Price target:
UOB Kay Hian “buy” 36 cents
RHB Group Research “buy” 32 cents

Feeding hungry heartlanders
Analysts are craving for more of coffeeshop chain operator Kimly, which is seen as a beneficiary of Covid-19 measures, as many people are still working from home.

“The advantages of coffeeshop operations include boosted earnings given the proximity to the heartlands, where many are working from home; easy access for online food delivery providers; and lower price point due to lower operating costs as compared to shopping malls,” says lead analyst Llelleythan Tan of UOB Kay Hian in an Oct 9 report, which initiated coverage with a “buy” call and a target price of 36 cents.

“As Singapore re-opens its economy following the lifting of circuit breaker measures, Kimly is well-positioned to ride on this as customers start to dine in at Kimly’s multiple restaurant brands,” says Tan, referring to the 65 coffeeshops it runs.

Meanwhile, due to the cash-generative nature of its business, Kimly has a net cash balance of $69.3 million (23% of market cap) as of 1HFY2020. This allows it to pay one of the highest dividends as compared to its local competitors.

“Also, Kimly has begun acquiring more coffeeshops to add to its growing portfolio with recent acquisitions completed in 1HFY2020. By doing so, the acquisitions would help boost future revenues and profits when these assets start contributing significantly in three to five years post-acquisitions,” adds Tan.

Similarly, RHB Group Research is keeping its “buy” recommendation on Kimly with an increased target price of 32 cents, from 29 cents previously.

Analyst Jarick Seet believes that Kimly is a beneficiary of the still-high frequency of food delivery orders, which has formed a new core revenue stream for the group.

“For FY2020, we project for food delivery orders to likely form 15-20% of total revenue. We believe this may be due to the fact that food sold at the company’s outlets is one of the most affordable options among the various food delivery platforms, making it more sustainable for the average family in Singapore in this flagging economy,” says Seet.

In addition, its outlets are well spread-out across Singapore — mainly near or in housing estates — ensuring a wide reach for food delivery.

Overall, Seet views the stock as a “defensive yet attractive value proposition”. “We expect Kimly’s business to remain strong amidst this pandemic, and it will likely continue to reward shareholders with attractive dividends. We expect dividends to remain attractive at 4.8% for FY2020,” he adds.— Samantha Chiew

Keppel Corp
Price target:
CGS-CIMB “add” $6.46

Renewable energy contract win likely a boost

On Oct 9, Keppel Corp, via its unit Keppel O&M, secured a $600 million contract for the engineering, procurement and construction of a vessel for the offshore renewable energy industry.

CGS-CIMB says it is “positive” that the company’s year-to-date orders of $907 million are ahead of its forecast of between $500 million and $1 billion for FY2020-FY2021. “We maintain our assumptions pending further discussion with the management,” CGS-CIMB head of research Lim Siew Khee wrote in a note dated Oct 9.

According to the brokerage, this contract win proves that Keppel is seeing “traction” in its focus to become a provider of renewable energy solutions. The company’s current projects include build- ing converter stations and substations to support the offshore wind energy industry in the German sector of the North Sea and in Taiwan, notes Lim.

The company also has a stake in Blue Tern, which is one of the world’s largest and most advanced multi-purpose offshore wind turbine installers for the UK North Sea, adds the brokerage.

Lim is keeping her “add” rating for the stock with an unchanged target price of $6.46. —Jeffrey Tan

Suntec REIT
Price target:
CGS-CIMB “add” $1.73
DBS Group Research “buy” $1.81
OCBC Investment Research “buy” $1.57 UOB Kay Hian “buy” $1.72

London acquisition seen as positive

Analysts have given the thumbs-up to Suntec REIT for its $756 million acquisition of properties in Lon- don announced on Oct 8, noting the “strategic fit” to its current Singapore and Australia portfolio and that it is yield-accretive.

Chong Kee Hiong, the CEO of Suntec REIT’s manager, says that the net property income yield of 4.6% will provide a distribution per unit (DPU) accretion of 4.9% upon the completion of the acquisition in December 2020.

“We like the location and quality of the Nova properties but think that Suntec REIT’s higher gearing could be a drag on near-term share price performance,” wrote CGS-CIMB’s Lock Mun Yee and Eing Kar Mei in their Oct 9 report, where they raised the target price to $1.73 from $1.70 while keeping their “add” call.

“Re-rating catalyst could come from better clarity on its acquisition funding strategy. Downside risks: higher-than-estimated rental waivers to retail tenants,” they add.

DBS analysts Rachel Tan and Derek Tan have maintained their target price of $1.81, which “implies 0.87 times price to net asset value (P/NAV) which is close to its historical mean and 4% dividend yield”. They believe that the addition of quality assets with an 11.1-year weighted average lease expiry (WALE) to the REIT’s portfolio adds income visibility and reduces near-term earnings risks.

The analysts believe that the DPU-accretive acquisition will also drive the REIT’s underlying DPU growth and further reduces the reliance on its capital distribution.

“The long WALE and 100% committed occupancy will provide stable earnings contribution from the asset. In addition, possible upside could be derived from rent review generally every five years at market or existing rent, whichever is higher,” they say.

The team at OCBC Investment Research has also maintained its fair value (or target price) at $1.57. While the team sees the acquisition as having “more positives than negatives”, they feel that equity fund-raising risks remain.

“Management highlighted that its longer-term aggregate leverage target remains at 42-45%. Besides equity, another funding option could also be the issuance of perpetual securities. This would reduce the accretion level of the acquisition,” they say.

UOB Kay Hian analysts Jonathan Koh and Loke Peihao say that this is an “opportune time” to invest in Suntec REIT, as the REIT’s three newly completed buildings — 9 Penang Road in Singapore, 477 Collins Street in Melbourne, and 21 Harris Street in Sydney — will add to its full-year contributions for 2021.

They have upgraded the counter to “buy” from “neutral” with a lower target price of $1.72, from $1.99 previously. — Felicia Tan

ST Group
Price target:
UOB Kay Hian “buy” 14 cents

Ability to scale while maintaining margins
UOB Kay Hian’s Clement Ho is initiating a “buy” recommendation on ST Group Food Industries with a target price of 14 cents, as he believes the group’s portfolio of F&B brands is able to rapidly scale yet maintain margins at more than 7%.

Some of the master franchise and licence agreements with popular brands that the group currently holds include PappaRich, NeNe Chicken, Gong Cha, Hokkaido Baked Cheese Tarts and Ippudo.

Prior to FY2020 when the group registered its first drop in revenue and earnings, core net profit grew at a CAGR of 59% in FY2016-2019, driven by growing sales from its rapid expansion.
Being a master franchisee with a developed franchise system supported by its central kitchen and logistics system, the group is able to rapidly scale up proven brands and expand a network of restaurants and kiosks in different geographical regions to support earnings growth without the need for heavy capital expenditure.

Ho notes that the number of sub-franchise and licensed outlets has more than doubled from 30 in FY2016 to 72 in FY2020, contributing 62% of the total number of outlets, which he interprets as ST Group’s ability to attract local partners to join as sub-franchisees.

He also believes given that franchise revenue (13.6% of FY2019 revenue) and supply-chain sales (18.2% of FY2019 revenue) command higher margins of 15-20%, there is room for margin improvement as the group expands its franchise network.

In FY2020, the group opened 10 outlets (net of closure) and has eight new stores in the pipeline for the rest of 2020.

“With stronger contributions from outlets opened in 1HFY2020 (which were hampered by lockdown measures) and new outlets in FY2021, coupled with the resumption of economic activities in its core markets of Australia and New Zealand, we expect net profit of A$2.5 million [$2.44 million] in FY2021, up from A$0.8 million in FY2020,” says Ho. The analyst also foresees a stronger recovery in FY2022 with net profit growing to A$4.1 million, barring another round of stringent lockdown measures.

The stock is currently trading at 1.1 times FY2021 earnings and 6.7 times FY2022 earnings, which the analyst views as undervalued, given its growth potential on the back of its strong portfolio of F&B brands. — Samantha Chiew


China Aviation Oil
Price target:
RHB Group Research “buy” $1.15

Improvement in China’s domestic air traffic to drive growth
RHB Group Research’s Shekar Jasiwal has kept his “buy” call on China Aviation Oil (CAO) with a raised target price of $1.15 from $1.05, on expectations that China’s domestic air traffic will improve even after the Golden Week holidays peak travelling period. According to the Civil Aviation Administration of China, during the Golden Week holidays, China saw 13.3 million passenger trips, and the average daily passenger traffic and average daily flight volume reached 91% and 90% of the same period last year.

Jasiwal notes “a gradual but partial recovery” in international aviation traffic in China — especially at Shanghai Pudong International Airport — should support CAO’s FY2021 earnings growth. While CAO’s share price has increased recently, valuations remain compelling amid expectations of about 30% profit growth in 2021.

Separately, he thinks China is well-positioned to extend its leadership in global aviation traffic recovery, as it manages to keep Covid-19 under control. Wu Guizhen, chief bio-safety expert at the Chinese Center For Disease Control and Prevention, was quoted in a report last month as saying that Covid-19 vaccine shots will be ready for public use as early as November or December in China. This is because final-stage clinical trials of several vaccine candidates have progressed very smoothly.

An effective vaccine development could improve travel sentiment — not only in China, but also in the region, which will in turn benefit CAO.

Finally, he said despite the rise in the stock price, CAO’s 2021 price-to-earnings ratio (P/E) of 9.3 times is below the range of multiples of its global jet fuel-supplying peers, and implies only 0.3 times 2021 price/earnings to growth ratio (PEG).

The company has a zero debt balance sheet with a net cash position of US$406.7 million ($552.7 million), which is equivalent to about 64% of its market cap. On an ex-cash basis, the stock is trading at a compelling 3.3 times 2021 P/E. — Lim Hui Jie

Price target:
CGS-CIMB “add” 96 cents

Higher swine and milk prices to mitigate weak poultry business
CGS-CIMB analyst Cezzane See is keeping her “add” recommendation on Japfa, with a target price of 96 cents. The company is see- ing mixed outlook for the prices of the pigs, chicken and milk it sells across the region.

For example, in Vietnam, swine prices have doubled in July and August to an average of VND80,000 ($4.68) per kg, compared to this time last year. This, according to See, implies a still-strong 3Q2020, with the Animal Protein Other segment Ebit having already posted an earnings turnaround in 2Q2020, from a loss in 2Q2019.

Meanwhile, raw milk prices in China for 3Q2020 were up 3.9% q-o-q to RMB3.7 (75 Singapore cents) per kg as at Sept 23. This upward trend is positive for Japfa’s dairy segment, whose Ebit had already increased by some 21% y-o-y to US$19.6 million ($26.6 million) in 2QFY2020.

However, things aren’t too rosy for Japfa in its home market Indonesia. Prices of day-old chicks in 3QFY2020 dropped by a-fifth to around IDR3,300 (30 Singapore cents), while average 3QFY2020 broiler prices were down 13% y-o-y to IDR14,600, amid an oversupply situation.

“Our Indonesia team believes weak disposable income in Indonesia due to the ongoing impact of Covid-19 could cap the demand recovery for Indon poultry in 2H20F. We foresee 3QFY2020 and 2HFY2020 prospects remaining weak for this segment,” says See, who expects Japfa to report a 3QFY2020 Ebit of about US$62 million, up 28% y-o-y.— Samantha Chiew