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1007 Brokers Digest

The Edge Singapore
The Edge Singapore • 16 min read
1007 Brokers Digest
Take a look at these stocks for this week, including Sea, Capitaland Investment, and Raffles Medical Group.
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Price target:
Maybank Kim Eng “buy” US$378

Free Fire Max ignites ‘buy’ call for Sea
The upsizing of Free Fire’s growth potential has spurred Maybank Kim Eng’s Lai Gene Lih to maintain his “buy” call and target price of US$378 ($507) on gaming and e-commerce company Sea.

In his Oct 15 note, Lai says the launch of multiplayer battle royale mobile game Free Fire Max — now featuring better graphics, animation and draw distance — has helped re-engage existing users while reaching out to new ones.

So far, the latest version has garnered over 50 million downloads since its launch on Sept 28.

For comparison, the popular mobile game Pokemon Go took 19 days to hit 50 million downloads on Play Store, he adds.

“While we are cognisant that a chunk of Max’s downloads could be from the existing Free Fire user base, the point to underscore is that Max appears to be exhibiting momentum in re-engaging existing users and keeping them sticky, which is an efficient use of capital to maximise return on a successful game,” says Lai.

Free Fire Max’s game plan is to offer existing users more immersive game play while allowing them to create new maps. They are also able to play on Max by linking their progress through Garena’s Firelink technology.

Meanwhile, Lai believes that the latest version will see it being played in “new markets” where users are more affluent and have a tendency to use more premium smartphones.

In 1H2021, Garena came in tops in terms of mobile game net revenue in India, Indonesia, Thailand, Brazil and Mexico — some of the fastest growing economies in the world.

While PlayerUnknown’s Battlegrounds (PUBG) was the highest grossing mobile game across Asia, Latin America and India, Lai believes that the immersive nature of Free Fire Max could potentially “narrow the gap with PUBG”, especially among iPhone users.

However, he says: “China’s crackdown, as well as Bangladesh’s three month ban of Free Fire (along with other addictive apps) could ignite greater awareness of social risks.” — Amala Balakrishner

Attractively valued relative to other large-cap peers
DBS analysts Dale Lai and Derek Tan have maintained their “buy” call on Ascendas REIT (A-REIT) with a target price of $4, representing more than 30% potential share price upside.

In their Oct 19 note, the analysts say that A-REIT offers an attractive yield of about 5.6%, more than 100 basis points higher than other large-cap industrial Singapore REIT peers.

The analysts also point out that they believe investors have neglected A-REIT’s myriad of structural tailwinds. These range from e-commerce, data-centres and office decentralisation, which would drive earnings and capital values higher in the longer term.

Over the past decade, A-REIT has been concentrating its growth around new economic assets.

Since its listing, A-REIT’s portfolio has been anchored by its properties in the Science Park 1 and Science Park 2 clusters. The company further strengthened its foothold as a REIT that is focused on new economy assets following its $904.6 million acquisition of a group of data centres in Europe.

Currently, about 85% of its portfolio is made up of new economy assets with business and science parks taking up the lion’s share, the analysts note.

Science Park 1’s first cycle of rejuvenation began more than seven years ago. Eight older properties were redeveloped into modern business park facilities to cater to the growing R&D needs. |

As the technology, life sciences and biomedical sectors expand in Singapore, Lai and Tan expect another wave of growing demand for high-quality new economy facilities in the Science Park and One-North precincts.

“We believe the redevelopment plans for the TÜV SÜD PSB Building comes at a very opportune time, especially as A-REIT works to maximise the plot ratio of the asset, potentially leading to an about 2.5 times increase in the asset’s gross floor area.”

“This sets a precedent for A-REIT to tap on the unutilised plot ratio of its older assets within Science Park,” say the analysts.

Based on DBS estimates, an increase in plot ratio to 3.5 for its 12 assets in Science Parks 1 and 2 could lead to a more than 24% increase in A-REIT’s NAV.

From a valuation perspective, the uplift in RNAV would make A-REIT the cheapest large-cap industrial REIT on a P/NAV basis, the analysts highlight.

The upcoming redevelopment of the TÜV SÜD PSB will cement A-REIT’s position as one of the largest landlords of new economy assets in Singapore and drive earnings growth in the medium term.

“During this time when other landlords are finding it increasingly challenging to acquire modern new economy assets, A-REIT only has to look at its own ‘backyard’ to tap on redevelopment projects that could potentially be worth up to $5.6 billion,” the analysts add. — Khairani Afifi Noordin

CapitaLand InvestmentPrice target:PhillipCapital “accumulate” $4New growth journey PhillipCapital is initiating an “accumulate” recommendation on CapitaLand Investment (CLI) with a target price of $4, representing a 19.6% upside from the market price. Analyst Natalie Ong says CLI has under its belt stable recurring revenues from fees income and real estate investments. These segments contribute about 20% and about 80% of Ebitda, respectively. Approximately 80% of fee income from the fund management is recurring in nature, while the lodging platform generates franchising and management fees from predominantly third party-owned assets. Income generating assets held by CLI are also expected to deliver highly visible cash flows. Meanwhile, Ong sees that growth for CLI will come from fee income, driven by fund management and lodging AUM. “CLI has made great headway towards hitting its 2024 funds under management (FAUM) target of $100 billion,” she adds. The lodging platform is also on track to surpass its 2023 target of 160,000 keys under management. CLI has already signed 8,300 keys in 8M2021, bringing the number of keys to 130,900 — of which an estimated 40% are still under development and have not begun contributing to revenue. Ong is also positive on CLI’s asset recycling efforts, as its divestment targets are channelled into new economy sectors. “CLI remains committed to its $3 billion divestment target, which will help replenish dry powder to be reinvested into new economy assets such as logistics, data centres, business parks, as well as lodging assets like PBSA and multifamily assets which provide stable returns. This helps to better diversify and keep the portfolio future ready,” says Ong. On the outlook, she sees that CLI’s property portfolio continues to recover on the back of a reopening and return-to-normalcy, while its investment management and lodging platform continues to receive growing demand from private capital and lodging owners. The group also remains committed to its $3 billion divestment target, monetising its balance sheet and rebalancing into new economy assets to keep its portfolio future ready. — Samantha Chiew

Lower than expected 2QFY2022 earnings
PhillipCapital analyst Vivian Ye has downgraded Fortress Minerals to “accumulate” with a lower target price of $0.51.

The downgrade comes as the company’s results for the 2QFY2022 ended August stood below her expectations.

Revenue and Patmi for the 1HFY2022 stood at 39% and 34% of her FY2021 forecasts, respectively. Revenue for the 2QFY2022 also fell 23% y-o-y due to a 49% collapse in production.

Fortress Minerals, however, saw a 48% y-o-y growth in selling prices, which offset some of the weakness in revenue. The company also saw lower sales volume on the back of production disruptions at Bukit Besi Mine — located in Dungun, Terengganu — which stood below expectations.

Fortress Minerals’s average selling price (ASP) of US$141.82 ($190.58) per dry metric tonne (DMT) stood in line with Ye’s forecast of US$140/DMT.

Ye has lowered her Patmi estimates for the FY2022 by 22% to US$23.9 million. She has also lowered her sales volume forecast by 8.6% to US$455,020/DMT.

In addition, she has decreased her ASP forecast to US$120/DMT for FY2022 as iron ore prices are expected to remain weak at around US$140/DMT, with continued steel production cuts in China.

Fortress Minerals also reported increased bank borrowings of US$22.9 million for the 2QFY2022 due to the acquisition of Fortress Mengapur. The higher net debt presents another negative on the counter, says Ye. — Felicia Tan

Raffles Medical Group
Price target:
DBS Group Research “buy” $1.81

Higher earnings for FY2022
DBS Group Research analyst Rachel Tan has kept “buy” on Raffles Medical Group with a raised target price of $1.81, from $1.48.

The higher sum-of-the-parts target price took into consideration the historical mean P/E of 34.5 times to FY2022 earnings, plus 20 cents per share for the group’s China hospitals.

According to Tan’s calculations, her historical mean starts from FY2012.

In her report on Oct 12, she estimates that the group’s earnings for FY2022 to FY2023 could achieve record highs due to the strong Covid-19-related services, recovery of elective procedures and foreign patients.

Raffles Medical Group, being the largest Covid-19 service provider and key polymerase chain reaction (PCR) test provider at Changi Airport, is the biggest beneficiary for the pent-up demand for travel with the border relaxations.

The group also stands to benefit from the recovery of elective procedures and the return of medical tourism to Singapore.

Tan also acknowledges that her FY2021 to FY2023 earnings estimates are one of the highest among the brokerages who cover the counter. This comes as she expects contributions from Covid-19-related services to “surprise on the upside”. — Felicia Tan

Price target:
Maybank Kim Eng “buy” $1.65
RHB Group Research “buy” $1.72

Fundamental improving with buoyant demand

Analysts from Maybank Kim Eng Research and RHB Group Research are keeping “buy” on AIMS APAC REIT (AA REIT) after the REIT delivered strong results for the 2QFY2022 on Oct 13.

For the quarter, the REIT reported distribution per unit (DPU) of 2.50 cents for the 2QFY2022 ended September.

This brings DPU for the 1HFY2022 to 4.75 cents.

During the quarter, the REIT also registered better portfolio occupancy and rental reversion.

“Fundamentals are improving with buoyant logistics demand ([around] 50% of gross rental income),” says Maybank Kim Eng analyst Chua Su Tye.

In his report dated Oct 13, Chua has upped his target price estimate to $1.65, from $1.60 previously.

He has also raised his earnings estimates from FY2023 to FY2024 by 2% on stronger rental growth assumptions.

The REIT’s Woolworths’ acquisition should also lift its Australian contribution from 22% to 38% of its assets under management (AUM), boost DPUs by 405% and strengthen income visibility, writes Chua.

“For now, valuations are undemanding at 6.7% FY2022 DPU yield, and 1.0 times price-to-book (P/B),” he adds.

Chua is also positive on the REIT’s rental reversion, seeing it improving into 2HFY2022.

As it is, the REIT reported portfolio rental reversion of 2.1% in the 2QFY2022, up from 0.4% in the 1QFY2022.

AA REIT’s balance sheet “remains sound”, to which Chua expects “management could look to add further [acquisitions] in its core markets”.

RHB analyst Vijay Natarajan has kept his target price of $1.72 as the REIT’s 2QFY2022 DPU stood in line with his expectations.

He has also kept his earnings estimates unchanged. “[AA REIT’s] valuation remains compelling, at 1 time P/BV (sector average 1.5 times) and offering a 7% FY2022 (Mar) yield,” he writes in an Oct 13 report.

AA REIT’s operating metrics were also positive, with a healthy occupancy rate improvement, positive rental reversions and an increase in asset value, he notes.

In addition, contributions from the REIT’s Woolworths’ acquisition should kick in this quarter, further boosting its DPU. — Felicia Tan

Aztech Global

Price target:
UOB Kay Hian “buy” $1.70
Maybank Kim Eng “buy” $1.26
CGS-CIMB “add” $1.75

Missed 3Q, but future still robust
Analysts from UOB Kay Hian and Maybank Kim Eng have both lowered their target prices on Aztech Global, but have maintained their “buy” calls despite the company missing expectations for its 3QFY2021 results.

UOB Kay Hian’s John Cheong and Clement Ho adjusted their target price from $1.86 to $1.70, while Maybank Kim Eng’s Lai Gene Lih has cut his target price sharply to $1.26, from $1.86.

In an Oct 15 report, he writes that the company’s 3Q profit after tax and minority interests of $18 million only made up 60% of the brokerage’s estimates, due to the worsening of the components shortage.

Thus, he cut his FY2021 to 2023 Patmi forecasts by 11% to reflect FY2021’s reduced orderbook, and lowered expectations for FY2022 to 2023.

Lai notes the current orderbook for FY2021 delivery is $210 million, which he projects to a FY2021 revenue of $600.7 million (+24% y-o-y) — if there are no further delays in receiving components. However, this figure is a $79 million shortfall to his prior FY2021 expectation.

“Of the $426 million order book slated for FY2022, most should be delivered in 1HFY2022, and some in 3QFY2022. Management will work hard with suppliers to secure components, or even pull in components, where possible,” Lai writes.

He maintains his “buy” call as he believes that most negatives are priced in, and points out that the stock is undervalued.

Lai also thinks Aztech may also do share buybacks, which may buoy the share price in the near term. “However, we believe the stock won’t re-rate meaningfully until supply chain challenges have largely been alleviated. On that front, management expects component shortage to continue into the next six to 12 months.”

While the UOB Kay Hian analysts also broadly agree with Lai, they also note that Aztech’s 3QFY2021 results were “commendable” amid the global logistical and component challenges.

Cheong and Ho say higher demand for IoT (internet of things) devices and data-communication products led to a 49% y-o-y increase in 9MFY2021 revenue to $391 million, and revenue from IoT devices and data-communication products grew 70% y-o-y to $368 million to account for about 94% of the group’s total revenue.

They also highlight that Aztech’s net margin has improved q-o-q from 11.4% in 1QFY2021, 12.1% in 2QFY2021 and 12.8% in 3QFY2021, due to better efficiency and the ability to pass on higher material costs.

They add: “9MFY2021 net margin of 12.1% exceeded our estimated net margin of 11.8% for 2021 and we see room for further upside in 4QFY2021 due to better operating leverage in the seasonally strongest quarter.”

Cheong and Ho are “cautiously optimistic” on the stock, in light of the healthy demand for IoT products, improving vaccination rate, strong orderbook and steps that were put in place to minimise production disruption due to power usage regulations.

Furthermore, its share buyback mandate has been approved in its EGM on Oct 13, which could lift its share price.

On Oct 18, CGS-CIMB’s William Tng wrote in a report that Aztech has a “respectable performance in the face of component shortages”. He is of the view that if there were no component shortages, the 9MFY2021 revenue could have been 10% to 15% higher at $429 million to $449 million, instead of the reported $390.7 million.

Aztech said that as at Oct 14, it has an outstanding orderbook of $636 million, and the company expects to fulfill at least $210 million worth of these orders in 4QFY2021.

Tng thinks the group could deliver the remaining $426 million by 1HFY2022. He adds that while Covid-19 remains a relevant risk, 93% of Aztech’s China workforce has completed two doses of the Covid-19 vaccination and 85% of its Malaysian workforce has achieved the same.

With its vaccination rate above 80%, Aztech has guided that it will be able to resume operating with its full workforce in Malaysia by the third week of October.

Management believes that the global component shortages will continue into the next six to 12 months, but also notes that the company has not lost any customers or orders arising from the component shortages.

While Tng has cut his target price from $1.82 to $1.75, he — like the other analysts — maintains his “add” call.

“Downside risks to our call are component shortages and Covid-19 related supply chain disruptions. New customer wins and stronger earnings could re-rate the stock,” Tng writes. — Lim Hui Jie

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