Singapore Telecommunications
Price target:
DBS Group Research ‘buy’ $3.39
Holding company discount to narrow
DBS Group Research analyst Sachin Mittal keeps his “buy” call on Singapore Telecommunications (Singtel) with a higher target price of $3.39 from $3.18.
“Our fair value for the company’s core business is 89 cents (previously 84 cents) per share due to higher Singapore operating profit coupled with a higher valuation of the data centre business. We value regional associates at $2.50 per share (from $2.34) using a 15% HoldCo discount, with most of the increase coming from the higher market value of Bharti Airtel,” says Mittal in his Oct 4 report.
Singtel’s shares, which closed at $2.43 on Oct 3, are trading at a record holding company (HoldCo) discount of 47% versus its last five-year average of 31%.
The HoldCo discount has expanded from less than 15% in FY2018 to 47% currently due to a 59% decline in its core operating profit (excluding associates) over the last five years,” the analyst notes.
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However, he now expects the HoldCo discount to narrow to 15% to 20% due to a steady rise in Singtel’s core operating profit.
“Key drivers are tariff-hikes in Australia and cost-savings from merging consumer and enterprise businesses. A divestment target of $6 billion (over 36 cents per share) over the next two to three years would support special dividends, save interest costs, and help reduce HoldCo discount,” says Mittal.
The analyst remains positive about Singtel, seeing the business benefits from its geographical diversification. The telco is the top integrated player in Singapore and owns Optus, the second-top mobile player in Australia. Furthermore, Singtel has significant stakes in its telecom associates in India, Indonesia, the Philippines and Thailand. These stakes have contributed over 68% of the group’s operating profit in FY2023 ended March 31.
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In Mittal’s view, a potential catalyst is the consolidation of the mobile sector in Singapore and special dividends from the group.
“We project an annual dividend per share of 14.9 cents over the next three years, supported by 3 cents to 4 cents of special dividends, leading to a total yield of 6.2%,” he writes.
In addition to his higher target price, the analyst has raised his FY2024 and FY2025 earnings estimates by 3% and 4% to reflect the sale of Trustwave.
On Oct 2, Singtel announced that it had agreed to sell Trustwave to MC2 Titanium for US$205 million ($280 million).
Meanwhile, a key risk to Mittal’s upbeat view is a further decline in the country’s Australian dollar or irrational competition.
“There can be an adverse impact from Optus due to any irrational competition coupled with a further decline in the AUD. Our base case assumes a gradual recovery in Optus’ operating profit, which could be at risk,” he adds. — Felicia Tan
Apac Realty
Price target:
CGS-CIMB Research ‘add’ 57 cents
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Higher cost projections
CGS-CIMB Research analyst Lock Mun Yee has reiterated “add” on Apac Realty with a lower target price of 57 cents from 70 cents previously as the company continues to invest for the future and grow its overseas footprint.
In her Oct 9 report, Lock cuts her FY2023, FY2024 and FY2025 earnings per share estimates by 39.2%, 41% and 39.4%, respectively, to factor in higher-than-projected marketing and personnel costs such as recruitment, on top of other additional expenses from its expansion into Vietnam and Indonesia.
She notes that investments to improve technological capabilities would likely keep IT costs higher in the near term. This will likely lower CGS-CIMB’s forecasted ebit margin estimates to 2.9%–3.1% versus 4.6%–5.1%.
Furthermore, Lock believes APAC Realty CLN ’s overseas division would likely continue to show a small loss for the rest of FY2023, dragged by the slower Vietnam property market ytd.
“We believe Apac Realty could deliver a stronger h-o-h patmi in 2HFY2023. New home sales rebounded in 2QFY2023, with 4,009 units sold from April to August versus 1,318 in 1QFY2023. Given the one to two-quarter lag in billings, we estimate the brokerage commissions from the higher transaction volumes should start to filter in from 2HFY2023,” says Lock.
CGS-CIMB expects new home sales to remain relatively flat compared to last year at 7,000 to 8,000, which should continue to benefit Apac Realty.
Lock highlights that Apac Realty has continued to increase its Singapore agent count, which should enable it to broaden its market share. “Based on our checks on the Council for Estate Agencies website, an estimated 9,033 agents are registered with ERA as at Oct 9, versus 8,839 agents as at end-June.”
On Sept 28, Apac Realty announced a new foray into Australia through an ERA Master Franchise Agreement with Queensland 888. The latter will operate as ERA Queensland with an initial team of 17 agents across three offices in Brisbane, focusing on off-plan projects, high-end prestige properties, general residential, property management and the sale of leasing commercial properties.
CGS-CIMB believes this move will enable Apac Realty to create brand awareness in Australia, with contributions likely to remain minimal in the immediate term, largely from franchisee fees.
Following the 15% share price decline since mid-August, Lock believes much of the lower y-o-y patmi performance is already reflected in Apac Realty’s current share price. She adds that the stock will likely be supported by its projected FY2023 dividend yield of 5.9%. — Khairani Afifi Noordin
Singapore Airlines
Price target:
KGI Securities ‘buy’ $6.90
Capturing the year-end peak travel season
KGI Securities has maintained its ‘buy’ call on Singapore Airlines C6L , along with a $6.90 price target, on expectations that the airline will be able to ride on the momentum of a seasonal rebound with the year-end holidays coming.
Singapore received some 1.13 million visitors in September, which remains “far below” the pre-pandemic levels of 1.69 million in January 2020, for one. KGI believes that there is still more room for visitor arrival recovery. It also notes that November to February is the peak travelling season within a year.
China’s recent Golden Week is a portend of the pent-up travel demand from one of Singapore’s major visitor source markets. “Singapore is expected to see more visitors from China as well as around the world, as Singapore is a sweet spot of overseas travelling for families,” says KGI.
The brokerage has also observed more airlines, including SIA, starting to sell promotional fares to capture this year-end demand. “With prices starting as low as $168, this is bound to attract consumers to travel during the upcoming travel season,” says KGI. — The Edge Singapore
Frencken Group
Price target:
UOB Kay Hian ‘buy’ $1.23
Improving outlook
UOB Kay Hian analyst John Cheong is maintaining his “buy’’ call on Frencken Group E28 at a raised target price of $1.23 from $1 previously, following an improvement in semiconductor fab equipment spending and the recent increase in revenue guidance by its key customers.
Cheong pegs his target price to 12.6x FY2024 P/E, based on 1 standard deviation (s.d.) above the mean P/E.
“The +1 s.d. in our P/E multiple peg is to capture Frencken’s earnings cycle, which is approaching a trough, and improvement in earnings quality where the medical, as well as analytical and life sciences segments, could see more contributions.”
He adds: “Also, we note that Frencken has a diverse stream of revenue sources, which could help the company remain resilient amid a volatile macro environment.”
Frencken’s biggest semiconductor segment contributed to 40% of FY2022 earnings and is expected to perform better h-o-h from 2HFY2023 onwards, based on the group’s guidance. Furthermore, two of Frencken’s largest semiconductor customers have raised their revenue guidance in their latest results.
The first is ASML which has raised its FY2023 y-o-y revenue guidance from 25% to 30% in its 2QFY2023 results and expects a 3QFY2023 of EUR 6.8 billion ($9.8 billion), or a y-o-y growth of 17%.
Meanwhile, Frencken’s second-largest semiconductor customer, Applied Materials (AMAT), reported earnings that beat analysts’ estimates in August. AMAT has also guided for earnings in 3QFY2023 that were 10% above what analysts were earlier projecting due to stronger demand from AI-related chips and rising orders from customers in China.
The outlook of the semiconductor industry remains bright. In his Oct 10 report, Cheong expects next year’s spending recovery to come about following the end of the inventory correction this year and strengthening demand for semiconductors in the high-performance computing (HPC) and memory segments.
“The trend suggests that the semiconductor industry is turning the corner and on a path back to growth,” writes the analyst.
Frencken’s stable outlook for 2HFY2023 is also encouraging, as earnings have already bottomed in 1HFY2023, and there is potential for more new business for the group, more so in Asia than Europe.
The group is guiding for higher revenue in 2HFY2023 versus 1HFY2023 for the semiconductor and its analytical and life sciences segments. It expects lower revenue between this period for the industrial automation segment and, last but not least, comparable revenue for the medical and automobile segments.
Cheong has raised his FY2024 and FY2025 earnings forecasts by 17% and 8% after increasing his revenue estimates by 5% to account for the improved revenue outlook by Frencken’s key customers. “We also raised our gross margin assumptions by 0.5% and 0.1%, respectively, to account for better operating leverage from higher revenue.”
Given its long-standing ties with customers and healthy balance sheet, he remains upbeat about the company’s long-term growth prospects. “This will ensure that it is well-positioned to capitalise on a recovery in the global economy and technology sector,” Cheong says. — Douglas Toh
Raffles Medical Group
Price target:
Maybank Securities ‘buy’ $1.65
Good morning Vietnam
Maybank Securities’ Eric Ong has kept his “buy” call and $1.65 target price on Raffles Medical Group BSL , following its latest move to acquire an undisclosed majority stake in a hospital in Vietnam.
The 120-bed American International Hospital in Ho Chi Minh City has been valued at US$45.6 million ($62.4 million). Upon completion of the deal, Raffles Medical will be managing this hospital too.
Raffles Medical says AIH has seen steady growth in both outpatient and inpatient volumes since its inception. “That said, we do not expect any near-term contribution from this proposed acquisition, which may take at least six to nine months to complete, subject to the fulfilment of certain conditions and relevant approvals,” says Ong.
The deal will enable Raffles Medical to ride on the growing demand for private healthcare services in Vietnam and augment its clinic operations there.
“Leveraging on its strong balance sheet, we believe this is an integral part of Raffles Medical’s long-term strategy to expand its income stream while diversifying the group’s hospital operations beyond Singapore and China,” says Ong.
Separately, Raffles Medical has extended its contract to provide medical services at Connect@Changi until February 2025.
According to Ong, the contract at Connect@Changi was won at $151,392 per month, which was 54% lower than the next closest bidder. He believes Raffles Medical can put in such a lower bid because it has already sunk in one-off set-up costs.
“We expect margins to normalise given the higher opex of running the facility,” says Ong, whose $1.65 target price is based on a discounted cash flow valuation model. — The Edge Singapore
Sheng Siong Group
Price target:
OCBC Investment Research ‘buy’ $1.92
Defensive stock
OCBC Investment Research (OIR) has kept its “buy” call on Sheng Siong Group OV8 with a lower price target of $1.92 from $1.94. The lower estimate was due to the team’s adjustments on sales growth, gross margin and administrative expenses due to estimates of higher staff and utilities costs.
Still, the group remains a defensive play amid rising inflation and slower economic growth.
The demand for groceries will continue to normalise this year from Covid-19 as consumers focus on value-for-money buys due to inflationary pressures and a higher cost of living. Moreover, grocery sales could be supported by inflation offset measures such as the GST Voucher scheme as well as the Assurance package.
Sheng Siong has reported stable margins so far, expanding from 27.4% in FY2020 to 29.7% in 1HFY2023 ended June, which underscores its pricing strategy and cost management.
The team expects the group’s gross margin to remain stable with room for further improvement. This is as Sheng Siong continues its margin enhancement initiatives by improving its sales mix, increasing its selection and types of house brand products and bulk purchases, the team adds.
“We expect store growth to pick up next year, supported by the ramp-up in supply of HDB estates,” the team continues.
Sheng Siong is slated to open a new store in Kunming, China, by the end of 2Q2024, bringing its total store count to six in the country. As at 1HFY2023, the group’s operations in China remained profitable, supported by its older stores.
“Sheng Siong sees strong growth prospects in its Chinese operations though the margin profile is lower compared to its Singapore stores given its current size and scale in China,” says the team. “Year to date, Sheng Siong only opened one new store in 1QFY2023 at 91 Jalan Satu. We now expect Sheng Siong to open only two new stores in Singapore this year and three new stores in 2024.” — Felicia Tan
Keppel REIT
Price target:
UOB Kay Hian ‘buy’ $1.06
Stable Singapore, improving Sydney
UOB Kay Hian’s Jonathan Koh has kept his “buy” call on Keppel REIT, with a lower target price of $1.06 from $1.08 previously, with signs of recovery for its Sydney portfolio even as the Singapore assets remain stable.
“KREIT is well-positioned as it has backfilled vacant office spaces ahead of competition from new supply from IOI Central Boulevard Towers,” states Koh in his Oct 9 note.
“Its properties in Sydney, 8 Chifley Square, Pinnacle Office Park and Blue & William benefit from companies tightening on hybrid work arrangements,” he adds.
Koh believes that Keppel REIT’s unit price has been weighed down by the impending distribution in specie by Keppel Corp to its shareholders as part of a special dividend payout.
Entitled Keppel Corp shareholders stand to receive one Keppel REIT unit for each five shares they hold. The distribution, to have a total of 352.4 million units, is equivalent to 9.4% of its total base.
Upon completion of the distribution, Keppel Corp’s stake in Keppel REIT will drop from 46.5% to 37.1%.
Koh notes that Keppel REIT is now trading near its all-time-low price-to-NAV ratio of just 0.62x or 38% discount to its NAV of $1.34 per unit.
Back in March 2020, when the market was reacting to the start of the pandemic, Keppel REIT’s P/NAV reached 0.61x.
“The potential downside from Keppel Corp shareholders selling the KREIT units they received in specie could be limited due to KREIT’s current depressed valuation,” suggests Koh.
“Fundamentally, Keppel Corp’s distribution in specie of Keppel REIT units has no impact on its DPU,” he adds.
On its part, Keppel REIT has set aside $100 million from accumulated capital gains to be distributed to unit holders over five years to mark its 20th anniversary in 2026.
The distributions will be made every six months from 2HFY2022 to 1HFY2027 at a pace of $10 million each time. — The Edge Singapore
Mapletree Industrial Trust
Price target:
UOB Kay Hian ‘buy’ $2.76
New data centre acquisition
Mapletree Industrial Trust has been kept at “buy” by UOB Kay Hian’s Jonathan Koh, along with a revised target price of $2.76, slightly higher than the $2.74 indicated earlier.
The call by Koh, made on Oct 9, follows the completion of the acquisition by MINT of a 98.5% stake in a newly-built data centre at Osaka for JPY52 billion or $507.9 million, described as a “strategic diversification to Japan’s data centre market.”
The multi-storey data centre is near Osaka’s downtown and will account for 5.5% of its portfolio valuation after the acquisition.
The data centre, which provides a net property income yield of 4%, is estimated to be accretive to pro forma FY2023 distribution per unit by 2.1%.
It is fully fitted and is leased to an operator with a weighted average lease to expiry (WALE) of 20 years, increasing MINT’s overall WALE from 3.9 years to 4.5 years. The property has a net leasable area of 136,900 sq ft and sits on a plot of land with a 70-year lease commencing from Oct 1, 2020.
Koh notes that data centres in Japan provide positive yield spread with cap rates of 3%–4% and there might be more of such assets to come as MINT has the right of first refusal from Mapletree Investments to acquire the remaining 50% stake in their second data centre, JV Mapletree Rosewood Data Centre Trust (MRODCT), which owns 13 data centres in the US.
According to Koh, MINT is exploring the feasibility of recycling assets in Singapore to finance its acquisition of data centres in Japan.
Assets that might be divested include three business park properties at International Business Park, The Strategy and The Synergy, as well as The Signature at Changi Business Park. These three assets carry a total valuation of $543 million as of March. Three light industrial buildings valued at $53 million in aggregate as of March are considered too.
Koh points out that MINT is trying to optimise the cost of borrowings with yen-denominated debt, amid total leverage which has increased 0.8ppt q-o-q to 38.2%.
The analyst notes that the average all-in funding cost was unchanged at 3.5% in 1QFY2024 and that MINT expects the funding in Japanese yen to cut all-in funding costs by 20 bps–30 bps.
“We like MINT’s ongoing expansion to acquire data centres in Japan coupled with asset recycling in Singapore, which brings MINT closer to being a pure play on data centres,” says Koh. “Tapping on funding in JPY will also reduce its cost of debt,” he adds. — The Edge Singapore
