Brokers' Digest: Hongkong Land, Wilmar, CSE Global, Aztech Global, Sea, MPACT, Far East Hospitality Trust

CGS-CIMB Research analysts Raymond Cheng, Will Chu and Steven Mak have maintained “hold” on Hongkong Land (HKL) with a lower target price of US$4 ($5.31) from US$4.70 previously.

This is based on a wider 60% discount to NAV as its EPS recovery is taking longer than expected amid a high-interest rate environment.

In their July 25 report, the analysts note that HKL’s Hong Kong Central office portfolio had a vacancy of 6.3% as at end-March. They expect the company to be resilient enough to maintain a vacancy lower than the Central average through its FY2024, given its prime location and HKL’s commitment to ESG standards for its investment properties.

The analysts expect the mild negative rental reversions for HKL’s Hong Kong office to continue through FY2024 due to falling market rent rates and upcoming new supplies in the Hong Kong Central District.

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HKL expects sales completions of its China development properties to be higher in FY2023 than in FY2022 due to the absence of pandemic-related restrictions. However, profit booking would be skewed to the second half of FY2023.

The analysts believe lower gross profit margin for its China development properties sales recognition will be a new norm for HKL, comparable to China’s largest state-owned developers such as China Overseas Land and Investment and China Resources Land.

As the floating-rate borrowing cost for the Hong Kong dollar and the US dollar now stands high at about 6%, CGS-CIMB believes HKL will continue to keep a slow race in share buyback, even though it still had US$400 million budget unused for buyback as at end-June. “We also believe HKL will extend its buyback programme by one year to December 31, 2024 and maintain its buyback budget,” the analysts add.

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CGS-CIMB has cut its FY2023–FY2025 EPS estimates by 5%–15%. This is to reflect lower average selling price assumptions for its China and Singapore development property sales; new Hong Kong dollar to renminbi assumption of 0.93; delay in property sales booking schedule in FY2023–FY2025; and weaker-than-expected EPS growth due to slower share buyback. The analysts have also cut their NAV for HKL by 3% to US$10.1 accordingly. — Khairani Afifi Noordin

Wilmar International
Price target:
RHB Bank Singapore ‘buy’ $4.65

Undervalued, commendable ESG efforts

Wilmar International’s environmental, social and governance (ESG) efforts are “commendable”, say RHB Bank Singapore’s analysts following a recent sustainability briefing by the company, adding that the agribusiness company is “undervalued” and “inexpensive” when compared against its China-listed peers.

Wilmar has over 500 manufacturing plants and an extensive distribution network covering China, India, Indonesia and some 50 other countries. Wilmar is involved in three main commodities: oil palm, soybean and sugar.

In November 2021, Wilmar committed to net-zero emissions by 2050.

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The company is now developing time-bound strategies to achieve near-term net-zero emission reduction targets by end-2024, say RHB analysts. As part of the preparation for target setting assessment, its Scope 1 and Scope 2 baselines were externally verified and audited by EY.

Furthermore, Wilmar has completed the mapping of its Scope 3 emissions. Scope 3 emissions of the group for its baseline year of FY2020 is 155.8 million tonnes of carbon dioxide equivalent (tCO2e), which accounted for 91% of its total emissions.

The Scope 3 emissions mainly came from purchased goods and services, which make up 90% of its total Scope 3 emissions. Now that the mapping of Scope 3 emissions is completed, Wilmar’s next action is to establish plans to address and reduce the emissions.

In a July 25 note, RHB also highlights that more than 32,000ha of Wilmar’s oil palm plantations are regarded as conservation areas. In addition, as part of its riparian rehabilitation programme, the company planted more than 30,000 trees beyond its Malaysian operation’s designated conservation and riparian areas.

While Wilmar welcomes the EU deforestation policy, it believes that some of the challenges arising from the implementation of the policy need to be worked together with the authorities, notes RHB. “The challenges include the definition of deforestation, current certification standards and best practices not being recognised, and the increased amount of administrative work.”

As far as the EU deforestation policy is concerned, Wilmar is confident of being deforestation-free throughout its supply chain, add the RHB analysts.

RHB maintains its “buy” call on Wilmar with an unchanged target price of $4.65, which represents a 24% upside. The target price includes a 2% ESG premium, based on RHB’s proprietary methodology, for which Wilmar is a top scorer.

“We believe the stock remains undervalued, trading at 11x 2023 price-to-earnings (P/E) versus its China-listed peers’ 20x–40x, while its combined stake in Yihai-Kerry and Adani Wilmar is almost double that of its market capitalisation,” write RHB’s analysts. — Jovi Ho

CSE Global
Price target:
Maybank Securities ‘buy’ 62 cents

Worst over, inflexion point reached

Maybank Securities analyst Jarick Seet has initiated a “buy” call on CSE Global with a target price of 62 cents. This represents an upside of 46% to CSE’s share price of 45 cents as at Seet’s report on July 24.

Seet’s target price is pegged to 17x P/E on CSE’s blended FY2023/FY2024 earnings. To the analyst, the stock is now at an inflexion point, with its profitability estimated to surge some 250% y-o-y in the FY2023 on the oil & gas (O&G) upcycle.

“We think the worst is over for CSE global and 1HFY2023 should be a strong inflexion point towards a multi-year upcycle. CSE Global offers a unique opportunity to ride the upcycle in attractive growth areas, accompanied by a sustainable 2.75-cent payout representing a 6.2% dividend yield,” Seet writes.

CSE operates across three segments of energy, infrastructure and mining & minerals. It trades at an undemanding valuation of 13.7x FY2023 P/E, versus 22.3x P/E for peers, notes Seet.

In 1QFY2023 ended March 31, CSE’s energy segment saw revenue increase 22% y-o-y to $71 million. This is expected to grow further as the company benefits from more O&G projects on the back of strong global O&G demand. “Years of under-investment since the oil-price crash in 2015/16 means that capital expenditure (capex) is badly needed in the near future,” he points out.

The strong demand for data centres and infrastructure projects in Singapore and Australia is also likely to lead to much higher earnings for the company during FY2023.

The company’s strategic move to diversify from its O&G business to data centres is a win in Seet’s book as CSE has won over customers such as Meta, Amazon, Apple, Netflix and Alphabet. He adds that the company is likely to secure more projects on the data-centre front in the US as the need for such facilities continue to grow.

Finally, CSE’s order book is likely to grow with the company being in a “sweet spot” to win contracts from multiple sectors. “All in all, we expect the current order book of $480 million to surge to $900 million by the end of FY2023 with near-term contract wins.” CSE Global will be releasing its results on Aug 10. — Felicia Tan

Aztech Global
Price targets:
Maybank Securities ‘buy’ 93 cents
UOB Kay Hian ‘buy’ $1
DBS Group Research ‘buy’ $1.05
CGS-CIMB Research ‘add’ $1.11

Eyeing a better second half

Analysts are staying positive on Aztech Global following its 2QFY2023 earnings that turned in strong sequential improvement as the company maintained a healthy order momentum and efficiency gains. In 2QFY2023 ended June 30, Aztech reported earnings of $29.5 million, up 1.7% y-o-y and 120% q-o-q. This brings its 1HFY2023 earnings to $42.9 million, up 0.2% y-o-y.

The company, which is 70.24% held by chairman and CEO Michael Mun, has declared an interim dividend of 3 cents per share, implying a FY2023 payout ratio of 54%, higher than the target of at least 30%. The company did not pay an interim dividend this time last year.

In his July 24 note, Maybank Securities analyst Jarick Seet notes that Aztech has improved its net margins in 2QFY2023 but this will remain challenging to defend. Nonetheless, Seet has maintained his “buy” call and 93 cents target price, which is pegged to 8x FY2023 earnings. The interim dividend, at current annualised levels, translates into a yield of 9.2%. “Aztech as it is one of the rare manufacturers with decent revenue and earnings growth in this tough climate,” he adds.

Given the overall weakness in the manufacturing sector, UOB Kay Hian analysts John Cheong and Heidi Mo expect Aztech to continue to face a “challenging” 2HFY2023 but have kept their “buy” call and $1 target price.

Similarly, DBS Group Research’s Ling Lee Keng, in her July 22 note, has maintained her “buy” call and $1.05 target price, which is pegged to 8.5x earnings. She expects a “significant” portion of Aztech’s $594.5 million order book as at July 21 to be scheduled for completion by end of the year, which is expected to help FY2023 revenue rise 9.3% y-o-y to $897 million and earnings to grow 30% y-o-y.

Aztech is on track to put its new plant in Johor to work, thereby driving overall production capacity. The plant at Pasir Gudang, covering 300,000 sq ft, has already started trial runs. Coupled with its two existing plants, one spanning 460,000 sq ft in China and another 86,000 sq ft facility in Johor, it now has a total space of 846,000 sq ft. Besides boosting capacity, the new plant will help Aztech better serve customers requiring product diversification, says Ling.

William Tng of CGS-CIMB Research is thus far the most bullish on Aztech, with a call to “add” while raising his target price to $1.11 from $1.01 previously, citing how revenue and earnings for the current 2HFY2023 should come in higher than originally projected as Aztech Global is in the midst of developing new products with customers.

For Tng, re-rating catalysts include potential new customer wins and more project wins from its main customer. Downside risks includes component shortages and order cancellations due to an economic slowdown affecting demand and volatile foreign exchange rate movements affecting its financials. — The Edge Singapore

Sea
Price target:
UOB Kay Hian ‘buy’ US$94.34

Improved margins as Shopee keeps market dominance

UOB Kay Hian analysts John Cheong, Jacquelyn Yow Hui Li and Heidi Mo have maintained “buy” on Sea with a target price of US$94.34 ($125.29), highlighting the counter’s share price appreciation of over 15% since it turned profitable for the first time in 4QFY2022 ended December.

In their July 25 report, the analysts note that Shopee’s continued dominance in its established markets and growth in new markets should enable it to continue increasing commission fees as well as expand its logistics structure. As such, the analysts expect margins to improve.

Shopee is still leading in the Southeast Asian market share, achieving a gross merchandise value (GMV) of US$47.9 billion in FY2022. This is followed by Lazada, with a GMV of US$20.1 billion.

Although Alibaba further injected US$845 million into Lazada on July 19, the analysts believe that Shopee will maintain its market leadership, underpinned by its sizeable merchant and customer base. Additionally, Shopee’s localisation setup in each country it enters has proven to be very effective, providing excellent support and tailored solutions to localisation requirements.

“For instance, Shopee Singapore had 13.6 million visits in February as compared with Lazada Singapore’s 5.8 million visits. Despite starting its Singapore operations three years after Lazada, Shopee Singapore’s higher online traffic to date demonstrates its effective strategies,” the analysts note.

At Sea’s 1QFY2023 ended March results briefing, the company highlighted its focus on expanding its logistics network and integrating its in-house logistics arm, Shopee Express. While working with third-party logistics (3PL), Shopee has also been introducing automation into its workflow to improve efficiencies.

Sea claims that these initiatives would reduce average delivery times by more than half a day across its markets. With return rates for e-commerce sales ranging from 15% to 20%, building on its logistics arm will ensure a better and faster return experience to attract and retain customers, the analysts point out.

“We also note that Shopee has been improving monetisation of this arm, such as increasing seller shipping fees in Singapore from June. This allows Shopee to capture opportunities in the Southeast Asia logistics value chain. As e-commerce becomes increasingly prevalent, we reckon that such value-added services will drive margin expansion for the e-commerce segment,” they add.

In January, Shopee had closed its operations in Poland, following the closure of four Latin American markets, France, Spain and India. While this raised doubts in its ability to succeed in Brazil, which it had entered in late-2019, Shopee has achieved significant milestones in the market.

For instance, Shopee Brazil reached 2 million local sellers on its marketplace in April 2022, beating competitors. Since then, the number has grown by 50% to 3 million in March this year. As the leading e-commerce app in Latin America by monthly active users, the analysts opine that Shopee has huge potential in Brazil as it scales up operations and grows its presence.

UOBKH maintains its earnings forecast for Sea at US$935 million, US$1.27 billion and US$2.06 billion for 2023 to 2025 respectively.

“Given the current macro headwinds like rising global inflation dampening appetites for e-commerce, we expect the share price to trade sideways, buoyed by positive earnings momentum moving forward,” the analysts add. — Khairani Afifi Noordin

Mapletree Pan Asia Commercial Trust
Price target:
UOB Kay Hian ‘buy’ $1.90

Japan portfolio weathers pressure from new supply

UOB Kay Hian has maintained its “buy” call on Mapletree Pan Asia Commercial Trust (MPACT) with a reduced target price of $1.90 from $2.02 previously, as its Japan portfolio weathers pressure from new supply.

In his report dated July 24, analyst Jonathan Koh says that vacancy rates in the Central 5 Wards or Central Tokyo eased 0.1 percentage points q-o-q to 4.1% in the first quarter of 2023 while Grade A rents eased slightly by 0.4% q-o-q to JPY22,550 ($211.80) per tsubo (3.31 sqm) in the same period.

Koh believes there is a “flight to quality” with companies moving to higher grade and better located office buildings. He notes that several large-scale projects in Central 5 Wards will be completed in 2023, with landlords expected to reduce rents to attract tenants. According to CBRE, vacancy rates are expected to increase as Grade A rents drop 2.7% over the next 12 months.

The analyst says that MPACT’s cost of debt is expected to increase from its weighted average all-in cost of debt of 2.68% in FY2023 as interest rates remain elevated and older fixed rate debt and interest rate swaps progressively mature.

Currently, the REIT’s aggregate leverage is 40.9%, with 75.5% of its borrowings fixed or hedged to fixed interest rates. Coupled with the depreciation of the Chinese yuan, Koh has trimmed his FY2024 ending March 2024 dividend per unit (DPU) forecast for MPACT by 9%. He has also factored in an increase in cost of debt to 3.2% in FY2024.

While the analyst has reduced his target price to $1.90 accordingly, he is maintaining his “buy” call on MPACT as the REIT continues to benefit from resilient growth from VivoCity and Mapletree Business City (MBC) in Singapore and recovery from Festival Walk in Hong Kong.

As tourists return to Sentosa and VivoCity, MPACT has completed an 80,000 sq ft reconfiguration to convert part of department store Tangs’ Level 1 space into a new retail zone with new food and beverage options and an enhanced beauty and fragrance cluster. Resorts World Sentosa (RWS) has also embarked on a $4.5 billion expansion, while VivoCity benefits from the return of tourists as it serves as the gateway to Sentosa.

Meanwhile, MBC has maintained its position as a steady and resilient contributor. MBC clocked positive rental reversion of 8.0% with a healthy retention of 62.9% in FY2023, renewing the majority of leases with Google Asia Pacific — its largest tenant that contributed 5.9% of total gross rental income as of March — in FY2022 and FY2023. Occupancy at MBC also remained stable at 95.4% as of March.

In Hong Kong, Festival Walk’s recovery from the reopening of borders is underway. Hong Kong has progressively eased Covid-related restrictions in 2HFY2023, with quarantine-free cross-border travel between Hong Kong and Mainland China resuming in January. Visitor arrivals to Hong Kong hit 2.8 million in May or 48% of pre-pandemic levels.

Koh says that retailers also benefit from two instalments of consumption vouchers disbursed to residents totalling HK$5,000 ($849.98) in April and July. Retail sales recovered 18.4% y-o-y in May, while restaurant receipts rebounded 81.8% y-o-y in 1Q2023. CBRE expects Hong Kong retail rents to recover 5% to 10% in 2023. — Bryan Wu

Far East Hospitality Trust
Price target:
CGS-CIMB Research ‘add’ 77 cents

Re-rate on discount to peers, geographical diversification

CGS-CIMB Research analysts Natalie Ong and Lock Mun Yee have noted Far East Hospitality Trust (FEHT) reported a historical five-year P/B of 0.73x at a 20.9% discount to the P/B of its hospitality peers CapitaLand Ascott Trust (CLAS) of 0.91x, CDL Hospitality Trust (CDREIT) of 0.91x and 11.1% to Frasers Hospitality Trust (FHT) of 0.81x.

“We think that the discount relative to its peers could be due to FEHT’s comparatively smaller market capitalisation, lower free float, lack of diversification and comparatively fewer acquisitions,” says Ong and Lock.

The analysts also point to geographical diversification as another key reason to the re-rating of FEHT, citing the resulting room for expansion in investable markets and acceleration of inorganic growth.

As such, the analysts have recommended to keep “add” with a lower target price of 77 cents down from 79 cents previously.

In the July 21 report, the analysts observe that since FEHT’s IPO in 2012, its portfolio has grown from 11 to 12 properties, as well as a 30% stake in a JV holding three hotels in Sentosa.

At 32%, FEHT’s gearing places it amongst the lowest of the S-REITs, allowing a debt headroom of approximately $600 million to reach a gearing of 45%.

At this juncture, the trust has the right of first refusal pipeline of seven hotels and service residences in Singapore, but the analysts are concerned about the higher interest rate environment in Singapore and think that the acquisition of Singapore assets may not be adequately accretive in the near-term.

The analysts recall previous analyst briefings where the management of the trust have cited target acquisition markets, such as Japan, the UK and Australia. In today’s high interest rate environment, the analysts are aware that the S-REITs are focusing on acquisitions in Japan, given the positive yield spread in that market.

“We think that this could be a similar strategy for FEHT. Given the lower quantum for Japan properties (about $30 million and above) compared to Singapore assets (about $100 million and above), we think that FEHT could fully debt-fund a Japanese acquisition whilst keeping gearing at a comfortable approximately 30% level,” say Ong and Lock.

The way the analysts see it, an overseas acquisition would help break the acquisition hiatus for FEHT, as well as re-rate FEHT as a geographically diversified REIT with more opportunities for inorganic growth.

Finally, the analysts have lowered their FY2023 to FY2025 DPU by 2.6% to 8% based on a few key reasons: lower hotel margins from the lack of government contracts; lower margins for the rest of portfolio on higher operating costs; lower revenue for retail and commercial due to slower leasing; and higher cost assumptions. — Douglas Toh