Brokers' Digest: SingPost, Netlink NBN Trust, Frencken, Centurion, Singtel

Analysts are mixed on Singapore Post (SingPost) after the company released its 1QFY2024 ended June 30 business update when it reported a 15.0% lower y-o-y overall group revenue of $404.1 million but an 11.8% y-o-y improvement on operating profit at $11.9 million.

UOB Kay Hian Research’s Llelleythan Tan and CGS-CIMB Research’s Ong Khang Chuen have maintained their “hold” calls on SingPost with lower target prices of 44 cents and 52 cents respectively, down from 46 cents and 55 cents previously. Meanwhile, Ada Lim of OCBC Investment Research is keeping “buy” on SingPost with a target price that has inched up from 53 cents to 54 cents.

In his report dated Aug 21, UOB Kay Hian’s Tan says that the company’s overall group revenue and operating profits formed 20.0% and 10.4% of his full-year forecasts, respectively but notes that 1QFY2024 revenue was still largely in line with expectations given that the first quarter of SingPost’s financial year has historically been its seasonally weakest quarter.

He explains that the y-o-y drop in revenue was largely due to a moderation in revenue from Famous Holdings, which contributed some $50 million of the decrease, along with weaker overseas contributions from unfavourable forex impacts.

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However, Tan says that 1QFY2024 operating profit still came in below expectations, dragged down by the domestic post and parcel (DPP) segment and a stronger Singdollar. On a constant currency basis, he estimates that 1QFY2024 operating profit would have grown by around 40% y-o-y to around $17 million, forming 15% of his full-year estimate, which is closer and in line with his expectations.

According to SingPost, excluding the DPP segment, most of the group’s businesses were profitable in 1QFY2024. The company reported that revenue and volumes for its traditional letter and mail as well as e-commerce businesses continued to decline during the period, with total volumes down 5.3% y-o-y. “Despite additional volumes from new customer acquisitions, higher operating costs continue to plague the segment, with 1QFY2024 registering an operating loss,” says Tan.

He estimates that the operating loss for the DPP segment for 1QFY2024 stands at around $15 million, and notes that SingPost is still in discussions with government regulators to increase postage rates, which may help narrow its operating losses.

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CGS-CIMB’s Ong says SingPost is awaiting a “stopgap measure” for its DPP segment. Aside from regulatory change, he notes that the company is continuing to work on growing its customer base and wallet share among e-commerce platforms to drive volume recovery and cost-saving initiatives to limit losses.

“We believe its 1QFY2024 results are a clear reflection that given the high operating overheads of the DPP business, stopgap measures such as postage rate increases are needed urgently while discussions with regulators continue on a longer-term solution to tackle the structural challenges of the postal business,” says Ong.

Meanwhile, SingPost’s logistics segment has also been held down by falling rates. Assuming a 7% operating margin, the analyst sees a $50 million loss in quarterly revenue, which would have led to a $3 million to $4 million fall in operating profit to around $3 million for Famous Holdings.

SingPost’s overseas logistics operators have seen some organic growth despite the Australian dollar weakening against the Singdollar. Revenue from its Australian business was flat y-o-y with operating profit growing close to 30%, dragged down by industry-wide weakness. On a constant currency basis, 1QFY2024 revenue and operating profit were organically higher, driven by higher customer acquisitions and overall volume growth.

To account for the weaker overseas contributions from the logistics segment due to foreign currency translations, Tan has adjusted his FY2024, FY2025 and FY2026 patmi forecasts lower to $46.5 million, $73.3 million and $94.5 million respectively.

His decreased target price of 44 cents is pegged to the same price-to-earnings ratio (P/E) of 21.3x. However, based on a sum-of-the-parts (SOTP) valuation, Tan says he values SingPost at 77 cents, with its logistics and property segments worth around $1.8 billion. Assuming a $1 billion valuation for the mailing segment, he would value the company at 67 cents. “We think that the market is severely undervaluing both the logistics and mailing segments given that SingPost’s current market cap is only around $1.1 billion,” he says.

Similarly, OCBC’s Lim says that although SingPost’s DPP business is a drag on the broader group, the fundamentals of the rest of its business remain healthy with logistics likely to remain a key driver of growth. The company is also staying optimistic about cross-border e-commerce growth opportunities.

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Lim is awaiting further catalysts including SingPost’s ongoing work with the Infocomm Media Development Authority (IMDA) to ensure the long-term sustainability of its DPP business by balancing its obligations to provide quality postal services with the need to remain “commercially viable”. According to group management, the outcomes of the discussions and a broader strategic review of SingPost’s overall business should be completed within FY2024.

“We await on the sidelines for further clarity on the structural solutions proposed to tackle the structural decline in SingPost’s DPP business and expect SingPost’s share price to remain range-bound in the meantime,” says Lim. — Bryan Wu

NetLink NBN Trust
Price targets:
UOB Kay Hian ‘buy’ $1.05
DBS Group Research ‘buy’ 98 cents
Maybank Securities ‘buy’ 97 cents
CGS-CIMB Research ‘add’ 95 cents

Stable performance, rising DPU

Analysts have praised Netlink NBN Trust’s “stable performance” in 1QFY2024 ended June, with net profit up 2.1% y-o-y to $28.2 million, driven by higher revenue contributions.

Among four research houses cited here, UOB Kay Hian Research analysts Chong Lee Len and Llelleythan Tan have the highest target price on Netlink, which they call a “high-yielding and safe haven stock” with a 6.2% dividend yield. In an Aug 21 note, Chong and Tan have maintained a “buy” with an unchanged forecast of $1.05.

Netlink builds, owns and operates the passive fibre network infrastructure of Singapore’s Next Generation Nationwide Broadband Network (NextGen NBN). Management sees growth opportunities arising from the digital economy, 5G rollout, connectivity into data centres and Singapore’s Smart Nation initiatives.

“Importantly, Netlink has sufficient debt headroom, at 23.6% net gearing, to drive its acquisition ambition without compromising on cash flow and dividends,” note the UOBKH analysts.

Results for the upcoming Infocomm Media Development Authority (IMDA) regulatory review were not announced in the latest 1QFY2024 business update but Netlink expects the review of its interconnection offer (ICO) prices, terms and conditions to be concluded latest by end-2023 or 3QFY2024. In addition, adjustments to rates should be implemented within the lag of a few months once the final decision is announced, says management.

UOBKH expects 2QFY2024 to be a more likely timeline. “Management noted that discussions were still ongoing and that the delay was not disadvantageous to the group.”

Netlink has been investing in its network assets to cater to the growing end-user demand for residential, non-residential, non-building address points (NBAP) and segment connections. These investments would in turn increase its regulatory asset base.

UOBKH expects the next return on the regulatory asset base to be slightly higher because of the unprecedented elevated interest rates environment and expected higher cost base from inflationary pressures.

Netlink, which is 24.8% owned by Singapore Telecommunications (Singtel), pays distributions semi-annually. For FY2023, Netlink paid distributions per unit (DPU) of 5.24 cents, marking another increase since its IPO in 2017. In FY2018, FY2019, FY2020, FY2021 and FY2022; DPU was 3.24 cents, 4.88 cents, 5.05 cents, 5.08 cents and 5.13 cents respectively. DBS Group Research thinks this could rise further in FY2024, staying “buy” with an unchanged target price of 98 cents.

Netlink is trading at a 12-month forward distribution yield of 6.0%, implying a yield spread of around 300 basis points (bps), says DBS in an Aug 18 note. “The Singapore Government’s 10-year bond yield is at 3.2%, implying a yield spread of around 300 bps but similar to the last 12-month average. We think that Netlink may raise distributions by only 2%-3% in FY2024, despite a rise in regulatory weighted average cost of capital (WACC).”

DBS estimates that every 10 bps change in regulatory WACC will have a +1% impact on its ebitda. “We expect a 30-50 bps hike in regulatory WACC, but, in our view, Netlink may focus on the long-term sustainability of its distributions. We expect Netlink’s DPU to rise by 2% annually over the next few years, and the yield-spread to narrow towards 250 bps, reflecting Netlink’s resilient nature of distributions.”

Similarly, Maybank Securities forecasts that the Singapore 10-year bond yield will drop to 2.75% by end-2023. Its analyst Kelvin Tan thinks this might increase the yield spread further, leading to a rally in Netlink’s share price. “We expect DPU to rise steadily by 2%-3% in FY2024 and yield spread to taper to 250 bps as Netlink focuses on the long-term sustainability of its distribution.”

Maybank’s Tan keeps his “buy” call in an Aug 18 note with an unchanged target price of 97 cents.

Finally, CGS-CIMB Research analyst Ong Khang Chuen continues to like Netlink as a defensive play “amid the macro uncertainties, given its strong DPU visibility and stability”. Ong reiterates his “add” call on Netlink with an unchanged target price of 95 cents. — Jovi Ho

Frencken Group
Price targets:
CGS-CIMB Research ‘add’ $1.10
Maybank Securities ‘buy’ 95 cents
DBS Group Research ‘hold’ 78 cents

Better outlook ahead

Analysts are looking forward to a better second half for Frencken Group, as the company guided that the worst of the semiconductor downcycle is over, even as it reported a 53.8% y-o-y drop in its 1HFY2023 ended June earnings to $12.1 million.

In his Aug 18 report, William Tng of CGS-CIMB Research notes that the numbers were better than his expectations and that more importantly, Frencken’s 2QFY2023 was already showing signs of improvement, with earnings up 27.7% q-o-q and revenue up 3.5% in the same period.

“Although inflationary cost pressures persist, we think Frencken should continue to be diligent in cost management and, hence, our lower operating expense assumptions lead to 2.8-12.7% increases in our FY2023 to FY2025 net profit forecasts,” says Tng, who has upgraded his call from “hold” to “add” along with a higher target price of $1.10 from 87 cents previously.

Maybank Securities’ Jarick Seet expects Frencken to benefit as increased orders from its key customer should ramp up utilisation and allow it to enjoy the operating leverage it had in FY2022.

“While Frencken is still focusing on its investments in programmes for existing and new customers, we believe it will be well-positioned to capitalise on semi-con demand recovery, especially in FY2024E,” says Seet, who has indicated a “buy” call and 95 cents target price on the stock in his Aug 14 note.

As at June 30, the company’s net asset value per share was 90 cents - not far from its current share price.

Seet believes that Frencken is well-positioned to take advantage of a rebound in demand and that it is seen to “gradually improve in subsequent quarters”.

DBS Group Research, meanwhile, prefers to stay guarded on this stock, as it maintains its “hold” call and 78 cents price target.

DBS notes that Frencken’s margins remain weak, no thanks to inflationary pressures, higher depreciation costs and hefty capex. — The Edge Singapore

Centurion Corporation
Price targets:
RHB Bank Singapore ‘buy’ 62 cents
Lim & Tan Securities ‘buy’ 58 cents

On route to recovery

Analysts are keeping positive about Centurion Corporation following the company’s 1HFY2023 ended June 30 revenue expansion to $98 million. Alfie Yeo of RHB Bank Singapore and Chan En Jie of Lim & Tan Securities have maintained their “buy” calls on Centurion with higher target prices of 62 cents and 58 cents respectively, up from 51 cents and 55 cents previously.

In his report dated Aug 22, RHB’s Yeo says that Centurion’s 1HFY2023 results show the company is continuing on its recovery path, boosted by higher occupancies, bed rates and operational leverage.

“We expect higher rates to kick in ahead, as rental rate revisions, which began in 4Q2022, are being priced into new leases and will see their full impact on rental revenue over the next six to 18 months,” he says.

Yeo expects bed capacity to grow at a 3% CAGR from FY2022 to FY2025, led by asset enhancement initiatives (AEIs), new sites and an increase in bed capacity across Singapore and Malaysia.

Centurion’s Singapore portfolio has already seen an 888-bed increase at Westlite Jalan Tukang and Westlite Tuas Avenue 2’s quick-build dormitories (QBDs) and will also see 1,650 new purpose-built worker accommodation (PBWA) beds at Ubi Avenue 3 from 2025.

Across the causeway, its portfolio in Malaysia has added 290 beds at Westlite Tampoi with Westlite Senai adding another 770 beds from 3Q2023. Meanwhile, Westlite Senai II will also increase by 2,720 beds in 2024 after its AEI.

As such, the analyst says he is “more bullish” about Centurion’s margin, occupancies and rates. He has raised his occupancy and bed rental rates to account for increased revenues of

8%–11% following the company’s outperformance in 1HFY2023 earnings. “We have also factored in higher gross and operating margins to reflect better operational leverages,” adds Yeo.

He notes that the interim dividend of 1 cent for the period — compared to the 0.5 cent dividend declared in 1HFY2022 — represented a payout ratio of over 20%, also coming in above expectations.

Accounting for higher interest expense estimates, he has increased his FY2023–2025 earnings estimates by 11%–13%. As such, his target price has been lifted to 62 cents after rolling over Centurion’s earnings base to FY2024.

For Chan of Lim and Tan, Centurion’s 1HFY2023 results were in line with expectations as overall revenue and core profit formed 50% and 54% of his FY2023 forecast respectively.

Still, the continued shortage of bed supply across both the PBWA and purpose-built student accommodation (PBSA) segments is expected to provide positive rental reversions for the company. Centurion’s pipeline of new dormitory beds across Singapore and Malaysia remains healthy and will contribute to FY2023 revenue.

Chan expects the Singapore PBWA segment to be the company’s main growth driver. The segment contributed to 87% of total PBWA revenue in 1HFY2023, which saw a 9.5% increase in revenue and 21% increase in operating profits. The analyst estimates that monthly rates have increased from $280 pre-Covid to over $400 currently, an increase of over 40%.

Chan adds that given the tight supply across the country, management notes the possibility of lease extensions across its QBDs which will come to term around 2024–2025.

Meanwhile, the return of international students is expected to drive demand for student accommodation. Centurion’s PBSA portfolio in the UK and Australia remain poised to see further demand upside with occupancy rates currently at 90% and 86%, respectively, according to him.

“Pre-bookings for the academic year 2023/2024 are healthy and the bed supply shortage should provide additional rental uplifts. In view of shifts in consumer demand towards personal privacy, Centurion has commenced reconfiguration works on its student accommodation units,” notes Chan.

Along with strong demand from Malaysia’s PBWA and PBSA in the UK and Australia, he has revised his FY2023 and FY2024 revenue upwards by 1.8% and 3.1% and core earnings projections by 5.5% and 4.5% respectively. Chan’s higher target price of 58 is pegged to a 7.5x core FY2023 price-to-earnings ratio (P/E).

“We note that the government will announce a transition plan soon for existing dorms which are currently not required to follow these standards. This could reduce bed capacity and potentially affect Centurion’s revenue during the renovation period, although we note this is expected to be done in phases to reduce disruption to bed supply across Singapore,” explains Chan. — Bryan Wu

Singapore Telecommunications
Price targets:
DBS Group Research ‘buy’ $3.18
CGS-CIMB Research ‘add’ $2.80
UOB Kay Hian ‘buy’ $3.15
Maybank Securities ‘buy’ $3.10
RHB Bank Singapore ‘buy’ $3.40

Brighter prospects following better 1Q

Analysts from CGS-CIMB Research, DBS Group Research, UOB Kay Hian (UOBKH), Maybank Securities and RHB Bank Singapore are overall positive on Singapore Telecommunications’ (Singtel) 1QFY2024 ended June results, which came within their expectations.

All of the research houses have kept their “add” and “buy” calls. DBS, UOBKH, Maybank and RHB have kept their unchanged target prices of $3.18, $3.15, $3.10 and $3.40 respectively, while CGS-CIMB has lowered their target price to $2.80 from $3.00 previously.

The DBS analysts note that Singtel’s 1QFY2024 underlying net profit of $571 million came in line at 23.9% of their FY2024 earnings estimates although Singtel’s core operating profit from its Singapore and Australia businesses stood at 3% to 4% below their estimates. The telco’s core operating profit also fell by 8.5% y-o-y to $300 million due to Optus Australia’s weak performance.

Overall, the team at DBS likes Singtel for its 6.2% yield and over 10% FY2023–2025 earnings CAGR. This is supported by a rise in its average revenue per user (ARPU) in many markets outside Singapore plus cost-cutting in Singapore & Australia, says the team.

Meanwhile, Singtel’s underlying earnings for the quarter also came in line with UOBKH analysts Chong Lee Len and Llelleythan Tan’s expectations at 23%–24% of their FY2024 forecasts.

“Due to a weakened Australian dollar and softer consumer sentiment, Optus was the clear underperformer with revenue (–8.1% y-o-y) and ebitda –14.1% y-o-y) dropping,” they note.

To the analysts, Singtel “remains an attractive play” against elevated market volatility, underpinned by improving business fundamentals.

In their view, key re-rating catalysts by the analysts include the successful monetisation of 5G services, monetisation of data centres or NCS, as well as market repair in Singapore and the resumption of regional roaming revenue.

Meanwhile, Maybank analyst Kelvin Tan notes that Singtel’s 1QFY2024 results missed his full-year estimates due to its net exceptional loss. Excluding this, Singtel’s patmi would have been in line with consensus estimates, he notes.

To Tan, the weakness in Singtel’s Australian business has impacted its core business although he adds that the “successful integration of the core consumer and enterprise businesses in both Singapore and Australia would optimise synergies, help deliver cost benefits and drive growth”.

On Singtel’s $6 billion of capital recycling including proceeds from the divestment of Singtel’s Comcentre, Tan sees more scope for cash to fund the telco’s investments for growth while keeping its leverage “in check” through asset sales with minority stakes in regional telecoms worth around $27 billion.

“[Singtel] views its regional telecom stakes as strategic long-term assets as they benefit from leading market positions in developing markets. It could divest a portion of its shares without diminishing its influence, such as last year’s 3.3% Bharti stake sale,” he writes.

On the other hand, RHB Bank Singapore deems Singtel’s results as within expectations. Singtel’s 1QFY2024 core earnings made up 22% of the team’s forecast. “We deem this as being in line with expectations of a further normalisation in roaming traffic, continuing mobile price repair in Australia and NCS’s contributions gaining momentum in subsequent quarters,” says the team.

“The twin growth engines (NCS and Digital InfraCo) are performing well, with ebit up 17% y-o-y,” it adds.

The team is positive on Singtel’s low double-digit return on investment in capital (ROIC) target, which it hopes would be achieved soon with the “good operational traction from return on equity (ROE) accretive asset recycling initiatives (more than $6 billion since FY2021) and the reinvigorated core businesses (Singapore consumers, Optus, and enterprises).”

“There is scope for more value unlocking of infrastructure assets, with digital infrastructure now a strategic pillar. We retain our forecasts for now,” says the team.

Notably, the team’s listed target price includes a 6% ESG premium led by exemplary group-wide sustainability programmes.

Finally, CGS-CIMB analysts Kelvin Tan and Lim Siew Khee also remain positive on Singtel although the telco’s 1QFY2024 net profit missed their expectations. Meanwhile, Singtel’s core net profit for the three-month period stood largely in line due to associates’ growth and a reduction in net interest.

In their report, the analysts note that Singtel’s healthy subscriber growth for its Singapore business and strong NCS bookings could “indicate some success in Singtel’s expansion initiatives”.

At the same time, the analysts believe that Optus’ core business is “seeing improvements”.

“We believe Optus could see further ARPU uplift ahead, on the back of industry price hikes conducted,” they write. “In addition, management intends to accelerate cost rationalisation efforts and reap synergies from the integration of Optus consumer and enterprise (conducted in July 2022), which could point to margin improvement opportunities ahead, in our view.”

That said, the analysts have lowered their earnings per share (EPS) estimates for FY2024 to FY2026 by 9% to 13% on the back of lowered contributions from Singtel’s associates, lowered net finance expenses and increased Singapore dollar (SGD) assumptions versus Singtel’s other core currencies. — Douglas Toh