Singapore Airlines C6L
Price target:
Citi Research ‘buy’ $6.41
Upgrade on stronger yield outlook
Citi Research analyst Kaseedit Choonnawat has upgraded Singapore Airlines (SIA) to “buy” from “sell” after seeing a stronger-than-expected yield outlook.
In his report dated April 18, the analyst reveals that the brokerage conducted a ticket bookings exercise on SIA’s top 15 routes and found that the airline was charging 30% premiums on average for its non-stop flights compared to its one-stop flights. This is compared to the 20%–25% premiums charged pre-Covid. The exercise also found that SIA had limited some of its one-stop flight alternatives even though they are still in operation.
The combination of both the higher premiums and the limitation of one-stop flight alternatives means the industry’s supply resumption is less damaging to SIA’s pricing at least into the year-end of 2023.
In addition, the analyst expects the airline to enjoy an upside in its passenger yield going into summer and possibly lasting till the end of 2023. As such, he has upped his FY2024–FY2025 yield assumption to 15% and 9% respectively above its pre-Covid’s 6% and 3% respectively.
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In his report, Choonnawat is also seeing a potential sign of stabilisation in SIA’s cargo yields.
“We adjust FY2024–FY2025 cargo yield assumption to 36% and 9% above pre-Covid from 40% and 5% respectively earlier,” he writes.
SIA, which announced its operating results for March on April 17, noted that the group saw strong sequential passenger traffic and load factors across all its route regions.
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In March, the group’s passenger capacity was up by 10.9% m-o-m and stood at 79% of its pre-Covid-19 levels. The pre-Covid-19 period refers to January 2020, before the onset of the pandemic.
Amid all these factors, Choonnawat has raised his target price to $6.41 from $5.16 previously. The new target price is based on SIA’s FY2024 P/BV of 1.35x in relation to its 11.8% prospective core return on equity (ROE) from an FY2024 P/BV of 1.1x and 8.3% estimated core ROE.
He has also increased his earnings estimates for FY2023, FY2024 and FY2025 by 22%, 80% and 82% to factor in higher overall unit revenue of –1.4%, 7% and 4.3% and partly offset by the 11% and 2% higher effective jet fuel prices in FY2024 and FY2025 respectively.
On top of his double upgrade, Choonnawat has opened a 30-day positive catalyst watch as he expects SIA’s management to provide strong guidance at its FY2023 results briefing on May 17.
His upgraded earnings estimates are above the consensus at 4%, 15% and 87% for FY2023, FY2024 and FY2025 respectively. — Felicia Tan
Wilmar International F34
Price target:
UOB Kay Hian ‘buy’ $5.50
Better 1Q expected
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UOB Kay Hian analysts Leow Huey Chuen and Jacquelyn Yow Hui Li have kept their “buy” call on Wilmar International at an unchanged target price of $5.50 ahead of the group’s results for the 1QFY2023 ended March 31. Wilmar is slated to release its results on April 28.
In their report dated April 18, Leow and Yow expect the group’s core net profit to come in at around US$350 million ($467.6 million) to US$380 million, which makes up about 18% to 20% of their full-year forecast.
To them, the earnings will largely come from a turnaround in Yihai Kerry Arawana’s (YKA) sales volumes y-o-y. This is mainly driven by consumption spending to drive the sales volume for consumer packs and sales for medium and bulk segments due to festival demand. YKA is Wilmar’s Chinese subsidiary. The strong recovery from Wilmar’s China operations is also behind the analysts’ positive outlook for the group.
“We were impressed by the very young and knowledgeable team driving the operations, wider-than-expected product range, and fast take-up rate on the rental space. This is the smallest CK and was the first in operations with a capex of approximately US$50 million ($66.9 million),” say the analysts.
This central kitchen is also the official caterer for the Asian Games in Hangzhou, which will be held from Sept 28 to Oct 8. According to Wilmar’s recent AGM response, the central kitchen food parks generate revenue from multiple sources, such as their central kitchens, rental income from tenants, sale of their products to tenants and provision of services.
The analysts suggest that the turnaround in YKA’s contribution may offset the lower demand from Wilmar’s tropical oils segment. Despite the weak demand, Wilmar’s tropical oil performance in 1QFY2023 may still outperform its peers despite sharp margin compressions, they add. “Based on our channel checks, most downstream players complained about marginal profit or losses in 1QFY2023 for their downstream operations due to weak demand while crude palm oil (CPO) price remained relatively firm in 1QFY2023 due to a supply shortage.”
Although Wilmar’s refining margin may not have higher profit margins without market volatility, the analysts think the segment may still report a relatively healthy margin in 1QFY2023 with its integrated model, economies of scale and better timing when securing its feedstock.
Finally, the analysts expect some profit contribution from Wilmar’s sugar milling segment, with the harvesting season delayed to January. While sugar milling does not usually contribute to the first half of profits as milling season starts in the second quarter of the year, high rainfall in Queensland has delayed harvesting, which caused some of the milling profits to carry over to 1QFY2023. “This compensated for the weaker contributions from palm oil, while sugar merchandising continues to benefit from a larger white sugar premium.” — Nicole Lim
Sembcorp Industries U96
Price target:
PhillipCapital Research ‘buy’ $5.06
Renewable energy as growth engine
Renewable energy will be a growth engine for Sembcorp Industries, with stable earnings visibility coming from its Singapore power capacity, which is nearly fully contracted till 2024, says PhillipCapital Research analyst Peggy Mak.
Sembcorp should see an uplift in energy demand with China’s reopening, adds Mak in an April 15 note, as China accounts for 53% of its gross installed capacity.
In addition, India’s growing share of global manufacturing output is another tailwind, as manufacturers set up “China+” manufacturing bases to diversify risks, says Mak.
Finally. Sembcorp has added renewable energy assets, mainly through joint ventures that do not strain its balance sheet. Total gross installed and under development capacity has increased by 24% since end-2022 to reach 10.3 gigawatts (GW), surpassing its target of 10GW in installed renewable energy capacity by 2025.
Mak estimates an ROE of 8%–10% on these assets but ROE from future acquisitions could decline due to higher interest costs, intense competition for these assets and a softer macro environment that will affect tariffs.
Mak is maintaining a “buy” on Sembcorp, with a higher target price of $5.06 from $3.68 previously. Mak’s latest target price represents an upside of 20.2% against a last traded price of $4.30 on April 14.
Sembcorp’s Singapore power capacity is nearly fully contracted till 2024, with the latest 18-year power purchase agreement signed with a unit of Micron Technology for up to 450 megawatts (MW).
Singapore accounts for more than 70% of revenue and Sembcorp earns a spread on the sale of energy, writes Mak.
Though the Uniform Singapore Energy Price (USEP) has eased by 10.5% in January to March compared with FY2022 ended December 2022, margins should be maintained as it works on a cost-plus model, says Mak.
The Energy Market Authority (EMA) is calling for proposals in 2H2023 to add electricity generation capacity by 2028.
Peak electricity demand is projected to rise at a CAGR of 4%-6% to reach between 10.1GW and 11.7GW by 2028, up from 7.8GW currently. “We believe this lowers reserve margin from the current 34% to less than 15%,” says Mak.
To ride on the growth in energy demand, Sembcorp has commissioned the construction of its fourth hydrogen-ready 600 MW combined cycle power plant, which will be operational by 2026.
Meanwhile, Mak notes that Sembcorp’s sale of its Indian power plants for $2 billion at end-February 2023 will not dent its net profit. “Sembcorp extended a 15-year extendable loan to the buyer at an interest rate of about 9%. We estimate interest income of about $132 million, which would offset net earnings loss of $144 million from these assets.”
Sembcorp will, however, book a non-cash accounting loss of $81 million in FY2024 from the reversal of currency translation and capital reserves.
Meanwhile, Sembcorp’s land sales will be ramped up to 500 ha in 2025, underpinned by a strong order book of 312 ha and landbank of 2,743 ha, which are mainly in Vietnam. These would bring net gearing down to 0.96x at end-2024, according to Mak.
On Feb 21, the company reported earnings of $848 million for FY2022, up 204% over FY2021’s $279 million. Revenue was up 21% to $9.4 billion, with growth from both its conventional and renewable energy segments.
Sembcorp plans to pay a final dividend of four cents, and a special dividend of the same amount. This will bring the total payout for FY2022 to 12 cents.
Sembcorp has also been active in share buybacks. On March 1, it acquired 808,700 shares at $3.67 each on the open market. In subsequent buybacks, Sembcorp acquired its own shares at steadily higher prices, reaching $4.09 on March 21, when it acquired 784,500 shares.
On March 22, the company acquired 1.25 million shares at $4.13 each, bringing the total number of shares bought back under the current mandate to 15.36 million, equal to 0.861% of the total share base.
As of March 31, Sembcorp had bought back 0.86% of its issued shares (excluding treasury shares) as of the date of the buyback resolution, which was April 21, 2022.
In fact, Oversea-Chinese Banking Corporation (OCBC) and Sembcorp filed the highest buyback considerations on the Singapore Exchange in 1Q2023. During the quarter, Sembcorp bought back 6,415,500 shares at an average price of $3.99, including stamp duties and clearing charges paid or payable for the shares. — Jovi Ho
Dyna-Mac Holdings NO4
Price target:
Maybank Securities ‘buy’ 35 cents
Undervalued compared to global peers
Maybank Securities analyst Jarick Seet has initiated coverage on Dyna-Mac with a “buy” call and a target price of 35 cents, which is based on its FY2023 P/E of 9.5x ex-cash.
At its current share price, Seet believes the company is “significantly undervalued” as the company’s global peers are valued at 28.6x instead.
In Seet’s view, the engineering services firm is in an “enviable position” to capture the surge in floating production storage and offloading (FPSO) demand.
“There’s a shortage of FPSO capacity in the industry due to the lack of investment in the oil & gas (O&G) sector since 2016 and the attrition of competitors,” writes Seet, who notes that the long-term fundamentals of the O&G sector remain “sound”.
The high sustained prices in crude oil as well as the projected increases in offshore exploration and production spending have resulted in Dyna-Mac’s orderbook of $412.3 million as at Dec 31, 2022.
“We expect demand to remain strong in the next few years and Dyna-Mac could win larger orders (of over $300 million) with potentially higher margins,” the analyst adds.
In his report dated April 17, Seet is also positive about Dyna-Mac’s new management, in particular, its CEO Lim Ah Cheng, who joined the company in March 2020.
Under Lim’s watch, Dyna-Mac saw a turnaround in profitability, ending the FY2021 ended Dec 31, 2021, with earnings of $5.6 million. In FY2022, the company reported earnings of $13.2 million.
This was a reversal from the $24 million loss in FY2019 and the $58.4 million loss in FY2020 when the Covid-19 pandemic struck.
Seet is particularly impressed with Dyna-Mac’s improved cash position due to the restructuring of its payment terms with suppliers and customers.
“The company now requests 30%-50% upfront payment for contracts versus only 10%-20% before commencing steel works,” he writes.
M&As are also a possibility for Dyna-Mac thanks to its strong net cash position with no debt. As at end-December 2022, Dyna-Mac reported $185.4 million in cash and cash equivalents.
“Management says it’s keen to explore inorganic growth which we suspect to be in the O&G industry with recurring revenue,” says Seet.
“As Dyna-Mac is operating at close to full capacity, we think it may acquire more land to increase it yard capacity by 30% by the end of FY2023,” he adds.
Moving forward, the analyst is expecting Dyna-Mac’s shareholders to be rewarded with “much higher” dividends. Share buy backs are also a possibility with the company.
As he sees Dyna-Mac riding on the tailwinds of the O&G sector, Seet is forecasting CAGR for earnings of over 30% over the next two years. — Felicia Tan
Credit Bureau Asia TCU
Price target:
DBS Group Research ‘hold’ $1.02
Beneficiary of digital bank trend
DBS Group Research has initiated coverage of Credit Bureau Asia (CBA) with a ‘hold’ call and $1.02 target price.
CBA, described as a leading player in credit and risk information solutions market (CRIS) in Southeast Asia, is seen to be a beneficiary to Asean’s greater financial inclusion and the rise of digital banks, backed by a defensive business model.
CBA is the dominant provider of data to financial institutions in Singapore. It is also the only provider in Cambodia and Myanmar.
In addition, CBA provides a wide range of business information and risk management solutions to more than 6,000 customers, including banks, MNCs, SMEs and government agencies.
According to analysts Elizabelle Pang and Ling Lee Keng, Asean’s CRIS industry is forecasted to grow at 15% CAGR by 2024.
The growth will be driven by the growth of financing services, credit card penetration, and trade activities as well as the rise of digital banks.
“We believe growing CRIS demand from the region’s emerging markets and the addition of five digital banks to CBA’s scope of membership in 2022 can act as growth drivers,” write Pang and Ling in their April 18 note.
They expect CBA’s revenue and earnings to grow at a steady 8% and 10% CAGR respectively by FY2025. CBA’s financial year ends in December.
Besides a steady pace of revenue growth, the analysts believe that CBA runs a defensive business model. “We see resilient demand for CBA’s products across different economic cycles, amid the pandemic.”
CBA has a healthy balance sheet and no debt, which can help to ensure sustainable dividend payouts of at least 90% of net profit for investors, the analysts add.
The way Pang and Ling see it, potential catalysts can come from new license wins and strategic expansion plans into markets such as Vietnam and China.
Their $1.02 price target is based on two-stage dividend growth model that assumes sustainable dividend growth rate of 2.0%, which translates into their “hold” call due to limited upside and an implied FY2023 dividend yield of 3.5%. — The Edge Singapore
