Hong Leong Asia
Price target:
CGS-CIMB Research ‘add’ $1
‘Well set for the future’
Hong Leong Asia (HLA) seems to be “well set for the future” following a visit to a newly-opened prefab hub on Sept 8, say CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan.
The analysts have kept their “add” call and target price of $1, which represents an upside of about 62.6% to HLA’s price of 61 cents in their Sept 11 report.
The hub, which is the largest integrated construction and prefab hub (ICPH) in Singapore, is a 51:49 joint venture with Malaysia’s Sunway Construction Group. Its annual production capacity of 100,000 cubic metres of precast elements is equivalent to around 2,500 public housing flat units.
“We were impressed by the high level of automation integrated into the ICPH. An example shown to us was the automated precast production system (APPS), designed for efficient production of precast slabs/walls via automated pallet transporters, concrete spreaders and compacting stations,” say Ong and Tan, noting that the highly-automated fab needs just one third the workers and half the space versus an older facility to do the same work.
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The hub included environmental, social and governance (ESG) features such as the over 1,700 solar panels on the hub’s roof. The panels can generate enough electricity to support 20% to 25% of the hub’s annual power requirements.
Other ESG features include the hub’s use of perforated façade cladding (porous and angled surfaces), which allows natural ventilation and light within the compound and can help save $860,000 in power costs.
Following their visit, the analysts believe that HLA is “well-positioned” to benefit from the increase in public housing construction in Singapore. Additional re-rating catalysts include the Chinese government’s stimulus measures catalysing diesel engine sales, which will benefit HLA’s China-based subsidiary China Yuchai, and stronger construction activities in Singapore.
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Downside risks include slower-than-expected business sentiment recovery in China affecting diesel engine sales, and weaker construction demand in Singapore and Malaysia due to an economic slowdown, they add. — Felicia Tan
Lendlease Global Commercial REIT
Price target:
DBS Group Research ‘buy’ 90 cents
Recent sell-down ‘unwarranted’
The recent sell-down in the units of Lendlease Global Commercial REIT (LREIT) has been “unwarranted”, write DBS Group Research analysts Geraldine Wong and Derek Tan.
LREIT’s unit price has been falling steadily since the REIT released its results for the FY2023 ended June on Aug 7. Since then, units in the REIT have fallen by around 17.91% to 54.5 cents at the close of Sept 12.
However, Wong and Tan are remaining upbeat about the REIT’s prospects. In their Sept 11 report, the analysts have kept their “buy” call and target price of 90 cents, which represents an upside of 65% to the REIT’s last-closed price of 54.5 cents.
“LREIT has underperformed its retail-focused Singapore REIT (S-REIT) peers lately, with its share price weakening by close to 15% while its peers have declined only around 3%,” the analysts write. “This is despite the REIT building more resilience and growth via its acquisitions of JEM mall (in February 2022) and a 10% stake in Parkway Parade Mall in June 2023.”
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“With these strategic acquisitions, LREIT’s earnings are more diversified and defensive in our view and the pivot to Singapore is a strong strategic move,” they add.
Following the REIT’s strategic pivot to Singapore, the REIT’s assets in the city-state now make up 88% of its total assets, mainly from retail space. “We expect the REIT to deliver stable returns in the coming years,” write the analysts.
At present, the REIT is trading at an FY2024 yield of 8.2%, which is an opportunity “not to be missed”.
The REIT, which is also trading at a P/B of around 0.7x and –1 standard deviation (s.d.) of its historical mean means it is providing “attractive returns for an emerging suburban landlord”. However, this may imply expectations of a “significant cut” in its distribution per unit (DPU), add the analysts.
They remain optimistic about the REIT’s future performance, seeing its ebitda grow at a CAGR of 7% in FY2023 to FY2025. This is due to the further rental reversion upside for the REIT’s key assets, 313@Somerset and JEM.
“We expect these properties to see positive rental reversions of 5%–15% in coming years, underpinned by strong tenant sales exceeding pre-Covid levels by 15%,” write Wong and Tan.
“In addition, LREIT will see a boost from [the] acquisition of a 10% stake in Parkway Parade, and rental escalations from Sky Complex [in Milan],” they add.
At this price, the analysts see that an equity fundraising is unlikely to happen, given the REIT’s “stable financial metrics and strong lender support”. This also implies that the pressure to reduce its gearing is lower than the market’s perception.
Instead, the analysts envision the REIT conducting an asset sale or JEM Tower or Sky Complex, Milan, which could reduce the REIT’s gearing to 32% with minimal dilution to its DPU. — Felicia Tan
Suntec REIT
Price target:
PhillipCapital ‘buy’ $1.47
The discounted gem
PhillipCapital analyst Liu Miaomiao has initiated a “buy” call on Suntec REIT with a target price of $1.47. Liu’s target price is based on a dividend discount model (DDM) valuation, cost of equity (COE) of 10.4% and terminal growth of 1%.
Suntec REIT is a commercial REIT that owns office and retail assets. Among its portfolio spread across Singapore, Australia and the UK are several Grade A office buildings including its offices in Suntec City in Singapore. In addition, the REIT owns a one-third stake each in One Raffles Quay and MBFC (or Marina Bay Financial Centre) Towers 1 and 2.
The REIT also owns a 66.3% interest in Suntec Singapore Convention & Exhibition Centre, as well as a 100% stake in Suntec City Mall.
In her report dated Sept 11, Liu likes the REIT’s “healthy operating metrics”, noting its rental reversion and occupancy rates logged in its results for the 1HFY2023 ended June. During the period, the REIT’s Singapore offices reported a rental reversion of 10.8% and an overall occupancy rate of 99.3%. Occupancy for Suntec City Mall remained stable at 98.3% with a rental reversion of 18.7%. The mall’s tenant sales surpassed its pre-Covid-19 levels by 108%. Suntec Convention also performed well during the six-month period with revenue surging by 95.2% y-o-y to 83.7% of its pre-Covid-19 levels.
She is also positive about the REIT’s decision to conduct divestments instead of conducting an equity fundraising to lower its gearing. The REIT had successfully divested three of its office strata units in Suntec, collecting some $14 million in proceeds. Suntec REIT was also eyeing a potential divestment for its mature assets such as 477 Collins Street in Melbourne. The building is currently valued at $433.3 million.
“With the target of lowering the gearing to 40% ([it is] currently at 42.6%, +20 basis points y-o-y), we believe Suntec REIT needs to divest [around] $200 million worth of assets more,” Liu writes.
At its last closing price of $1.21 as at Sept 10, the REIT’s valuation is at a near-record low.
“Suntec REIT is currently trading at 0.33 standard deviation (s.d.) below the mean and 0.57x P/NAV (FY2023, NAV [of] 2.13) which is below the average Singapore REIT (0.86x P/NAV),” Liu notes.
“Despite the hike in Singapore 10-year bond yield to 3.22%, Suntec REIT is still trading at a positive spread of 2.33% (FY2023). Suntec REIT can benefit the most from an interest rate cut due to its lower fixed rate debt of 58% versus peers’ 76% (Keppel REIT), 78.3% (Mapletree Pan Asia Commercial Trust or MPACT) and 78% (CapitaLand Integrated Commercial Trust or CICT),” she adds.
In FY2023, the analyst is expecting the REIT to report a total distribution per unit (DPU) of 5.83 cents, which translates into a yield of 5.64%. In FY2024, her DPU estimate is at 7.29 cents, which represents a yield of 6.03%. Based on her estimates, the REIT’s net property income (NPI) yield for FY2023 is at around 4.2%. — Felicia Tan
Frencken Group
Price target:
RHB Bank Singapore ‘neutral’ 97 cents
Longer-term recovery seen
RHB Bank Singapore analyst Alfie Yeo has kept his “neutral” call on Frencken Group due to a mixed near-term outlook and the group’s “slightly lofty valuation”.
As of Yeo’s report dated Sept 11, shares in Frencken were trading at $1.02, which is 11x its FY2024 P/E and +0.5 standard deviation from its five-year mean.
For the 1HFY2023 ended June, Frencken’s revenue of $351 million stood in line with Yeo’s expectations although its earnings of $12 million stood below his estimates. The lower-than-expected earnings were attributed to lower margins and higher-than-expected costs.
Both of Frencken’s mechatronics and integrated manufacturing services (IMS) segments saw revenue decline by 11% and 4% y-o-y respectively to $303 million and $46 million due to lower sales in Asia and mitigated by better sales in Europe.
As Frencken’s 1HFY2023 earnings stood below estimates, Yeo has cut his net profit expectations for FY2023 by 17%. He has raised his earnings estimates for FY2024 to FY2025 by 17% each as he expects the semiconductor industry to recover in 2024.
“According to Semiconductor Equipment and Materials International (SEMI), the global semiconductor industry is on track for recovery in 2024 as the decline in chip sales moderates in 2H2023 and drawdown of inventory normalises,” Yeo writes in his Sept 11 report. “We expect fab utilisation rates to pick up and drive the recovery sometime next year on the back of improved electronics sales at more normalised inventory levels.”
“However, we remain cautious on electronics demand recovery and the pace of inventory drawdown, which could potentially delay the recovery pick-up in fab utilisation, affecting Frencken’s growth momentum in FY2024,” he adds. “Nonetheless, we expect the group’s 2HFY2023 revenue to be comparable with 1HFY2023, in line with chip inventory correction which is still at play.”
“Revenue for its semiconductor and analytical & life sciences segments should pick up [in] 2HFY2023, while the medical and automotive segments are anticipated to register stable revenue. However, the industrial automation segment’s revenue is anticipated to decline,” he continues.
Despite his “neutral” call, Yeo has raised his target price to 97 cents from 80 cents. His new target price is based on 10x Frencken’s P/E after rolling over his earnings base to FY2024 from a blended FY2023–FY2024 earnings. — Felicia Tan
Venture Corp
Price target:
DBS Group Research ‘buy’ $15.40
Excessive drop in valuations
Ling Lee Keng of DBS Group Research has upgraded her call on Venture Corp from “hold” to “buy” after the stock suffered a “sharp” 25% drop since her previous call in May following weaker-than-expected 1QFY2023 ended June numbers.
Besides the muted outlook, the weak share price performance was also affected by portfolio rebalancing from its removal from the MSCI Singapore Index which was effective from Aug 31, she adds.
“We believe the sharp decline in share price is excessive,” writes Ling in her Sept 11 note. “With valuations at trough level, we believe the upside risk outweighs the downside.”
Ling points out that Venture is now trading at a FY2023 and FY2024 PE of 12.6x and 11.2x. In contrast, at the depth of the pandemic back in March 2020, it was trading at 12x. Her target price of $15.40 is pegged to 13.5x earnings.
“Venture’s current low valuation should not be ignored given its strong financials, above-peers net margins and high net cash position,” reasons Ling, referring to the company’s net cash of $896 million, or $3.08 per share, equivalent to nearly a quarter of Venture’s current market value.
With no debt, this cash hoard should help the company maintain its 75 cents dividend payout for the current FY2023, which works out to an attractive yield of around 6%. “A strong war chest also enables the group to capture new opportunities for its next growth phase,” she adds, referring to areas such as life sciences, and the medical and healthcare sectors.
Ling, however, cautions that Venture’s 2HFY2023 earnings will likely be muted given the still weak outlook for downstream players. Ling projects Venture’s earnings to drop 20% y-o-y for FY2023 before recovering by 12% in the coming FY2024.
There are risks, such as weaker demand from clients because of a persistent global economic slowdown. Additional volatility of the US dollar could impact revenue growth as well. — The Edge Singapore
