Hyphens Pharma International
Price target:
CGS-CIMB Research ‘add’ 32 cents
Supply constraints
CGS-CIMB Research analyst Tay Wee Kuang is keeping his “add” call on Hyphens Pharma International 1J5 but at a lowered target price of 32 cents from 34 cents previously, following the company’s 3QFY2023 ended Sept 30 results.
In his Nov 27 report, Tay notes that Hyphens’ revenue grew 0.1% y-o-y in the quarter, taking its 9MFY2023 revenue to $117.5 million, which was “in-line” at 74.2% of his FY2023 estimate.
The analyst adds: “Although a detailed revenue breakdown was not provided, Hyphens said sales from its speciality pharma principal segment and medical hypermart and digital segment had grown 0.6% y-o-y and 1.9% y-o-y, respectively, to offset the 4.2% decline in sales of its proprietary brands segment.”
Supply disruptions which led to an inventory stock-out in the company’s Vietnam market in 1HFY2023 had eased in 3QFY2023, and the company expects further improvements in the supply situation by end-FY2023.
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“This should signal better revenue momentum, in our view, especially with new products added to its portfolio in 1HFY2023 that should see sales slowly pick up as they gain traction in the market,” writes Tay.
Meanwhile, the company’s gross profit margin showed a 4.8% y-o-y decline to 35.4% in the quarter, which Hyphens attributes to inflationary cost pressures.
On this, the analyst writes: “We think the discontinuation of Hyphens’ distributorship of Biosensors products in Vietnam, which led to a gross profit margin compression of 1.4% in 1HFY2023, had a similar impact on 3QFY2023’s gross profit margin, given that the distributorship only ceased in 4QFY2022.”
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Tay also understands that the y-o-y decline in sales of Hyphens’ proprietary brands segment in 3QFY2023 likely led to a poorer sales mix, contributing to the company’s gross profit margin.
Despite easing supply constraints pointing to an improvement in revenue momentum, Tay notes that “margins could remain compressed”, as it could “take time” for Hyphens to pass on the higher costs from brand principals to hospitals with “superior bargaining power”, as well as from its proprietary brands that consist of more discretionary consumer healthcare products.
As a result, Tay has reduced his discounted cash flow-based (DCF) target price after lowering his FY2023, FY2024 and FY2025 earnings per share (EPS) estimates by 12.9%, 5.3% and 5.1% respectively, to account for gross profit margin deterioration, even though his revenue estimates are “higher” as he expects Hyphens’ sales to benefit from the increase in products within its portfolio.
Noted re-rating catalysts by Tay include the earlier commercialisation of new products in Hyphens’ portfolio and more accretive acquisitions of proprietary brands or businesses. Conversely, downside risks include slower proprietary brand sales, further margin compression and depreciation of the Vietnamese dong against the US dollar and euro. — Douglas Toh
iFast Corporation
Price target:
UBS ‘buy’ $10
Time to revisit
Investors’ interest in iFast Corporation has declined over the last couple of years, note UBS analysts Aakash Rawat and Benjamin Tan.
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Their gripes for most of 2022 include a significant deceleration in assets under administration (AUA) growth, from 30%–45% y-o-y growth in 2020/2021 to shrinking 8% in 2022; a surprise acquisition of a loss-making UK bank in early-2022; concerns over potential delays in the launch of the Hong Kong mandatory ePension platform project; and a one-off impairment for the India business, which led to a net loss in 2QFY2022 ended June.
But are things finally turning for the better? Most of these concerns appear to be in the rear-view mirror with the outlook looking better from here, say the UBS analysts.
Firstly, the decline in AUA has reversed with AUA growing 2%–4% q-o-q over the last few quarters. Net inflows have also recovered, which suggests a recovery in the underlying business momentum, they add.
Secondly, losses in the banking business have started to narrow with guidance for breakeven in 2H2024. The group also looks to be making good progress in line with their strategic plans with the launch of the corporate and consumer banking services this year, say Rawat and Tan.
Lastly, iFast reported an earlier and higher-than-expected contribution from the ePension division in 3Q2023, a quarter earlier than guided, which should help to ease concerns around eMPF launch delays, add the analysts, who have maintained their “buy” call but with a new target price of $10, nearly 50% higher than $6.50 earlier.
In a Nov 27 note titled “Is it time to revisit iFast?”, Rawat and Tan think investors are likely to start pricing in the expected acceleration in earnings per share (EPS) growth, given the earlier-than-expected contribution from the ePension division in Hong Kong.
“We believe this could continue to be a catalyst for the re-rating of the stock,” say the UBS analysts. “We expect upcoming positive catalyst at the 4QFY2023 results in February 2024, where management is expected to provide updated guidance to the Hong Kong business and we believe are likely to raise it.”
They also expect a stabilisation in interest rates to drive higher AUA growth for iFast. “Lower rates next year are likely to help with valuations re-rating. Over the medium term, we remain positive on the structural growth prospects and potential cross-divisional synergies between banking and the core wealth management business.”
For the core wealth management business, the UBS analysts forecast 11% y-o-y AUA growth in 2024 and stable net revenue/AUA margins of 65 basis points (bps).
For iFast’s UK-based banking business, they forecast 20% y-o-y net revenue growth and a decline in the cost-to-income ratio (CIR) to 65%, down from 107% in 2023, driving a narrowing of losses.
For the ePension division, UBS forecast a $32.5 million profit before tax (PBT) contribution, “which is estimated based on the guidance shared for the Hong Kong business”. — Jovi Ho
Netlink NBN Trust
Price targets:
CGS-CIMB Research ‘add’ 95 cents
DBS Group Research ‘buy’ 98 ents
UOB Kay Hian ‘buy’ $1.01
Citi ‘buy’ $1.06
Completion of IMDA price review
The Infocomm Media Development Authority (IMDA) announced on Nov 27 the results of its review of the wholesale prices, terms and conditions of Netlink NBN Trust’s interconnection offer (ICO) for the next five years. This has removed a months-long overhang on the fibre network infrastructure operator, and analysts are relieved at the “long-award closure”.
Revised prices, which will take effect from April 1, 2024, are lower for residential and non-building address point (NBAP) connections, down 2% to $13.50 and 4% to $70.50 respectively. Non-residential end-user connection prices will remain unchanged at $55.00 per month.
CGS-CIMB Research analyst Ong Khang Chuen, who has kept his “add” call and 95 cents target price in his Nov 27 note, thinks the review outcome is “slightly better than expected”. He had assumed a 2% reduction in Netlink’s residential ICO pricing and a 5% reduction for non-residential and NBAP connection pricing, given a higher number of active fibre connections.
“The latest development removes a key overhang on NLT’s share price for the past year, and we think it strengthens our investment thesis of NLT as a defensive amid macro uncertainties, given strong distribution per unit (DPU) visibility.”
Ong likes Netlink’s strong operating cash flow generation, which should continue to support “stable” DPU growth of 2% per annum through to FY2030 “without meaningfully impacting its debt profile”. He forecasts a DPU of 5.3 cents for FY2024 ending March 2024, which represents a 6.5% dividend yield.
Similarly, DBS Group Research had projected much more aggressive cuts. “Given that the risk-free rate has risen to 3.0% compared to 2.1% seen at the time of its IPO in 2017, we had expected a 20-30 basis points (bps) rise in the regulatory return … However, Netlink has been allowed a regulatory return of 7%, same as last term, for a five-year period from April 2024.”
DBS is maintaining “buy” on Netlink with an unchanged target price of 98 cents, slightly higher than that of CGS-CIMB’s Ong. “We don’t see any impact on its FY2024/2025 distributions, which might rise by 1%–3% annually and can be sustained in the long-term.”
Netlink is trading at a 6.5% yield at 350 bps spread over Singapore’s risk-free rate, which is “very attractive”, says DBS. “Netlink’s 6.5% yield is also higher than the 5.8% average offered by industrial REITs despite Netlink’s much longer asset life, as Netlink incurs capex each year to maintain/enhance its regulated asset base.”
While Netlink has a long runway, UOB Kay Hian Research analysts Chong Lee Len and Llelleythan Tan expect near-term share price weakness “as total returns in the near term are adversely affected by the review [compared to] expectations of higher returns to compensate for elevated interest rates environment and expected higher cost base from inflationary pressures”.
Netlink may propose to conduct a mid-term price adjustment in the third year of the pricing period, or FY2027, note Chong and Tan. “Management noted that upcoming expected interest rate cuts in the short term alone would not trigger a mid-term adjustment and the group would look at other factors, such as opex/capex plans, before triggering a review.”
They expect the fall in prices for residential and NBAP connections to have an “insignificant” impact on FY2025–2026 earnings. “The $0.30 price reduction for residential connection implies a loss of around $5 million in annual revenue and would reduce our current FY2025–2026 patmi estimates by only 1%–2%.”
They add: “Furthermore, given that Netlink has been adding roughly 20,000 new residential connections per year, we expect new revenue contributions of roughly $2 million to partially offset the $5 million drop in revenue loss before returning to pre-price reduction levels by 1HFY2026.”
Dividends will remain unaffected, say Chong and Tan, who have kept their “buy” call and $1.01 target price. “Armed with strong annual operating cash flows of around $300 million, management noted that the group expects distributions to stay stable despite lower revenue contributions from the residential connections segment. Also, despite higher capex commitments in FY2024–2025, the group noted that additional capex net from its surplus cash after distribution would be borrowed, backed by the group’s strong balance sheet, with low 21.5% net gearing.”
Finally, Citi Research analysts Luis Hilado and Arthur Pineda had anticipated much worse cuts of 8% for the review. They have revised upwards their revenue and profit forecasts for FY2024/2025 by 4%/6% and 6%/13%, respectively.
In a Nov 27 note, the Citi analysts maintained “buy” on Netlink with a higher target price of $1.06, from 99 cents previously. This is the highest target price among the four research houses mentioned here.
“We have conservatively not assumed a rate increase within the next five-year window,” write Hilado and Pineda. “Even without such assumption, our revised target price provides healthy returns with at least five years of sustainable yield of over 6%.” — Jovi Ho
RE&S Holdings
Price target:
RHB Bank Singapore ‘unrated’
Strong cash, high yield
RHB Bank Singapore’s Alfie Yeo has flagged RE&S Holdings as a strong cash flow-generating F&B company that is now trading at an undemanding valuation while maintaining a steady dividend record thanks to its net cash balance sheet.
RE&S runs multiple F&B brands with a total of more than 70 outlets in Singapore and Malaysia. The brands include Ichiban Sushi, Kuriya Japanese Market, Ichiban Bento, Kyakiniku-GO, and Gokoku Japanese Bakery.
“We believe the outlook for the F&B segment will be more robust as the Singapore economy improves and we see earnings growth led by new outlets and concepts,” says Yeo in his unrated note on Nov 23, referring to brands such as Mr Donut.
According to Yeo, the company’s new growth strategy is to focus more on the so-called quick service restaurant segment, which is less reliant on service staff, thereby helping to tackle rising labour cost, which already accounts for 37% of the company’s operating cost. “QSR outlets tend to be more cost-efficient on labour and have better demand and outlet performance for better margins,” says Yeo.
With better-than-expected pickup in GDP growth of 3% seen next year, up from the 1.5% expected this year, Yeo believes this will be a positive on Singapore’s food service retail sales outlook.
Citing Singapore retail sales for the F&B sector, restaurant sales have recovered to near pre-pandemic levels. Yeo attributes the improvement to the lifting of post-pandemic restrictions as supermarket sales normalise and consumption shifts towards the food service sector.
“We believe RES is well placed to capture the more positive outlook in F&B spending next year,” he reasons.
While RE&S is planning more QSR outlets, which offer more “compelling value” to customers, Yeo believes that there is more “scope” for the mainstay full-service brands, although the high casual and premium market segments should not see similar rapid growth, given how these segments have been deemed by the management to have already matured.
In FY2023 ended June 30, RE&S reported revenue of $174 million, up 12% y-o-y, thanks to higher sales following the lifting of restrictions and new outlets. Gross margins improved 0.8 ppt to 72.7% due to lower food costs for some QSR concepts. ebit margin, however, fell to 8.8% from 11.1% largely because of higher labour costs but also higher utilities. As a result, earnings dropped by 19% y-o-y to $8 million.
Cash flow-generating ability remained strong despite a fall in net profit, says Yeo, who points out that F&B retail is a cash-generating business and RE&S generates operating cash flow of around $38 million to $44 million each in FY2021 to FY2023, or 11–12 cents per share. Yeo further notes that RE&S has no debt and net cash stood at $18 million or 5 cents per share.
RE&S has yet to lay down an official dividend policy although it increased its dividend per share steadily to 1.7 cents for FY2022. “Despite a fall in net profit, RE&S’s strong balance sheet and cash flow has enabled it to increase interim and final DPS payout in FY2023. Hence, the dividend payout ratio has increased from FY2019’s 40% to 83% in FY23,” says Yeo.
The analyst further notes that the stock now trades at a FY2023 ex-cash P/E of 9x and its dividend yield is attractive at 7%, due to its practice of paying out a sustainable DPS, thanks to its strong cash generating ability and balance sheet. “We like the stock for its cash flow-generating ability and compelling valuation,” says Yeo.
Key risks, according to Yeo, include a shortage of labour and high staff costs that can dampen margins and earnings going forward. Food safety could also potentially cause reputational risks, and a pandemic or lockdown could see outlets not operating — posting losses similar to FY2020. — The Edge Singapore
Frencken Group
Price targets:
Maybank Securities ‘buy’ $1.39
CGS-CIMB Research ‘add’ $1.37
DBS Group Research ‘buy’ $1.33
Improving margins and brighter outlook
DBS Group Research analyst Ling Lee Keng has upgraded her call on Frencken to “buy” from “hold” after the manufacturer reported improving margins and outlook in its business update for the 3QFY2023 ended Sept 30.
In 3QFY2023, Frencken saw revenue dip by 5.6% y-o-y to $184.4 million while patmi fell by 35.1% y-o-y to $7.1 million.
That said, its revenue and patmi have been improving sequentially from 1QFY2023 to 3QFY2023. In 3QFY2023, Frencken’s net margin improved slightly to 3.9% from 3.8% q-o-q.
“We expect to see further net margin further improvement after reaching a trough of 3% in 1QFY2023,” says Ling in her Nov 23 report. “Frencken is also well positioned to ride on the recovery path for the technology sector, especially with 40% exposure to the semiconductor segment.”
The analyst also likes the group for guiding higher revenue in 2HFY2023 for the semiconductor, medical, and analytical & life sciences segments, compared to 1HFY2023.
Nonetheless, Ling warns that Frencken’s industrial automation division is still expected to be weak due to its dependence on a key customer in the data storage space. Revenue for the automotive division is expected to be stable.
Frencken is also deemed to be well-positioned for the recovery in the semiconductor industry due to its sound balance sheet and diversified portfolio.
“We expect the semiconductor industry to register strong growth in 2024 and 2025, after a weak 2023. Semiconductor revenue is expected to dip 10.9% y-o-y in 2023 after a flat 2022 and recover with a strong gain of 16.8% in 2024 and 15.5% in 2025, according to Gartner,” Ling notes.
“Global semiconductor shipments in September 2023 showed a further improvement from the low in February 2023,” she adds.
Semi, the leading microelectronics industry association, also expects the industry’s rebound in 2024 to continue through 2026. This is thanks to wafer shipments setting new highs as silicon demand increases to support AI, high-performance computing (HPC), 5G, automotive, and industrial applications, the analyst continues.
“Coupled with its diverse exposure to multiple market segments and its sound financial position, Frencken is in a good position to weather the current headwinds and ride on the recovery path going forward,” she says.
To support her upgrade, Ling has raised her FY2023 and FY2024 earnings estimates by 15% and 43% respectively on higher margin assumptions. “We have assumed a net margin of 3.7% for FY2023 and 5.5% for FY2024, from 3.2% and 4.0% previously.”
Her new target price of $1.33, from 78 cents, is pegged to 13x Frencken’s P/E, slightly above the four-year average P/E and up from 11x previously on the group’s improving outlook.
Separately, Maybank Securities analyst Jarick Seet has kept his “buy” call but with a higher target price of $1.39 from $1.27, which is pegged to a higher FY2024 P/E multiple of 12x from 11x.
“So far, Frencken has delivered improving quarters since 1QFY2023 and we believe this trend is likely to persist,” says Seet in his Nov 24 report.
FY2024 should also be a “much better” year for the group with its semiconductor revenue picking up further on a q-o-q basis due to rising sales in Europe and stable sales in Asia.
As it is, Frencken expects its semiconductor revenue in the 2HFY2023 to outstrip that of 1HFY2023, Seet points out.
“We believe key customers have seen inventory levels normalise and are raising orders. Its key customer in Europe is also trying to move some production to Malaysia. We believe this will continue to benefit Frencken which has assisted the customer in shifting some production to Malaysia,” he says.
“The automotive segment is also expected to pick up strongly in the next few years due to some new product innovations (NPI) in the works in the electric vehicle (EV) space,” he adds.
At this point, Frencken, which is Seet’s top pick among the tech stocks under his coverage, is likely to have hit rock bottom and should see a gradual improvement in the subsequent quarters.
In Seet’s view, there is significant upside for the stock, especially if the semiconductor recovery materialises.
In his Nov 23 note, William Tng of CGS-CIMB Research maintains both his target price of “$1.37” and his “add” call on the stock, given how the 3QFY2023 earnings were in line with his expectations.
The bullish outlook is because of the expected recovery of the semiconductor industry this coming FY2024 into FY2025, possibly leading to double-digit earnings growth for Frencken for these two years.
For Tng, potential re-rating catalysts include a less severe slowdown in its semiconductor business segment, better cost controls, and greater concessions from customers on cost pass-throughs.
On the other hand, downside risks are further cost escalations affecting its net profit negatively, and further weakening in demand for its semiconductor business segment. — Felicia Tan
