Broker's Digest: Mapletree Commercial Trust, Wilmar International, ESR-REIT, First Resources

On March 21, the REIT managers of both MCT and MNACT announced the revision of their existing trust scheme agreement with the addition of a third option — a 100% cash consideration at $1.1949 per MNACT unit. Moving forward, this option will also be the default option.

In order to fund the increase in cash requirement, MCT will undertake a pro-rata non-renounceable preferential offering of up to 1.094 billion MCT units to MCT unit holders at an issue price of $2.0039 to raise gross proceeds of up to $2.2 billion. The $417.3 million that remains will be funded via perpetual securities and/or debt funding.

On this, CGS-CIMB analysts Lock Mun Yee and Eing Kar Mei are keeping their “add” call on MCT with an unchanged target price of $2.18. “The cash-only option values MNACT fairly at 1x P/NAV versus scrip and scrip plus cash options which value MNACT at 0.94x to 0.95x P/NAV, based on MCT’s last closing price,” say Lock and Eing in their March 21 report. The cash-only option also values MNACT higher than its five-year historical 0.8x P/NAV.

In addition, the analysts are buoyant on the strong commitment from Mapletree Investment (MIPL), which is the sponsor of both MCT and MNACT. As the introduction of the cash-only option will mean a higher cash requirement, this will be funded by the preferential offering, where MIPL has undertaken to subscribe for the maximum preferential offering units of up to $2.2 billion.

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Despite the all-cash offer, CGS-CIMB’s Lock and Eing see the deal as being immediately accretive to MCT’s DPU and NAV, with it being unchanged compared to the original terms.

They write: “While some favour MCT as a pure Singapore play, the acquisition will help to accelerate the growth prospects of the merged entity. While free-float size would be reduced in the cash-only consideration [compared] with scrip considerations, the merged entity will have a free float size equivalent to or greater than MCT’s and will still be one of the top five largest S-REITs in free float size.”

Following the merger, Lock and Eing believe Singapore will remain a core market to provide underlying portfolio stability while South Korea and China would be the focus of expansion.

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“In Hong Kong, [the] focus will be on improving Festival Walk which remains a quality mall, [while] in Japan, there is opportunity to recycle capital as it becomes a relatively small segment of the merged portfolio,” they add. “Office and office-like business park assets will be the asset class in focus.”

The research team at the BoS have also kept their “buy” rating on MCT with a target price of $2.04. “With the addition of an all-cash consideration option for MNACT unit holders, we seehigher chances of this proposed merger going through, and continue to recommend MCT unit holders to vote in favour of the trust scheme,” says the team. “If successful, the merged entity would become one of the largest REITs by market capitalisation listed in Asia, with a significantly larger scale and platform which is better positioned to unlock upside potential.”

“That said, we believe MCT would gain new exposure to riskier markets and see dilution to its pure-play Singapore status,” they add.

Despite the current macroeconomic and industry headwinds from the Covid-19 pandemic, the BoS team says it sees “signs of recovery’’ and believes MCT’s “strong parentage and healthy balance sheet will allow it to tide over near-term uncertainties’’. The REIT’s strong management team is also “well-positioned” over the longer-term, adds the team.

Finally, UOB Kay Hian analyst Jonathan Koh is keeping his “buy” recommendation and target price of $2.48.

Like the rest of the analysts, Koh has noted the flexibility offered to MNACT unit holders, as well as the preferential offering that is fully backed by the REITs’ sponsor. As the pro forma financial impact remains unchanged, Koh has kept his DPU forecast for MCT the same. Catalysts, in his view, are the DPU and NAV accretion from MCT’s merger with MNACT. MCT’s five properties in the HarbourFront area, which account for 91.5% of MCT’s total AUM, will “benefit immensely” from the redevelopment of the Greater Southern Waterfront area, as well as the rejuvenation of Sentosa Island and Pulau Brani. — Chloe Lim

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Wilmar International
Price target:
DBS Group Research “buy” $6.67
UOB Kay Hian Research “buy” $5.50
RHB Group Research “buy $5.30

Wilmar deserves to trade at premium to plantation peers

With minimal earnings downside risk, Wilmar International deserves to trade at a premium to its plantation peers’ P/E multiples, says DBS Group Research analyst William Simadiputra. In his March 21 report, he says Wilmar’s packaged consumer products’ margins and earnings can help to buffer its earnings performance when commodity prices reverse.

“The consumer downstream business should continue to bear good margins and ROE in the future, especially when Wilmar’s consumer products division’s performance recovers from higher cost pressure via efficiencies or price hikes.”

Wilmar is trading at around 11x FY2022 ending Dec 31, 2022 P/E. The company deserves a higher valuation multiple considering its earnings track record and position as one of the leading tropical oil refiners and food processors in Asia, on top of its expansion to branded consumer goods and central kitchens, Simadiputra adds.

On the back of the high commodity price environment this year, Simadiputra assumes the earnings split of Wilmar’s China and non-China operations in 2022 to be 30% and 70%, versus its previous assumption of 40% and 60%.

DBS values the China operations at 20x FY2022 P/E while its operations outside of China is pegged to 15x FY2022 P/E. Simadiputra believes the P/E multiple for Wilmar’s Chinese subsidiary Yihai Kerry Arawana (YKA) is fair,
considering YKA is currently trading at 40x FY2022 consensus P/E.

“Thus, our implied equity value of YKA is only US$11 billion ($14.93 billion) versus the current market capitalisation of US$38 billion, further upside risk to Wilmar’s valuation,” says Simadiputra.

Outside of China, Wilmar’s branded consumer goods division has a leading presence in India and Indonesia given its sizable edible oil refining capacity in both regions as well as 240,000 hectares of palm oil plantation assets. “Wilmar’s operations beyond China consists of consumer-branded goods such as Sania in Indonesia, which enables it to move further into the downstream consumer market segment in the country.”

Wilmar is one of RHB Group Research analyst Hoe Lee Leng’s top picks as one of the Indonesian planters with downstream exposure.

This is amid the flip-flop move by the Indonesian government, which may lead to slightly negative impact to pure planters with Indonesian exposure.

The Indonesian government made several changes last week, starting with removing the INR14,000 ($1.32) per litre price ceiling for packaged cooking oil while keeping the price subsidy for bulk cooking oil. Subsequently, it revoked the 30% domestic market obligation (DMO) just a week after raising it from 20%.

Additionally, the Indonesian government also raised the export tax and levies on crude palm oil (CPO) to US$575 per tonne limit if price exceeds US$1,500 per tonne.

Concurring with Hoe, UOB Kay Hian Research analysts Leow Huey Chuen and Jacquelyn Yow note that the Indonesian upstream players would suffer the most impact as they are the ones who bear the export tax and levy.
“Based on our estimation, the CPO reference price for April will be closer at US$1,700 per tonne or higher and hence the maximum duty and levy will be US$575 per tonne,” they add.

Raising its FY2022 earnings estimate by 16% to US$1.89 billion, DBS believes Wilmar should be able to maintain its strong performance this year. Acknowledging the forecast to be above consensus, Simadiputra says he believes Wilmar’s operations will be able to offset the impact of rising commodity prices.

DBS, UOB Kay Hian and RHB have all kept their “buy” calls for Wilmar at a target price of $6.67, $5.50 and $5.30 respectively” — Khairani Afifi Noordin

ESR-REIT
Price target:
RHB “buy” 53 cents

Merger with ALOG to contribute positively to ESR’s DPU
RHB Group Research analyst Vijay Natarajan has kept “buy” on ESR-REIT after the REIT’s unit holders voted in favour of the merger with ARA LOGOS Logistics Trust (ALOG) on March 21.

The analyst has also kept his target price of 53 cents. In his report dated March 22, the analyst has not factored in the effects of the merger into his forecasts, but he expects that the merger should contribute positively to the REIT’s DPU.

“We expect the combined REIT to execute its strategy of portfolio optimisation and asset enhancements, which should lead to a rerating,” Natarajan says. “With a strong and supportive sponsor and a healthy pipeline of assets, we see good growth potential.”

With the merger, new economy assets such as high-technology and logistics warehouses will take up 66% of portfolio rental income, as opposed to 47% at present, he adds. The merger between both REITs is slated to be completed by the end of the 1HFY2022 ending September 2022. It will result in a combined REIT asset size of $5.4 billion, making the merged REIT, ESR-LOGOS REIT, one of the top 10 Singapore REITs (S-REITs) by free float market cap. Following the merger, the REIT’s sponsor ESR Cayman will remain as a key shareholder with 11.2% of the combined entity and the REIT manager.

The analyst likes the merger for three reasons: Firstly, the sizeable new economy and well-diversified portfolio will reduce concentration risks while resolving the conflict of interest from overlapping acquisition mandates with the sponsor. Next, it lowers the cost of capital, with the interest cost alone expected to fall by approximately 100 basis points post-merger. Finally, the merger offers opportunities to transform its portfolio, by accelerating the divestment of its older, shorter-tenure assets and reinvesting the proceeds into modern new economy assets in the Asia Pacific region, with an estimated US$2 billion ($2.7 billion) worth of sponsor pipeline assets. — Chloe Lim

First Resources
Price target:
DBS Group Research “buy” $2.50

DBS lifts First Resources on strong price and earnings prospect

DBS Group Research analyst William Simadiputra has kept his “buy” call for First Resources, citing rising earnings prospects on strong crude palm oil (CPO) price outlook and production volume growth.

In his March 21 report, Simadiputra says there is room for the share price to further perform this year, as First Resources’ P/E multiple is still below its five-year average of 15x. He raises his target price to $2.50 and lifts his earnings forecast for FY2022 ending Dec 31 this year by 33% to US$194 million ($263 million).

The plantation company’s CPO yield will continue to perform above its peers in 2022, adds Simadiputra. “First Resources could deliver stronger earnings this year due to its unhedged sales volume amid rising CPO prices. Last year, FR’s earnings performance underperformed its peers due to hedged CPO selling prices and we only saw a meaningful improvement in 4Q2021.”

In 2022 and 2023, DBS’s CPO benchmark price assumption is US$1,125 per metric tonne while the selling price assumption is US$850 per metric tonne. With this, Simadiputra forecasts First Resources to achieve US$48 million earnings per quarter in 2022. This is a conservative estimate, he adds, considering that First Resources had booked earnings of US$63 million and US$53 million in 4Q2021 and 3Q2021 respectively.

“CPO benchmark price had averaged US$1,215 per metric tonne and US$1,064 per metric tonne respectively. Despite the outlook for higher CPO selling prices, we anticipate higher cash cost per ton for nucleus CPO on higher fertiliser cost. However, we believe First Resources can weather rising costs on strong yield performance which will keep the cost per hectare low.” — Khairani Afifi Noordin