DBS Group Holdings
Price target:
RHB “buy” $33
Strong growth prospects in India and China
The Singapore Research team at RHB Group Research has maintained its “buy” call on DBS Group Holdings with an unchanged target price of $33 after the bank announced its intent to acquire a stake in Shenzhen Rural Commercial Bank on April 20.
This is DBS’s second acquisition in five months, after India’s central bank proposed that Lakshmi Vilas Bank (LVB) be amalgamated into DBS India on Nov 17 last year.
DBS said that it will subscribe to a 13% stake in the Shenzhen bank for a consideration of RMB5.29 billion ($1.08 billion).
In the near-term, RHB’s team says that impact on DBS’s earnings will be small but in the long-run, the acquisition will help accelerate the bank’s expansion into the Greater Bay Area (GBA).
“Overall, we are positive on DBS’s strategic acquisitions in India and China — both countries with strong prospects,” writes the team in a report dated April 21.
Privately owned Shenzhen Rural Commercial Bank has built a niche in serving local communities that have grown in wealth since the city’s rapid growth.
The bank has total assets of RMB519 billion, and operates one of the largest branch networks in Shenzhen. The city itself has 210 of its 217 branches and over 2,100 self-service terminals. The bank has over five million active retail customers and over 170,000 active corporate clients.
“Shenzhen Rural Commercial Bank will allow DBS to increase its exposure to China — one of DBS’ six core markets. It will also accelerate DBS’ strategy to expand and grow in the GBA and it creates a mutually beneficial collaboration between Shenzhen Rural Commercial Bank and DBS’ Hong Kong and China franchises,” writes the team
“Management believes there will be [the] opportunity to raise DBS’ stake given liberalisation of China’s financial services sector. GBA refers to the Chinese government’s scheme to link the cities of Hong Kong, Macau, Guangzhou, Shenzhen, Zhuhai, Foshan, Zhongshan, Dongguan, Huizhou, Jiangmen and Zhaoqing into an integrated economic and business hub”.
Shenzhen Rural Commercial Bank posted a net profit of RMB4.8 billion in the FY2020 ended December. “A 13% share of Shenzhen Rural Commercial Bank’s FY2020 earnings would add 2.5% to DBS’ FY2020 net profit. In FY2020, Hong Kong and Greater China accounted for 24% of DBS’ earnings”, says the team. — Felicia Tan
Parkway Life REIT
Price target:
DBS Group Research “buy” $4.50
Rare opportunity for investors
DBS Group Research analysts Rachel Tan and Derek Tan believe that the potential upcoming renewal of Parkway Life REIT’s (PLife REIT) Singapore hospitals’ master lease will give investors a rare opportunity to ride further upside on the counter.
In an April 19 research note, the analysts maintained their “buy” rating for the REIT with a higher target price of $4.50, from $4.00 previously.
The 15-year master lease for PLife REIT’s Singapore hospitals ends on Aug 22, 2022.
The analysts believe that IHH Healthcare — the REIT’s sponsor and master leasee — will renew the lease, providing a key opportunity to revise rentals upward and carry out upgrades for the hospitals.
They estimate the renewal could increase the REIT’s DPU by 7% to 23%, which translates to a share price upside of 4% to 25%.
They recommend investors to buy the counter ahead of the renewal to ride the upside, despite PLife REIT currently trading at a premium of 2.1 times P/NAV.
The analysts also believe the renewal, along with robust income visibility, supports PLife REIT’s position as a “success story” and a favourite among investors.
The REIT’s share price has more than tripled since listing in 2007, translating to a CAGR of 9%.
“On a total return basis, investors have enjoyed a return of more than 4 times since its IPO or 11% CAGR,” they add.
The analysts also note that PLife REIT’s management is currently exploring opportunities to drive its next phase of growth.
They believe this could come from investments in mature healthcare markets like Australia, Europe, or the UK. The acquisition of Mount Elizabeth Novena is also a possibility.
“We believe the hospital would soon reach a stabilised state and potentially be injected into PLife REIT when the yield of the asset is accretive”, they add.
Their target price for PLife REIT is raised to $4.50, factoring in higher rentals from the lease renewal and new acquisitions assumption of $25 million. — Atiqah Mokhtar
Singapore Exchange
Price target:
RHB Group Research “buy” $11.60
Trading momentum should sustain through FY21
RHB Group Research is keeping its “buy” rating for Singapore Exchange (SGX) with an unchanged target price of $11.60, as its Singapore research team is confident that trading momentum will sustain for the rest of FY2021 ending June.
3QFY2021 ended March total securities trading value and securities average daily value (SADV) came in at $94.2 billion and $1.52 billion which were 7.1% and 5.6% lower y-o-y respectively.
However, the team says the y-o-y normalisation is within expectations as the market saw extreme volatility at the start of the pandemic and notes SADV grew 18% q-o-q.
The Straits Times Index (STI) also advanced 10% during this period, outperforming regional peers.
9MFY2021 equity total trading value and SADV grew y-o-y by 7.9% and 8.4% at $256 billion and $1.35 billion respectively, making up 76% of RHB’s full-year forecast of $335 billion total trading value.
The year-to-date derivatives average daily volume (DADV) was 6% lower y-o-y as record volume contracts were traded due to the outbreak of Covid-19 in March 2020. However, 3QFY2021 DADV was 19% higher q-o-q.
“We expect the active derivative trading to sustain global uncertainties and MSCI Singapore rebalancing. Sea Limited is expected to be included in MSCI Singapore which could stimulate trading interests,” the team notes.
The team anticipates movement restrictions could be further relaxed as more of the population gets vaccinated, supporting economic recovery.
“Coupled with our constructive view on STI (one of the cheapest among Asean peers), these factors should help sustain both SADV and DADV,” the team adds. — Atiqah Mokhtar
Dairy Farm International
Price target: UOB Kay Hian “buy” US$5.19
Upside from rising consumption power in Asia
UOB Kay Hian Research analyst Adrian Loh has initiated coverage on Dairy Farm International Holdings with a “buy” rating and a target price of US$5.19 ($6.89), implying 23% upside from current levels.
In a research note dated April 19, Loh says that Dairy Farm is a play on Asia’s developed and emerging markets, with an upside from the rising consumer spending power of its middle class.
“We like Dairy Farm’s position as the largest retailer in Asia ex-Japan with its strong market presence in China, Hong Kong, Taiwan, India and Asean giving it exposure to both developed and emerging markets”, he writes.
Dairy Farm’s diversified businesses and markets make its portfolio resilient and defensive, Loh adds.
Dairy Farm’s roster includes Cold Storage, Giant and Guardian as well as franchises like Starbucks, which it holds through its 50% stake in Maxim.
Despite Covid-19 negatively affecting gross margins for its health and beauty and convenience store segments, the higher margins from its home furnishings and grocery retail sectors mitigated the impact, resulting in FY2020 ended December 2020 operating profit dropping “only” 9% y-o-y to US$388 million.
Loh estimates Dairy Farm’s revenue will grow 2% y-o-y in FY2021 to US$10.48 billion, driven by domestic consumption recovery as vaccination programs continue rolling out, while ebit is forecasted to grow 8% y-o-y to US$420 million.
He is bullish on Dairy Farm’s long-term growth, driven by its ongoing structural transformation programme which began in 2018.
The analyst says that the programme has seen ebitda margins rise from 5% to 7% between 2014 to 2017 to 11% to 13% between 2018 to 2020.
Looking further ahead, he expects slightly slower revenue growth of 1.6% and 1.4% for 2022 and 2023, in tandem with post-pandemic recovery in Asia. Gross margins are also expected to contract and stabilise at 27% from 2022 onwards.
“Our [gross margin] forecasts have purposely been conservative given the lack of guidance from the company,” he adds.
Loh’s target price of US$5.19 is pegged to its fiveyear average P/E of 22 times. It excludes a forecast yield of nearly 5% for FY2021 based on its closing price of US$4.22 (as at April 16).
Dairy Farm’s P/E is one standard deviation below the five-year average which Loh says undervalues the company’s stable platform as regional economies recover and its earnings growth prospects — Atiqah Mokhtar
InnoTek
Price target: UOB Kay Hian “buy” $1.20
Beneficiary from growth in China auto sales
A strong recovery in China’s auto sales and a positive outlook for the electric vehicles (EV) industry has prompted UOB Kay Hian research analyst John Cheong to retain his “buy” rating for InnoTek with a higher target price of $1.20, from 82 cents previously.
China’s auto sales for March surged as China recovered from the pandemic, jumping 67% y-o-y and 64% m-o-m to 2.38 million. 1Q2021 passenger vehicle sales are estimated to grow 73% y-o-y to 6.34 million units.
Cheong believes this will bode well for InnoTek, which derives over 30% of its revenue from the China automobile market.
He is also bullish on InnoTek’s shift towards EV for its auto and metal components divisions, which the company alluded to in its 2020 Annual Report outlook statement dated April 13.
Cheong also notes that InnoTek is moving beyond single-part manufacturing to parts assembly within the EV industry, with initial orders secured for the latter and more expected to come in the future.
China’s passenger EV sales are expected to reach two million units in 2021 (+80% y-o-y), driven by both domestic demand and exports.
Cheong also expects demand for InnoTek’s office automation (OA) segment to recover in FY2021 ending December post-Covid-19. He notes InnoTek’s factory in Thailand started commercial production of OA equipment in 2020, with InnoTek looking to develop the factory to support automotive customers in Thailand in the future.
Overall, Cheong expects InnoTek’s FY2021 earnings per share to grow 39% y-o-y.
The analyst also points out that InnoTek’s net cash position as of end-2020 stood at $90.2 million (44% of current market cap), up 158% from $35 million as of end-2015.
“InnoTek has been paying out a dividend per share of 0.5 cents since 2016, and gradually increased this to 2 cents in 2020,” Cheong adds.
His higher target price of $1.20 is pegged to FY2022 P/E of 12 times, up from FY2021’s P/E of 10 times.
He believes InnoTek is undervalued at current valuations, given that it is trading at 9 times FY2022 earnings, versus peers’ multiple of 12 times. — Atiqah Mokhtar
