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Brokers' Digest 919

The Edge Singapore
The Edge Singapore • 11 min read
Brokers' Digest 919
  Far East Hospitality TrustPrice targets:69 cents DOWNGRADE HOLD (DBS Group Research)86 cents BUY (UOB Kay Hian Research)64 cents UNDERWEIGHT (JPMorgan Research)82 cents BUY (HSBC Global Research)70 cents HOLD (CGS-CIMB
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Food Empire Holdings

Price targets:

89 cents INITIATE BUY (UOB Kay Hian Research)

83 cents BUY (RHB Group Research)

UOB Kay Hian is initiating coverage on instant coffee manufacturer Food Empire Holdings with a “buy” recommendation and a target price of 89 cents – representing a potential upside of close to 35%.

“At current prices, the stock trades at an attractive valuation at 9.2 times 2020F price-to earnings (PE), significantly lower compared to peers’ average of 22 times,” says lead analyst Joohijit Kaur in a Feb 5 report, calling Food Empire a “huge bargain”.

Food Empire’s flagship brand, MacCoffee, is the leading 3-in-1 coffee mixes brand in Commonwealth Independent States (CIS) countries and commands the largest market share of Russia’s instant coffee market.

“Following the collapse of the Russian ruble in 2014, the group has successfully diversified its sales through deepening its penetration in emerging markets,” Kaur says.

In 2013, the group launched its iced coffee product Café Pho in Vietnam. According to Kaur, it is now among the top five leading brands by volume share and a top three player based on value share in the Vietnam 3-in-1 instant coffee market.

“Sales contribution from Russia was about 60% prior to the ruble’s collapse in 2HFY2014 but has since fallen to 40%, mainly due to its geographic expansion into regions such as Vietnam and diversification efforts into the upstream business,” Kaur notes. Moving forward, the analyst believes Food Empire could see a strengthening margin from cost rationalisation.

“Efforts to streamline operations and the exit of its loss making Myanmar business improved 9MFY2019 reported net margin by 2.6 percentage points to 9.8%,” Kaur says. “The group is set to have pulled off a record year in 2019 – with the highest level of reported net profit – underpinned by stable revenue growth coupled with margin expansion.”

For 9MFY2019 ended September 2019, Food Empire reported a 37.4% jump in earnings to US$21.1 million ($28.9 million), even as revenue for the period came in relatively flat at US$215.3 million.

Selling and marketing expenses were 11.7% lower at US$32.1 million, led by the rationalisation of underperforming businesses.

“With management’s focus on key markets and less of a drag from underperforming markets, margin should continue to trend upwards,” Kaur adds. “We estimate a net margin increase of 2.5 percentage points and 0.3 percentage point in 2019 and 2020 respectively as we expect cost savings from the streamlining exercise and improvement in scale.”

“With a stable revenue growth, we forecast earnings to grow at 9.4% CAGR for 2019-21,” the analyst concludes. “We note that 2019 is set to be a record year for the group as it reports the highest level of net profit.” — By Stanislaus Jude Chan

Far East Hospitality Trust

Price targets:

69 cents DOWNGRADE HOLD (DBS Group Research)

86 cents BUY (UOB Kay Hian Research)

64 cents UNDERWEIGHT (JPMorgan Research)

82 cents BUY (HSBC Global Research)

70 cents HOLD (CGS-CIMB research)

80 cents BUY (Maybank Kim Eng Research)

Far East Hospitality Trust’s (FEHT) distribution per unit (DPU) in 2020 is expected to be hit as a result of the coronavirus outbreak, according to DBS Group Research. This comes as Singapore recently initiated a travel ban on all China passport holders and foreigners who have visited China in the past 14 days.

Given that 70% of FEHT’s revenue is derived from the local market, DBS believes its operations would be “adversely impacted”.

“We believe that a fall in tourist traffic will result in higher competition and likely to affect FEHT’s DPU performance this year,” DBS analyst Derek Tan writes in a note dated Feb 3.

FEHT’s serviced residence business could also face headwinds, according to DBS. It notes that the change in regulations to allow private residential units to be rented out for a minimum of three months – instead of six months previously – would introduce additional competition.

This may cause near-term pressure on room rates for FEHT’s serviced residence segment, although this will be partially offset by its strategy to target shorter term leisure guests, the brokerage says.

Still, DBS reckons that FEHT should benefit from a positive medium-term outlook for the hotel industry. It also points out that supply is constrained as no new hotel land sites were released by the Singapore government from 2014 to 2017.

DBS has projected new room supply to only grow by 1% to 2% per annum from 2020 to 2023, compared to 4% to 7% over the past few years.

“We believe the supply curtailment and growing travel demand due to rising Asian affluence should lead to an increase in RevPAR,” says Tan. “In addition, FEHT’s earnings should benefit from the opening of the first phase of the 850 room Sentosa going forward." - By Jeffrey Tan

Ascott Residence Trust

Price targets:

$1.53 UPGRADE BUY (Phillip Securities Research)

$1.50 BUY DBS Group Research)

$1.40 HOLD (Maybank Kim Eng Research)

$1.57 BUY (UOB Kay Hian Research)

$1.35 EQUAL WEIGHT/ATTRACTIVE (Morgan Stanley Research)

$1.45 OVERWEIGHT (JPMorgan Research)

$1.34 HOLD (CGS-CIMB Research)

Even as uncertainty over the novel coronavirus outbreak has battered investor confidence in Singapore real estate investment trusts, analysts are staying positive on Ascott Residence Trust (ART).

“The recent collapse in the share price due to the uncertainty caused by the novel coronavirus presents a good entry price in our opinion,” says research analyst Natalie Ong in a Feb 5 report.

Over the past two weeks, units in ART have fallen 8.8% from its closing price of $1.36 on Jan 20.

The way Ong sees it, ART’s serviced residences attract a largely corporate clientele with longer average length of stays. This makes ART less likely to be crippled by the impact of the coronavirus outbreak compared to other leisure-driven hospitality REITs, she says.

“The management expects that travel volumes will be impacted in the short term, as well as some cancellation of bookings. However, given ART has more long-term stays than short-term stays which are driven by corporate clients on project groups or secondment and less leisure-tourism dependent, we expect to be more protected than other hospitality REITs,” Ong says.

She notes that ART is trading at an “attractive” yield of 6.6% and price-to-net asset value (P/NAV) of 0.94.

On top of ART’s positioning in the service residences space, DGS Group Research analyst Derek Tan points out that its well diversified portfolio also provides a “good buffer” against the coronavirus outbreak. Tan estimates that ART’s portfolio has a mere 7.2% exposure in China post-merger with Ascendas Hospitality Trust (AHT).

“In addition, the more than timely divestments of Citadines Xinghai Suzhou and Citadines Zhuankou Wuhan, will further reduce China exposure,” says Tan in a Jan 31 report. “Diversity remains a key defence against volatility in the hospitality sector.” — By Stanislaus Jude Chan

Venture Corp

Price targets:

$18.23 UPGRADE BUY (Maybank Kim Eng Research)

$17.00 OUTPERFORM (Macquarie Global Research)

$16.88 HOLD (CGS-CIMB Research)

$17.18 ACCUMULATE (Phillip Securities Research)

$16.30 NEUTRAL (RHB Group Research)

$16.00 NEUTRAL (JPMorgan Research)

As Venture Corp’s major clients are projecting optimism ahead, Maybank Kim Eng Research reckons that the electronic services provider could do better this year.

Underpinned by a robust pipeline of key product launches for its customers, Maybank believes the company could return to y-o-y earnings growth in 2HFY2020 ending December.

This is on top of consensus’ 2020 revenue forecast for Venture’s customers have been broadly unchanged through 4Q19 as trade tensions subsided, unlike previously when escalating trade tensions resulted in frequent downward revisions.

“This suggests that [Venture’s] customer base is showing signs of operational stabilisation,” Maybank analyst Lai Gene Lih writes in a note dated Jan 29. “If our thesis plays out, we believe [Venture] may see y-o-y earnings growth in 2HFY2020, assuming 1H:2H seasonality of 46:54.”

To that end, Maybank has raised its FY2020 and FY2021 earnings per share forecasts by 6% and 8%, respectively, in line with FactSet consensus.

The brokerage has also increased its target price for Venture to $18.23, from $16.91 previously.

According to Maybank, Venture’s customers have turned more positive this year, owing to their robust product pipeline, pent-up demand from delayed spending and 5G roll-out.

Key customers – such as Agilent, Thermo Fisher and Honeywell – are of the view that the economy has bottomed and are expecting this year to be better than last year, it notes.

This is in contrast to Illumina, which has guided for lower NovaSeq shipments y-o-y in 2020.

The key risk, however, is if the cautious environment persists caused by trade, US elections and general manufacturing-related headwinds, says Maybank. — By Jeffrey Tan

Clearbridge Health

Price targets:

41 cents OVERWEIGHT (Tayrona Financial)

26 cents BUY (Phillip Securities Research)

Emerging areas of precision medicine could transform loss-making healthcare group Clearbridge Health into a “potential unicorn in the making”, according to Tayrona Financial, the independent equity research house formerly known as NRA Capital.

“We see high growth potential for the company as doctors increasingly customise treatments to patients’ genetic composition,” says analyst Liu Jinshu in a Jan 31 report. “With its network across Asia, Clearbridge is positioning itself to tap on this trend over the next five to ten years.”

According to Liu, such growing markets in precision medicine include direct-to-consumer DNA tests, drug sensitivity testing and cancer treatment.

Liu notes that Clearbridge has been growing its portfolio of healthcare facilities through acquisitions over the past two years. Clearbridge now owns the largest chain of clinical laboratories and renal dialysis centres co-located in some of the best hospitals in Indonesia. In Singapore, the group has also acquired a medical-cum-aesthetic clinic and a chain of dental clinics.

Meanwhile, Clearbridge’s 24.8%-owned associate Biolidics has been making waves in China. This includes working with partners to develop clinical and laboratory tests using its patented technology to separate tumour cells from blood.

“Liquid biopsies can be used to detect cancer early and monitor disease and has been touted as a game changer in cancer treatment. In the US, similar companies have captured the attention of pharma giants and have been the subject of several acquisitions over the last two years,” Liu says.

Clearbridge, though, is still in the red although its losses have narrowed. For 9MFY2019 ended September 2019, the group posted a net loss of $8.2 million, down from a net loss of $16.2 million in the corresponding period a year ago.

9MFY2019 revenue more than trebled to $13.2 million, from $3.9 million a year ago, on the back of strong contributions from its recent healthcare acquisitions.

“With a stream of profitable acquisitions, we expect Clearbridge to turn EBITDA positive in 2020 and report its maiden profit in 2021,” Liu says. He notes that the company’s management has a track record of running and monetising medical technology businesses.

“We believe that Clearbridge deserves an aggressive valuation for its high future growth potential. Hence, we value Clearbridge at US$201.3 million,” he adds. — By Stanislaus Jude Chan

OUE Commercial REIT

Price targets:

60 cents BUY (DBS Group Research)

56 cents HOLD (CGS-CIMB Research)

OUE Commercial REIT (OUECT) could well have started to reap profits from its merger with OUE Hospitality Trust (OUEHT).

Following the merger, OUECT has become one of the largest diversified REITs with total assets of some $6.8 billion and seven properties across the commercial and hospitality segments in Singapore and Shanghai.

For one, the OUECT’s results for 4Q19 ended December were largely “in line” with analysts’ expectations. The REIT booked a distribution per unit (DPU) of 0.84 cent, some 12% higher than the 0.75 cent DPU back in 4Q18. However, FY19 DPU fell 4.9% y-o-y to 3.31 cents on an enlarged base.

Revenue for the quarter surged 80.7% to $86.8 million from the previous year, while net property income (NPI) correspondingly grew 92.6% to $70.6 million on the back of the consolidation of OUE Downtown Office’s income since Nov 2018, as well as contributions from OUEHT.

According to Rachel Tan, an analyst at DBS Group Research, OUECT appears to be “firing on all cylinders” following the merger. “Being a larger entity now, Singapore-centric with strong underlying performance, and working towards potential indexation, OUECT should start to draw investor interest,” says Tan in a report on Jan 31.

OCBC Investment Research analyst Chu Peng hones in on the REIT’s Singapore office properties, which recorded strong positive rental reversions in the range of 9.4% to 26.5% in 4Q19 as rents for renewed leases were higher than expiring rents.

“Average passing office rent for Singapore offices were higher y-o-y as a result of consecutive quarters of positive rental reversions,” says Chu. “We expect good rental reversions potential with 20% of OUECT’s commercial portfolio by gross rental income (GRI) due for renewal in 2020, and 28% due in 2021.” — By Uma Devi

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