Brokers' Digest: Netlink NBN Trust, Manulife US REIT, Yangzijiang Shipbuilding, Suntec REIT, AEM Holdings

OCBC Investment Research analyst Chu Peng has maintained her “buy” rating for Manulife US REIT (MUST) with a lower target price of 41 US cents (54.5 cents) from 47 US cents previously.

In her Jan 6 report, Chu notes that MUST recently reported an update on its asset valuations, which declined by 10.9% y-o-y to US$1.95 billion as at end-December 2022.

“The decline in valuation was attributable to a mix of weakening occupational performance in MUST’s submarkets due to softer demand and leasing activity, as well as higher discount rates and capitalisation rates for certain properties on the back of macroeconomic headwinds and idiosyncratic risks at the property level,” says the analyst.

Figueroa, MUST’s third largest asset by property valuation as at end-2021, saw the most significant impairment, with its property valuation declining by 33.1% to US$211 million. As a result, MUST’s net asset value is estimated to fall by US$237.4 million, or 13 US cents per unit. Despite the decline in valuation, Chu says that MUST does not expect the financial covenants in its existing loans to be breached.

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She notes that MUST’s interest coverage ratio (ICR) is projected to decrease to 3.1x, while gearing is expected to increase from 42.5% to 49% — a whisker shy of the Monetary Authority of Singapore’s (MAS) regulatory gearing limit of 50%. While MUST is exploring ways to lower its gearing level, it will prioritise divestments for now, says Chu, who adds that MUST would need to raise an estimated US$170 million to bring its gearing level down to 45%.

While MUST is trading at low valuations, she is turning more cautious on its outlook given potential risks from a mild recession in the US in 2023 and the continued slowdown of leasing demand and activities in the US office market.

The analyst is also wary of a potential equity fundraising should the divestment process be slower than expected or if MUST is not able to decrease its gearing level below 50% via proceeds from divestments. The equity fundraising exercise could lead to huge equity dilution to unitholders. She also highlights concerns over MUST’s inability to refinance its loan — MUST has US$105 million of debt due for expiry in 2023 — although she sees the risk likely to be low at this juncture, and further impairment of asset valuations should headwinds persist.

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Factoring in the expected impact of persistent headwinds, Chu has decreased her distribution per unit (DPU) estimates by 3% to 9% for FY2022 to FY2026 (The REIT has a December year-end). Meanwhile, she has raised her cost of equity (COE) assumption from 10.5% to 11.8% on a higher beta input. These new assumptions lead the analyst to a lower fair value estimate of 41 US cents from 47 US cents previously.

On the other hand, Chu says MUST’s share price could see some reprieve if it manages to carry out dispositions at reasonable valuations or if it can secure replacement tenants for its Figueroa property. — Bryan Wu

NetLink NBN Trust
Price target:
DBS Group Research ‘buy’ 98 cents

Attractive yield, resilient amid inflation

DBS Group Research analyst Sachin Mittal has upgraded NetLink NBN Trust to “buy” from “hold” previously.

His target price estimate has also been increased to 98 cents from 90 cents before. “We model a 250 basis point (bps) yield spread, assuming a risk-free rate of 3.0%, to arrive at a target distribution yield of 5.5% on a 12-month forward distribution per unit (DPU) of 5.40 cents,” Mittal writes in his Jan 10 report.

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To him, NetLink’s yield of 6.5% as at its last-traded target price of 83.5 cents on Jan 9 is attractive. The stock’s yield spread of 360 bps is also “attractive” compared to its last 12-month average of 290 bps.

In his report, the analyst notes that the Singapore government’s 10-year bond yield shrunk to 2.9%, down from 3.6% in November 2022, implying a yield spread of 360 bps. This is similar to NetLink’s average spread since its listing.

Mittal expects NetLink’s DPU to rise by 2% annually over the next year’s yields. Its yield spread is also expected to narrow towards 250 bps, reflecting the stock’s “resilient nature of distributions”.

Furthermore, the high inflationary environment should not eat into NetLink’s distributions. “Inflationary pressures on capital expenditures (capex) and operating expenditures (opex) are taken into consideration under the Regulated Asset Base (RAB) model,” explains Mittal.

“We expect NetLink’s higher regulatory weighted average cost of capital (WACC) over January 2023 [to] December 2027 due to a higher risk-free rate than 2.1% seen at the time of its IPO in 2017,” he adds.

Despite a rise in regulatory WACC, Mittal expects NetLink to raise distributions by only 2% to 3% in FY2024 (FY ends in March). This is based on a 10-bps change in WACC to have a +1% impact on NetLink’s ebitda. He is expecting to see a 300 bps to 500 bps hike in the regulatory WACC.

“In our view, NetLink may raise its distributions by only 2%–3% as it focuses on [the] long-term sustainability of its distributions,” Mittal stresses.

Despite the upgrade, the analyst warns that NetLink’s bear case valuation may dip to 77 cents. This is based on any sharp rise in the risk-free rate from the analyst’s base case of 3.0% to 3.5% and coupled with NetLink’s yield spread hovering around 350 bps (versus its base case of 250 bps). — Felicia Tan

Yangzijiang Shipbuilding
Price target:
UOB Kay Hian ‘buy’ $1.55

Attractive risk-reward

UOB Kay Hian analyst Adrian Loh has upgraded Yangzijiang Shipbuilding (YZJ) to “buy”, with an unchanged target price (TP) of $1.55.

In his report dated Jan 10, the analyst says that YZJ’s “stellar” share price performance since the demerger of its debt investments arm, Yangzijiang Financial, in April 2022 has led to recent profit-taking on the stock early in the year. Loh also sees YZJ potentially doubling its dividends in FY2022 ended December 2022 and winning US$400 million ($532 million) of new orders.

“Since YZJ demerged its debt investments arm in late-April 2022, its share price has risen by over 31% and easily outperformed the Straits Times Index’s (STI) –1.4% return over the same period. As a result, YZJ’s share price, like some of the other outperformers in 2022, suffered from profit-taking in the first few trading days of 2023,” he explains.

Loh says that the perceived loss of a large liquified natural gas (LNG) carrier order also added to the negative sentiment on the stock. “On Jan 2, industry sources indicated that one of China’s state-owned shipyards, China Merchants Industry Holdings, had won an order for four 180,000 cubic metres LNG carriers from Celsius Tankers. As the market had been holding out hope that this could be awarded to YZJ, its perceived ‘loss’ of this large US$1.88 billion led to the stock being sold down.”

“However, after speaking to management, it appears that YZJ walked away from this large order as the margins were thinner than normal,” Loh explains. He says that YZJ had said at its 3QFY2022 results briefing that the company would selectively accept new orders for large LNG carriers as it sees some supply chain risk for equipment and raw materials. Therefore, backing away from this large order should not come as a “major surprise”.

As a result of the recent share price weakness, Loh now believes that YZJ’s risk-reward looks attractive with a nearly 30% upside to his unchanged TP of $1.55, which uses a target price-to-earnings ratio (P/E) of 9.0x to his 2023 earnings per share (EPS) forecast. Loh also notes that at his fair value of $1.55, YZJ would trade at a 2023 price-to-book ratio (P/B) of 1.3x.

“Our target P/E multiple is 1 standard deviation (s.d.) above YZJ’s past five-year average of 6.7x which we view as fair given the company’s earnings growth in 2023, as well as the stability of its earnings due to its US$10.3 billion order book at present,” he says.

Loh has also upgraded his call on YZJ to “buy” as he sees YZJ possibly announcing higher-than-expected dividends when it releases its annual results at the end of February. Historically the company has paid a dividend of 4 cents to 5 cents per share, however, the analyst points out that YZJ had around 19 cents per share of cash as at end-June 2022 and limited needs to fund either a debt investment arm, or growth and maintenance capex. “Assuming [YZJ] pays out half of its cash hoard, this would equate to a yield of 9.5%.”

Apart from the near-term dividend upside, the analyst maintains that YZJ’s valuations appear attractive. “Due to the recent decline in YZJ’s share price, we highlight that the stock is now trading at an attractive 2023 P/E and enterprise value-to-ebitda ratio (EV/Ebitda) of 7.3x and 3.5x respectively,” he says. — Bryan Wu

Suntec REIT
Price target:
RHB Group Research ‘neutral’ $1.47

Downgrade follows slowdown in technology sector

RHB Group Research analyst Vijay Natarajan has downgraded Suntec REIT to “neutral” from “buy” with a lower target price of $1.47, down from $1.70 previously.

The downgrade comes as the analyst foresees Suntec REIT’s office portfolio being impacted by the slowdown in the technology sector. The slowdown is likely to see a moderation in rent growth with a slight uptick in vacancy, notes Natarajan.

“This, coupled with the sharp interest cost impact from a spike in rates, should weigh on its share price,” he adds.

The technology, media and telecommunications (TMT) sector is the biggest occupier of Suntec City Office Towers, making up around 38% of the building’s rents in FY2021 ended December 2021. The sector has also been the key source of new leasing demand over the years, the analyst points out.

Suntec City Office Towers itself is the largest asset in the REIT’s portfolio, contributing around 30% to its total income. It currently has a high occupancy rate of 99.6% and rent reversion of 3.3% as at 3QFY2023.

“For FY2023, [around] 27% of leases are due for renewal and we expect committed occupancy could fall to [around] 98% levels with flattish rent reversions,” says Natarajan.

“Other joint venture (JV) Singapore office assets in its portfolio (One Raffles Quay, Marina Bay Financial Centre) are predominantly focused on the financial and insurance sectors’ tenants and likely to be less impacted,” he adds. “Suntec City Mall’s performance should remain relatively steady while the convention segment is expected to rebound strongly in FY2023.”

In Natarajan’s view, divestments are also anticipated in the near-term and are likely to happen in FY2023 to lower debt. This is with Suntec REIT’s gearing on the high side at 43.1%, compared to its peers. The REIT’s high gearing has also been one of the key investor concerns, he notes.

“While the cap rate expansion is expected to have a negative impact on the value of its overseas assets (the UK in particular), we expect this to be partially offset by its Singapore assets, which have seen strong operational improvements. Thus we do not expect any significant reduction in portfolio value during its year-end valuation, with gearing to be maintained below the 45% level,” he writes.

“We also see the potential for it to divest assets in Australia or pare down its stake in Singapore to lower debt. Suntec REIT has one of the lowest hedged debt profiles (58%), with every 50 basis point (bps) rise in rates impacting distributable income by [around] 5%,” he adds. — Felicia Tan

AEM Holdings
Price target:
Maybank Securities ‘sell’ $3.08

Downgrade on impacted margins

Maybank Securities analyst Jarick Seet has downgraded AEM Holdings to “sell” from “hold” previously, with a target price of $3.08.

In his report dated Jan 8, the analyst sees that the company’s margins could be squeezed amid chipmakers cutting costs and lowering spending plans.

“Intel has already announced plans to cut costs by US$3 billion ($4.01 billion) this year and to delay some equipment purchases. We suspect that AEM’s margins may be hurt if key customers are not faring well,” Seet writes.

To this end, the analyst believes AEM’s results in the 1HFY2023 ending June 30 won’t be as great as its “robust” 1HFY2022 ended June 2022, which saw an “exceptional surge” in orders by AEM’s key customer. “[This] will likely not be replicated in the 1HFY2023,” says Seet.

“We expect 1HFY2023 to show a decline y-o-y but this should be partly mitigated by orders from new customers as shown in the surge in inventory to $117.6 million at end-September 2022 from end-December 2021,” he adds. “We also expect orders to be more evenly distributed throughout the four quarters in FY2023.”

On this, Seet has cut his FY2023 earnings estimate by 5%. The analyst has also lowered his target price to $3.08 from $3.43 previously. This comes as he lowers his pegged P/E to 8.5x from 9.0x FY2023 P/E.

Despite AEM’s share price correction, Seet still sees downside risks in the form of the weak outlook from its key customer. The looming recession in Europe and the US is also a downside risk.

“We are confident in AEM’s mid-long term prospects but short-term headwinds may present lower priced entry levels in the near-term for investors,” says Seet.

Among the semiconductor stocks, Seet has indicated his preference for UMS due to its strong order book and earnings growth despite the current weak macro outlook. — Felicia Tan