by 2.5% and 1.9% respectively due to lower associate contribution.

“We conservatively assume FY2021 net profit could still be lower than FY2019’s net profit of US$323.8 million as international borders have yet to open and movement controls may only be eased in 2HFY2021 with the wider roll-out of vaccines,” she writes.

However, she remains positive on the counter as its share price is still trading below its long-term average mean. “We find Dairy Farm attractive for medium-term investors who are looking to revisit recovery plays and willing to ride out the volatilities of the stock (due to HK uncertainties; uneven recovery in Covid-19 cases and in its Southeast Asia business),” she says.— Felicia Tan

Hongkong Land Holdings
Price target:
CGS-CIMB “add” US$5.70

Continue to ‘add’ despite lower underlying profit for FY2020

CGS-CIMB Research’s Raymond Cheng is maintaining his ‘add’ rating on Hongkong Land Holdings with a higher target price of US$5.70 ($7.67) from US$5.30 previously after the company announced its FY2020 results ended December 2020 on March 11.

Despite Hongkong Land’s underlying profit for FY2020 declining by 11% y-o-y to US$960 million due to Covid-19 impacting development property delivery, Cheng notes that it exceeded his estimates, while dividend per share for the period was maintained at 22 US cents, similar to the last two years.

While vacancies for its Hong Kong office portfolio rose from 2.9% to 6.3% in FY2020, Cheng points out that average monthly rent remained flat at HK$120 psf ($20.79 psf).

For the company’s Hong Kong retail portfolio, effective average monthly rent declined to HK$164 psf in FY2020 due to rental concessions and negative rental reversion. However, Cheng notes that year-end occupancy held up well at 99.7% as Hongkong Land switched to a flexible short lease term strategy that kept its average lease expiry low at 1.9 years.

Looking ahead, Cheng expects a solid recovery for Hong Kong retail in FY2021. “With local shopping activities resuming, we expect local luxury retail sales to stage a solid recovery in FY2021 which should benefit Hongkong Land’s retail rental income,” he says.

For its Hong Kong office portfolio, Cheng states that despite negative rental reversion expected in 1HFY2021, management believes that the work from home trend will not negatively impact corporations’ demand for prime office space, with leasing demand to remain robust.

Meanwhile, Cheng anticipates more development property projects in China as he expects Hongkong Land to replenish its landbank there, following management comments that the company has enjoyed a short payback period and a more predictable profit margin in China. He notes that Hongkong Land acquired two sites in China (including the Shanghai West Bund site) last year.

Cheng’s higher target price of US$5.70 is based on higher FY2021 and FY2020 EPS assumptions by 4% and 1% respectively, while its NAV was also raised by 7% to US$10.40 “to factor in the better recovery in the investment property business”. He applies a 45% discount to NAV to derive the target price. — Atiqah Mokhtar

AEM Holdings
Price target:
KGI Securities “outperform” $5.05

‘No guidance, no problem’

KGI Securities’ Kenny Tan trimmed his target price for AEM Holdings from $5.26 to $5.05 as he expects AEM’s “blistering” growth pace to decelerate this year, after six years of high double-digit growth which saw revenue expand close to 16 times from 2014’s trough. Nevertheless, Tan, who is keeping his “outperform” call, sees AEM as fairly undervalued relative to test equipment peers.

AEM has announced that contrary to past practices, it will not be issuing a profit guidance until it has closed the offer for the acquisition of CEI, a contract manufacturer which focuses on printed circuit boards and various semiconductor capital equipment involved in wafer sort and optical inspection.

“Though CEI’s acquisition is EPS accretive for AEM regardless of which option CEI shareholders choose, we expect minimal positive sales impact with the acquisition, and for synergies to come from the cost end or from the strategic standpoint of supply chain diversification,” says Tan.

Its 4QFY2020 sales came in at $83.4 million, 5.9% lower y-o-y, while patmi is up 7.3% y-o-y. FY2020 core sales of $519 million are in the upper

range of AEM’s last profit guidance of between $500 million and $520 million.

Tan notes that AEM’s production mix skewed back towards consumables in 4QFY2020, and that overall FY2020 mix is at 57% tools & machines and 43% consumables, a favourable mix for the longer term.

While AEM has traditionally guided for machines to have lower margins than consumables, profit margin of 18.7% came in above Tan’s 18% estimate, supported by lower tax rates from a write back of tax provisions.

The analyst continues to forecast for about 6% y-o-y core revenue growth, after adjusting his product mix forecast to skew towards machine production over consumables.

“Our profit margin forecast remains around 18% for FY2021/2022/2023 ... [and] currently excludes the impact from CEI’s acquisition” he notes.

“We maintain 14 times P/E peg, above AEM’s usual PE band as we expect continued tailwinds for the semiconductor capital equipment industry. Given AEM’s recent increase in production capacity, we may see further upside to our target price,” he adds. — Lim Hui Jie

Credit Bureau Asia
Price target:
CGS-CIMB “add” $1.53

Defensive business, market dominance

CGS-CIMB Research analysts Andrea Choong and Darren Ong have started coverage on Credit Bureau Asia (CBA) with an “add” call and $1.53 target price, citing its defensive business model and market dominance in Singapore.

CBA is a credit and risk information solutions (CRIS) provider. It aggregates and repackages credit information into usable reports and data packets and sells them to both financial institutions (FI) and non-FI clientele.

In a research note dated March 16, Choong and Ong highlight CBA’s position as a market leader (by revenue) in Singapore’s CRIS space via its subsidiary Credit Bureau Singapore (CBS).

“Institutions wishing to conduct a lending business are required by the Monetary Authority of Singapore to make enquiries with a credit bureau prior to commencing operations,” they explain.

Given CBS’s track record of 18 years, it has clear headway in terms of data collection, making barriers to entry into the Singapore CRIS space high for new players. In addition, CBA has joint ventures in Cambodia and Myanmar that are the sole credit bureaus in both countries.

Choong and Ong also note the defensive nature of CBA’s business model. “We view CBA’s business model to be resilient across economic cycles — as a gauge of creditworthiness during periods of economic growth and to assess counterparty risk during cycle troughs,” they say.

Looking ahead, the analysts predict solid growth for CBA, with population growth and increasing urbanisation to drive credit demand, while the launch of digital banks will enlarge the marketplace. To that end, they forecast ebitda to grow between 8%–18% between FY2021 and FY2023. — Atiqah Mokhtar