Prime US REIT

Price target: PhillipCapital “buy” 94 US cents

Thumbs up as 1H20 DPU and NPI surpass IPO expectations
PhillipCapital analyst Tan Jie Hui has maintained her “buy” call with a higher target price of 94 US cents following the REIT’s 1H20 results. “We still favour Prime US REIT for its diversified portfolio and organic growth potential derived from rental reversions and escalations,” she says in a report dated Aug 11.

On Aug 6, Prime US REIT declared distribution per unit (DPU) of 3.52 US cents (4.83 Singapore cents) for 1H20 ended June, which represents a 5.1% y-o-y increase from its IPO forecast. Net property income (NPI) rose 7.6% y-o-y to US$47.5 million, while income available for distribution rose 15.0% y-o-y to US$35.9 million.

Tan says the REIT’s NPI and DPU “slightly surpassed” her expectations, forming 50.6% and 51.5% of its estimates for FY20. Despite an overall occupancy dip to 93% q-o-q, Prime US REIT still enjoys a stable lease expiry profile, with only 3.3% and 7.4% due to expire in FY20 and FY21, as well as a “long” weighted average lease expiry (WALE) of 4.8 years.

“We remain positive on Prime’s outlook due to its income stability supported by long WALE of 4.8 years, minimal expiries of 3.3% and 7.4% in FY20 and FY21 and high levels of asset and trade sector diversification. No property contributes more than 15.3% to NPI,” says Tan.

“Despite heightened levels of cautiousness surrounding new leases and expansions amidst uncertainty, Prime saw robust leasing activity in 1H20 which spilled over to 3Q20. Post-1H20, an additional 36,000 sq ft of renewals and expansion leases were executed by existing tenants at positive reversions,” she adds. For FY20 and FY21, Tan is expecting a total DPU of 7.04 US cents and 7.32 US cents, respectively. — Felicia Tan

StarHub

Price target:

PhillipCapital “neutral” $1.24

DBS “hold” $1.16
CGS-CIMB “add” $1.60

Weak connection to Starhub outlook keeps calls on ‘hold’
StarHub’s 2Q20 results came in below analysts’ expectations, which caused an overall “neutral” sentiment on the stock. For 2Q20, StarHub saw earnings drop 5.6% y-o-y to $37.3 million, while revenue fell 18% to $99.4 million from the previous year. The company cut its interim dividend to 2.5 cents but is guiding for at least 5 cents this year, down from the 9 cents paid last year.

Apart from the earnings miss and cut in dividends, PhillipCapital’s Paul Chew notes in an Aug 11 report that cybersecurity operating losses widened to $7 million in 2Q20. But this is a seasonally weaker quarter for the cybersecurity segment as most government contracts are completed in March.

Furthermore, the company is still investing in the business, especially on regional capabilities. And the enterprise business is faced with a decline in projects and delayed spending, especially in managed accounts.

“We were surprised by the 25% y-o-y fall in managed services revenue as it was supposed to be the annuity segment on the enterprise business,” says Chew, who is keeping a “neutral” call and target price of $1.24 on the stock.

On the bright side, StarHub’s PayTV segment saw unchanged revenue from the previous quarter at $46.9 million. The contraction in subscribers is now at 2,000 to 3,000 per quarter compared to the average 20,000 per quarter in FY19. StarHub even eked out a modest $1 q-o-q rise in average revenue per user (ARPU) to $39.

Nonetheless, the overall outlook for StarHub looks grim for at least the next two years, as the loss in roaming and tourism-related revenue cannot be replaced until the international borders are reopened. It is also currently unclear how much 5G can help lift ARPU for StarHub.

DBS Group Research’s Sachin Mittal shares the same sentiments, as he kept his “hold” call but with a reduced target price of $1.16 from $1.37 previously, on worries over persistent competitive pressure in the mobile industry, no thanks to new entrants such as TPG. “While we believe that TPG does not have a business case in Singapore, the recent capital injection of about $170 million into TPG might help it to sustain for another two years and industry consolidation could be delayed to FY22,” he adds.

On the other hand, CGS-CIMB Research is more bullish on the stock as it maintains its “add” recommendation on StarHub with a lowered target price of $1.60 from $1.70. In an Aug 7 report, lead analyst Foong Choong Chen sees 2Q20 earnings as largely in line with estimates, although DPS was a miss.

Foong is more positive on StarHub’s outlook in the 5G space as the group has guided for its initial investment for 5G rollout to be about $200 million over five years, which includes its 50% share of the StarHub-M1 joint venture company’s (JVCo) capex for radio and spectrum, as well as its own capex for building a 5G core network.— Samantha Chiew

 

CapitaLand

Price target:

DBS “buy” $3.70

CGS-CIMB “add” $3.42

Analysts upbeat as economy reopens

Analysts from DBS Group Research and CGS-CIMB Research are keeping their “buy/add” calls on CapitaLand despite a 90% y-o-y drop in earnings for 1H20 due largely to impairments.

DBS and CGS-CIMB have target prices of $3.70 and $3.42, respectively.

DBS analysts Derek Tan and Rachel Tan are observing a “gradual increase in metrics” following retailers’ gradual reopening and along with it, better traffic and tenant sales.

The analysts add that CapitaLand’s office and business parks (BP) remained resilient despite Covid-19 challenges, with strong occupancy rates of 84% to 95% across their main geographies as of end-June 2020. The group also reported positive rental reversion in its office and BP portfolio in 1H20.

Furthermore, CapitaLand’s lodging business has remained profitable despite the global travel bans due to cost containment measures across the portfolio. The North Asia (excluding China) and Singapore markets have been profitable, but this has been offset by losses in Europe and Southeast Asia (excluding Singapore). Revenue per available room (RevPAR) dropped 43% in 1H20 to $64/ unit, but occupancy rate was maintained at a profitable level of about 50%.

CGS-CIMB analyst Lock Mun Yee largely concurred with the above points, but also highlighted that a strong China residential profit recognition was expected in 2H20.

She noted that CapitaLand handed over about RMB1.6 billion ($315 million) worth of residential properties and achieved RMB 5.6 billion in new sales in 1H20 as transactions rebounded with the reopening of sales centres. It targets to recognise another RMB12.7billion worth of sales in 2H20.

In Vietnam, it handed over $124 million worth of sales in 1H20, and another approximately $234 million of sales are due to be billed in 2H20. In Singapore, it achieved $60 million of residential sales and has about 1,800 units remaining in its launch pipeline.

“In the longer run, we believe that CapitaLand’s resilience is enhanced through its diversified business model,” says Lock, who notes that the operating environment is likely to remain challenging in the near term.— Lim Hui Jie