Manulife US REIT
Price target:
RHB Group Research ‘buy’ 43 US cents
Potential recovery in 2HFY2022 misplaced
RHB Group Research analyst Vijay Natarajan is keeping his “buy” call on Manulife US REIT (MUST) even though he notes that his earlier view of the REIT’s potential recovery in the 2HFY2022 was “misplaced”.
“MUST’s sharp valuation decline indicates that the US office market remains in a state of flux,” he notes in his Jan 3 report.
Natarajan’s new target price of 43 US cents (57.66 cents), down from his previous target price of 64 US cents, reflects the REIT’s valuation decline.
The REIT, on Dec 30, 2022, revealed that the real estate valuation of its portfolio fell by 10.9% from US$2.18 billion to US$1.95 billion ($2.62 billion) based on the year-end valuations for 2022.
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The decline, which came in worse than expected, was driven mainly by Figueroa, one of the REIT’s properties in Los Angeles, US. The property’s value fell by 33%, accounting for 48% of the total value decline.
“This was mainly due to: The imminent exit of the anchor tenant, TCW Group, by end-2023; the downsizing of another Quinn Emanuel, and the cap rate rising by 100 basis points (bps),” Natarajan notes.
“On a blended basis, discount rates and terminal cap rate assumption by valuers are [an estimated] 40–50 bps higher,” he adds. “This was on the back of a sharp spike in rates, office transactions coming to a near-standstill in 2HFY2022 due to the lack of interest, and banks pulling back on financing.”
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He continues: “Other assets which saw a double-digit percentage valuation decline include Plaza and Exchange in New Jersey, Penn in Washington and Centerpointe in Virginia, highlighting the greater impact in gateway cities while secondary markets fared relatively better.”
The decline in valuation brought MUST’s gearing to the edge of 49%, making it the highest among the Singapore REITs (S-REITs) currently.
The REIT’s interest cover ratio (ICR) was estimated to be at 3.1x as at the end of December 2022.
“S-REITs are allowed a maximum gearing of up to 50%, provided the ICR is above 2.5x, and up to 45% if the ICR is below 2.5x. As interest rates have spiked up sharply since 2HFY2022, we think the ICR could drop below 2.5x by end-2023 — indicating that remedial measures are needed soon,” says Natarajan.
In his report, the analyst raised the possibility of the REIT’s sponsor, Manulife, lending its support.
“MUST is currently in a strategic review to cut its gearing and unlock value. While the REIT has been on the active lookout for divestment opportunities, the current adverse market conditions have limited such options. Its sponsor, Manulife, currently manages global real estate worth US$20.3 billion (as of 1HFY2023) and holds a 9% stake in the REIT,” he notes.
“We believe possible options for the sponsor are: Set up a real estate fund to buy some of MUST’s assets, or take a stake in the assets based on their latest valuations. It could also underwrite equity fund-raising at a premium, although the maximum 10% stake cap limits such options,” he adds.
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On this, Natarajan has also reduced his distribution per unit (DPU) estimates for the FY2023 to FY2024 by 15%. This comes from trimming MUST’s dividend payout ratio to 90% compared to 100% previously as he expects the REIT to conserve cash. The lowered DPU also takes into account an adjusted occupancy rate and financing assumptions.
In addition, the analyst has upped his cost of equity estimate by 170 bps and lowered his terminal growth assumptions to 1.5% from 2.0%, resulting in his lower target price estimate.
“MUST has a top environmental, social and governance (ESG) score of 3.3 out of 4.0, and, as such, we apply a 6% ESG premium to intrinsic value to derive our target price,” says Natarajan.— Felicia Tan
Japfa
Price target:
CGS-CIMB Research ‘add’ 42 cents
Lower target price following spin-off listing
CGS-CIMB Research analyst Tay Wee Kuang is keeping his “add” call on Japfa but with a lowered target price of 42 cents from 65 cents previously.
The new target price is based on an FY2024 P/E of 8x, which is based on Japfa’s remaining animal protein businesses. This comes after removing Japfa’s stake in AustAsia Group (AAG) from FY2023.
Japfa’s subsidiary, AAG, was listed on the Hong Kong Exchange (HKEX) on Dec 30, 2022, at HK$6.40 ($1.11) per share.
With the listing of AAG, eligible Japfa shareholders will need to choose from four options with regard to the AAG shares that they are entitled to.
To Tay, the poor market sentiments have resulted in a less-than-ideal IPO valuation of HK$4.48 billion for AAG despite its growing milking capacity. This is compared to the price tag of HK$9.12 billion in 2021 when AAG welcomed new strategic shareholders: New Hope, Genki Forest and Honest Dairy.
“Given the growth prospects of China’s dairy industry, we believe that opting for Options 1, 2 or 3 may allow shareholders to benefit over the longer term. However, the default option (Option 4) is convenient for shareholders entitled to less than the lot size of 1,000 AAG shares to dispose of odd lots, or for investors who do not wish to have exposure to AAG’s business,” says Tay in his Jan 4 report.
“Nevertheless, investors should also consider that it may take till April 19 (i.e. 90 days after the end of the election period) to receive sales proceeds from the disposal of AAG shares by Japfa on behalf of investors, whereas those who choose Option 1 or 2 could have their AAG shares credited to a Hong Kong brokerage or nominee/counterpart by Jan 30, based on the indicative timelines provided by Japfa,” he adds.
To this end, the analyst notes that Japfa’s share price of 31.5 cents as at Jan 3 implies a 16% discount to its 55% stake in Japfa Comfeed.
“[This is] while disregarding the value behind its animal protein other (APO) business, although we understand that persistent losses in its APO business due to the persistent recurrence of African Swine Fever (ASF) have weighed on Japfa’s valuations,” Tay writes.
“As a result, we expect the unpredictability of ASF to drag on Japfa’s consolidated earnings,” he adds.
To the analyst, the subsiding of the ASF and easing cost pressures are re-rating catalysts for Japfa while weaker average selling prices resulting in a compression of margins are downside risks. — Felicia Tan
Grab Holdings
Price target:
Aletheia Capital ‘buy’ US$4.0
Asean’s white knight
Aletheia Capital has initiated “buy” on Grab Holdings with a target price of US$4 ($5.37). The target price implies an upside of 24% based on Grab’s price of US$3.20 as at analyst Nirgunan Tiruchelvam’s report dated Jan 3.
In his report, the analyst notes that Grab has emerged as the super app for Asean, even though its super app status has not been recognised by the market. The group now operates in 400 cities in eight countries, including Indonesia, which has a population of 270 million.
“[Grab’s] adjusted net revenue as a percentage of gross merchandise value (GMV) is 12%, while its take rate has risen threefold since 2018. This is better than Alibaba,” says Tiruchelvam.
“Grab has the potential to be re-rated as an all-encompassing super app like Alibaba. It is becoming a one-stop-shop for ride-hailing, food delivery, payments and other services,” he adds.
Another plus for Grab is that its extended cash burn may be about to end.
“Grab has reached an inflection point in its ebitda performance at a segmental level. In 3QFY2022, Grab’s delivery segments recorded adjusted ebitda positivity (5% of revenue) for the first time,” the analyst writes.
“The mobility segment generated record adjusted ebitda margin of 12.5% in 3QFY2022,” he adds, expecting Grab to record its first full year of ebitda positivity for both its delivery and mobility segments in FY2023.
Furthermore, the analyst projects Grab to see ebitda and free cash flow (FCF) positivity in FY2024.
“The inflection point is imminent because of a rise in ride-hailing and food delivery GMV, as well as a cut in incentives,” says Tiruchelvam.
Meanwhile, Grab’s main competitor in the Asean region, GoTo, is facing a cash crunch. Tiruchelvam sees this as an opportunity for Grab to acquire the latter after a 78% drop in GoTo’s share price.
“This move could not only rescue GoTo but also enhance Grab’s value proposition by cementing its dominance and cutting operating expenses. We ascribe a 55% probability to Grab acquiring GoTo with US$3.5 billion of equity financing in FY2023,” he says.
On his target price, Tiruchelvam values Grab’s ride-hailing and food delivery businesses on a P/GMV basis of 0.45x. The digital banking business is valued on a price-to-tangible book value (P/TPV) multiple of 0.13x, he says.
“We expect a high probability of a value-accretive acquisition of GoTo by Grab with the support of a strategic investor,” he adds. — Felicia Tan
