Broker's Digest: iFast Corporation, Sea, LHN, Kimly, Del Monte Pacific

Citi Research analyst Tan Yong Hong is keeping his “sell” call on iFast after its share price rallied around 60% from its trough in November, in line with the news of China’s reopening.

Retaining his target price at $3.80, Tan says the counter’s average daily value traded (ADV) spiked since mid-November following the news.

“Year to date, iFast’s share price shares a 90% relationship with the MSCI APAC Index, which rallied [around] 14% from end-September. This is because we think [iFast’s] unit trust (68% of [its] assets under administration or AUA) segment has high exposure to the index,” Tan says.

“[The] market is pricing in a potential rebound in AUA (after three successive quarterly declines) and hence earnings for 4QFY2022/ FY2023, but at a level we believe is excessive.”

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At iFast’s share price of $5.96 on Dec 6, Tan believes that the market is pricing in an FY2023 P/E of 50x for iFast’s core business based on Citi’s as well as consensus estimates. This is after stripping out $1.20 per share attributable to the Hong Kong e-Mandatory Provident Fund (MPF) project.

“Our FY2023 numbers already assumed AUA rebounds [around] 25% y-o-y in FY2023, as well as some recovery in net platform margins,” he says. “Our FY2023 profits are now broadly in-line with consensus’ FY2022 profits but [around] 10% behind consensus’ FY2023 profits likely on the back of adding HK eMPF earnings contribution using management’s guidance.”

On the market’s valuation of 50x P/E for iFast’s FY2023 earnings, the analyst believes the market has likely overestimated the impact of the company’s higher AUA, which is driven by a rebound in the MSCI APAC Index.

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“Based on our sensitivity analysis, every 5% increase in AUA would raise [iFast’s] earnings by [just] 5%,” says the analyst. “[This is] assuming net platform margins [remain] flat at 60 basis points (9QFY2022 estimated 57 bps after stripping out its [Hong Kong eMPF] project fees), the cost-income ratio at 77% for core business (9MFY2022: 83%) and 16% tax rate.”

“As such, we see a valuation gap with fundamentals,” says Tan. — Felicia Tan

Sea
Price target:
UOB Kay Hian ‘hold’ US$58.77

Sea faces headwinds in entertainment segment

UOB Kay Hian analysts John Cheong, Jacquelyn Yow and Heidi Mo have initiated coverage on Sea with a “hold” call and target price of US$58.77 ($79.21).

In their note, the analysts point out that Sea’s share price has recovered after its 3QFY2022 ended Sept 30 results announcement with a narrower net loss. However, they remain doubtful that the company’s cost rationalising exercise could continue to improve profitability with slower growth from the digital entertainment and e-commerce segments.

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They highlight headwinds for the digital entertainment segment, which is Sea’s only profitable segment. “Sea has lowered its 2022 booking guidance by 10% to US$2.6 billion–US$2.8 billion. It has faced headwinds recently, such as India banning Free Fire and Riot Games taking back distributorship from Garena, Sea’s digital entertainment arm.

“We foresee further deterioration in the segment’s revenue and profitability as users spend less time and resources on gaming and the segment focuses more on internally-developed games. Also, heavy reliance on a single game, Free Fire, is a risk to be noted. For FY2022 and FY2023, we foresee a 28% and 13% decline in the segment’s operating profit,” they add.

UOB is also cautious about Sea’s e-commerce segment profitability. Sea expects its e-commerce arm Shopee to reach ebitda breakeven by the end of 2023. However, it is cautious about slower sales growth, weaker consumer spending power and potential loss of market share.

“Interestingly, Shopee’s sales and marketing expenses per new order surged from US$1.40 in 1QFY2020 to US$6.70 in 2QFY2022, indicating higher customer acquisition costs. We attribute the huge jump mainly to the new peripheral market expansion in Latin America,” say the analysts.

Meanwhile, the analysts highlight the risk of potential divestment of Sea’s stake by its second-largest shareholder Tencent — which has 18.6% shareholding — should not be taken lightly. Garena’s earnings may also be affected if Tencent distributes its games alone. Out of the current 15 games published by Garena, six were developed by Tencent, add the analysts.

According to the analysts, Sea’s huge amount of convertible notes due in 2025-2026 puts its financial strength at risk. By the end of 2025, Sea would have US$1.1 billion worth of convertible notes, which would be due at a convertible price of US$90.46 per share. The following year, US$2.9 billion would be due at the convertible price of US$477.01 per share.

“Sea’s adjusted net cash position as of 3QFY2022 is only around US$3.1 billion, after deducting US$4.2 billion from its total cash position of US$7.3 billion. To recap, Sea’s net cash outflow for 9MFY2022 alone has already reached US$3.2 billion. Even at a reduced burn rate from 2023 onwards, Sea’s financial strength is weaker than it appears,” they add.

UOB’s target price of US$58.77 is based on a SOTP valuation which pegged Garena at 8x FY2023 P/E, Shopee at 1.8x FY2023 P/Sales and Sea’s digital financial services segment SeaMoney at 3.5x FY2023 P/Sales. — Khairani Afifi Noordin

LHN
Price target:
PhillipCapital ‘buy’ 47 cents

Lower target on lower valuation

PhillipCapital Research analyst Paul Chew has maintained his “buy” call for LHN with a lower target price of 47 cents from 51 cents after reporting a 63.3% y-o-y surge in FY2022 earnings to $45.8 million.

In FY2022 ended September, LHN saw revenue and adjusted patmi come in at 91% and 100% of Chua’s forecasts for the year. The group’s 2HFY2022 adjusted patmi declined 19% y-o-y to $13.4 million due to the absence of worker dormitory earnings.

Chua says LHN’s co-living business is growing strongly, with 38% y-o-y revenue growth in 2HFY2022, driven by an estimated 25% growth in rooms and a mid-teens rise in room rates. The group’s new capacity additions for the period were 320 Balestier Road, 75 Beach Road, 115 Geylang Road and joint venture (JV) properties at 40 and 42 Amber Road and 471 Balestier Road.

The analyst says FY2023 earnings will be supported by an estimated 60% expansion in co-living capacity under the group’s Coliwoo brand by 600 rooms to around 1,600. He adds that the new 411 units in Mount Elizabeth will be one of the largest sites for Coliwoo.

However, earnings from facilities management dropped 37% y-o-y in 2HFY2022 to $4.4 million due to the exit of the dormitory business in mid-2022. The analyst expects the drag from dormitory earnings to persist into 1HFY2023.

Chua’s slightly reduced target price comes from a decline in valuations of LHN’s listed LHN Logistics. Its core business valuations are pegged to a 6.5x FY2023 P/E, while the industry is trading at 13x. LHN is also trading at a 35% discount to the book value of 45.5 cents, representing a dividend yield of around 6%.

LHN’s net debt has risen from $63 million to $107 million in FY2022 due to $53 million incurred through investment properties. “We expect stability in FY2023 cash flows, as the focus will be on launching and raising occupancy levels of Mount Elizabeth Coliwoo. The bulk of the debt is on fixed rates for the next two years,” he says.

Chua expects 38% of the group’s FY2023 revenue to come from space optimisation in LHN’s industrial, commercial and residential businesses, which will account for 17%, 7% and 14% respectively.

He forecasts that the facilities management business will account for another 38%, with growth driven by expansion in new car packs under management and more contracts secured. The final 24% of LHN’s revenue next financial year will arrive from its logistics services with the completion of a new International Organization for Standardization (ISO) tank depot in mid-2023. — Bryan Wu

Kimly
Price target:
UOB Kay Hian ‘hold’ 36 cents

Loss of appetite for future food stalls

UOB Kay Hian analysts Heidi Mo and John Cheong have kept their “hold” call on coffee shop operator Kimly and have trimmed their target price from 37 to 36 cents.

The analysts note that higher operating costs continue to dampen margins for the company. This comes from higher energy costs. Staff costs also increased by 15% to 20% due to a manpower shortage. Furthermore, the Singapore government has also raised the minimum qualifying salaries for foreigners by 11% to 20% from September.

In light of this, Kimly’s gross profit margin has fallen by 3.6 percentage points y-o-y to 29.2% in FY2022 ended Sept 30.

Mo and Cheong also foresee fewer food outlets in future, given that Kimly has announced that it will sell Rive Gauche Pâtisserie, its confectionery business for $2.8 million to Muginoho Global. The disposal comprises seven branches and is expected to be completed in FY2023.

On top of this, the agreements of nine coffee shops under a third-party brand were expected to be terminated in 2HFY2022 upon completion of an internal reorganisation. As four coffee shops have yet to be terminated as of the end of FY2022, they foresee the closure of these shops in the next financial period.

Still, Mo and Cheong note that the company is still recording strong performance from its food retail segment. FY2022 revenue from the group’s food retail segment has risen substantially from $119.4 million to $191.2 million, a 60.2% jump y-o-y. This was mainly from the newly-acquired Tenderfresh Group in October 2021.

As management continues to set up more Tenderfresh food stalls in its coffee shops, Mo and Cheong say the group can capture growth opportunities in the Halal dining scene, estimated at $1 billion in 2019.

Kimly’s balance sheet is also strong, with a net cash position of $77.6 million at end-FY2022. Despite being lower than the $95 million in FY2021, the lower net cash balance was largely caused by the $34 million purchase of Tenderfresh.

They have slightly lifted their FY2023– FY2024 revenue forecasts by 2.2% and 2.1%, respectively, on greater contributions from the Tenderfresh network, although the higher operating costs assumptions and fewer outlet openings reduce this.

Accordingly, the analysts have slightly increased its FY2023–FY2024 net profit estimates by 3.4% and 3.2% to $34.9 million and $37.9 million, respectively.

They also highlight that Kimly has proposed a final dividend of 1.12 cents per share, bringing the total FY2022 dividend to 1.68 cents per share. “This indicates a 5% dividend yield and demonstrates Kimly’s consistency in its policy of paying out over 50% of annual earnings.” — Lim Hui Jie

Del Monte Pacific
Price target:
Phillip Capital ‘buy’ 67 cents

Record margins

F&B consumer company Del Monte Pacific posted record margins for 2QFY2023 ended October, thanks to price increases. With 1HFY2023 revenue and patmi at 49% and 67% of FY2023 forecasts, PhillipCapital’s head of research Paul Chew says the company is performing “better than expected”

2QFY2023 earnings jumped 38% y-o-y to US$49.5 million ($67.09 million) supported by 7% higher revenue. The continued push towards branded products drove gross margins to 29%, and is ahead of Chew’s modelled 26% from higher selling prices.

Chew raised his FY2023 earnings forecast by 19% to an adjusted US$123 million. In a Dec 12 note, Chew maintained “buy” on Del Monte Pacific but with a lower target price of 67 cents from 69 cents previously, with a “huge 50% discount” to the industry valuation due to its smaller market cap and higher gearing.

“Del Monte Pacific’s valuations are attractive at 4x P/E FY2023 and an 8% dividend yield. Multiple rounds of price increases and new products have supported gross margin expansion despite cost pressures. The drive towards more branded and new products in the US continues to bear fruit,” writes Chew.

PhillipCapital had initiated “buy” on Del Monte Pacific last October. In January, PhillipCapital replaced Thai Beverage with Del Monte Pacific in its Absolute 10 Model Portfolio. For analyst Vivian Ye, her pick of Del Monte Pacific is based on how the consumer foodstuff maker took a turn for the better as the result of a restructuring exercise.

Back in 2014, Del Monte Pacific acquired its current US subsidiary Del Monte Foods Inc, which focused mainly on producing low-margin canned food for the likes of Walmart or Costco. In 2018, a new management team decided to transform the business. As the company shifted towards a higher-margin business of selling products under its own brand and introduced new products catering to modern lifestyles such as healthy snacks, Del Monte Pacific’s overall earnings also improved “tremendously”.

In 1HFY2022 ended October, 2021, Del Monte Pacific reported earnings of US$30 million ($40.5 million), almost twice that of the whole FY2021. Meanwhile, the group’s sales in the Philippines and international (Del Monte Philippines Inc) segment recovered strongly in 2QFY2023, notes Chew, surging 22% y-o-y in peso terms to PHP11.3 billion ($0.28 billion). However, revenue in US-dollar terms only improved by 5%. “Growth stemmed from the transition to new distributors in the last quarter and a rebound in food service, up 21% y-o-y, and convenience stores, up 48% y-o-y, as the lockdowns ease.”

That said, Chew notes a rise in net debt by US$505 million to US$2 billion. Net debt to ebitda climbed from 4.3x to 5.6x over the past six months. Driving up debt levels were a US$366 million increase to US$1.25 billion, and US$70 million for the purchase of Kitchen Basics, a line of ready-to-use stocks and broths from McCormick & Company.

Meanwhile, a 40% y-o-y jump in inventory was due to higher cost of materials, which Chew believes was in preparation for a strong holiday season. “We expect debt to remain elevated due to the redemption of 6.5% US$100 million preference shares in December. Around 15%–20% of total debt is on fixed rates.”

On the outlook, Chew expects sales momentum to continue into 2HFY2023. For its US operations, cost pressure remains in raw materials, utilities and labour. However, DMFI will ride on the price increase implemented in September and a more selective increase in February 2023, notes Chew.

Around 75% of the products sold in the US are priced less than US$2. “It is an affordable and value option for households especially in the current inflationary environment,” says Chew. — Jovi Ho