Digital Core REIT
Price target:
UOB Kay Hian “buy” US$1.18
Low gearing and steady pipeline from sponsor
UOB Kay Hian analyst Jonathan Koh has initiated coverage of the newly-listed Digital Core REIT (DCREIT) with a “buy” call and target price of US$1.18 ($1.61).
The REIT listed on Dec 6 at 88 US cents per share, with a listing value of about US$990 million.
In a Dec 7 report, Koh writes that the REIT most notably derives 68.5% of its base rental income from what is known as “hyperscalers”, or technology giants — like Amazon, Facebook, Google, IBM and Microsoft — dominating the cloud services industry.
They utilise data centres built on a massive scale with sizeable commissioned power of 20 megawatt (MW) to 100MW to support hundreds of millions of users. Demand for hyperscale data centres is projected to grow at a CAGR of 23% in 2020 to 2024, outpacing a CAGR of 15% for the broader North America data centre market.
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He also observes that DCREIT has enduring customer relationships: Its top six tenants are sponsor Digital Realty’s has long-standing customers of more than 15 years, and it also benefits from customer relationships with a high tenant retention rate of 95.8%. Furthermore, its tenants are entrenched due to high capex incurred and high switching costs.
The REIT is also able to scale up rapidly due to its sizeable sponsor pipeline, supported by its low aggregate leverage of 27% and competitive cost of debt at 1%.
Digital Realty is the largest global provider of cloud- and carrier-neutral data centres, colocation and interconnection solutions. It has a network of 291 data centres with net rental square feet (NRSF) of 35.8 million sq ft, across 47 cities in 24 countries on six continents.
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DCREIT is the exclusive S-REIT vehicle of Digital Realty. Digital Realty has granted DCREIT a global right of first refusal (ROFR) on its growing data centre pipeline worth over US$15 billion.— Lim Hui Jie
CDL Hospitality Trusts
Price target:
DBS Group Research “buy” $1.40
Gaining from the domestic staycation boost
DBS Group Research analysts Geraldine Wong and Derek Tan believe CDL Hospitality Trusts (CDLHT) stands to gain from concerns over the Covid-19 Omicron variant.
For them, CDLHT will benefit from a rise in local staycation demand as border reopenings continue to see delays. “CDLHT continues to be one of the top beneficiaries to benefit from a staycation demand boost as Singaporeans look locally for holiday options this year-end,” they write in a Dec 6 research note.
The appearance of the Omicron variant has waylaid what the analysts view as “green shoots” in recovery, following indicators in 3Q2021 of markets resuming normalcy.
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Even so, the analysts believe CDLHT’s Singapore hotels will likely see an extension of government block bookings to beyond 1Q2022 as a near-term hedge.
The analysts are projecting a softer recovery trajectory of around 70% of pre-Covid-19 levels in 2022, up from around 50% of pre-Covid-19 levels this year. They also estimate a softer 16% y-o-y growth in DPU in FY2022 ending December on more conservative assumptions.
Wong and Tan note of CDLHT’s pivot towards the built-to-rent (BTR) sector as a way to seek resilience through diversity and earnings stability, post pandemic. “With a varied demand driver compared to hospitality assets, we believe that the BTR investment is value-accretive and complementary to its portfolio.”
Considering the updated growth estimates and valuations that have been rolled forward to FY2022 ending December, the analysts have a new target price of $1.40 for CDLHT, up from $1.35 previously. They maintain their “buy” call on the counter. — Atiqah Mokhtar
Micro-Mechanics Holdings
Price target:
DBS Group Research “buy” $4.05
More legroom for growth
DBS Group Research analyst Ling Lee Keng and its Singapore research team has initiated a “buy” rating on Micro-Mechanics Holdings (MMH), and target price of $4.05, offering a potential upside of 28%.
MMH is currently trading at 21.9 times FY2022 P/E, near +1 standard deviation of its four-year historical average forward P/E, according to Ling.
“We believe that there is still legroom for growth in the semiconductor cycle, and we anticipate a further re-rating towards its historical peak multiple into 2022,” she writes in a Dec 7 report.
The semiconductor industry is expected to grow approximately 9% in 2022 and see a CAGR of 8% in 2020 to 2025, led by drivers such as Internet of Things (IoT), 5G and automotive demand.
The consumable nature of products of MMH contributes to greater resiliency towards industry swings. “Consumable nature of MMH’s back-end tools and front-end equipment parts support regular demand across the cycle,” he says. “In most downturn periods, MMH’s revenue was observed to be relatively less impacted.”
MMH’s earnings outlook and stable dividend yields are supported by strong balance sheets. “We project MMH to achieve a net profit compound annual growth rate of 10% between FY2021 to FY2023, with a stable dividend yield of 4.1%,” adds the analyst.
Ling also observed that MMH is in a strong financial position because of its zero debt. “MMH has no borrowings, which we believe could help the company weather cyclical downturns more effectively. In addition, the company is able to generate strong cash flows, enabling it to fully fund its capital expenditure even during periods of slowdown, without relying on debt.”
MMH has seen a steady uptrend in its free cash flows and estimated cash flows from operations less capex over the years, according to the analyst. Some risks noted by the analyst include earlier and sharper-than-expected semiconductor industry downturn and/or significant cost pressures from suppliers. — Chloe Lim
Far East Hospitality Trust
Price target:
CGS-CIMB “buy” 74.5 cents
DBS Group Research “add” 78 cents
Far East Hospitality Trust to benefit from divestment
Analysts from both CGS-CIMB Research and DBS Group Research have kept their “buy” or “add” calls on Far East Hospitality Trust (FEHT), with DBS raising their target prices.
DBS’s Geraldine Wong and Derek Tan have handed the stock a target price of 78 cents, up from their previous target price of 70 cents, while CGS-CIMB analysts Eing Kar Mei and Lock Mun Yee maintain their target price of 74.5 cents.
FEHT entered into a put and call option agreement with City Developments (CDL) to divest its interest in Central Square for $313.2 million, plus an incentive fee of up to $18 million.
This is subject to certain conditions being fulfilled by Dec 31, 2023, including getting provisional permission for a higher mix of residential use.
The divestment consideration represents a 57.9% premium to the independent valuation of $198.3 million (as at Dec 31 last year) and a 70.8% premium to the original purchase price of $183.3 million in August 2012.
After accounting for transaction-related costs, FEHT expects a net gain of $112 million, with the divestment expected to be completed by end of the first quarter of 2022.
Eing and Lock write in a Dec 3 report that divestment is the best strategy for the REIT, saying the announcement did not come as a surprise. This is because FEHT had previously said it is exploring various options for Central Square, after it received outline advice from the Urban Redevelopment Authority (URA) to redevelop the property.
However, under the strategic development incentive scheme, Central Square could be redeveloped up to a maximum gross floor area (GFA) of 31,758 sq m, 75% more compared to the current GFA of 17,858 sq m. It could also be built to a height of 20 storeys, up from seven storeys currently.
“Considering the long redevelopment gestation period and that a REIT has [a] 10% development limit, FEHT concluded that a divestment via a tender exercise is the best strategy for the REIT,” the analysts say. The proceeds from the divestment will be used to pare down FEHT’s debt.
Eing and Lock add that assuming 83.9% of the divestment net proceeds are used to pay down debt, FEHT’s gearing will be significantly reduced from 41.3% (as at June 30) to 33.5%, while its debt headroom will be increased to $533.6 million, based on the 45% gearing limit.
This will provide FEHT flexibility in acquisitions, and while Central Square accounted for about 8% of FEHT’s 2020 assets under management (AUM), the divestment will increase its pro forma NAV per unit by 7.2% and DPU by 0.8% due to interest savings.
As for DBS’s Wong and Tan, they note that FEHT currently trades at an attractive valuation, offering investors a FY2022 to FY2023 CAGR of 25% in distributions of about 6.9% as travel resumes.
They write: “While the Omicron strain threatens to be a party pooper, we are comforted by FEHT’s downside protection with a significant part of its revenues on fixed rental basis, supported by its sponsor.” They also believe the overall portfolio metrics should recover in FY2022 to FY2023, where they see an acceleration in momentum post vaccine distribution. However, the analysts warn that a slower recovery in FY2021 is a risk if the Covid-19 pandemic continues. — Lim Hui Jie
Dairy Farm International
Price target:
UOB Kay Hian “buy” US$3.60
‘Underwhelming’ performance in 2021
UOB Kay Hian analyst Adrian Loh has kept “buy” on Dairy Farm International (DFI) as he sees some positivity in the group’s retail sales in Hong Kong, as well as y-o-y sales growths in its F&B associate Maxim in 3QFY2021 ended September.
However, Loh has lowered the counter’s target price to US$3.60 ($4.91), from US$4.53 previously due to the “underwhelming” performance seen this year.
While the group reported positive figures in FY2020 due to the panic spending and government support, it had a “tough act” to follow in FY2021 following the previous year’s high base.
In FY2021, the group’s key associate Yonghui, a Shanghai-listed hypermarket and supermarket operator, was negatively affected by increased levels of competition in China. “Positive y-o-y performances from some of its segments do not appear to be able to rescue its 2021 numbers,” adds Loh. In its business update for the 3QFY2021 ended September, DFI’s results stood “weaker than expected”.
Its associates Maxim and Yonghui performed better on a y-o-y basis, although the competition in China has “materially degraded” Yonghui’s margins. Management has also not guided as to when this will turn around.
Meanwhile, DFI’s grocery, health and beauty as well as home furnishings declined y-o-y.
Hong Kong’s closed borders also remain an issue in terms of seeing a return to business-as-usual, especially for its health and beauty segment, adds Loh. On this, he believes DFI’s anticipated poor performance for the FY2021 should be already priced in.
“With consensus having already downgraded earnings by over 50% in the past three to four months, and earnings likely to trough in 2021 in our view, we expect DFI’s share price to re-rate in the next few months once the 2022 earnings growth comes into view,” Loh writes in a Dec 8 report.
“The company has in place its ‘multi-year transformation programme’ and remains encouraged by the momentum of the progress, though the market will still need to see evidence of this in the near- to medium-term.”
In addition to his lower target price estimate, Loh has lowered his earnings forecasts for the FY2021 to FY2023 by 6% to 43%, with the largest changes pertaining to FY2021. This is due mainly to the poor performance of Yonghui superstores in China, as well as a slightly lower margin outlook for the near to medium-term, he says.
The lower target price is also due to the 12% reduction in Loh’s EPS estimates for the FY2022.
“We peg our 2022 EPS estimate to a target multiple of 22.2 times which is 1 standard deviation below its five-year average P/E of 29.1 times (excluding 2020). We believe that the discount to its five-year average P/E is fair and reasonable given the continued Covid-19 related challenges that the company faces in its various business segments and geographies,” he says.
“Additionally, we note that DFI — despite its size and organisational capabilities — could improve on its reporting transparency as it only discloses its geographic segments as either ‘North Asia’ or ‘South Asia’.”
Moving forward, Loh expects DFI to trade at higher multiples as the region sees a higher percentage of vaccinations within the population. Further evidence of DFI’s business transformation in the near to medium-term “reporting periods” will also contribute to the counter’s better share price performance. — Felicia Tan
Frasers Hospitality Trust
Price target:
DBS Group Research “buy” 65 cents
Portfolio rejuvenation efforts kick off
DBS Group Research analysts Geraldine Wong and Derek Tan maintain a “buy” rating on Frasers Hospitality Trust (FHT) with an unchanged target price of 65 cents.
FHT continues to look attractive from a valuation standpoint at 0.7 times price-to-net asset value (P/NAV) on pandemic level valuations, or –1 standard deviation from its historical trading range. “We estimate a 136% y-o-y growth in dividends-per-share on a low base in FY2021,” say Wong and Tan.
Although the divestment of its Australian property Sofitel Wentworth results in a temporary income gap, capital top-ups are likely, say the analysts. The recent divestment of Sofitel Sydney Wentworth on a 12% premium to asset valuation will likely go into partial debt repayment (from 42% to 34% gearing) and potentially capital top-ups in the coming years, to possibly offset the loss of income from the asset.
“Any near-term acquisitions will serve as upside to our conservative estimates,” they add. “We have adjusted our estimates to account for softer projected normalisation of travel with RevPAR at around 50% of 2019 levels in 2021.”
Additionally, given the sponsor’s significant 62% stake in FHT and relative illiquidity versus peers, the analysts believe that the stock remains an attractive takeover target, as it costs less than $500 million to take it private and gain control of its portfolio of approximately 4,000 room keys and landmark Singapore hotels.
FHT’s FY2021 revenue of $85.5 million was in line with estimates, where net profits interest (NPI) and distributable income of $57.6 million (–3.7% y-o-y) and $21 million (–29.7%) y-o-y, made up 94% and 65% of the analysts’ estimates respectively.
“The lower gross revenue and NPI were due to partial closure of six UK properties for around three months and Westin Kuala Lumpur for around eight months for the year,” say Wong and Tan.
On a y-o-y comparison, FY2020 was boosted by around five months of pre-Covid-19 operating figures from October 2019 to March last year and constituted a relatively higher base.
Some risks that the analysts anticipate include the development of the Omicron variant, which may cause a longer-than-expected delay to the reopening of borders.— Chloe Lim
Lian Beng Group
Price target:
PhillipCapital “unrated”
Positives despite ‘challenging’ construction sector
PhillipCapital research analyst Vivian Ye sees encouraging signs for Lian Beng Group despite it being a “challenging” time for the construction industry.
In an unrated Dec 3 research report, Ye says that Lian Beng’s construction order book remains strong at $1.4 billion, which is expected to support construction activities until FY2026 ending May.
She is also positive on the diversified nature of its portfolio, which she says has cushioned the negative impact of the headwinds in the construction industry on Lian Beng’s bottom line. The group operates four main segments — construction, property development, investment holdings and dormitory.
“With the property market booming during the pandemic, the property development, dormitory and investment holding segments contributed 94% to profit before tax in FY2021, even though they make up only 17% of FY2021 revenue,” Ye says.
Looking ahead, she anticipates a further recovery in the construction sector, underpinned by public sector projects such as public housing and infrastructure works. As of September, the value of construction contracts awarded has increased 36.7% y-o-y to $21.7 billion.
Ye also says that Lian Beng has maintained its dividend payouts throughout the challenging environment. “Dividend payout ratios averaged 21% over the past five financial years, and were 17.4% and 19.2% in FY2020 and FY2021 respectively, translating to dividend yields of 2%.”
While upbeat on the group’s prospects, she however cautions of the possible manpower shortages and deployment challenges in the construction industry. Property market cooling measures is another potential risk as it could impact Lian Beng’s other segments, Ye adds.— Atiqah Mokhtar
