Brokers' Digest: FEHT, SGX Group, SATS, Civmec, Food Empire

Analysts are remaining positive on Far East Hospitality Trust’s (FEHT) prospects after the hospitality REIT reported a 24.3% y-o-y increase in its distribution per stapled security (DPS) for the FY2022 ended Dec 31, 2022.

“FEHT owns the only pure-play Singapore hospitality portfolio within the Singapore REIT (S-REIT) sector and is to see a golden year ahead with Singapore revenue per available room (RevPAR) maintaining its record high since mid-2022,” say DBS Group Research analysts Geraldine Wong and Derek Tan. The analysts have kept their “buy” call with a higher target price of 74 cents from 70 cents previously. FEHT’s full-year DPS stood in line with their estimates.

“We tweaked our interest rate assumptions for FY2023/FY2024 to reflect management’s guidance of a 3.5% average interest rate. Our weighted average cost of capital (WACC) assumption was revised to reflect lower debt financing with gearing reduced to 32.0% (after debt repayment following the Central Square divestment),” they write.

Wong and Tan expect Singapore’s hospitality scene to see a “robust” 2023 with tourist arrivals estimated at around 67% of normalised levels within the year. FEHT will also be a key beneficiary from the stronger demand in corporate rooms and a longer length of stay.

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Wong and Tan also see the recycling of FEHT’s divestment proceeds as “naturally accretive” to the trust. “The recycling of divestment proceeds will be naturally accretive to FEHT as divestment proceeds from Central Square — at an exit yield of 1.8% — get recycled, potentially overseas,” they say.

They have lowered their FY2023/FY2024 DPS estimate to 3.58 cents and 4.0 cents from 3.87 cents and 4.41 cents previously. The new estimates imply a forward yield of 4.7% and 5.3%.

On the other hand, CGS-CIMB Research has also kept its “add” call with a higher target price of 79 cents from 73 cents before. This is as FEHT’s full-year DPS surpassed expectations at 105.9% of CGS-CIMB’s FY2022 estimates.

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Analysts Lock Mun Yee and Natalie Ong see the trust as benefitting from the return of Chinese tourists and leisure demand, adding that these two factors will drive the trust’s recovery in FY2032.

However, the analysts have lowered their DPS estimates for FY2023 to FY2024 by 8.4% to 8.8% as they lower their revenue assumptions and factor in higher borrowing costs. — Felicia Tan

Singapore Exchange Group
Price targets:
Maybank Securities ‘buy’ $10.73
OCBC Investment Research ‘buy’ $10.20
PhillipCapital ‘buy’ $11.71
CGS-CIMB Research ‘hold’ $10.00
RHB Group Research ‘neutral’ $9.40

Mixed bag of sentiments

Analysts are keeping their “buy” and “neutral” or “hold” calls on Singapore Exchange (SGX) Group after the exchange’s results for the 1HFY2023 ended Dec 31, 2022.

Maybank Securities, OCBC Investment Research (OIR) and PhillipCapital are the more positive brokerages, with unchanged “buy” calls as the group’s 1HFY2023 results stood in line with the street’s estimates.

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Maybank’s Thilan Wickramasinghe notes that the group’s multi-asset derivative platform “continues to deliver and offers a strong competitive moat in the current volatile markets backdrop”. He has also raised his target price on SGX to $10.73 from $10.65 previously.

Meanwhile, OIR’s research team is also keeping its “buy” call with a lowered fair value estimate of $10.20. In the team’s view, SGX needs time to execute its plans even though the team is positive about the group’s various initiatives to broaden its revenue streams. The team expects to see a “further ramp-up” of revenues from SGX’s recent bolt-on acquisitions.

PhillipCapital analyst Glenn Thum is keeping his “buy” call on SGX with an unchanged target price of $11.71 after SGX’s 1HFY2023 revenue and adjusted patmi met his estimates.

The analyst noted positives including the surge in treasury income and higher fees from its FTSE China A50 and Nifty 50 contracts and negatives such as the lower listing revenue, which hurt the group’s fixed income and cash businesses.

On the other hand, analysts from CGS-CIMB Research and RHB Group Research have kept their “hold” and “neutral” calls. CGS-CIMB’s Andrea Choong has also kept her target price of $10 after SGX’s core net profit came in line with her estimates, forming 50% of her full-year forecasts.

On SGX’s treasury income, Choong notes that any further increase will depend on various factors such as derivatives market activity and open interest (OI) on collateral.

RHB Group Research analyst Shekhar Jaiswal has raised his target price on SGX to $9.40 from $9.30 after SGX’s core patmi came in higher than his estimates. “We lift FY2024 to FY2025 profit by 2% each,” says Jaiswal. — Felicia Tan

SATS
Price targets:
CGS-CIMB Research ‘add’ $3.21
UOB Kay Hian ‘buy’ $3.28

Proxy for recovery in travel

SATS on Feb 13 announced its 3QFY2023 ended December 2022 results, which saw earnings or patmi come in some 90.2% lower y-o-y at $0.5 million. While patmi saw a y-o-y decline, this positive patmi comes after two consecutive quarters of losses, reflecting an improvement in business conditions and the seasonal high, says SATS.

Revenue for 3QFY2023 rose by 54.5% y-o-y to $475.7 million as business activities increased on the back of a recovery in the aviation industry. Following its results announcement, analysts are generally optimistic about the group’s upcoming prospects. CGSCIMB Research is keeping its “add” recommendation with an unchanged target price of $3.21, as analysts Tay Wee Kuang and Lim Siew Khee note that the group’s recovery continues to be dampened by higher costs.

“We expect SATS to see a core net loss of $30.5 million in FY22023 from $6.9 million in net profit previously, implying a muted net profit of $2.5 million in 4QFY2023 due to the volume-driven nature of higher other operating costs and remaining acquisition-related expenses of Worldwide Flight Services (WFS), which could set SATS back on its pace of recovery in the near term, even though staff costs and raw material costs have normalised,” say the analysts.

Meanwhile, they are upbeat about China’s reopening, although there may be some delayed financial impact, as the Singapore-China flights are still at less than 10% of pre-pandemic levels. “As such, we believe the reopening of China’s border, although an important milestone given that Chinese tourists made up 19% of total visitors to Singapore pre-pandemic, will only gradually pick up over the next two quarters,” say Tay and Lim.

Although the earnings profile is expected to deteriorate post-acquisition, the analysts like the group’s improved cash-generation capabilities, given an estimated ebitda of about $605 million in FY2024 and $717 million in FY2025. They also see SATS as a proxy for a recovery in travel.

UOB Kay Hian has also reiterated its “buy” call on SATS and target price of $3.28. Analyst Roy Chen is optimistic about the group’s moderate q-o-q improvement in earnings but says this was a slight miss compared to his projection, which expected SATS’ core profitability to have returned to positive territory in 3QFY2023.

The slight miss of SATS’s core profitability was mainly due to the faster-than-expected growth of operating costs, as during the quarter, SATS continued to proactively ramp up the workforce strength in preparation for the recovery of air traffic from China. Management has said that its workforce has recovered to almost 100% of its pre-pandemic level, making it well-positioned to support and capture the regional air traffic recovery with China’s reopening.

Chen is expecting positive core profitability in 4QFY2023. “Given that SATS has completed workforce ramp-up in the past quarter and taking into account further regional air traffic recovery with China’s reopening (China used to contribute to about 20% of SATS’s total business volume), we expect SATS’ core profitability to return into the black in 4QFY2023,” says Chen. — Samantha Chiew

Civmec
Price targets:
Maybank Securities ‘buy’ $1
DBS Group Research ‘buy’ 95 cents

1H earnings beat

Civmec has delivered the goods, writes Maybank Securities analyst Eric Ong, as the construction and engineering services provider beat estimates in 1HFY2023 ended December 2022.

1HFY2023 patmi rose 25% y-o-y to A$28.2 million ($25.96 million), beating consensus expectations. “To our positive surprise, the group doubled its interim dividend to two Australian cents on the back of strong cash flow.”

In a Feb 9 note, Ong maintains “buy” on Civmec with a higher target price of $1 from 94 cents previously. The new target price represents a 53% upside against its last traded price of 66 cents.

Civmec continued to grow its order book to A$1.18 billion at end-1HFY2023, compared to A$935 million in 1QFY2023 ended September.

Tendering activity across all sectors remained robust, notes Ong. “This should help to secure the majority of the turnover planned for the next 12 months, with a portion of the secured order book extending as far as 2029.”

In the future, the group will focus on securing new contracts that generate good returns by optimising its workforce gradually, Ong adds. “Coupled with China’s recent reopening, visibility of upcoming projects for existing clients is good.”

The highly anticipated Australia Defence Strategic Review (DSR), which is likely to be released in March, is expected to open further shipbuilding and sustainment opportunities, says Ong. “We understand Civmec recently appointed Mark Clay as General Manager, Defence to support the growing tempo of defence activities, especially in the Henderson maritime precinct.”

Ong raises his FY2023-FY2025 earnings per share (EPS) forecasts by 5%-10%, mainly due to better-than-expected margins.

Meanwhile, DBS Group Research analysts Elizabelle Pang and Paul Yong believe Civmec is “well-positioned in both private and public sectors”.

In a Feb 10 note, Pang and Yong maintain “buy” on Civmec with a higher target price of 95 cents from 92 cents previously.

“Customer capex from these sectors is estimated to expand at a 9% CAGR up to FY2024. Australia’s government aims to deliver over A$120 billion in infrastructure investments over 10 years and has pledged to invest A$183 billion by 2050 in naval shipbuilding, with Civmec as one of the few approved players.”

Pang and Yong like Civmec’s diversified revenue streams from both private and public sectors. “Public sector spending generally kicks in during economic downturns and when private capex is low, providing diversification to the group’s revenue streams.”

In addition, Civmec’s 1HFY2023 operating cashflows turned positive, the first since June 2016. Cashflows from operations for 1HFY2023 came in at A$84 million, resulting in a cash balance of $62.8 million and borrowings (excluding finance leases) of A$50 million, note Pang and Yong.

1HFY2023 marks the first period since June 2016 that the group has been in a favourable net cash position, following three years of significant capex investments in new facilities. — Jovi Ho

Food Empire
Price target:
Maybank Securities ‘buy’ $1.20

Cheap valuations, special dividend prospects and potential takeover target

Jarick Seet of Maybank Securities has initiated coverage on Food Empire with a “buy” call and $1.20 target price, citing the instant beverage maker’s cheap valuations, prospects of a special dividend, and a chance that it is a takeover target.

He adds that Food Empire trades at just 7.4 times core FY2022 earnings, nearly a quarter of the global peer average of 27 times. His target price of $1.20 is pegged to 11 times earnings. “We think Food Empire’s business model has shown its resilience and should continue to enjoy decent growth going forward,” writes Seet in his Feb 13 report.

The war between Ukraine and Russia – vital Food Empire markets – has not hurt the company’s earnings. For its 9MFY2022 ended September 2022, the company managed to grow its revenue by 27% y-o-y to US$286 million. Besides higher sales, the company enjoyed better margins too.

“In our view, a ceasefire or the end of the conflict could result in a major stock re-rating. While Food Empire is not subject to sanctions, its valuation took a huge hit when war broke out and could recover sharply on a truce, we believe,” says Seet.

For the coming FY2022, Food Empire is likely to give a special dividend, drawing partly from the proceeds of the sale of a building, says Seet, who is forecasting a total FY2022 distribution of four cents, which translates into a yield of more than 5%.

Seet also observes that Food Empire has been buying back shares at 82 cents, with some 5.95 million repurchased. Citing how Food Empire is trading at just 7.4 times core earnings, a “steep discount” off both listed and privately held peers, Seet believes that the company is an attractive acquisition target by the more prominent players, eyeing its existing presence in Russia and Vietnam.

Super Coffee, another Singapore-listed instant beverage maker, was taken over in 2017 by Netherlands-based Jacobs Douwe Egberts for $1.35 billion, which implies a valuation of 30 times. Separately, Food Empire, in an after-market announcement, says that earnings for FY2022 are likely to be “substantially” higher versus the preceding year.

“The substantial increase in the group’s profit after tax for FY2022 was mainly attributable to better operating profit and a one-off gain from the disposal of a non-core asset,” says Food Empire, without referring directly to the sale of the building. The company expects to release its earnings on or around Feb 27. — The Edge Singapore