Broker's Digest: Genting Singapore, Nanofilm Technologies, SGX, Kimly, Digital Core REIT

Maybank Securities analyst Yin Shao Yang has maintained a “hold” recommendation on Genting Singapore as “grey clouds” linger around the counter.

Yin has also reduced his target price estimate to 83 cents from 86 cents, as he rolls his valuation base forward to end FY2022. He has also raised his weighted average cost of capital (WACC) “a tad” to 13.1%, from 12.3%.

Citing the suspension of the vaccinated travel lane (VTL) between Singapore and Malaysia by land, Yin predicts Genting Singapore’s earnings to be “flattish” for yet another year.

In a Jan 17 report, Yin says Malaysians were estimated to contribute some 20% to 30% to Resorts World Sentosa’s (RWS) VIP volume and RWS’s mass market gross gaming revenue (GGR) before Covid-19. Before the pandemic, an estimated 250,000 Malaysians entered Singapore by land daily.

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Due to the suspension of the land VTL between both countries, Yin predicts that the coming Chinese New Year festivities is also likely to be “another quiet one” for Genting Singapore.

“With no guarantee that [the land VTL] will resume, we fear that not many Malaysians will gamble at the Singaporean integrated resorts (IRs) during the peak Chinese New Year period,” writes Yin.

In addition, the analyst expects competition for the counter’s premium mass market to intensify in the longer-term.

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“The arrest of Macau’s junket ‘king’ Alvin Chau has put US$19.3 billion ($26.02 billion) of VIP GGR at risk in Macau, Philippines and Cambodia. Note that the 2019 Singapore total GGR was only $6.2 billion or US$4.5 billion,” says Yin.

“Channel checks inform us that it is virtually certain that the IRs in Macau, Philippines and Cambodia will target the premium mass gamblers that frequently gamble in Singapore to try and plug the aforementioned gap when borders reopen. Competition from Cambodia will be most intense.”

Yin adds that the current estimates made by consensus are “aggressive”. He has also reduced his core earnings estimates for the FY2022 by 72% as he does not see Genting Singapore’s GGR recovering materially during the year.

Given that the FY2021 is over, Yin has kept his estimates for the year unchanged. He has also cut his earnings estimates for the FY2023 by 54% to reflect the delayed return of Malaysian gamblers, who were predicted to return in FY2022 previously.

“Essentially, we expect Genting Singapore’s earnings to remain uninspiring for another year making it three years of pedestrian earnings.” — Felicia Tan

Nanofilm Technologies International
Price target:
CGS-CIMB “buy” $3.92

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Supply chain woes to weigh on revenue

CGS-CIMB Research analyst William Tng has maintained his “add” call on Nanofilm, but with a lowered target price of $3.92 from $4.02.

“Our FY2020 to FY2023 EPS CAGR is 22.25% and a target P/E of 22.25 times will translate into a P/E to growth ratio of 1.0 times,” writes Tng in a Jan 18 report.

“We ascribe a 15% premium to this multiple (for its potential growth prospects and proprietary technology) and value the company at 25.59 times FY2023 EPS, leading to a lower target price of $3.92 (previously $4.02, using 30.44 times FY2022 EPS),” he adds.

In the same report, Tng forecast that Nanofilm’s 4Q results for FY2021 ending Dec 31 are “likely better” as production picked up during the period.

However, he thinks previous revenue expectations for FY2021 to FY2023 may need to be lowered for now, pending stronger growth recovery for its customers.

Furthermore, Nanofilm might incur higher operating expenses as it spends on headcount, new equipment and qualification processes to prepare the company for future growth.

“Typically, the third quarter is the busiest quarter; however in FY2021, the company’s fourth quarter was the busiest due to supply chain disruptions.” As such, Nanofilm expects some of the production scheduled for 4QFY2021 ended Dec 31, 2021, to spill into 1QFY2022.

Tng notes that mass production for its first micro-lens array (MLA) project for its customer’s new-generation wearables has commenced under its nanofabrication business unit (NFBU).

As such, the company expects positive contributions from NFBU in 4QFY2021 and beyond, as there are other new projects under development.

Nanofilm also updated that it will be accelerating its efforts to develop core technologies and new product offerings. Over the last three financial years, Nanofilm has incurred approximately 5.9% of revenue per year in R&D and engineering expenses.

The group’s target spend on R&D is more than 5% of revenue, and in the update, Nanofilm has also highlighted that it is involved in the development of engineered optics for virtual reality and augmented reality glasses.

With these expenditures and supply chain disruptions to customers, Tng thinks his previous revenue expectations may take longer to be realised.

He has reduced his FY2021 to FY2023 revenue forecasts by 3.3%–5.6%. In line with the company’s long-term growth plans, he has also raised his operating expenses assumptions for FY2021 to FY2023.

Some rerating catalysts for Nanofilm also include new order wins from customers and market share gains, while downside risks are customer concentration or persistent component shortages, and an inability to find uses in new verticals for its coating solutions. — Lim Hui Jie

Singapore Exchange
Price target:
UOB Kay Hian “hold” $9.74

Lifting target price on growth projections

UOB Kay Hian analyst Llelleythan Tan has kept his “hold” call on Singapore Exchange (SGX) but with a revised target price of $9.74 from $9.41 previously, on expectations of broad-based growth ahead.

Tan, in his Jan 18 note, observes that SGX is facing stiffer competition from Hong Kong’s recently launched MSCI A50 index futures offering. That is cause for caution on how SGX’s own earnings will be affected. “However, we think that the success of new exciting initiatives … could re-rate SGX to trade similar to its peers’ 29.6 times earnings,” writes Tan, referring to OTC forex offerings, government initiatives, depositary receipt linkages and the flurry of spacs listings. Tan’s current target price for SGX is pegged to a forward FY2022 P/E of 23.8 times. The exchange is slated to report its 1HFY2022 ended Dec 30 earnings on Feb 4.

In SGX’s monthly statistical update for December released on Jan 14, total securities turnover dropped 19.6% y-o-y to $19.6 billion, bringing the drop for the July to December 2021 period down 7% y-o-y. “The downtrend was due to lower trading velocity in 2021 as compared to an elevated 2020 and we expect the turnover value to continue trending downwards and bottom out to pre-Covid-19 levels going into 2HFY2022,” writes Tan.

For the coming 1HFY2022, Tan believes SGX will be reporting “flattish” earnings. Drawing reference from reported securities daily average traded volume (SDAV), he sees cash equities revenue dipping 3.9% y-o-y to $396.7 million as volume normalised to pre-Covid 19 levels.

Overall revenue for 1HFY2022 is seen to dip by 3 to 4% y-o-y, which will be 48% of Tan’s FY2022 estimates. “Dependant on its success, newly anticipated spac listings in 2HFY2022 may help stem the overall decline in FY2022.”

However, there is a bright spot in the form of fixed income, currencies and commodities (FICC) derivatives. “Earmarked as a core revenue growth driver, we forecast FY2022 revenue from the currencies and commodities segment to increase 18.6% y-o-y, on the back of strong volumes in the USD/CNH and INR/USD futures as well as outperformance from FFA, iron ore and petrochemical derivatives,” says Tan, who expects revenue from this segment to rise from 16% to 18% y-o-y.

The data, connectivity and indices segment is also another reliable source of revenue for the exchange. “Post-acquisition of Scientific Beta in FY2021, we expect 1HFY2022 revenue to grow 4-5% y-o-y, given growing secular demand for index-tracking and ESG/thematic investing.”

Apart from the Singapore banking sector, SGX is set to be yet another beneficiary of the interest rate hikes from the US Federal Reserve, which is likely to hike rates by three to four times in 2022 on the back of record-high inflation. While higher rates might “depress trading velocity” of cash equities, the higher rates will also boost SGX’s treasury income, which Tan estimates will be boosted by around $20 million for FY2023. Tan expects FY2022 earnings to dip by 1.7% y-o-y before increasing by 7.1% and 4.7% y-o-y for FY2023 and FY2024 respectively. — Felicia Tan

Kimly
Price target:
RHB “buy” 46 cents

CAD case no longer an overhang

RHB Group Research analyst Jarick Seet has kept “buy” on Kimly but with a higher target price of 46 cents from 42 cents. Seet’s optimism is based on the coffeeshop operator’s strong FY2021 ended Sept 30, 2021, results, where earnings grew by 55.7% y-o-y to $39.3 million on the back of a 13.2% y-o-y gain in revenue to $238.6 million.

“Going forward, with the Tenderfresh acquisition, its bottom line and profitability should increase further. We expect the company to continue expanding organically, by opening more outlets and refurbishing existing ones,” writes Seet in his Jan 18 report.

In addition, Seet sees an ongoing Commercial Affairs Department (CAD) probe as no longer an overhang factor. On Nov 11, 2021, Kimly’s then-executive chairman Lim Hee Liat and then executive director Chia Cher Khiang were charged by the CAD in relation to Kimly’s failure to notify the Singapore Exchange (SGX) that its acquisition of Asian Story Corporation was an interested person transaction. Lim faces a separate charge in which he failed to disclose that ASC was a company that was partially beneficially owned by him.

While the case is ongoing, Kimly’s management has “proactively reshuffled positions and duties of the team members to address this issue”, says Seet.

Moving forward, the eventual closure of the CAD case will be positive for Kimly in the long-term.

“This will finally remove the overhang factor and enable management to move forward with its growth strategy,” he adds.

“Lim, the majority shareholder of the company, will likely continue to benefit the group with his expertise and experience. Compared with the recent privatisation of Koufu at 16 times FY2022 price to earnings (P/E), Kimly is trading at a much lower valuation.” — Felicia Tan

Digital Core REIT
Price target:
DBS Group Research “buy” US$1.40

Potential to be the largest S-REIT

DBS Group Research has initiated a “buy” on Digital Core REIT with a target price of US$1.40 ($1.88).

The target price is based on a discounted cash flow (DCF) model with a weighted average cost of capital (WACC) of 5.3% (and a risk-free rate of 2.0%).

"This implies a normalised target yield of 3.6% in the next two years. We have assumed a total of US$750 million in acquisitions over the next two years,” write analysts Dale Lai and Derek Tan in a Jan 14 report.

“Catalysts baked into our valuations are an assumed US$250 million of debt-funded acquisitions in FY2022 and a further assumed US$500 million of acquisitions funded by both debt and equity by FY2023.”

“These are expected to drive a three-year DPU CAGR of 7% during FY2021–FY2024 and 10%– 11% above IPO forecasts,” they add.

Digital Core REIT owns a portfolio of fully occupied data centres with a long weighted average lease expiry (WALE) of around 6.2 years, which ensures income stability and visibility, note the analysts.

Furthermore, the REIT enjoys annual rental escalations of around 2% for its portfolio, which provides for organic growth in its earnings.

Digital Core REIT also has the potential to become one of the largest Singapore REITs (S-REITs) as it has been granted rights of first refusal (ROFR) to around US$15 billion worth of data centres around the world.

In addition, the REIT’s sponsor has a further US$5 billion worth of data centre developments that could potentially be made available to the REIT when completed.

Lai and Tan note that key risks to its view would be the “slower-than-anticipated acquisition growth and a spike in borrowing costs”. — Felicia Tan