StarHub
Price targets:
Maybank Securities ‘hold’ $1.10
DBS Group Research ‘buy’ $1.25
PhillipCapital ‘accumulate’ $1.21
RHB Singapore ‘neutral’ $1.15
UOB KayHian ‘buy’ $1.37
CGS-CIMB Research ‘hold’ $1.15
Lower IT spending, higher revenue
Analysts from Maybank Securities and DBS Group Research have raised their respective target prices for StarHub CC3 following better-than-expected 3QFY2023 ended September earnings.
In 3QFY2023, StarHub’s various key businesses including mobile, broadband, enterprise and cybersecurity all reported higher y-o-y revenue, lifting overall service revenue 8.9% y-o-y to $526 million. Earnings increased 36.5% y-o-y to $37.3 million in the same quarter.
“We foresee further earnings and cost synergies as the group continues to improve cost efficiencies through infrastructure and capacity optimisation,” says Maybank analyst Kevin Tan, who has raised his target price to $1.10 from $1.08.
Sachin Mittal of DBS is more bullish as he upgraded his call from “hold” to “buy” along with a higher target price of $1.25 from $1.05. He notes that StarHub has managed to incur lower costs in reorganising its internal IT systems. This, in turn, has helped bring down maintenance, depreciation and finance costs.
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Due to this combination of lower costs and revenue recovery, Mittal has raised his earnings projection by 26% and 25% for FY2024 and FY2025, which leads to an earnings CAGR of 8% between FY2023 and FY2025.
His new target price of $1.25 is based on 15x FY2024 earnings, a higher multiple from the 12x accorded earlier but still lower than 18x which StarHub was pegged to in the last four years.
With StarHub maintaining a dividend guidance of 5 cents per share, or an 80% payout ratio, the stock will give a yield of 5.7% at the $1.25 target price. Mittal points out that his revised earnings estimate is ahead of his peers by 13% for FY2023 and 6% for FY2024. “We expect consensus to be raised soon,” he says.
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Paul Chew of PhillipCapital, in his Nov 10 note, has flagged an overlooked aspect of StarHub’s business. He maintains that investors have yet to recognise the value of Ensign, StarHub’s relatively low-profile cybersecurity unit, as it is still loss-making, although it has been building up its franchise. He has kept his “accumulate” call and $1.21 target price, which is pegged to 6.5x FY2023 EV/Ebitda.
Meanwhile, UOB KayHian, CGS-CIMB Research and RHB Singapore have warned that StarHub’s capex might increase in the current 4QFY2023, thereby weighing down the bottom line.
Kenneth Tan and Lim Siew Khee of CGS-CIMB Research, citing uncertainty over the pace of the IT spending, which could intensify ahead, have kept their “hold” call and $1.15 target price.
RHB Singapore, which has a “neutral” call and $1.15 target price, is cheered by the better-than-expected earnings and the 10% forward yield at current price levels. However, it expects the IT spending to “play catch-up” in 4QFY2023 and FY2024.
UOB KayHian’s Chong Lee Len and Llelleythan Tan Yi Rong have the most bullish target price of $1.37 even as they warn of margins softening into 4QFY2023 from higher IT spending. “At our fair value, the stock will trade at 6x 2023F EV/Ebitda or –1 s.d. (standard deviation) below its five-year mean EV/Ebitda of 7x; it also offers a decent dividend yield of 4.8% for 2023,” the analysts say. — The Edge Singapore
Nanofilm Technologies International
Price targets:
DBS Group Research ‘fully valued’ 83 cents
CGS-CIMB Research ‘reduce’ 75 cents
Weaker-than-expected 3Q
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Analysts have cut their target prices on Nanofilm Technologies International MZH following a weaker-than-expected business update for 3QFY2023 ended Sept 30. On Nov 8, the company, which provides coating services for manufacturers, reported revenue of $55 million for 3QFY2023, down 19% y-o-y due to weaker end-consumer demand. This brings its 9MFY2023 revenue to just $129 million, down 29% y-o-y, which is 68% of consensus projections.
In his Nov 8 note, William Tng of CGS-CIMB Research says Nanofilm’s “key customer” is “seeing improvement in reducing its inventory levels”, citing the company management. This suggests demand might pick up, he adds.
In the coming FY2024, Nanofilm remains concerned over the outlook for the macroeconomic environment which could continue to dampen consumer electronics demand.
Meanwhile, a coating joint venture in China, ApexTech, is experiencing slower-than-expected progress in customer qualification because of excess capacity on the part of that customer, notes Tng. There are also multiple concurrent developments in different markets. For example, it is exploring acquisitions in Europe to gain a foothold in the market and in Vietnam, where it is setting up additional capacity, production could commence after next March. In addition, Nanofilm is finalising a factory-in-factory arrangement with a partner to provide coating services in India for its key customer.
However, because of the muted demand outlook for the current 4QFY2023, Tng expects Nanofilm to see a light net loss of $0.7 million as its gross margin is projected to drop by 9.7 percentage points given the low utilisation rate. However, even as Nanofilm faces weak demand, it is continuing with its investments in capacity and geographical expansion.
Given the challenging business environment, Tng has cut his FY2024 and FY2025 revenue by 18.6% and 20.6% respectively and earnings by 35 and 56% respectively.
Tng has kept his “reduce” call on the stock and also cut his target price from 91 cents to 75 cents, which is based on 12.1x FY2025 earnings. For him, the upside might come from new order wins as well as faster operational progress at ApexTech. Besides ApexTech, Nanofilm has another key joint venture, Sydrogen, which is in partnership with Temasek Holdings and focuses on the hydrogen economy.
On the other hand, potential de-rating catalysts are high customer concentration and higher operating costs as it expands into other countries and other businesses.
DBS Group Research’s Ling Lee Keng notes that Nanofilm has various initiatives in place to drive growth. However, significant earnings contribution will only be seen from FY2025 onwards.
She warns that cost pressures will come from spending on new capacity in new markets, and that order momentum will be softer versus last year. “Higher costs from the various initiatives to drive long-term growth are also expected to affect margins. The group would have to reach a certain scale before they can enjoy operating leverage,” says Ling.
She expects Nanofilm to remain profitable in FY2023 but taking into account near-term woes and slow order momentum, Ling has cut her target price from 88 cents to 83 cents, based on 20x FY2024 earnings — while keeping her “fully valued” call. — The Edge Singapore
Singapore Technologies Engineering
Price targets:
DBS Group Research ‘buy’ $4.50
Maybank Securities ‘buy’ $4.20
CGS-CIMB Research ‘add’ $4.27
UOB KayHian ‘buy’ $4.20
RHB Singapore ‘buy’ $4.45
PhillipCapital ‘buy’ $4.50
From defensive to growth
Jason Sum and Suvro Sarkar of DBS Group Research have raised their target price for Singapore Technologies Engineering S63 following its 3QFY2023 ended September earnings, as they see the company “no longer just a defensive play, but also a compelling growth story”.
Traditionally, ST Engineering has been seen as the “defensive stalwart” giving a steady yield but limited growth. In their Nov 14 note, the DBS analysts point out that ST Engineering, since 2018, has transformed this “narrative” as it undertook its largest acquisition to date of TransCore to diversify into future growth areas.
“These proactive steps position ST Engineering to achieve mid-single-digit revenue growth over the long haul, in our view,” Sum and Sarkar state, as they kept their “buy” call and raised their target price from $4.20 to $4.50.
A potential increase in its dividends, which is now at four cents per quarter, could also catalyse a re-rating, they add.
Most of the other analysts, while similarly upbeat on ST Engineering, have maintained their target prices following the 3QFY2023 numbers, where revenue increased by 9% y-o-y to $ $2.4 billion.
As at end 3QFY2023, the company has built up an order book of $27.5 billion, just a tad lower than the record $27.7 billion as at end 2QFY2023, which provides for three years of revenue visibility.
In 3QFY2023, the company won $2.2 billion in new orders, versus between $4.7 billion and $4.8 billion each in the two preceding quarters. “Management noted that quarterly new contract wins ebb and flow, but the underlying demand trajectory has remained very healthy,” states UOB KayHian’s Roy Chen in his Nov 14 note. Chen’s “buy” call and unchanged target price of $4.20 is pegged to discounted cash flow valuation.
Shekhar Jaiswal of RHB Bank Singapore, who has a “buy” call and $4.45 target price, believes that ST Engineering is set to enjoy further upside for its commercial aerospace business as the recovery of international travel in Asia-Pacific trails other major markets. “The addition of new hangar capacity in China, the US and Singapore over the next few years will help in taking on more order deliveries,” he adds.
Peggy Mak of PhillipCapital is eyeing growth in another business segment to support her “buy” call and $4.50 target price. “Heightened geopolitical tensions will drive an increase in spending and stockpiling of defence and cybersecurity products and services, thus driving STE’s order wins going forward,” says Mak in her Nov 14 note.
There is one blemish though, with ST Engineering guiding that its urban solutions and satcom division will see a weaker ebit in FY2023 due to delayed customer spending.
Lim Siew Khee of CGS-CIMB Research is unfazed, as she expects this division to rebound in the coming FY2024 thanks to the ramping up of major projects and optimised costs over at satellite operations. She has reiterated her “add” call and $4.27 target price on strong earnings growth seen over FY2023 to FY2025.
Kevin Tan of Maybank Securities is confident ST Engineering can maintain its dividend payout, which stands at 4 cents per quarter, thanks to its robust cash flow and resilient business portfolio. Tan, in his Nov 10 note, expects the company’s total borrowings to reduce from $6.2 billion as at September to mid-$5 billion by the end of December on strong operating cash flows. — The Edge Singapore
Frasers Hospitality Trust
Price targets:
DBS Group Research ‘buy’ 62 cents
Maybank Securities ‘buy’ 53 cents
Strong recovery
Analysts at DBS Group Research and Maybank Securities are keeping a “buy” on Frasers Hospitality Trust ACV (FHT) following the release of its 2HFY2023 ended September results.
Maybank analyst Li Jialin notes that FHT’s Japan and UK assets showed the strongest revenue per available room (RevPAR) growth in 2HFY2023 due to higher occupancy and average daily rate (ADR), respectively. Its Singapore and Malaysia assets saw ADR growth at 7% and 6% h-o-h respectively, accompanied by robust occupancy. However, its Australian assets showed softer performance with a 12% decline in ADR, partially offset by largely resilient occupancy. Li says this was led by tepid corporate and group demand in Melbourne, on top of new hotel openings of over 4,000 keys in the past 24 months.
While Li notes that FHT’s occupancy in 2HFY2023 across its portfolio is still shy of pre-pandemic levels, he highlights that RevPAR in all markets is 2%–12% ahead of 4QFY2019 levels.
DBS analysts Geraldine Wong and Derek Tan point out that FHT’s full-year valuations came in stronger than expected, with a valuation uplift seen across all portfolio assets in local currency terms, except for Maritim Dresden in Germany, which declined 5.3% y-o-y. Portfolio valuation rose 1.7% y-o-y in Singapore dollar terms, they add.
The analysts observe that cap rates have expanded by 50 to 150 basis points in overseas markets, which has been more than compensated by strong cash flow growth to reflect an increase in valuation in local currency terms.
“FHT’s year-end revaluation was generally within our expectations that an upward trajectory in cash flow recovery will help support valuations, despite an expansion in cap rates, which we have seen in other asset classes for the corresponding geographies,” Wong and Tan say.
As the trust’s refinancing exercise is in July 2024, Maybank does not expect the full impact of the higher cost of debt until FY2025. Li adds that a relatively stable Japanese yen base rate could also cushion the increase from the Singapore dollar and Malaysian ringgit-denominated loans, part of which currently carry fixed interest rates of 3.08% and 4.85% respectively.
Maybank lowered its FY2024–FY2025 revenue estimates by 6% to 8% and rolled its valuation base to FY2026. Given the upcoming additional supply in FHT’s key markets, namely Edinburgh, Kuala Lumpur and Dresden, Li sees the trust entering a more competitive environment in FY2024 against normalising RevPAR growth.
“Nonetheless, strong event pipeline and recovery tailwinds should underpin growth. We lowered our DPU [estimates] by about 3%-6% for FY2024-FY2025 and trimmed the target price to 53 cents from 54 cents previously.”
Meanwhile, DBS analysts highlight more optimism on meetings, incentives, conferences, and exhibitions (Mice) demand going into FY2024. They believe FHT’s corporate-positioned hotels in Singapore will continue to see further traction from the return of corporate travel as a strong MICE calendar unfolds this year.
“Overseas low-hanging markets such as Japan and Germany will also depend on the return of corporate events in their respective submarkets to drive gross profits, indicating that a turnaround can happen quickly in a few quarters,” the analysts add. DBS has raised its target price to 62 cents from 58 cents previously. — Khairani Afifi Noordin
Sats
Price targets:
PhillipCapital ‘reduce’ $2.23
DBS Group Research ‘buy’ $3.40
CGS-CIMB Research ‘add’ $3
UOB Kay Hian ‘buy’ $2.90
Upgrades on return to profitability
Singapore Airport Terminal Services (Sats) has returned to profitability in 2QFY2024 ended September, prompting a couple of analysts to raise their target prices.
In 1HFY2024, the airport ground handler announced a loss of $7.8 million, an improvement over the loss of some $32.5 million in 1HFY2023. In 2QFY2024, Sats returned to profitability with a core patmi of $16.8 million, thanks to better operating leverage where revenue growth outpaced costs.
CGS-CIMB Research analysts Tay Wee Kuang and Lim Siew Khee have upgraded their call to “add” from “hold” with a higher target price of $3 from $2.86, with Sats returning to profitability three months ahead of their expectations.
Besides Sats’ own improvements in the home market, contributions from the company’s share of associates and joint ventures also improved 8.5% q-o-q to $23.1 million in 2QFY2024 due to China and Japan.
They note that Sats managed an ebit margin of just 1% for its food business in 2QFY2024, but along with the continued recovery in the aviation industry, more meals would be served. They expect this segment’s ebit margins to revert towards FY2018 to FY2020’s average of 14.7% by FY2025, write the analysts.
DBS Group Research analyst Jason Sum, who sees a sustained recovery in air travel supporting Sats, has kept his “buy” call on the counter with a higher target price of $3.40 from $3.20. Also, despite the weaker global economy, there are signs that the air cargo market appears to be stabilising.
Sats’ non-travel-related food business should also see healthy growth, driven by a wider customer base, an expanding product range and productivity gains. “We find the present risk-to-reward setup attractive and anticipate a 20%–25% upside from the current share price level,” says Sum.
The acquisition of WFS should also start to see “operational and financial synergies over the next few years”. The analyst is aware that the market will be paying attention to the assimilation of WFS with Sats and whether the group can achieve its “intended operating synergies within its projected timeline, to justify the price paid for WFS”.
Key risks noted by Sum include global macroeconomic instability that could delay the normalisation of air passenger traffic or negatively impact air cargo volumes, as well as potential execution risks associated with integrating WFS and achieving the anticipated synergies.
UOB KayHian Research (UOBKH) analyst Roy Chen has kept his “buy” call on the counter, as he sees “meaningful room for recovery”.
He notes that excluding WFS, Sats’ original businesses of flight handling, meals served and cargo tonnage handled were at only 82%, 83% and 93% of pre-pandemic levels respectively. “Since Sats’ workforce strength should have largely stabilised after the early round of recruitment, moving forward, we expect operating leverage to kick in and help with Sats’ earnings recovery as business volume continues to recover,” says Chen.
To reflect a more moderate pace of recovery, Chen has cut his earnings estimates for FY2024 and FY2025 to $41 million and $159 million while keeping his FY2026 forecast at $285 million. His new target price, which is based on 9.7x FY2025 EV/Adjusted Ebitda, which is the same as the acquisition multiple for WFS, is $2.90, from $2.99 previously.
Contrary to her peers, PhillipCapital’s Peggy Mak has downgraded her call to “reduce” from “neutral”, no thanks to an uninspiring report card. Mak, in her Nov 14 notes, points out that Sats managed an operating margin of just 0.3%, which barely covered the group’s interest expenses as its net debt rose.
Excluding the contribution from WFS, Sats’ operating profit came in at just $3 million. “We believe the key reasons were a rise in operating costs, chiefly staff costs due to a manpower shortage in Singapore and Hong Kong, and a fall in revenue from non-aviation at 13.8% y-o-y due to lower catering and distribution demand,” says Mak. She expects further growth to be “limited”, given the manpower and capacity bottlenecks faced by airlines. And further improvement in the food solutions earnings could be muted.
Looking ahead, Mak sees rising costs and interest expenses as hindering earnings recovery while working capital needs could rise with the inclusion of WFS. Her new target price is $2.23, down from $2.51. — Douglas Toh
