Dairy Farm International
Price target:
RHB “buy” US$4.78
A recovery play deserving an upgrade
The ramp-up in vaccinations and “better containment” of the Covid-19 situation has prompted RHB Group Research to upgrade their rating for Dairy Farm International Holdings (DFI) from “neutral” to “buy”.
“We believe DFI’s current valuation offers a good opportunity for investors seeking to position for a cyclical recovery,” the Singapore research team says in a July 19 research note.
RHB has kept its US$4.78 ($6.53) target price for the counter unchanged, implying some 17% in upside and 4% in yield.
The team is forecasting an earnings growth of 10% for DFI’s FY2021 ending December 2021, driven by improved foot traffic to its restaurants and convenience stores as lockdown restrictions ease. This is expected to offset the tapering off of its high grocery retail earnings base as consumer behaviour and government subsidies normalise.
“Home furnishings should see further sales growth underpinned by outlet expansions and rising e-commerce sales,” the team adds. Meanwhile, its health and beauty segment could still face challenges until tourism can resume, thus boosting shopping mall traffic.
Looking ahead, the team highlights that DFI is looking to strengthen its operation in China via product innovation and promotion while upgrading its IT systems to enhance customer shopping. In Hong Kong, the company intends to protect its market strength through a price reinvestment campaign and the offering of Meadows products.
For its Southeast Asia markets, the team anticipates that DFI’s rebranding and introduction of new concept stores should continue to deliver positive results.
The team is also upbeat on DFI’s push for digitalisation in light of Covid-19. “The pandemic compelled the management to shift more strategic focus or priority to enhancing the e-commerce capabilities and digitisation network,” they remark.
In addition, DFI is also emphasising sustainability through its partnerships. The company is launching a new range of cage-free eggs under Meadows brand while the introduction of IKEA ‘Plant Balls’ has significantly reduced the climate footprint vs the one for regular meatballs.
Other pandemic-driven changes include support for staff through the Food Drinks Allied Workers’ Union (FDAWU) initiative and cutting down plastic usage by 14%.
The RHB team notes that risks to their recommendation include delays in mass vaccination progress and escalating social tensions in Hong Kong, which could deter tourism recovery. — Atiqah Mokhtar
HRNetGroup
Price target:
Phillip Securities “buy” $1
Hiring picking up
Phillip Securities analyst Tan Jie Hui has initiated coverage on professional staffing and recruitment firm HRnetGroup with a “buy” call and target price of $1.00.
This is expected to give the counter a 33.2% return from its current 77 cents price, writes Tan in her July 16 report. “Our target price is set at 14x FY2021 ex-cash P/E (net of interest income after tax), given that HRnet has been generating superior ROEs than most regional and global recruitment peers,” explains Tan. The historical high of HRnet’s ex-cash P/E was around 14 times.
HRnet has a December year-end. HRnet is now trading at 16.2x FY2021 P/E — a level that is significantly lower than its peer average of 24.4x, notes Tan.
“Stripping out net cash of $332.2 million which is equivalent to 43% of its market cap, it trades at ex-cash P/E of 9.2x/8.9x on FY2021/22 EPS. A strong cash hoard positions HRnet for any earnings-accretive North Asian opportunities that may come its way,” she stresses.
With a market share of 20.5% based on its 2015 revenue, HRnet is the largest employment agency in Singapore.
A recent compilation by Acra (Accounting and Corporate Regulatory Authority) indicates that the company has remained the largest and most profitable recruitment service player in the republic. It also has operations across 13 Asian cities including Malaysia and China.
Aside from market share, Tan highlights that HRnet is the “most profitable” in the human-resource business.
For one, it attained 152% ex-cash ROE, thanks to strong income generation. This stems from its scale and reputable brands that are led by an experienced board and management team, notes Tan.
She adds that the company’s permanent recruitment and flexible staffing arms saw stronger volumes and rates following urgent market needs to fill positions left vacant during the pandemic.
For instance, there were 18,700 and 17,600 new jobs created in Singapore in 4Q2020 and 1Q2021. This followed renewed hiring by sectors such as food and beverages and community, social and personal services.
With high barriers to entry for both permanent recruitment and flexible staffing services, Tan expects HRnet’s bottom line to grow by 1.9% y-o-y in FY2021, after accounting for the easing in Covid-19 government grants. — Amala Balakrishner
Fortress Minerals
Price target:
Phillip Securities “buy” 81 cents
Strong iron ore prices
While maintaining a “buy” rating for Fortress Minerals, Phillip Securities analyst Vivian Ye has raised her target price for the iron ore mining company to 81 cents from 64 cents previously.
This comes after Fortress posted a stellar set of results for 1QFY2022 ended May 31.
According to Ye in her July 16 note, the company is expected to outperform ahead amid strong iron ore prices and favourable demand and supply dynamics, and as such, raised her FY2022 earnings forecast for the company by 41%.
Citing figures from the World Steel Association, Ye notes that global steel demand will grow 5.8% in 2021 to 1.87 billion tonnes, after dipping 0.2% in 2020.
Global steel demand will further grow 2.7% to 1.92 billion tonnes in 2022, it adds.
At the same time, global iron-ore supply is facing uncertainties.
Major Brazilian iron-ore producer, Vale, recorded a q-o-q decline in iron ore sales of 28.4%, due to operational issues and maintenance at its S11D mine.
As such, Ye has now raised her average selling prices forecast by 37% to US$140 per dry metric tonne ($191.4 per dry metric tonne).
Fortunately for Fortress, the company’s mining operations are gradually reopening despite the Covid-19 restrictive measures imposed by the Malaysian government.
Certain states, such as Terengganu and Pahang where the company’s mines are located, have moved to Phase Two of a four-phase National Recovery Plan.
Ye points out that the company’s Bukit Besi mine has gradually returned to “normalcy”, after resuming at an approved worker capacity of 80% on July 5
“Catalysts are expected from an increase in production and strong iron-ore prices,” says Ye. — Jeffrey Tan
Fu Yu Corp
Price target:
DBS Group Research “buy” 40 cents
Acquisition of Avantgarde Enterprise
DBS analyst Chung Wei Le has kept his “buy” call and 40 cents price target on Fu Yu Corp following the manufacturer’s US$4.5 million ($6.15 million) acquisition of Avantgarde Enterprise.
The privately-held company, which was sold by one Hu Huilan, was incorporated in Singapore in November 2019 and is in the provision of supply chain management services for commodities and trading in exchange-traded financial futures (derivatives).
Fu Yu, which is funding this deal internally, expects to complete the transaction by July 30. For the FY ended Dec 30, Avantgarde Enterprise reported earnings before tax of $3.73 million and it has a net book value of $3.14 million.
According to Fu Yu, the acquisition lets it diversify into a new business area given how it is “challenging to purely rely on its core manufacturing business to continue a growth trajectory,” writes Chung.
Fu Yu plans to centralise its resin procurement process via Avantgarde Enterprise and achieve cost savings through economies of scale.
On a proforma basis, assuming the acquisition was completed on Jan 1 2020, Fu Yu’s earnings would have increased by 18.4% to $20 million from $16.9 million.
Calling it “the best of both worlds”, Chung is upbeat on this deal. “We believe that the deal is both cheap and strategic — attractive valuations and it opens a new business opportunity,” writes Chung in a July 19 note.
“However, the sustainability of Avantgarde Enterprise’s earnings is uncertain as we should bear in mind that FY20 was a very volatile year for commodities and profits could be exceptional,” cautions Chung.
He also notes that Fu Yu’s revenue growth, at 4.6% CAGR from FY2020 to FY2021, is “lacklustre”. As such, the main driver of net profit (9.3% CAGR from FY2020–2023F) is the expansion of its operating margins.
Nevertheless, the acquisition of Avantgarde aside, Chung is already bullish on Fu Yu, given its attractive valuations of P/E ratio of 6.1 times excluding cash and FY2021 dividend yield of 5.2%. The company’s cash balance of $102.1 million, post-acquisition, is equivalent to 44.5% of its market value. — The Edge Singapore
CapitaLand
Price target:
RHB “buy” $4.40
Favourable prospects with restructuring
While maintaining a “buy” rating for CapitaLand, RHB Securities has raised its target price for the property developer to $4.40 from $4.25 previously.
This comes after CapitaLand released its scheme document on July 17 outlining details of the proposed restructuring of its businesses into two companies.
RHB says the scheme document has led it to be more positive on the restructuring exercise.
“Independent financial adviser Evercore has deemed the deal ‘fair and reasonable’ and our recommendation is also to vote in favour of the transaction,” RHB analyst Vijay Natarajan writes in a note dated July 21.
Under the proposed restructuring exercise, CapitaLand’s investment management platforms and lodging business will be consolidated into CapitaLand Investment (CLI).
Meanwhile, the company’s real estate development business will be privately held by existing controlling shareholder CLA Real Estate Holdings, a wholly-owned subsidiary of Temasek Holdings.
CapitaLand expects CLI to remain in the FTSE/EPRA Nareit Index after the proposed restructuring is completed.
RHB says the deal will preserve the existing CapitaLand ecosystem.
Under a reciprocal rights of first refusal arrangement between CLI and CapitaLand, CLI will be given a first right to invest up to 100% in relevant assets from CapitaLand, it notes.
On the other hand, CapitaLand will be given a first right to invest up to 100% in any development opportunity within CLI, it adds.
RHB points out that management expects double-digit return on equity on a “steadystate basis”.
“In the mid-to-long term, CLI is expected to adopt a more asset-light approach to investments, by taking slightly lower stakes in new investments and also divesting some of its existing stakes in REITs and private funds,” says Natarajan.
Moreover, CLI’s pro-forma gearing is expected to be lower at 0.56 times, compared to CapitaLand’s 0.68 times, says RHB.
CapitaLand shareholders are expected to vote on the proposed restructuring at an extra general meeting and scheme meeting on Aug 10. — Jeffrey Tan
Mapletree Logistics Trust
Price target:
Maybank Kim Eng “buy” $2.35
Strong earnings, resilient occupancy seen
Maybank Kim Eng analyst Chua Su Tye has kept his “buy” call on Mapletree Logistics Trust (MLT) but with an upgraded target price of $2.35 from $2.25. This follows the REIT’s “strong” earnings for 1QFY2022 ended June 30.
On July 19, thanks to higher rental income and contribution from recent acquisitions worth $1.6 billion, MLT reported a DPU of 2.161 cents, up 5.7% y-o-y, which was ahead of consensus estimates.
“We expect occupancies to stay resilient on the back of steady demand growth, and raised DPUs by 4% on stronger rental assumptions,” writes Chua in his July 20 note.
During the quarter, MLT enjoyed better rental reversions of 2.2%, a slight dip from the 2.4% gain enjoyed in the preceding 4QFY2021, led mainly by its Vietnam, Hong Kong and Singapore properties.
Overall portfolio occupancy increased from 97.5% to 97.8% and weighted average lease expiry (WALE) was stable at 3.8 years.
“We expect its occupancies to remain resilient, as demand continues to be driven by e-commerce tenancies and 3PLs,” says Chua.
“While its retail sector occupiers have adopted a wait-and-see approach, MLT is looking to drive rental upside from its higher value tenants in the next 9–12 months,” he adds. — The Edge Singapore
