Sembcorp Industries
Price target:
CGS-CIMB “add” $2.51
Renewable projects ‘gathers wind’
CGS-CIMB Research’s Lim Siew Khee has kept her “add” call and target price of $2.51 on Sembcorp Industries (SCI). Lim’s target price of $2.51 is based on 15 times CY2022 P/E of Sembcorp Industries’ Asian peers’ average.
Lim’s move follows reports from industry sources that Green Wind Infra Energy, a subsidiary of Sembcorp Industries, bagged 180MW out of the 1,200MW that was up for tender by the Solar Energy Corporation of India (SECI).
Priced at INR2.69/unit (4.9 cents/unit) the tariffs imposed in the current tranche are comparable to previous ones, which Lim estimates will give SCI earnings of around $2–$3 million from this contract.
In line with this, the company’s renewable power generation assets would now come up to around 3.5GW. SCI is looking to quadruple the gross installed capacity of its renewable energy from 2.6GW to 10GW by 2025.
At present, some 58% of the company’s conventional energy plants are powered by gas, while the remaining are driven by coal.
Most of its power plants are on long-term contracts other than merchant markets driven mainly by spot prices.
Some of these contracts are with Singapore Sembcorp Cogen (1,219MW), Sembcorp Energy India Project 2 (1,070MW) and Flexible Generation Assets in the UK (684MW).
Lim notes that merchant markets have somewhat reflected higher input costs. costs. For instance, the energy price of Uniform Singapore Energy was up by around 68% year to date, she explains.
“We believe there is also scope for fuel source optimisation given Sembcorp Industries’ position as a gas importer for both PNG and Liquefied Natural Gas (LNG),” adds Lim.
For now, she notes that a shortage in the supply of coal as well as toughening emissions standards in China have imposed widespread curbs on power usage.
However, given that Sembcorp Industries “took a S$212 impairment for its 49%-owned Chongqing Songzao Sembcorp in August,” Lim believes that the impact from the recent power crunch would be minimal.
The company operates another 658MW gas-fired cogeneration plant in China through Shanghai Cao Jing. The plant sells electricity to the Shanghai Municipal Electric Power Company under an annually-renewable power purchase contract with a cost pass-through mechanism.
The plant’s steam is also sold to industrial customers through long-term supply contracts.
Lim points out that “the stock’s valuation is undemanding at 11 times CY22F P/E” which is 15 times below that of its peers. — Amala Balakrishner
F&B operators
Price target:
Kimly: CGS-CIMB “add” 46 cents
Koufu: CGS-CIMB “add” 80 cents
F&B players in heartlands winner in latest tightened measures
Mass-market food and beverage operators, especially those located in the heartlands, could benefit from more employees working from home, and students in home-based learning, says CGS-CIMB.
Lead analyst Kenneth Tan has “add” calls on coffees hop operator Kimly and food court operator Koufu with target price of 46 cents and 80 cents respectively.
Kimly is the analyst’s top pick and he believes that the stock could benefit slightly, as it has the highest heartlands exposure via its diverse network of coffee shops (about 78% of outlets are in the heartlands).
Meanwhile, Tan thinks that the tightened measures could be slightly negative for Koufu, due to food courts only allowing two-pax per group and lower footfall for outlets located in malls, tourist hotspots, and schools.
“While Koufu has a decent presence in the heartlands via its food courts and coffee shops, tighter distancing measures would impact its outlets located at tourist hotspots, schools, and malls,” says Tan.
On the other hand, Tan believes that Jumbo should be most impacted given its focus on the mass premium market and having the bulk of its outlets located in non-heartland areas.
Overall, the Singapore F&B service index peaked in March this year as footfall recovered amid Phase 3 measures where up to eight patrons per group were allowed to dine-in. Since then, the index has fallen steadily in line with tightening distancing measures in Singapore.
As of latest figures in July 21, restaurants are still suffering (–22% y-o-y) while cafes, food courts and other eating places were relatively resilient with 7% y-o-y growth, albeit still lower compared to pre-Covid levels.
“We also note that the demand for online food delivery has been structurally growing, which bodes well for companies with established online presence,” adds Tan.
The outlook for the F&B sector, according to Tan, is still uncertain. “2021 has been a tough year for the F&B industry in Singapore … Despite Singapore’s transition to living with the virus, it appears that tightening of distancing measures may still be required in future to control rising infection rates,” he says. — Samantha Chiew
StarHub
Price target:
PhillipCapital “neutral” $1.24
StarHub removes potential disrupter — at a price
PhillipCapital is keeping its “neutral” call on StarHub with a target price of $1.24, following StarHub’s acquisition of a 50.1% stake in MyRepublic’s Singapore broadband business.
StarHub’s total investment will be up to $162.8 million. An initial consideration of $70.8 million will be paid by StarHub for 50.1% of the shares in the new entity, MyRepublic Broadband, while a deferred consideration of up to $92 million will be paid if future financial performance metrics are met. In addition to equity, StarHub has agreed to refinance $74.2 million of debt for MyRepublic for a period of three years.
MyRepublic will retain the remaining 49.9% stake and its senior management team, led by co-founder and CEO Malcolm Rodrigues.
Upon successful acquisition, StarHub’s market share in Singapore’s broadband market will increase by 6% to 40%, trailing slightly behind market leader Singtel at 43%. According to analyst Paul Chew: “The transaction will further consolidate the market into effectively two major operators with at least 80% share. Another benefit is the possible avoidance of a better funded shareholder of MyRepublic that could disrupt prices the market.”
Chew is also positive on this deal as the cost synergies will come from sharing of network infrastructure cost and capital expenditure. StarHub can drive more products such as cloud computing and OTT into MyRepublic’s higher ARPU consumer customer base. MyRepublic also has SME customers where StarHub’s enterprise solution may become an attractive value add.
Overall, the analyst sees this deal as a financially accretive acquisition, as he believes that the acquisition will raise StarHub historical FY2020 EPS by 3.8% to almost 9 cents. Ebitda will also improve by around 3.3%.
However, the deal does not seem entirely cheap. “The historical EV/Ebitda and PE ratio of the acquisition are 8.0 times and 13.8 times respectively. It is above our target valuations of StarHub but considered fair once the potential synergies materialise,” says Chew.
Furthermore, there are some risks to this transaction, as it includes a $74.2 million loan to MyRepublic backed by an undisclosed security package and is interest-bearing. — Samantha Chiew
Facebook
Price target:
PhillipCapital “buy” US$424
Initiating with a like
PhillipCapital has initiated coverage on Facebook with a “buy” call and target price of US$424 ($573.77), with expectations that the company’s earnings will grow heading into FY2022.
Analyst Jonathan Woo writes in a Sept 27 note that the social media company’s patmi is expected to grow at a CAGR of 19% till FY2022, supported by growth in Family Monthly Active People (MAP) and Family Average Revenue per Person (ARPP).
Facebook’s Family MAP was up 14% y-o-y in FY2020 ended Dec 31, 2020, from 2.9 billion to 3.3 billion people. Correspondingly, Family ARPP was also up by 17% y-o-y, due to increases in digital ad spending.
Woo estimates that worldwide digital ad spends as a percentage of total media ad spend is projected to increase from 58% in FY2020 to 68% by FY2024, ad spend is also projected to almost double from US$378 billion to US$646 billion in the same period.
Woo notes, “the strong growth in MAP and ARPP reflects FB’s ability to attract, retain and commercialise users on its platforms. We expect ARPP to increase 22% y-o-y in FY2021, on the back of tailwinds from a recovering advertising market.”
But, he thinks that MAP growth rate will dip slightly in the later years to around 8–10% y-o-y. This is in view of strong competition from other social media platforms, as well as Facebook’s already large share of active Internet users around the world.
Separately, he also highlights that Facebook is also expanding outside advertising into commerce and AR/VR verticals.
Woo sees that Facebook plans to capitalise on commerce to develop Shops into an all-in-one touchpoint for users to browse and transact without third-party diversions, similar to other e-commerce platforms.
More than 200 million small businesses around the world are currently estimated to be tapping Facebook’s reach and tools to promote their businesses — with this number growing each day.
As such, he thinks this is a “huge opportunity” to develop a new revenue stream to complement its main advertising business.
Revenue from payments & others was up 146% y-o-y in 1QFY2021 and he expects continued growth on the back of increased commerce activity and usage of WhatsApp Pay.
He also points out that Facebook is also doubling down on AR/VR products and services, touting its future potential as being more immersive products than current web browsers.
This worldwide AR/VR market is projected to expand 10 times over the next four years — from US$30 billion to US$300 billion, providing the company with another large market opportunity to capture.
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Facebook’s financials also seem strong. In FY2020, the company recorded net margins of 34%. This is slightly below its five-year average of 35%. Its largest cost item is R&D at 21% of revenue and free cash flow (FCF) has been growing at a CAGR of 14% over the past three years despite the huge capital expenditure programmes. — Lim Hui Jie
