Broker's Digest: Thai Beverage, China Sunsine, Far East Hospitality Trust

Great potential

Analysts are all advising investors to “buy” Thai Beverage following its FY2022 earnings reported on Nov 25, which indicated clear improvements thanks to the recovery from the pandemic which curbed consumption.

For the year ended Sept 30, the Thailand-based beer and beverage giant reported earnings of 30.1 billion baht ($1.16 billion), up 22% y-o-y, driven by higher sales. While all segments showed improvements, the beer business stood out with its 39% jump in operating profit thanks to a 15% increase in volume.

“We foresee the recovery momentum continuing into FY2023 on a further pick-up in tourism activities. We continue to like the company as a major proxy to capitalise on the recovery, taking into account its strong market presence and brand equity,” writes RHB Group Research in its Nov 28 note.

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RHB cautions that while Thai Beverage will experience higher raw material costs, this can be offset with price increases and continuous efficiency. However, distribution costs might go up as the company steps up its branding activities to spur spending and capture more market share.

As such, RHB has trimmed its target price from 97 cents to 91 cents to take into updated risk assumptions including higher than expected input costs and also slower than expected pick up in tourist numbers.

UOB Kay Hian’s Llelleythan Tan has similarly kept his “buy” call. However, to take into account “sharply lower” spirits consumption and lower margin estimates, he has cut his earnings forecast for the current FY2023 and following FY2024 by 13.9% and 15.8% respectively.

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As a result, Tan’s new target price for the stocks is 73 cents, from 87 cents previously.

CGS-CIMB Research’s Ong Khang Chuen and Kenneth Tan have kept their “add” call and 88 cents target price, as they see the company further benefitting from volume growth in Thailand and Vietnam.

At current levels, they believe ThaiBev is trading at an “undemanding” valuation of 12.6x FY2023 earnings.

“Potential rerating catalysts include strong volume recovery. Downside risks include higher-than-expected input costs pressuring margins,” they write.

DBS Group Research’s Andy Sim has similarly kept his “buy” call on the stock. In his Nov 28 report, he pegs Thai Beverage as a stock worth 87 cents. Just on Nov 18, he reinitiated coverage on the company with a target price of 84 cents.

Sim notes that there are global uncertainties and potential headwinds on the macro front. However, demand for its products should remain “resilient”, with recovery seen in both key markets Thailand and Vietnam.

Sim also notes that Thai Beverage has low refinancing risks and that its strong cash flow of at least 36 billion baht a year can easily deal with debentures of some 22 to 26 billion baht due over the next two years.

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Thai Beverage is now trading at around 14x forward earnings, which is around 1 standard deviation (s.d.) below the mean.

“We believe it has not priced in its potential as one of Southeast Asia’s largest F&B players,” says Sim. — The Edge Singapore

China Sunsine

Price target:
CGS-CIMB Research ‘add’ 60 cents

Lower TP on potentially weaker FY2023

CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan are keeping their “add” call on China Sunsine Chemical Holdings after the company’s results for the 3QFY2022 ended Sept 30 came in above expectations.

The positive recommendation also comes as the company’s valuations are deemed as “attractive” to the analysts, at an FY2023 P/E ratio (ex-cash) of 1.9x. China Sunsine’s strong free cash flow generation track record is also seen as a plus.

On Nov 11, China Sunsine reported a core net profit of RMB128 million ($24.5 million) for 3QFY2022, which was 28% higher y-o-y but 45% lower q-o-q. The quarterly net profit brought China Sunsine’s 9MFY2022 net profit to about 88% of the analysts’ FY2022 forecast despite the challenging macro environment.

“The beat was due to stronger-than-expected sales volumes (–6% y-o-y), as we had projected a steeper decline in view of a slowdown in China’s economy,” Ong and Tan write. “3QFY2022 gross profit margin (GPM) saw some contraction on a q-o-q basis to 27.2% but was stronger on a y-o-y basis. Stronger y-o-y profits were also helped by a lower effective tax rate as China Sunsine was awarded the ‘High-Tech Enterprise’ status in May, which entitles it to a concessionary tax rate of 15% for three years,” they add.

Despite the “resilient sales volumes”, the analysts are anticipating the company to report a “narrower profit spread” in the 4QFY2022 due to m-o-m increases in rubber accelerator and aniline prices and given that China Sunsine typically locks in quarterly pricing for its rubber accelerator products with major customers while taking spot prices for raw materials.

On this, the analysts are forecasting the company’s GPM to decline further q-o-q to 25%.

As global macro conditions seem to be declining further, the analysts believe sales volumes for rubber accelerators will be hit as consumers dial back discretionary spending such as automobiles.

“While the potential reopening of China could help spur domestic demand recovery, we still expect FY2023-FY2024 sales volumes to be lower than FY2022 levels on export weakness,” say Ong and Tan. “We hence lower our FY2023-FY2024 earnings per share (EPS) [estimates] by 4.1%-4.5%.”

In their report on Nov 15, Ong and Tan lowered their target price estimate to 60 cents from 70 cents previously. The lower target price is now pegged to a lower FY2023 P/BV of 0.7x, from 0.9x previously, as the analysts account for a potentially weaker FY2023. The new ratio is 0.5 standard deviations (s.d.) below China Sunsine’s 10-year historical mean.— Felicia Tan

Far East Hospitality Trust

Price target:
UOB Kay Hian ‘buy’ 71 cents

Pure-play on room-rate recovery

UOB Kay Hian Research analyst Jonathan Koh has maintained his “buy” call for Far East Hospitality Trust (FEHT) with a target price of 71 cents.

In his Nov 28 report, Koh says that FEHT is a pure play on the recovery of room rates in Singapore, with variable rent recovering to pre-pandemic levels. “FEHT will benefit from the reopening of Singapore’s international borders since April 2022 on a full-year basis in FY2023 (ending December 2023). One of its nine hotels started to contribute variable rent in 3QFY2022, with a second hotel expected to do so in 4QFY2022,” says Koh.

Variable rent accounts for less than 5% of master lease rental income for FEHT’s hotels in FY2022, compared to the pre-pandemic rate of 29% in FY2019 as variable rent is assessed on an annual basis. With the recovery gathering pace, the analyst expects hotel revenue per available room (RevPAR) to increase 51% to $135 in FY2023 and 5% to $142 in FY2024.

As RevPAR recovery carries into FY2023 and FY2024, Koh expects variable rent to normalise to 23% and 28% of its hotels’ master lease rental income respectively. Meanwhile, he estimates that FEHT’s serviced residences, which have consistently contributed variable rents despite the Covid-19 pandemic, will account for 36% of its master lease rental income for its serviced residences due to high occupancy of 90.4% in 3QFY2022.

The analyst says that FEHT’s low aggregate leverage of 33.5% will enable it to weather an extended period of high interest rates.

He has deemed the stock to be trading at an attractive valuation with its FY2023 distribution yield of 5.9% and P/NAV of 0.73x.

Also contributing is FEHT’s gains of $39.3 million for the divestment of Central Square, which was completed on March 24. Koh notes that FEHT intends to distribute a portion of the divestment gains at $8 million per year over three years based on the highest historical net profits interest (NPI) achieved by Central Square since its IPO. For FY2022, FEHT plans to declare a capital distribution of $6.2 million.

Meanwhile, Koh says Singapore’s economic reopening is driving the recovery, although the occupancy rate for hotels dropped 3.1 percentage points (ppt) y-o-y to 76.1% in 3QFY2022 due to fewer hotels under government contracts and the closure of Elizabeth Hotel for renovation. The average daily rate (ADR) increased 107.6% y-o-y to $137 due to the return of corporate guests and higher rates for the remaining four government contracts, while RevPAR recovered 101.9% y-o-y to $105 in 3QFY2022.

“Currently, FEHT has four out of its nine hotels on government contracts for isolation purposes till December or January 2023. These government contracts provide comparable revenue compared to the market but incur lower operating costs. FEHT would evaluate redeploying these four hotels to serve leisure and business travellers in early 2023 if the recovery in visitor arrivals continues to strengthen,” says Koh.

Serviced residences have also displayed resilience from long-stay contracts with both fixed and variable rents. On a same-store basis, excluding Village Residence Clarke Quay, occupancy improved 12.1 ppt y-o-y to 90.4% and ADR increased 24.4% y-o-y to $235 in 3QFY2022 due to strong demand from long-stay corporate guests, says Koh, adding that RevPAR expanded 43.7% y-o-y to $213 in 3QFY2022.

He has cut his FY2023 DPU forecast by 8% due to the higher cost of debts under the assumption that loans of $132 million or 18% of FEHT’s total borrowings will be refinanced at 4.5% sometime in mid-2023. — Bryan Wu