Broker's Digest: Top Glove, Singapore Airlines, Sembcorp Industries, Frasers Centrepoint Trust, HRNetGroup

CGS-CIMB Research analyst Walter Aw has retained his “reduce” call on Top Glove Corporation after the group posted its results for the 4QFY2022 and FY2022 ended August.

In 4QFY2022, Top Glove reported a loss of RM52.6 million ($16.3 million), bringing its total FY2022 earnings to RM236.0 million, 96.9% lower y-o-y. The figures were due to the weak average selling prices (ASPs) and a decline in sales volume. Top Glove also incurred margin compression from higher operating costs such as a higher minimum wage floor and costlier natural gas.

Core net profit for the 4QFY2022 fell by 99.4% y-o-y to RM3.4 million excluding losses of RM56 million (inventory writedown to net realisable value). The quarter’s core net profit contributed to the group’s FY2022 core net profit of RM465 million, down 94.1% y-o-y.

Despite the plunge in core net profit, FY2022’s figure stood above Aw’s expectations at 155% of his full-year estimates.

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“[The] earnings beat was due to a surprise new revelation by Top Glove that it had conducted an inventory write-down of RM229 million in FY2022,” the analyst explains. “No dividend was declared in the quarter; within expectations.

The analyst has lowered his earnings per share (EPS) estimates for the FY2023 to FY2024 by 60%–86.5%.

Accordingly, his target price was lowered to 50 sen from RM1 previously.

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The retained “reduce” call also comes as current valuations at two standard deviations (s.d.) of Top Glove’s five-year mean have “yet to fully account for its weak near-term earnings prospects”, the analyst says.

Heading into the FY2023, Aw expects Top Glove’s core net profit to decline by 90% y-o-y, assuming that ASPs of US$19 ($26.77) per 1,000 pieces and a utilisation rate of 50%, same as that of FY2022’s.

He adds that the supply glut in the global glove sector is expected to only dissipate towards the 2HFY2023.

Furthermore, Top Glove’s intention to raise its ASPs to pass on cost hikes is likely to be difficult in the near term due to the current operating environment, the analyst points out.

On Top Glove’s decision to defer its capacity expansion plans in the FY2023, Aw is positive on the development as it will alleviate pressure on the group to sell its new capacity, on top of the positive impact on overall global glove supply-demand dynamics. — Felicia Tan

Singapore Airlines
Price target:
KGI Research ‘buy’ $5.50

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Boost from recovering tourism sector

Thanks to the post-Covid boom in the tourism sector, KGI Research is keeping its “buy” call on Singapore Airlines (SIA) with a target price of $5.50. KGI also has an entry price of $5.28 and a stop loss price of $5.17. It has also been noted that Bloomberg’s consensus average 12-month target price is $5.86 for SIA.

The SIA Group has over 20 subsidiaries covering a range of airline-related services. These range from cargo to engine overhaul. Its subsidiaries include SIA Engineering Company, Scoot, Tiger Airways, Singapore Flying College and Tradewinds Tours and Travel. Principal activities of the group consisting of air transportation, engineering services and other airline-related activities.

In its latest 1QFY2023 ended June, the local carrier recorded a net profit of $370 million, bouncing back from a $409 million loss in the previous year, thanks to the sharp revival in travel demand following borders reopening. Additionally, SIA’s operating statistics showed significant m-o-m passenger traffic growth since April, with August’s sharp increase.

According to statistics by the Singapore Tourism Board (STB), there has been an exponential increase in visitor arrivals this year. This increase was thanks to the reopening of Singapore’s borders to vaccinated travellers without quarantine in April.

Between January and August this year, there were about 2.96 million visitors, a y-o-y increase of 1,833% compared to the same period in 2021. In August alone, Singapore welcomed approximately 729,000 visitors. However, this sentiment may be slowing down as visitor growth only saw a slight increase of 2,000 visitors from July to August.

With the travel resumption, SIA has benefited from the growth in passenger traffic. It more than doubled its monthly available seat kilometres and boosted the number of passengers it flew by more than tenfold. “With both business and leisure travellers increasing, the airline will have to manage resources and manning shortages well,” says KGI, as labour issues plague several industries in Singapore.

Nonetheless, KGI believes that aviation will continue to recover as it sees more borders opening up and people taking advantage of their travel freedom.

Additionally, with the upcoming events to be held in Singapore and the year-end holiday season, the research house expects travel demand to remain robust for the rest of the year.

STB is expecting the events industry to post a strong recovery this year. The Singapore Grand Prix F1 Race 2022 is already back after a two-year hiatus. Happening from Sept 23 to Oct 2, this is one of Singapore’s most significant global events, as historical data shows that around 40% of those attending the race are from overseas, while the attendance for the race days can range between 250,000 to 300,000.

Meanwhile, STB is also expecting the meetings, incentives, conventions and exhibitions (Mice) industry to see a comeback, expecting a full recovery for the MICE sector in two to three years. Already, STB boasts a strong pipeline of events for the rest of this year. — Samantha Chiew

Sembcorp Industries
Price target:
PhillipCapital ‘accumulate’ $3.68

UK energy bills cap to cause impact

PhillipCapital analyst Terence Chua has kept his “accumulate” call on Sembcorp Industries (SCI) with an unchanged target price of $3.68, expecting the UK consumer energy bills cap to have a subdued impact on the company.

In his Sept 15 report, Chua notes that UK Prime Minister Liz Truss has capped consumer energy bills at GBP2,500 ($4,011) for two years to cushion rising energy prices. For businesses and public sector bodies, a sixth-month scheme will offer equivalent support to that for households, with a review in three months about how it could be better targeted.

SCI has 1.3GW of energy assets in the UK, consisting of energy generation and battery storage. The UK is not a significant contributor to SCI’s overall portfolio of energy assets, which are concentrated in Southeast Asia, China and India, Chua highlights.

“SCI’s contract with the national grid of the UK means that it generates electricity through a portfolio of diesel and gas generators. The price cap imposed limits the amount that it can charge for its tariffs. The difference between the power in the wholesale markets, and the capped consumer price, however, is expected to be borne by the UK government,” Chua explains.

Truss has also announced a review of the government’s net-zero strategy, which is argued as necessary under the current landscape. The review could potentially impact demand for energy storage, although Chua notes that this is still uncertain at this stage.

“[Truss] has announced schemes she said would increase energy resilience, including launching about 100 new oil and gas licences along with dozens of new North Sea licences to boost domestic oil and gas production.

“In the last 10 years, the UK has made significant progress to decarbonise its power sector. It has grown its renewable share of electricity generation from 7% to 43%. This has led to increased demand for energy storage, in which SCI is operating one of the largest energy storage portfolios in the UK at 120MWh,” says Chua.

SCI is currently building a 360MW energy storage system at Wilton International on Teesside, which will help the UK achieve its net-zero target.

Chua’s target price of $3.68 is based on 1.2x P/BV, the average of its peers. — Khairani Afifi

Frasers Centrepoint Trust
Price target:
PhillipCapital ‘accumulate’ $2.38

Recovered from pandemic

PhillipCapital Research analyst Darren Chan has kept his “accumulate” rating on Frasers Centrepoint Trust (FCT) as the REIT’s occupancy and tenant sales have already recovered to above its pre-pandemic levels.

However, Chan has lowered his target price to $2.38 from $2.64 as he increases his cost of equity from 6.41% to 7.08% on a higher risk-free rate assumption P/NAV of 0.98x.

“The P/NAV of 0.98x, which is trading near five-year lows at –1 standard deviation level, might seem cheap,” he says in his Sept 19 report. “However, we think this is fair given the rising interest rate environment. The yield spread has fallen from over 4% at the start of the year to 2.65%, and we expect this to fall even further as well.”

Despite the lower target price, Chan’s DPU estimates remain unchanged.

In his report, the analyst sees several positives for FCT. During the 1HFY2022 ended March, FCT’s rental reversions came in at a positive 1.7%. This is compared to the 0.6% seen in FY2021 and is expected to be similar for the rest of the year, he notes.

The tenant retention rate of its portfolio also remains healthy at 70%–80% of the total portfolio. At the same time, FCT’s retail portfolio is equipped with a well-spread lease maturity profile with a weighted average lease expiry (WALE) of 1.85 years by net lettable area (NLA) or 1.78 years by gross rental income (GRI) and only 5.3% of expiring leases by GRI remain in 4QFY2022 for FY2022.

“Shorter tenancies allow for faster repricing in rent to cope with surging interest rates,” explains Chan.

Occupancy, however, dipped slightly from 97.8% in 2QFY2022 to 97.1% in 3QFY2022, but still above pre-Covid-19 levels of 96.5%. FCT is in advanced negotiations with replacement tenants to fill the space left by Filmgarde at Century Square, which caused the slight dip in occupancy, Chan explains.

Tenant sales in 3QFY2022 were up 23% y-o-y and around 10% above pre-Covid-19 levels. Shopper traffic in 3QFY2022 was up 32% y-o-y and around 80% of pre-Covid-19 levels.

“We expect the impact from the further easing of community measures, especially the one where mask-wearing is no longer required in indoor settings except for certain situations, to further increase shopper traffic going forward,” says Chan.

Meanwhile, 69% of total borrowings by FCT are hedged to fixed interest rates and the tenor of the hedge is usually matched with the debt maturity profile. In total, the cost of debt is 2.4%, and green loans account for approximately 31.6% of total borrowings.

At present, FCT has an aggregate leverage of 33.9%, where every 50 basis points (bps) increase in Singapore Overnight Rate Average (Sora) is estimated to impact FCT’s DPU by around 1.3%.

Chan also notes how hybrid work arrangements should benefit FCT’s malls, which are located near transportation nodes. “Commute-driven footfall and incidental spending should see an uptick, lifting tenant sales and gross turnover (GTO) revenue for FCT,” he adds.

Occupancy cost, at around 16%–17%, is at the five-year pre-Covid-19 average. Chan says that improving tenant sales should lower occupancy costs further, which may support FCT’s ability to raise rents.

Utilities represent around 7% of property operating expenses and are fully hedged for FY2022.

The analyst shares that FCT’s energy contracts will expire in end-FY2022 and mid-FY2023 as well.— Chloe Lim

HRNetGroup
Price target:
RHB Group Research ‘buy’ $1.01

Healthy outlook and attractive dividends to continue

RHB Group Research analyst Jarick Seet has maintained his “buy” call on HRNetGroup with a target price of $1.01 on the back of continued resilient hiring.

Seet notes that HRNet’s 1HFY2022 ended June results came in line with RHB’s estimates. Its flexible and professional recruitment segments grew 13.2% and 18.6% y-o-y respectively, with Singapore remaining its largest market share.

“Hiring is expected to remain strong in the technology, healthcare and consumer sectors. There is potential for a slowdown in hiring, especially if a recession hits, but signs continue to indicate hiring is healthy,” he adds.

HRNet has previously announced that it intends to purchase up to $30 million of its shares via the open market. The maximum number of shares which may be purchased by the company under the programme is 100.38 million, equivalent to 10% of its issued shares.

As at August 16, the company has purchased 0.21% of its total shares outstanding. Seet expects the share buyback programme to continue and that it is likely to be a boon to its share price.

HRNet has also declared its first-ever interim dividend per share of 2.13 cents. With the positive performance likely to continue, the company should keep rewarding shareholders with attractive dividends, says Seet. “As a result, we expect a 5.5% dividend yield for FY2022 using a 60% payout ratio.”

The company remains bullish for both its recruitment segments across all geographical areas as there is continued strong demand for its services year-to-date. Due to this, Seet believes the positive performance will continue and the company should benefit from higher margins as well.

HRNet is trading at 11x FY2022 P/E, lower than its global peer average. RHB’s target price of $1.01 is pegged to 14x FY2022 P/E. — Khairani Afifi