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Broker's Digest: ComfortDelGro, APAC Realty, Valuetronics, Japan Foods, Golden Agri-Resources

Khairani Afifi Noordin
Khairani Afifi Noordin11/18/2021 09:22 PM GMT+08  • 12 min read
Broker's Digest: ComfortDelGro, APAC Realty, Valuetronics, Japan Foods, Golden Agri-Resources
Here's what analysts are recommending this week.
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Price target:

PhillipCapital “buy” $1.80

‘Restructuring whimper’ but retains positive cash flow

ComfortDelGro faces “restructuring whimper” but retains positive cash flow, according to PhillipCapital analyst Paul Chew, who is maintaining a “buy” rating on ComfortDelGro, with a modestly lowered target price from $1.83 to $1.80.

According to Chew, 3QFY2021 ended September earnings were below expectations. This comes when the 9MFY2021 revenue and patmi was 70% and 60% respectively of his FY2021 forecast respectively.

ComfortDelGro’s revenue for 3QFY2021 was $880.3 million, up 7.4% y-o-y. In addition, taxi rebates in 3QFY2021 resulted in operating losses, where taxi operations suffered $8 million operating losses in 3QFY2021 excluding government relief. “Losses have widened from the $2.1 million in the prior quarter,” says Chew.

Operating cash flow for the company remains healthy however, coupled with record cash levels. Free cash flow generated during the quarter was around $95.2 million (compared to $137.7 million in 3QFY2020), and net cash has bulked up to $458 million (against $116 million in 3QFY2020), including finance lease. Capital expenditure is around $200 million per annum against the $350 million pre-pandemic, according to the analyst.

In light of existing social restrictions and largely closed borders in Singapore, Chew expects muted earnings for 4QFY2021. “The transition to New Rail Financing Framework version 2 (NRFF 2) was a disappointment,” says Chew, as he had expected higher cover for the losses experienced in Downtown Line (DTL). “However, the losses are limited to service charge payable and computation of the shortfall was combined or offset with NEL and SPLRT,” he added.

Separately, a planned listing of the Australian subsidiary has been halted due to challenging market conditions as well, notes Chew.

The analyst noted that the DTL transitioning to NRFF 2 resulted in a net $15 million saving although the new bus contract extension may lower future operating earnings by $34 million. — Chloe Lim

APAC Realty

Price target:

CGS-CIMB “add” 99.6 cents

DBS Group Research “hold” 88 cents

RHB “neutral” 90 cents

Solid 3QFY2021 but analysts mixed on outlook

Analysts from CGS-CIMB Research, DBS Group Research and RHB Group Research are mixed on APAC Realty after the group saw net profit after tax surge 139% y-o-y to $26.1 million for the 9MFY2021 ended September.

CGS-CIMB’s Lock Mun Yee is the most positive among her peers with an unchanged “add” call but with a higher target price of 99.6 cents from 96 cents, as she notes that APAC Realty’s earnings for the 9MFY2021 beat her expectations.

To Lock, APAC Realty is “still going strong” in the 3QFY2021 as higher commissions across all market segments boosted its performance for the 9MFY2021.

“Looking ahead, we believe the resale residential market is likely to remain robust, in tandem with the primary residential segment,” she writes in a Nov 15 report. The reopening of the economies in Indonesia, Malaysia, Thailand and Vietnam should spur more home buying going forward as well.

Meanwhile, DBS Group Research analyst Ling Lee Keng has downgraded her call to “hold” from “buy” with a lower target price of 88 cents from $1.05, citing “lacklustre growth outlook” and that positives are already priced-in at current level.

The lower target price is pegged to a lower price-to-earnings (P/E) ratio of 10 times on FY2022 earnings, which is APAC Realty’s four-year average.

“Earnings could taper and move sideways in the next one to two years. Furthermore, the stock is at risk of de-rating if property cooling measures are announced,” notes Ling in her Nov 15 report.

RHB Group Research Vijay Natarajan has remained “neutral” on the stock, although he has upped his target price to 90 cents from 88 cents given its “solid quarter of earnings”.

Natarajan has also upped his earnings estimate for the FY2021 to FY2023 by 8-12% on the back of resilient market fundamentals and market share gains.

“The earnings surge was driven by strong residential momentum in primary and resale market volumes where 9MFY2021 transactions have exceeded that of the entire 2020,” he notes in a Nov 16 report.

APAC’s slight increase in primary market share for the 9MFY2021 is likely to be sustained, he says. “Based on its internal estimates, APAC secured a primary market share of 32.6% for 9MFY2021, up from 28.6% during the same period last year. This is positive as margins in primary sales are more than double that of the resale margins. Although there has been pressure of late on primary sales margins, management expects it to stabilise around the current levels of 13-14%,” he writes.

While Natarajan has showed concerns on the limited supply in the pipeline amid the declining inventory levels, the gathering momentum in the enbloc market would provide a “positive boost” in terms of more launches likely for 2023. — Felicia Tan


Price target:

DBS Group Research “hold” 55 cents

Maybank Kim Eng “sell” 50 cents

CGS-CIMB “reduce” 53.3 cents

UOB Kay Hian ‘hold” 52 cents

Earnings missed expectations

DBS Group Research is of the opinion that Valuetronics is “almost there” in its turnaround story but the recent earnings missed expectations of the others.

Maybank Kim Eng has downgraded Valuetronics to a “sell” rating from a “hold”, joining CGS-CIMB, who has a “reduce” rating on the stock.

Target prices from these two brokerages stand at 50 cents and 53.3 cents respectively, from their previous figures of 60 cents and 50.4 cents.

In contrast, DBS and UOB Kay Hian Research have maintained their “hold” ratings, although with target prices of 55 cents and 52 cents, down from their previous targets of 60 cents and 66 cents respectively.

The main reason for the lower optimism among the brokerages is the fact that the company missed expectations for its 1HFY2021 ended June results. Valuetronics’ patmi came in at HK$56.6 million ($9.8 million), 38.1% lower y-o-y, missed the expectations of all four brokerages.

UOB Kay Hian’s John Leong sums up the reason for the underperformance as largely due to weaker than expected gross margin.

1HFY2022 gross margin fell 2.8% to 14.2%, as it was hit by higher component prices due to tight supply, increased labour and operating costs in China under an appreciating renminbi.

DBS analysts Chung Wei Le and Ling Lee Keng elaborates on the labour costs, saying the “zero-Covid stance” adopted by China’s government, lockdowns, and the risk of being quarantined in another city have reduced the supply in the labour market in China, resulting in higher labour prices.

In addition, Maybank Kim Eng’s Lai Gene Lih notes that consumer electronics revenue fell 12.5% as orders were cancelled or deferred due to chip shortages.

Industrial and commercial electronics decreased 4.8%, and this is as the expected loss of automotive allocation was offset by growth from printing and sensing customers that are exposed to ecommerce and/or logistics.

The DBS analysts foresee headwinds to persist in FY2022 and believe that the overhanging weakness from the component shortage and potential downside risks weigh on the stock.

This is also echoed by CGS-CIMB analyst William Tng, who highlights that the company’s management expects net profit to be “significantly lower”.

“Management expects the global component shortages to continue to affect its ability to fulfill customers’ orders. Component shortages coupled with increasing operating costs in China led the management to guide for margin erosion in the near term … these factors will lead to FY2022 results being significantly lower compared to FY2021,” he writes.

A bright spot for the company, however, is that its newly constructed plant in Vietnam is on track and could begin mass production in the first quarter of 2022. DBS also believes in holding on to the stock due to its strong financial position and attractive valuation.

“In our view, Valuetronics is approaching the turnaround story by end-FY2022 with the ramp-up of its Vietnam plant, revenue from potential new customers, and tailwinds from the logistics and e-commerce industries,” Chung and Ling write.

However, till then, all the analysts note that it will be a challenging outlook for Valuetronics, with CGS-CIMB’s Tng preferring other stocks in the sector such as Venture Corp and Aztech Global.— Lim Hui Jie

Japan Foods

Price target:

KGI Securities “outperform” 56 cents

Lower target price on delayed reopening

KGI Securities is maintaining its “outperform” rating on F&B group Japan Foods Holding with a lower target price of 56 cents from 65 cents previously as analyst Joel Ng accounts for a weaker FY2022 ending March 2022 due to the delayed reopening plans in Singapore.

This follows Japan Foods’ latest 1HFY2022 results announcement. It has reported a $1.6 million loss, reversing from the $0.3 million earnings recorded the year before.

The losses recorded are despite higher revenue of $21.2 million logged for the period, up 14.5% y-o-y driven by higher revenues from brands including Afuri Ramen, Ichiro Ramen, Fruit Paradise and Yonehachi, as well as contributions from new halal brand Tokyo Shokudo.

The group declared an interim dividend of 0.5 cents per share, lower than 0.75 cents issued in the previous year. Ng notes that Japan Foods operated 52 restaurants in Singapore as at end September, a slight increase from 50 as at end March, but a decline from 59 as at end September 2020.

“However, we believe the worst is behind us. The break of dawn brings new opportunities, which the group has taken advantage of to expand into areas such as Halal-certified restaurants,” says Ng.

Meanwhile, the group’s venture into Tokyo has been delayed due to the pandemic. But on a positive note, the group has retained a well-located store in Tokyo that can start operations without the need for major operations.

“We understand that Japan Foods pays a minimal fee to retain the location and can potentially open in March 2022. The success of this restaurant would be a key element to Japan Foods’ growth profile as it would open up a completely new market for the group,” Ng says.

The analyst believes that the group’s revenue mix is better diversified now. While Ajisen Ramen’s 29.7% revenue contribution in 1HFY2022 is still the largest, it is down from 35.1% in the prior year period. Other brands that are contributing more include Tokyo Shokudo (15.2% of 1HFY2021 revenue), which is the group’s first-ever Halal-certified restaurant that was started in FY2021. Japan Foods now has six Tokyo Shokudo restaurants (end-September).

“After more than one and a half years of start-stop dining restrictions, we believe Singapore is finally ready to ease restrictions on a more sustainable basis,” says Ng, adding that the recent announcements of the vaccinated travel lane (VTL) for up to 16 countries and easing of restrictions of dining out for vaccinated people from the same household is evidence of the government’s focus to treat Covid-19 as endemic.

Overall, Ng sees a brighter future for the F&B industry with increasing vaccination rates and improving treatment for Covid-19.

Despite an expected weaker FY2022, the analyst believes that Japan Foods is in a favourable position to grow and expand its market share given its flexible and resilient business model.

“We particularly like its ability to rotate among its restaurant brands and constantly bring in new concepts, supported by its rock-solid balance sheet,” he adds.— Chloe Lim

Golden Agri Resources

Price target:

CGS-CIMB “hold” 28.1 cents

RHB “neutral” 28 cents

UOB Kay Hian “cease coverage” 18 cents

Higher 3Q earnings but tapered growth ahead

Analysts at CGS-CIMB Research and RHB Group Research have increased their target price for Golden Agri-Resources on the back of higher expected earnings to 28.1 cents and 28 cents respectively, from 25 cents and 24 cents previously.

Analysts at UOB Kay Hian, however, have ceased their coverage on Golden Agri, with a last target price of 18 cents.

Golden Agri reported a 269% y-o-y improvement in ebitda to US$828 million ($1.12 billion) in 9M21, driven mainly by higher net crude palm oil (CPO) prices and production. The strong fresh fruit bunches (FFB) output was driven by the acquisition of 34 hectares of new estates as well as improved yields from its estates that were hit by drought last year, CGS-CIMB analysts Ivy Ng Lee Fang and Nagulan Ravi note.

Due to the change of biological cycle for FFB this year, Golden Agri expects FBB growth in 4QFY2021 to be flattish q-o-q, reducing its FY2021 FFB growth guidance to 5%. In this case, FFB output in 4QFY2021 will be 20% lower y-o-y, RHB analysts highlight.

“As such, we lower our FFB growth to 6% (from 10%) for FY2021, but keep it at 3% to 5% for FY2022 to FY2023. Despite the lower growth guidance for FFB, management expects CPO growth to be higher at 7% y-o-y for FY21F, from higher external purchases. We have adjusted up our forecasts accordingly,” they add.

UOB Kay Hian analysts Jacquelyn Yow Hui Li and Leow Huey Chuen highlight that both Golden Agri’s upstream and downstream operations performed well on the back of strong sales volume. The total output of palm oil for 3QFY2021 and 9MFY2021 had increased by 22%, which includes the acquired estates in late 2020.

“Downstream sales volume had continued to increase by 10% q-o-q and 12% y-o-y in 3QFY2021 which we attribute to the benefit of Indonesia’s export levy structure, which benefits companies with higher margin. The downstream margin remains healthy at about 4% to 5%,” they add.

Golden Agri revealed that fertiliser costs have increased by 50%, which could raise its costs of production for CPO by 10% to 15% in FY2022 from the estimated US$300 per tonne ($405.24 per tonne) in FY2021. It is currently in the midst of tendering for 1HFY2022 fertiliser requirements.

The company had also cut its replanting target to 10,000 to 15,000 hectares ha due to current high CPO prices, CGS-CIMB analysts note.

“We lift our FY2021 to FY2022 earnings per share forecasts to reflect our recently revised higher net CPO price (post export levy and tax) assumptions of US$756 per tonne in FY2021, US$682 per tonne in FY2022 and US$643 per tonne in FY2023,” they add.— Khairani Afifi Noordin

Photo: The Edge Singapore

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