Brokers' Digest: SGX, Keppel REIT, CICT, Aztech Global, ThaiBev

RHB Group Research analyst Shekhar Jaiswal is remaining “neutral” on Singapore Exchange (SGX) as the exchange’s market turnover data for the 1QFY2023 ended Sept 30 fell below his estimates.

On Oct 11, SGX reported total securities market turnover of $25.76 billion for the month of September, down 4.72% y-o-y.

SGX’s securities daily average value (SDAV) also fell 4.72% y-o-y to $1.17 billion.

“The implied FY2023 [ending June 30, 2023] SDAV and derivatives daily average volume (DDAV), based on SGX’s 1QFY2023 reported data, were below our forecasts [by 16% and 5% respectively],” says Jaiswal.

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The analyst has lowered his target price on SGX to $9 from $10.30 previously.

He has also cut his earnings estimates for FY2023 to FY2025 by 8%–9% on lower SDAV estimates. “Our target price is based on a target P/E of 21x on FY2023 earnings per share or EPS (vs 22x FY2023 EPS previously), which is a tad below its historical average P/E. We believe this is reasonable, given the muted near-term earnings outlook,” he writes. “Our target price includes an environmental, social and governance (ESG) premium of 8% over its fair value of $8.60.”

For FY2023, Jaiswal has lowered his SDAV and DDAV estimates by 9% and 2% respectively.

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In his report dated Oct 20, Jaiswal notes that SGX’s valuations are starting to look compelling based on its share price of $8.47 as at the close of Oct 19. At that level, SGX’s FY2023 P/E of 21.2x is below the historical average of 22x, he adds. However, the analyst believes that muted securities market turnover in coming quarters could keep investors at bay for now. Moreover, the stock currently offers a below-market dividend of 4%, he adds.

To Jaiswal, higher-than-guided operating costs for FY2023 and a slower ramp-up in revenue contributions from acquisitions are potential downside risks to the counter. The upside risks comprise higher-than-estimated SDAV from the potential pipeline of exchange-traded funds, REITs, and special-purpose acquisition company listings, as well as continued global macroeconomic uncertainties leading to higher derivatives volumes, he says. — Felicia Tan

Keppel REIT
Price target:
RHB Group Research ‘buy’ $1.15
UOB Kay Hian ‘buy’ $1.24
Citi Research ‘buy’ $1.42
DBS Group Research ‘buy’ $1.15

Lower target prices following recent results

Analysts have maintained their “buy” calls on Keppel REIT with lower target prices following the trust’s 9MFY2022 results ended Sept 30 announcement.

RHB Group Research analyst Vijay Natarajan, who has a target price of $1.15 from $1.31 previously, says Keppel REITs updates show continued positive momentum in the Singapore office portfolio with healthy occupancy improvement and strong rent growth.

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“Outlook remains positive although slightly moderated lower, and should mitigate increasing interest costs’ impact. Service charges are also being raised across all Keppel REIT’s assets to counter higher utility charges,” says Natarajan.

UOB Kay Hian analyst Jonathan Koh, who has a target price of $1.24 from $1.33 previously, concurs, highlighting that Keppel REIT achieved positive rental reversions of 9.2% for 3QFY2022. Occupancy across One Raffles Quay, Ocean Financial Centre and Keppel Bay Tower have improved q-o-q, while average signing rents stood at $11.47 psf for 9MFY2022. Tenant retention was also healthy at 82%.

Although the average signing rent for Singapore office leases has inched up in 9MFY2022, Citi Research analyst Brandon Lee estimates 3QFY2022 signing rent edged lower by 0.7% to $11.74 psf per month.

This could be due to tenant or asset-specific reasons, or Keppel REIT’s slight cautiousness ahead of a slower leasing market in 4QFY2022 and impending macroeconomic slowdown, he adds. Lee’s target price for the REIT is $1.42.

Meanwhile, Keppel REIT has surprised its shareholders with the declaration of $100 million from accumulated capital gains to be distributed over the next five years, leading up to its 20th anniversary in 2026. DBS Group Research analysts Rachel Tan and Derek Tan describe this as a bold and rare move, especially in such a challenging environment.

“The 20-year anniversary reward is considered separately and is over and above any normal capital distribution that Keppel REIT typically reviews on a regular basis. Currently, Keppel REIT has more than $400 million in capital gains in the books,” they add.

DBS’s target price has been lowered to $1.15 from $1.40 previously to factor in higher risk-free rates, floating rates and refinancing rates. Despite higher financing costs, the analysts revised their FY2022–FY2023 DPU estimates upwards by 0.5% to 1.8% to factor in the 20-year anniversary reward.

“Despite the challenging environment and an uncertain macroeconomic outlook, we believe the management of Keppel REIT is making all the right moves to ensure the resilience of the portfolio, riding on the current Singapore office upcycle as it prepares to weather a ‘rainy’ day.

“With the heightened capital distribution, Keppel REIT is offering a 7% FY2023 yield and trading at 0.7x P/B, slightly below –1 standard deviation of its historical range and close to trough levels in the past five years — very attractive valuation levels, in our view,” they add.

RHB’s Natarajan has also lifted his FY2022–FY2024 DPU by 3%–4%, factoring in capital top-ups and higher financing charges.

Similarly, UOB Kay Hian’s Koh raised his FY2023 DPU forecast by 2.3%, noting the positive impact of capital distribution of $20 million per year partially mitigated by higher cost of debts. “We expect the average cost of debts to hit 3.3% in 2HFY2023.”— Khairani Afifi Noordin

CapitaLand Integrated Commercial Trust
Price target:
RHB Group Research ‘buy’ $2.00
Citi Research ‘buy’ $2.35

Upbeat on 3Q business update

Analysts from RHB Group Research and Citi Research are positive on CapitaLand Integrated Commercial Trust’s (CICT) prospects after the REIT released on Oct 21 its update for the 3QFY2022 ended Sept 30.

RHB analyst Vijay Natarajan has upgraded his recommendation to “buy” as he sees value emerging amid the current market selloff.

CICT’s unit price fell some 16% in the last month, the analyst points out. “While volatility should persist in the near term, we see [CICT’s] current [unit] price level as a good entry point for the long term,” he writes.

In his report dated Oct 25, Natarajan notes several positives from CICT’s 3Q business update. In the 3QFY2022, CICT reported a 13.7% y-o-y increase in its gross revenue of $374.1 million. At the same time, its net property income (NPI) rose 12.7% y-o-y to $273.3 million.

The y-o-y increase in NPI was due to the new acquisitions made by the REIT manager, as well as higher revenue on gross turnover.

However, Natarajan notes that the growth was offset by an increase in utility expenses, which saw CICT’s NPI margin reduce by one percentage point y-o-y to 73% in the 3QFY2022. Most of CICT’s utility hedges expired in the 2QFY2022, he adds.

“CICT will be gradually rolling out higher service charges [which is expected to boost its revenue by around 1%–2%] to offset rising costs and mitigate inflationary pressures,” Natarajan writes. “Four key assets (CapitaSpring, Six Battery Road, Capital Tower and Asia Square Tower 2) will also see a significant cash flow increase starting FY2023 as [around] 15% of the committed occupancy at these assets is expected to start fully contributing.”

The REIT’s operating metrics also improved across the board, with portfolio occupancy rising 1.3 percentage points q-o-q to 95.1%. The higher occupancy was driven largely by CICT’s Singapore portfolio which rose 3.1 percentage points q-o-q to 96%. CICT’s retail and integrated portfolio also registered slight improvements during 3QFY2022.

Natarajan also notes that asset recycling is likely with limited inorganic growth potential.

As at Sept 30, CICT’s gearing is at 41.2%, which is on the higher end of the regulatory limit of 50%. However, its portfolio asset is expected to “hold firm”, which should not impact its gearing adversely, the analyst says.

“Overall cost of debt rose 10 basis points (bps) q-o-q to 2.5%, and [around] 80% of its debt is currently hedged, with every 100 bps increase in rates impacting [CICT’s] distribution per unit (DPU) by –3%,” he writes. “About 12% and 17% of its debt is due for expiry in FY2023–FY2024, which is likely to be rolled over with a 100–150 bps increase in finance costs.”

On the back of higher finance costs and moderated rent growth assumptions, Natarajan has lowered his DPU estimates for FY2023 to FY2024 by 3%–4%.

Despite the recommendation upgrade, Natarajan has lowered his target price to $2 from $2.30, due to a higher cost of equity (COE) assumption of 50 bps at 7.4% amid a sharp increase in rates assumptions.

To this end, the analyst remains “cautiously optimistic” on his outlook for FY2023, with additional cash flow expected from its committed leases.

Regarding environmental, social and governance (ESG) ratings, CICT has one of the highest scores among the Singapore REITs (S-REITs) at 3.3 out of 4.0.

“This is three notches above the country median, and thus we apply a 6% ESG premium,” Natarajan writes.

Citi analyst Brandon Lee has kept “buy” on CICT with an unchanged target price of $2.35. To him, the REIT’s “well-executed acquisitions” in the 1HFY2022 and partial pick-up in retail gross turnover rental have underpinned its performance in the 3QFY2022.

During the quarter, CICT registered improving retail performance all-around for the 3QFY2022, which may help to mitigate an impending slowdown in the office sector as the economy slows, says Lee.

Even as units in CICT have outperformed the S-REITs sector overall, Lee believes that the counter is undervalued at its existing P/B of 0.82x versus its 1.17x mean.

In his report dated Oct 21, Lee sees a slightly positive impact on CICT’s unit price in view of improvements in both its retail and office metrics. — Felicia Tan

Aztech Global
Price target:
CGS-CIMB Research ‘add’ 96 cents

Lowered target price on margin pressure

CGS-CIMB Research analysts William Tng and Izabella Tan have lowered their target price on Aztech Global to 96 cents from $1.22 previously as Aztech’s margins could remain under pressure due to supply chain, logistics and manpower issues.

As such, they have also cut their gross profit margin (GPM) estimates for FY2022 to FY2024 by 0.5 to 1.0 percentage points. Aztech’s FY ends on Dec 31.

The lowered GPM estimates have led to a decrease of 3.8%–5.7% in the analysts’ earnings per share (EPS) estimates. Their EPS estimate for the FY2023, in particular, is lowered by 7.5% to 12.4 cents.

On the back of the lowered FY2023 EPS estimate, Tng and Tan’s new target price now values Aztech at 7.70x (0.5 standard deviations or s.d. below its two-year average forward P/E multiple) as the global economic outlook turns more uncertain.

The new valuation has led to the lowered target price, the analysts explain.

“Previously, we valued Aztech at 9.1x FY2023 P/E (two-year average forward P/E) as the economic outlook then was more robust. Aztech is currently trading at 5.92x [of] our FY2023 EPS. This is below its two-year (FY2021–2022) –1 s.d. forward P/E of 6.70x,” they write.

Despite the lower GPMs, the analysts’ forecasts for the FY2022–FY2024 remain unchanged as they think Aztech’s order book remains “fairly resilient”.

Ahead of Aztech’s results for the 3QFY2022 ended Sept 30, the analysts estimate that the company’s net profit could come in at $21.05 million, which is up by 16.9% y-o-y and 27.3% q-o-q. Aztech will release its results at market close on Nov 3.

“[Aztech’s] 3QFY2022 revenue was likely $217.44 million (+54.1% y-o-y/–8.1% q-o-q). To recap, Aztech reported 2QFY2022 revenue/ net profit of $236.6 million/ $29.0 million as the company executed well to meet order backlog in that quarter,” the analysts write. “In our view, Aztech may not have experienced net order cancellations but 3QFY2022 performance could hinge on cost management.”

They have however kept their “add” call in their latest report dated Oct 20, as they see Aztech’s net cash balance sheet as sufficient enough to help the company weather the downturn. Additionally, Aztech’s projected dividend yields of 7.96%–9.95% over FY2022–FY2024 will provide some relief. The company’s EPS could still grow by 10.2% and 14.6% by FY2023 and FY2024 respectively as well. — Felicia Tan

Thai Beverage
Price target:
CGS-CIMB Research ‘add’ 88 cents

Boost from Sabeco

CGS-CIMB Research is keeping its “add” recommendation on Thai Beverage (ThaiBev) with a target price of 88 cents as analyst Ong Khang Chuen notes a solid set of 3QFY2022 (ended September) from its 53.6%-owned Vietnam subsidiary Sabeco.

Sabeco saw 3QFY2022 revenue grow to VND8.6 trillion ($490 million), representing a 4% q-o-q decline but a 102% y-o-y growth, from a low base, as Vietnam was under strict social distancing measures with Ho Chi Minh city in total lockdown from late July to October 2021.

While gross profit margin (GPM) contracted 3.1 percentage points to 31.2% due to higher input costs during the quarter, it still remains higher compared to 3QFY2021’s 26.7%.

“The sequential GPM contraction did not come as a surprise, as Sabeco typically has six to 12-month forward contracts for its raw material procurement, hence the higher barley prices in early-2022 are now being reflected,” says Ong, while noting that Sabeco raised average selling prices (ASPs) in December 2021 and April this year to pass on cost pressures; it does not rule out further price hikes.

Overall, 3QFY2022 Patmi came in at VND1.3 trillion, representing a 20% q-o-a decline but a 202% y-o-y increase, thanks to stronger operating leverage.

For the 9MFY2022 period, revenue was 44% higher y-o-y at VNY25.0 trillion, broadly in line with expectations at 74%/72% of Refinitiv consensus/company guidance for FY2022. Meanwhile, 9MFY2022 patmi growth of 77% y-o-y to VND4.2 trillion appears to track ahead of expectations at 84%/91% of Refinitiv consensus/company guidance for FY2022.

“We think Sabeco’s 3QFY2022 results could be a slight positive read-through to ThaiBev’s upcoming FY2022 (ended September) results — Sabeco typically makes up about 10–15% of ThaiBev’s net profit,” says Ong.

To that end, Ong expects ThaiBev to see earnings growth in FY2022, as it rides on easing Covid-19 restrictions in Thailand and Vietnam, while valuations remain attractive with forward P/E at about 1 standard deviation below historical mean. “ThaiBev also offers defensiveness in view of potential economic slowdown in 2023, given its strong positioning in the mass segment (potential beneficiary of downtrading), in our view,” says Ong.

“With Thailand’s further economic reopening and improving consumer sentiment in July-September quarter, we forecast ThaiBev’s 4QFY2022 revenue/Ebitda to grow 34%/56% y-o-y, respectively,” he adds. — Samantha Chiew