Broker's Digest: SGX, ESR-LOGOS REIT, Tiong Woon Corp, Q&M Dental Group, Uni-Asia Group, SingPost

Analysts are split on the Singapore Exchange’s (SGX) latest set of results, as weakness in equities trading and an expanded multi-asset strategy have earned the bourse both upgrades and downgrades.

In FY2022 ended June, SGX’s equities revenue fell slightly to account for 64% of total revenue, down from 66% in FY2021. Conversely, SGX’s fixed income, currencies and commodities (FICC) revenues increased to 23% of total revenue in FY2022, up from 20% in FY2021.

In an Aug 19 note, PhillipCapital Research analyst Glenn Thum upgrades SGX to “buy” from “accumulate” with a higher target price of $11.71.

“FY2022 revenue of $1.1 billion was slightly below our estimates, at 94% of FY2022, while earnings of $452 million met our estimates, at 99% of our FY2022F,” writes Thum. “Variance came from lower-than-expected equity revenue due to lower treasury income.”

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Meanwhile, Citi Research analyst Tian Yafei maintains a “buy” on SGX with a raised target price of $11.24 from $11.

SGX acts as a proxy to the Singapore market, writes Tian in an Aug 19 note. “Upside could come from an improved economic outlook, while further news of slowdown may imply further downside.”

Tian thinks cross-border exchange mergers and acquisitions (M&A) in Asia are “unlikely”, but SGX is considering “bolt-on” acquisitions that are additive to and can enhance its core business and drive its strategic priorities.

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SGX has liquid assets exceeding $700 million, notes Tian, but perhaps around half of that is committed funds. “While SGX is debt-free, in October 2019, SGX launched a multicurrency debt programme which gives a capacity of up to $1.5 billion to fund potential acquisitions.”

Likewise, UOB Kay Hian Research analyst Llelleythan Tan is maintaining a “buy” on SGX but with a lower target price of $10.85 from $11.09

“With higher interest rates, we expect SGX’s margins to expand in FY2023 as treasury income starts to recover. However, rising cost pressures may start to weigh on margins,” writes Tan in an Aug 19 note.

Tan adds: “As SGX is currently trading below its historical mean, we reckon that there is some upside at current price levels. Robust contributions from FICC and equity derivatives are set to continue in FY2023 due to volatile macroeconomic conditions whilst higher treasury income from interest rate hikes is expected to start from 2HFY2023. With a moderate yield of 3%, we like SGX for its resilient business model that benefits from global economic uncertainty.”

On the other hand, CGS-CIMB Research analyst Andrea Choong is unimpressed by SGX’s results, downgrading the bourse to “hold” from “add” with an unchanged target price of $10.40.

SGX’s treasury income fell sharply to $28.6 million in FY2022 from $57.5 million in FY2021. Treasury income is the interest spread that SGX makes between global market interest rates, and cash deposited by investors to trade.

In an Aug 19 note, Choong notes that a recovery of treasury income will likely drive sequential earnings growth, but she thinks this is priced in. “Notably, treasury income had improved on a h-o-h basis on the back of higher interest rates, although this figure was still comparatively weak y-o-y.”

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Likewise, DBS Group Research and OCBC Investment Research are maintaining “hold” on SGX with target prices of $10.20 and $10.40 respectively.

DBS analysts Lim Rui Wen and Tabitha Foo have issued the lowest target price among the research houses mentioned here. “While SGX saw good contributions from all business segments in the last two years, including from equities and FICC, on the back of heightened market volatility, we maintain our hold call, as we believe there are no immediate catalysts for the stock, with the mixed performance of FY2022 equities and derivative volumes.”

Lim and Foo also point to increased competition. “SGX’s FTSE China A50 Index futures, which used to be the only offshore China A50 futures index, accounting for 42% of SGX’s total derivatives in terms of volume, now sees competition from HKEx’s MSCI China A50 Connect Index futures, which are gaining market share. Should HKEx’s MSCI continue to gain market share, there is a potential earnings risk for SGX as well.”

Finally, RHB Group Research analyst Shekhar Jaiswal is maintaining “neutral” on SGX with a lower target price of $10.30 from $10.70 previously. This includes an 8% environmental, social and governance (ESG) premium over RHB’s fair value of $9.50.

SGX is guiding for 7%–9% growth in total expenses for FY2023, of which 2% growth will come from the full-year impact of the MaxxTrader acquisition, says Jaiswal. “Much of the other increase in costs will come from higher expenses from the buildout of its OTC FX business and higher staff costs from salary increments. SGX expects expenses to grow at mid-single digit during the medium term.”

SGX’s valuation is reasonable, he adds. “Accounting for higher operating costs and a likely muted securities daily average value (SDAV) in FY2023, we lower FY2023–FY2024 earnings by 3%–4% each.”

SGX’s FY2023 P/E of 22.7x is now slightly above its historical average of 21.9x, writes Jaiswal. “With no visibility of a higher dividend payout, the stock offers a modest yield of 3.2% as compared to Singapore’s market yield of more than 4%.” — Jovi Ho

ESR-LOGOS REIT
Price target:
Maybank Securities “buy” 55 cents

Greater exposure to new-economy assets

Maybank Securities has re-initiated a “buy” call on ESR-LOGOS REIT (ELOG) with a target price of 55 cents, representing an upside of 42% from the REIT’s last traded price of 41 cents.

“ELOG has emerged from its merger with ARA Logos Logistics Trust (ALOG) as one of the top 10 Singapore REITs (S-REITs) by free float, with higher contributions from new-economy AUM,” writes analyst Li Jialin on Aug 24.

Following the completion of its merger in April, ELOG now has $5.5 billion in AUM compared to ESR-REIT’s $3.3 billion in AUM. The $2.2 billion worth of additional assets are in “good locations” in Singapore and Australia, which would help ELOG gain a “stronger foothold” in key Australian markets, Li points out.

Prior to the merger, ALOG was a pure play REIT that had logistics and warehouse assets. The merger with ALOG has boosted ELOG’s exposure to new-economy assets to 63% in effective gross rental from 47% in 2021, Li says.

“We expect robust contributions from the Australia portfolio due to the strong fundamentals, underpinned by historical low occupancy. We see room for revaluation gains on the back of cap rates compression,” she writes.

On this, the analyst says she is positive on ELOG’s “refreshed focus on new-economy assets, which could provide stronger rental growth”.

“Supply chain disruptions and relocation, post-Covid recovery and rising e-commerce consumption will continue to drive demand for space,” Li says.

“Aside from rental upside, the addition of mature assets further increased occupancy (to 94.1% in 1HFY2022 from 92% in 4QFY2022). We also expect more functional upgrades from asset enhancement initiative (AEI) projects to capitalise on the rental growth momentum,” she adds.

Post-merger, Li has forecast ELOG’s revenue to grow by 42% y-o-y to $344 million in FY2022 and $402 million in FY2023 on the back of the additional income from the logistics and warehouse assets.

She has also forecast the REIT’s distribution per unit (DPU) to come in at 2.99 cents in FY2022 and 3.01 cents for FY2023, implying an attractive distribution yield of 7.4% for both FY2022 and FY2023 respectively.

Li’s DPU estimates also translate to a P/BV of 1.36x.

“Our sensitivity suggests that an acquisition of $100 million in Japan will at least be 0.6% accretive to DPU (2% cash on delivery (COD), 50% debt and 4% net property income (NPI) yield), while an acquisition of $200 million in Singapore and Australia will at least be 0.2% accretive to DPU (4.5% COD, 60% debt and 4.5% NPI yield),” she writes.

Finally, Li likes ELOG’s robust balance sheet, as well as its growth prospects backed by its sponsor.

“Post-merger all-in cost of debt fell to 2.97% as of 1HFY2022, and management targets a solid credit rating in 2HFY2022 to further reduce the cost, given its larger AUM. A further 50 basis-point increase in cost of borrowings will negatively impact DPU by 0.7%,” Li says.

She adds: “We see $958.5 million debt headroom supporting acquisitions from its sponsor’s visible pipeline in Japan and Australia, which would provide tailwinds for further AUM growth.”— Felicia Tan

Tiong Woon Corp
Price target:
UOB Kay Hian “buy” 88 cents

Lift from construction sector upturn

UOB Kay Hian Group Research analyst John Cheong has initiated a “buy” call on Tiong Woon Corp with a target price of 88 cents.

Tiong Woon is the second-largest crane operator in Singapore with a strong regional presence, which makes it well-positioned to benefit from the construction and oil & gas upcycles.

“We expect earnings per share (EPS) to double in FY2022 and grow 37% y-o-y in FY2023, driven by higher utilisation rates and double-digit growth in crane rental rates,” writes Cheong.

The group has been listed on the Singapore Exchange (SGX) since 1999 and has over 40 years of a track record. Headquartered in Singapore, the company has a strong regional presence with establishments in 12 other countries. “We expect a strong construction upturn and resumption of more oil & gas capex to be the key growth drivers,” Cheong says.

For FY2022–FY2024, the analyst estimates Tiong Woon’s total revenue to come in at $133 million–$189 million, representing a CAGR of 18%, and earnings of $21 million–$34 million (12.3% CAGR). This comes on the back of double-digit increases in crane rental rates and higher utilisation of crane operations, driven by demand from more construction activities in the property, infrastructure and oil & gas sectors.

Tiong Woon will be able to capture better margins because of better operating leverage where rates can increase while costs remain controlled, says Cheong. “We expect gross margin to expand to 42%, 42% and 41% for FY2022, FY2023 and FY2024 respectively,” Cheong adds. “Combined with revenue growth of 18%, 20% and 15%, this gross margin expansion will drive earnings growth of 113%, 37% and 19% for FY2022, FY2023 and FY2024 respectively.”

Cheong points out that Tiong Woon owns more than 500 cranes, some of which can have a capacity of up to 1,600 tonnes each. This means the company is well poised to tap the strong resumption of activities in Singapore’s construction sector and rising capex in the oil & gas industry.

Besides new public housing, the list of big projects that will drive demand for cranes include the Cross Island Line, Changi Airport T5, Tuas Mega Port and the North-South Corridor.

Cheong thinks that current valuations of FY2023 P/E of 4.4x and P/B of 0.4x are attractive, given the group’s market-leading position and strong EPS growth in an industry upcycle. — Chloe Lim

Q&M Dental Group
Price target:
CGS-CIMB Research ‘hold’ 44 cents

Near-term challenges ahead

CGS-CIMB Research analysts Tay Wee Kuang and Kenneth Tan have downgraded Q&M Dental Group to “hold” from “add” due to the limited number of upside catalysts.

The analysts have also slashed the group’s target price to 44 cents from 73 cents.

“Following Q&M’s analyst briefing, we reduce our earnings forecasts for the FY2022/ FY2023/FY2024 by 30%–34% on earnings void from lower Covid-19 tests,” the analysts write.

“Our revised earnings estimates take into account the removal of Covid-19 contributions and slower dental core revenue growth,” they add.

Despite the lower target price, Tay and Tan believe the market has already priced in the group’s near-term challenges.

Q&M’s core net profit for the 1HFY2022 ended June stood at $9.8 million, below the analysts’ expectations at 33.7% of their FY2022 estimates.

“Apart from the slower-than-expected growth from its dental core business, we also understood from management that the lower operating leverage was a result of continued investments into its digital AI-guided clinical decision support system and a change in accounting treatment of employee bonuses and directors’ fees, which will now be accrued quarterly compared to only in the fourth quarter during FY2021,” they write.

“The relaxation of testing requirements in Singapore also saw Q%M’s diagnostics arm, Acumen, dip back into losses in 2QFY2022, compared to the high profitability observed in FY2021,” they add.

In their report, Tay and Tan also note the group’s lower average revenue per clinic, which is co-related to the general decline of dental visits in Singapore.

Furthermore, the tight labour conditions and wage inflation could hold back the group’s organic growth ambitions. However, the analysts believe their estimate of 20 new clinic openings per year remains “achievable” for FY2022 to FY2024.

As Q&M is looking to assess its capital allocation options in the short term, which could include paying down its debt in the higher interest rate environment and for undertaking growth opportunities, the analysts are reducing their dividend expectations for FY2022 to 1.0 cent per share from 1.8 cents previously.

The lower dividend expectations imply a payout ratio of 50%, which is in line with the group’s pre-Covid-19 levels. “We expect it to resume in 4QFY2022,” the analysts say.

“Although Q&M maintains a dividend policy of 30% payout ratio, we think Q&M’s healthy cash balance is supportive of its historical payout ratio,” they add. — Felicia Tan

Uni-Asia Group
Price target:
PhillipCapital Research ‘buy’ $1.26

Stellar earnings, positive outlook

PhillipCapital is reiterating its “buy” call on UniAsia Group with a target price of $1.26, following the group’s recent 1HFY2022 ended June earnings release.

Uni-Asia on Aug 12 announced its 1HFY2022 results, which saw its highest interim dividend of 6.5 cents declared for the period, some 225% higher compared to the previous year.

This came on the back of the group’s record set of results, which saw a 54% y-o-y increase in revenue to US$48.9 million ($66.9 million), as well as a 134% growth in profit after tax to US$16.5 million. Uni-Asia explained that the increase in revenue was driven by improved charter income, fee income and the sale of two properties under development.

The revenue and patmi for 1HFY2022 came in above expectations at 64% and 68% respectively of the Phillip Research Team’s FY2022 forecasts.

Charter revenue surged 70% y-o-y to US$34 million, thanks to a 78% jump in average daily charter hire rates to US$19,400.

Although vessel operating days were 5% lower y-o-y due to a container ship that was disposed of in 1QFY2021, margins expanded as vessel operating expenses rose only 14% y-o-y to US$10.6 million.

Higher costs came from crew salary, crew logistics and other expenses. The group was not highly affected by the increase in fuel cost, as fuel cost is borne by the shipping companies, and not Uni-Asia.

With free cash flow tripling to US$20.9million, the group still does not have any current plans to order vessels.

However, the Phillip Research Team is wary of the group’s lower pipeline of properties in Japan. In 1HFY2022, Uni-Asia sold two units of its residential projects located in Tokyo. The pipeline of ongoing projects is down to eight from 13 a year ago. “This implies fewer available projects to lease or for sale in the coming quarters,” writes the research team in an Aug 19 report.

On the outlook, the research team believes that charter rates will remain positive in the medium term. New orders for dry bulk vessels, which are at 30-year lows due to multiple factors, include shipyard capacity already filled by container vessel orders, port congestion, slow steaming and uncertainty over future emissions standards and fuel type for dry bulkers.

The Baltic Exchange Handysize Index started to roll over in June. The index in 3QFY2022 is likely to be weaker than a year ago, albeit still elevated than 2019/2020 levels. Weakness in charter rates is due to softness in commodity demand in China. Shipping lines are cautious and delaying their commitments of hiring vessels.

“We expect the dry bulk shipping cycle to be resilient in the coming two years as the new supply remains modest at multi-decade lows,” writes the research team. — Samantha Chiew

Singapore Post
Price target:
CGS-CIMB Research ‘reduce’ 55 cents

Near-term headwinds

CGS-CIMB analyst Ong Khang Chuen has downgraded his recommendation for Singapore Post (SingPost) to “reduce” from “add”, with a lower target price of 55 cents from 80 cents previously, following its underwhelming 1QFY2023 ended June results.

Ong believes SingPost’s net profit could remain dragged in the near term until its international post and parcel (IPP) segment shows stronger signs of recovery. His 55 cent target price is based on 15.8x FY2023 P/E, 1 standard deviation below SingPost’s five-year historical average, and lowered from 18.8x due to “near-term headwinds”.

SingPost’s ebit of $10.6 million in 1QFY2023, a 47% y-o-y decrease, came in below expectations at 9% of both Ong‘s and Bloomberg consensus FY2023 expectations, despite profit guidance in July 2022 already signalling a tough operating environment for Singpost’s post and parcel business — which entered into an operating loss position during the quarter.

IPP volumes fell 33% y-o-y in 1QFY2023, impacted by supply chain disruptions from China lockdowns and continued elevated air conveyance costs, according to the analyst.

“We believe that IPP volumes should recover in the upcoming quarters given incremental air capacity improvement through Changi Airport and moderation of air conveyance costs towards the end of 1QFY2023. However, the pace of recovery could be gradual in the near term given continued strict Covid-related controls in China and weaker cross-border volumes year to date due to changes in the EU’s value-added tax rules,” he writes.

Meanwhile, domestic post and parcel (DPP) is likely to remain challenged, given the deceleration in e-commerce growth with post-Covid normalisation and a tougher competitive landscape for last-mile e-commerce delivery with aggressive competitors and Shopee insourcing part of its logistics, says Ong.

Although strong growth in domestic e-commerce volumes successfully offset traditional letter mail declines in FY2022, he believes that it will be difficult to repeat this trend in FY2023, with DPP already down 26% y-o-y in the first quarter.

“Given the high fixed operating leverage nature of DPP, our FY2022 to FY2024 earnings per share is lowered by 16.4% to 24.5% on the back of weaker volume assumptions,” Ong says.

Positively, logistics strength helped lead SingPost’s revenue to rise 35% y-o-y in 1QFY2023, driven by both organic growth as well as consolidation of Freight Management Holdings. The company plans to further expand its reach in the Australian market and extract operational synergies across entities, with Ong forecasting the segment’s operating profit to rise 28.5% y-o-y to $57 million or 58% of the group in FY2023. — Bryan Wu