Food Empire Holdings F03
Price target:
UOB Kay Hian ‘buy’ $1.28
Upbeat on frequent share buybacks
UOB Kay Hian is reiterating its “buy” recommendation on Food Empire with a target price of $1.28, as analyst John Cheong and Heidi Mo see the group’s continued share buyback in 1QFY2023 ending March, which has contributed to a higher share price, especially after recording a 134% y-o-y increase in FY2022 core earnings of US$45 million ($59.9 million).
During the first quarter, Food Empire bought back close to two million shares at 65 cents to 90 cents. This is close to the 52-week high share price of 96 cents.
With the group also doubling its FY2022 dividend and strong core earnings growth in the last four quarters, the analysts believe that the group is confident in its future outlook.
The growth was mainly driven by an increase in consumer demand for Food Empire’s products, given its affordable price points, improving net margin from easing of supply chain issues and improvement in product mix.
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In addition, the group has declared a dividend of 4.4 cents per share for FY2022, double FY2021’s dividend of 2.2 cents per share.
“Also, any positive development in the Russia-Ukraine conflict could lead to further valuation re-rating for Food Empire, which is trading at a 40%–50% discount versus peers,” say Cheong and Mo.
On the outlook, the group expects strong consumer demand across its segments, despite rising inflationary pressures and average selling prices. Given the consumer-staple nature of the group’s products, demand is relatively price-inelastic, say the analysts.
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Even as prices increase, the group’s products in the coffee segment remain affordable enough for mass appeal, leading to a sustainable or stronger demand in FY2022. Hence, the analysts see that sales volumes are more sheltered from market volatilities. “With supply chain disruptions easing in some markets, we forecast higher earnings and improved margins moving forward,” say Cheong and Mo.
With the strong levels of demand sustained amid inflationary pressures and currency volatility due to geopolitical uncertainties, the analysts’ forecast incorporates a 7% increase in FY2023 core earnings and another 7% increase in FY2024 core earnings.
“We believe Food Empire is attractively valued at 8.3 times FY2023 P/E, 1 standard deviation below its long-term mean and at around a 40%–50% discount to its local and regional peers,” say the analysts. — Samantha Chiew
Lendlease Global Commercial REIT JYEU
Price target:
CGS-CIMB Research ‘add’ 90 cents
Higher earnings forecast, lower cost of equity
CGS-CIMB Research analysts Natalie Ong and Lock Mun Yee have kept their “add” call on Lendlease Global Commercial REIT (LREIT) with a higher target price of 90 cents from 88 cents previously as they see both organic and inorganic growth possibilities for it.
In their March 29 report, the analysts estimate that LREIT’s portfolio valuation could increase by 4.1% y-o-y to $3.7 billion. This is based on increases in the valuations of 313@Somerset, Jem and Sky Complex by 2.1%, 4.4% and 0.2% respectively.
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The uplifts can come from rental escalation and indexation, positive reversions and the deployment of the 10,200 sq ft of unutilised gross floor area at 313@Somerset, note the analysts.
Without the fair valuation gains, the analysts’ FY2024 gearing of 40.2% for LREIT translates into a debt headroom of $115.8 million, assuming an internal gearing limit of 42%. However, once the increments are factored in, the analysts’ gearing estimate would be lowered to 38.8% from 40.2% for the FY2024. The increase in LREIT’s properties’ valuations would also increase its debt headroom by 92.5%, from $115.8 million to $222.9 million, based on a 42% gearing limit.
The analysts also see the possibility of LREIT acquiring a 12% stake in Paya Lebar Quarter (PLQ) or 40% of its sponsor’s 30% stake in PLQ. This is after the increase in its asset valuation, which should lower its gearing and increase its debt headroom, they note.
LREIT may also be able to acquire its sponsor’s entire 6.1% stake in Parkway Parade, or up to 32% of the entire asset if the other shareholders are willing to divest their stakes, the analysts add.
The analysts have upped their DPU estimates by 0.3%, 0.3% and 2.9% for the FY2023, FY2024 and FY2025 respectively as they foresee higher earnings from LREIT and lower cost of equity (COE) of 7.5% from 7.9% previously.
Despite its organic growth potential, the analysts note that LREIT’s unit price has underperformed the Singapore REITs index, falling by 18.1% since March 2022 compared to the index’s 12.9% decline during the same period. They attribute the underperformance to its adjusted interest coverage ratio (ICR) falling below 2.5x, which caps its gearing at 45% compared to the 50% for Singapore REITs with adjusted ICRs above 2.5x. In their view, the lower gearing limit translates into a smaller debt headroom and hampers inorganic growth.
At present, the analysts do not expect LREIT’s adjusted ICR to cross the 2.5x mark in the next few years due to the higher cost of debt and perpetual securities secured in this high interest rate environment.
“In the meantime, LREIT is trading at [an] attractive 6.6%/6.9% FY2023/FY2024 DPU yields [or] 2.5 standard deviation of [its] historical yield,” the analysts write. — Felicia Tan
Raffles Medical Group BSL
Price targets:
UOB Kay Hian ‘buy’ $1.90
RHB Group Research ‘buy’ $1.70
DBS Group Research ‘hold’ $1.48
Transitional care facilities to join Singapore’s healthcare ecosystem
With the Ministry of Health (MOH) announcing the inclusion of transitional care facilities (TCF) in Singapore’s healthcare ecosystem, analysts are upbeat on Raffles Medical Group (RMG), as they expect TCFs to continue operating throughout the year, translating to better margins for the group’s FY2023 ending December.
TCFs are short-term care facilities set up during the pandemic for Covid-19 patients that help to free up beds in hospitals.
UOB Kay Hian (UOBKH) analysts Llelleythan Tan and John Cheong are maintaining their “buy” call on RMG with a higher target price of $1.90 from $1.85 previously, while RHB Group Research analyst Shekhar Jaiswal is keeping his “buy” call and $1.70 target price on RMG.
Both research houses are upbeat on the group’s TCF prospects.
Tan and Cheong point to a supply-demand imbalance. “During the Covid-19 XBB infection wave in 4Q2022, Singapore’s public hospitals faced a hospital bed crunch as both Covid-19 and non-Covid-19 patients swarmed public hospitals’ emergency departments.”
To free up hospital beds, MOH has implemented several initiatives.
Apart from increasing hospital bed capacity from 2024, MOH is working with private operators to accept emergency patients from public hospitals, benefiting private hospitals such as RMG’s Raffles Hospital, which is under the Emergency Care Collaboration (ECC) programme.
Patients are also being funnelled to step-down care facilities, such as the TCFs. There are five TCFs in operation, with one to be set up in the west near Ng Teng Fong General Hospital.
During a parliamentary debate on March 23, Singapore’s health minister mentioned that the TCFs would become “a medium or even longterm feature of our healthcare system”, note Tan and Cheong.
Currently operating one TCF in the east, RMG is set to benefit from the Singapore government’s renewed focus on TCFs.
With tight public hospital bed capacity, RMG’s domestic hospital is set to see robust patient loads as patients are diverted to Raffles Hospital Singapore via the ECC programme.
Coupled with the return of foreign patients, domestic elective surgeries and the ramp-up of RMG’s Chinese operations, UOBKH analysts expect FY2023 ending December segmental revenue from the hospital services to grow by 24.5% y-o-y.
Tan and Cheong note: “We now expect the TCF to operate till June 2024 minimally, given that there is no additional bed capacity till 1H2024 as new public healthcare facilities progressively open.” RMG’s TCF contributed nearly 40% of the group’s FY2022 operating profit. This would help support RMG’s profit for FY2023 to FY2024, add the analysts.
As the TCF business model is confidential due to its partnership with MOH, the UOBKH analysts have little guidance on its revenue and profitability. “However, we reckon that the TCF’s margins are healthy due to it being asset-light. We estimate that FY2022 Covid-19 revenue (TCF and vaccination centres) was around $240 million, of which a greater contribution of $180 million–$200 million was from the TCF as most vaccination centres were shut down or consolidated by 1H2022 due to a fully vaccinated population.”
Before 2020, healthcare operating margins were constant at around 6%–8%, note Tan and Cheong. “Assuming the same margins for FY2022 non-Covid-19 services, we estimate that FY2022 Covid-19 services would have operating margins of 63.1%.”
RMG had annual cost savings of $67 million y-o-y in FY2022. “With domestic inflationary pressures and a shortage of nurses in Singapore, we expect staff costs to inch back up to the historical average of 50%,” say Tan and Cheong.
“Adding back $50 million of staff costs to FY2022, we estimate normalised operating margins for the TCF to be 35%–40%,” add the analysts. Based on this, RMG’s TCF would have contributed around 35%–40% of the group’s overall FY2022 annual operating profit.
Coupled with favourable tailwinds, Tan and Cheong like RMG for its cheap FY2023 P/E valuation (19.6 times) compared to regional peers (35.8 times).
Similarly, RHB’s Jaiswal says: “We remain positive on RMG’s long-term growth, which is dependent on its China operations generating profit…Its forward P/E remains compelling versus regional peers.”
He expects RMG’s China hospital business to resume operations gradually this year, and noted that despite it being in its second year of operation, the ebitda losses were comparable to what it anticipated in its first year. “RMG still expects its Shanghai hospital to break even (in terms of ebitda) in two to three years,” he says. “It has a $1 billion multi-currency medium-term note programme in addition to a $180 million net cash position, which will allow it to undertake an acquisition if a compelling opportunity arises.”
DBS Group Research, on the other hand, is keeping its “hold” call and $1.48 target price on RMG, as it maintains its view that RMG’s earnings growth will slow this current FY2023 from the “very high base” of the preceding FY2022.
While DBS is positive on the group’s TCF development too, some re-rating catalysts from DBS include stronger visibility in the earnings trajectory from the TCF business; a longer contract with the government locked in, and last but not least, more partnerships with the government. — Jovi Ho & Nicole Lim
Sembcorp Marine
Price targets:
DBS Group Research ‘buy’ 14 cents
CGS-CIMB Research ‘add’ 12 cents
Analysts upbeat on merger despite irregularities allegation in Brazil
After Sembcorp Marine’s merger with Keppel Corporation’s (Keppel Corp) offshore and marine unit, Ho Pei Hwa of DBS Group Research has resumed coverage on Sembcorp Marine with a “buy” call and 14 cents price target, citing that the “tide is turning”.
In her March 28 report, Ho says that the combined entity is a “global champion with world-class yard facilities and offshore engineering capabilities” and is poised to become a “leading clean energy solutions provider”. Noting the combined order book of over $17 billion, Ho sees losses narrowing this current FY2023 ending December and forming the base for the eventual turnaround in FY2024.
She warns that integration hiccups and costs could pose downside risks this year but should be seen as one-offs.
“Looking beyond, we expect Sembcorp Marine to reap the synergies from the merger on both the cost and revenue front,” says Ho.
Her target price of 14 cents is based on 1.2 times FY2023 book value, which aligns with global peers’ median valuation and an upside of some 40% from current levels.
Meanwhile, the Brazilian authorities have commenced a “preliminary administrative liability proceeding” against the company’s local unit, Estaleiro Jurong Aracruz (EJA), for alleged “irregularities”, which Ho sees as a risk.
Despite the news, CGS-CIMB Research analyst Lim Siew Khee keeps her “add” call and 12 cents target price on Sembcorp Marine.
“We think the resurgence of negative newsflow on any form of investigation by the Brazilian authorities could weigh down Sembcorp Marine’s share price in the near term until further clarity is provided,” writes Lim in her March 24 note, adding that the Sembcorp Marine said that the notice gave no further details and it cannot assess the matter or its impact, if any. EJA is fully cooperating with the authorities.
Lim says her “add” call is premised on how the new management team at the combined entity, trading under Sembcorp Marine, can execute the orders on hand and the pace of turnaround. — The Edge Singapore
Choo Chiang Holdings 42E
Price target:
Lim & Tan Securities ‘buy’ 48 cents
Riding the construction boom
Local retailer and distributor of electrical products Choo Chiang Holdings is poised to be a beneficiary of the construction recovery and a buoyant resale property market, according to Lim & Tan Securities analyst Chan En Jie in his March 22 report.
This is apparent in the group’s latest FY2022 ended Dec 31, 2022, results, which saw revenue growing by 10.3% y-o-y to $87.6 million, while profits gained 5.3% y-o-y to $9.0 million. Total dividends were at 2.2 cents, higher than 2.0 cents a year ago, representing a favourable 6.6% dividend yield based on the current share price.
Chan views the group’s ex-cash P/E of 5.2 times and FY2022 ROE of 15.7% as attractive. He has also kept his “buy” call and 48 cents target price on the counter.
In Chan’s opinion, the outlook for Choo Chiang remains positive for the year ahead, driven by strong customer demand and project sales. Despite raw material price pressures and an inflationary environment, margins have remained stable.
The group is also shielded from interest-rate hikes as it has no interest-bearing debt. A portion of its $23.3 million cash pile is invested in fixed deposits which can provide additional interest income in FY2023.
“A potential divestment of its non-core investment properties can also be reinvested into the higher-yielding distribution business and act as a share price catalyst,” says Chan. — Samantha Chiew
