Broker's digest: MLT, Raffles Medical Group, iFast Corporation, Sembcorp Industries

Analysts from four brokerages have maintained their “buy” rating on Mapletree Logistics Trust (MLT), although CGS-CIMB Research’s Lock Mun Yee and OCBC Investment Research have cut their target prices.

CGS-CIMB has slashed its target price from $2.10 to $2.05, while OCBC Investment Research dropped its target price from $2 to $1.92. Maybank Securities’ Chua Su Tye and UOB Kay Hian’s Jonathan Koh on the other hand, have held their target prices at $2.15 and $2.08 respectively.

In their reports, the four brokerages mentioned that MLT had “met expectations” with its 1QFY2023 results ended June.

In its first quarter, MLT recorded a 17.2% y-o-y rise in distributable income to $108.6 million. As such, DPU rose 5% to 2.268 cents on an enlarged unit base following the placement in 4QFY2021.

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CGS-CIMB’s Lock says that as at end 1QFY2023, MLT has hedged 80% of its debt into fixed rates and hedged 73% of its distributable income in the next 12 months.

In terms of sensitivity, every 25 basis points (bps) hike in interest rates would translate to a 1-cent shift in DPU.

MLT’s revenue in the quarter rose 14.6% y-o-y to $187.7 million, but property expenses increased by 24.8% to $24.4 million due to the enlarged portfolio and higher property and land tax. Accordingly, net property income (NPI) grew by 13.2% to $163.2 million.

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MLT’s portfolio occupancy dipped slightly q-o-q to 96.8% as at end-1Q, dragged down by lower occupancies in Singapore, South Korea and China, partly offset by an improvement in take-up in Japan and Hong Kong.

There was a stronger positive rental reversion of +3.4% in 1QFY2023 compared to +2.9% in 4QFY2022, with the most uplift from Singapore, India, Vietnam, Japan and Malaysia.

About 24.2% of its rental income is up for renewal in 9MFY2023, the bulk coming from China, Singapore and South Korea.

In her report, Lock says that the REIT’s management remains “cautiously optimistic” on rental reversions in China as leasing sentiment improved towards the end of 1H2022. “This was particularly so in Tier-1 cities, albeit amid moderate take-up as tenants remain cautious about capacity expansion,” she writes.

UOB Kay Hian’s Koh adds that Tier-2 cities have experienced slower take-up, and tenants are cautious, some having signed shorter leases of one to two years.

Overall occupancy for MLT’s China portfolio eased by 0.2 percentage points (ppt) q-o-q to 92.9% in 1QFY2023.

Management expects continued weakness in 2QFY2023, but “recovery is in sight” starting 3QFY2023, with Koh noting that key tenants, such as JD.com and Cainiao, are keen to renew their leases.

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Lock also sees that leasing demand for warehouse space is expected to stay resilient, supported by domestic consumption, e-commerce and inventory stockpiling.

On the acquisition front, she adds that MLT continues to explore inorganic growth and sees opportunities in Australia, Japan and South Korea.

Its gearing stood at 37.2% as at end 1Q, translating to a potential debt headroom of $700 million (based on a 50% guideline ceiling) and it plans to recycle $300 million worth of assets in Singapore, South Korea and Malaysia.

Koh identifies two projects that MLT is expected to place more emphasis on in the near term, namely, 51 Benoi Road in Singapore and developing the first modern ramp-up logistics property in Subang Jaya, Malaysia. These will be completed by 4QFY2025 and 2027 respectively.

MLT has acquired two parcels of leasehold industrial properties at Subang Jaya, which are located next to its existing Subang 3 and 4 logistics properties.

Maybank’s Chua estimates about $700,000 to $2.2 billion of debt headroom to support acquisitions, adding that management is eyeing a $2.5 billion deal pipeline.

However, this is at a below 20% conversion rate, although the REIT will continue to execute on its $300 million — $500 million divestment plan.

OCBC Investment Research also echoed this point, saying that MLT’s management has strong execution capabilities and that its portfolio capital recycling strategy has also resulted in net divestment gains being distributed to unitholders.

“Although MLT will not be immune to uncertainties in the macroeconomic environment, we expect it to remain relatively more resilient vis-à-vis its peers,” they said, adding that the brokerage sees MLT as a key beneficiary of the structural shift towards more robust e-commerce growth trends ahead.

While they expect that MLT’s management would exercise “prudent capital management,” the rising interest rates mean that OIR raises its cost of equity assumption from 6.4% to 6.6%, mainly driven by an increase in its risk-free rate assumption from 2.5% to 3.25% and lowering its fair value.

OCBC also writes that “[MLT’s] management highlighted that it was still actively exploring inorganic growth opportunities but will adopt a more stringent selection criteria given a higher cost of capital.”— Lim Hui Jie

Raffles Medical Group
Price target:
RHB Group Research ‘buy’ $1.50

Sound long-term growth

RHB Group Research analyst Shekhar Jaiswal has kept a “buy” rating on Raffles Medical with a target price of $1.50 as he sees the group as having a “sound long-term growth” and “reasonable valuation” at its current share price levels.

Jaiswal’s target price represents a 33.9% upside to Raffles Medical’s share price of $1.12 as at the time of writing on July 25. His target price, which includes a 2% environmental, social and governance (ESG) premium, is based on a fair value of $1.48.

“We recognise that investors are concerned about Raffles Medical’s flattish FY2022 profit growth amidst lower contribution from Covid-19 related revenue in Singapore, rising inflation, and slower than earlier guided growth in its China business,” the analyst writes.

Jaiswal expects Raffles Medical’s Singapore hospital business to witness higher occupancy and billings, driven by the return of domestic patients undergoing elective treatments that were deferred during the Covid-19 pandemic as well as from the return of some foreign patients to Singapore. “This, in addition to normalised business operations for Singapore healthcare clinics, would help Raffles Medical offset the drop in Covid-19-related revenues in the near term and support growth in 2023 and beyond,” he observes.

The analyst also notes that China, which accounts for around 7% of Raffles Medical’s revenue, should also see higher revenue beyond 2023.

However, the diversion of resources into China’s zero-Covid-19 approach has forced multiple private hospitals to suspend services they relied upon for revenue. “We believe China’s zero Covid-19 policy impacted Raffles Medical China’s operations as well,” writes Jaiswal.

Raffles Medical’s Chongqing hospital was expected to see an Ebitda breakeven by the end of the year, which could now be delayed by a year, according to the analyst. Raffles Medical was supposed to see a meaningful revenue contribution from its Shanghai hospital in 2022. “However, we now believe this higher revenue contribution will now be delayed into 2023,” Jaiswal says.

The analyst maintains that the Shanghai hospital will achieve an ebitda breakeven by the end of 2024, as per the original estimate. “We believe Raffles Medical’s China hospitals have a strong long-term growth outlook as private hospitals accounted for only around 15% of total patient visits in 2020,” he writes. “This percentage, we believe, has the potential to grow further in coming years.”

At present, Raffles Medical’s FY2023 P/E and EV/Ebitda are below its peers’ average, according to Jaiswal.

Overall, while Raffles Medical’s focus will be on ramping up China operations, once the country gradually relaxes its stringent Covid-19-related restrictions, Jaiswal believes that the company’s $91 million net cash position should enable it to look at inorganic growth opportunities within the region. — Chloe Lim

iFast Corporation
Price target:
CGS-CIMB Research ‘hold’ $4.00
Citi Research ‘sell’ $3.80
DBS Group Research ‘hold’ $4.08

Higher costs, slower growth

Following iFast Corporation’s 1HFY2022 results ended June, CGS-CIMB Research analyst Andrea Choong has slashed her target price on iFast to $4 from $7.60 previously. Choong also downgraded iFast to “hold” from “add” in a July 26 note. Meanwhile, DBS Group Research has cut its target price by nearly 25% to $4.08 from $5.42 previously. This will be a year of higher costs and slower growth in revenue for iFast, writes DBS analyst Ling Lee Keng. Ling maintains her “hold” call on iFast in a July 26 note.

iFast reported a net loss of $2.69 million for 2QFY2022 ended June, owing to a oneoff impairment from its India business. This extends a decline for the wealth management platform company; net profit had declined 34.9% y-o-y to $5.74 million in 1QFY2022.

On a half-year basis, iFast reported a net profit of $3.04 million in 1HFY2022, though this was still down 80.8% y-o-y.

Writes Ling: “The tough market conditions, coupled with higher operating expenses and initial operating losses for iFast Global Bank, together with the $5.2 million impairment charges for the India platform business, has led to a net loss …. The year 2022 will be a year of higher costs, as the group prepares to launch the ePension business in Hong Kong while the UK bank is still incurring losses, at least till 2024.”

At the end of March, iFast completed its acquisition of the UK-based iFast Global Bank (formerly known as BFC Bank). Management expects it to turn profitable in FY2024. Attributable loss from the bank in 2QFY2022 stood at $0.952 million and full-year attributable losses were guided at $4 million.

iFast says it is currently working to restructure the business consistent with the group’s wealth management focus, and will provide an update at either the results release of 3QFY2022 (due September) or 4QFY2022 results (due February 2023).

Ling also points to a lack of near-term catalysts, as iFast’s bid for a digital bank licence in Malaysia is likely off the table. “There was no update on the bidding on the digital bank licence in Malaysia, and the management stated that it is fair to assume that it was not successful.”

Meanwhile, Citi Research has long panned iFast’s share price potential. In a July 26 note, analysts Tan Yong Hong and Tian Yafei reiterate “sell” on iFast with a target price of $3.80.

Ahead of iFast’s 1HFY2022 results, Tan and Tian had cut their target price from $4.20 in a July 19 note, extending their slashing of iFast’s fair value from $7.50 last October.

Tan and Tian value iFast on a “two-stage dividend discount model”. “The first stage is based on a discount of our dividends forecast to the present value. The second stage calculates the terminal value based on a Gordon growth model. We assume a sustainable return on equity (ROE) of 23%, terminal growth rate of 2.0% and a cost of equity (COE) of 10.4%.”

For the second interim dividend for 2QFY2022, iFast has declared a dividend of 1.10 cents per ordinary share, unchanged from this time last year. That said, Tan and Tian note that iFast has offered no official dividend policy. “iFast will maintain absolute dividends in FY2022 using FY2021 levels, and will start to raise DPS in line with growth in profitability from FY2023. Dividend payout ratio stood at 42–34% in FY2021/22.” — Jovi Ho

Sembcorp Industries
Price target:
PhillipCapital ‘neutral’ $2.96

Downgrade on recent share price run

PhillipCapital’s senior research analyst Terence Chua has downgraded his recommendation on Sembcorp Industries (Sembcorp) to “neutral” from “accumulate” after the recent run-up in its share price.

Shares in Sembcorp crossed the $3 mark on July 20, which is a 52-week high.

Despite the downgrade, Chua has raised his target price on the counter to $2.96 from $2.94 previously. His new target price is still based on an FY2022 P/B of 1.2x, which is the average of its peers.

Chua has also lifted his patmi estimates for the FY2022 by 6% as he factors in higher profits from Sembcorp’s conventional energy and renewable energy segments for the FY2022 ending Dec 31.

Sembcorp, on July 19, said that it was expecting its financial results for the 1HFY2022 to be “materially higher”, due to the conventional energy segment.

In his report dated July 21, Chua notes three positives in Sembcorp’s outlook.

First, the average Uniform Singapore Energy Price (USEP), which rose 239% y-o-y or 9.8% h-o-h in the 1HFY2022 driven by the conflict in Ukraine, will lift Sembcorp’s conventional energy segment in the 1HFY2022.

As it is, the global energy crunch since September 2021 had lifted Sembcorp’s conventional energy segment in the 2HFY2021. The conflict in Ukraine at the beginning of 2022 “further exacerbated” the risk of disruptions in oil and gas, he adds.

Average USEPs for the 1HFY2022 surged to $324/MWh, higher than the $295/MWh average in 2HFY2021.

“Spark spreads have increased to 6.3 ytd as average USEP prices have moved ahead of high sulphur fuel oil (HSFO) in the last nine months,” Chua writes.

Next, tariffs for power in India’s Tamil Nadu and Gujarat rose some 88% y-o-y in the 1HFY2022, driven by high global oil prices and higher temperatures in the country.

The International Energy Agency (IEA) has also recently revised upward India’s electricity demand to 7% from negative previously in light of the intense heatwave in the country, says Chua.

As such, the analyst has raised his FY2022 revenue estimates for Sembcorp’s conventional energy segment to $8.8 billion from $8.6 billion to account for better spark spreads for Sembcorp Cogen and India.

Third, Sembcorp, which is on track to building up its green energy portfolio, is seen as an important re-rating driver for Chua.

“Sembcorp’s gross renewables capacity in operation and under development globally now stands at 6.8GW in 1HFY2022 from 6.1GW as at end-2021. This is ahead of our FY2022 target of 7.3GW,” says the analyst.

“Accordingly, we revise our FY2022 gross renewables capacity to 7.6GW on account of the group’s aggressive build-up of its renewables portfolio,” he adds. “We believe the company is on track to achieve its plans of increasing its renewable capacity to 10GW by 2025.”

On the other hand, negatives to the counter include headwinds in China’s property market, which has “weakened sharply” in the past year.

The weakening of China’s property market was due to the government’s clampdown on excessive borrowings by developers and the Covid-19-induced economic slowdown.

“We believe this will hurt the group’s land sales in China, though the impact is not expected to be significant as China accounts for just 6% of the group’s total saleable land,” Chua writes. — Felicia Tan