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Brokers’ Digest: ComfortDelGro, Frasers Property, Bumitama Agri, Paragon REIT, Cromwell European REIT, Memiontec, CSE

The Edge Singapore
The Edge Singapore • 24 min read
Brokers’ Digest: ComfortDelGro, Frasers Property, Bumitama Agri, Paragon REIT, Cromwell European REIT, Memiontec, CSE
Analysts are staying positive on ComfortDelGro (CDG) despite its latest 1QFY2024 ended March numbers coming in lower than some expected. Photo: ComfortDelGro
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ComfortDelGro Corp
Price targets:
DBS Group Research ‘buy’ $1.80
Maybank Securities ‘buy’ $1.60
CGS International ‘add’ $1.70
UOB Kay Hian ‘hold’ $1.56
PhillipCapital ‘buy’ $1.63

Cruising along while awaiting more catalysts

Analysts are staying positive on ComfortDelGro C52 -

(CDG) despite its latest 1QFY2024 ended March numbers coming in lower than some expected.

“Earnings growth is still underway,” says Paul Chew of PhillipCapital, who has kept his “buy” call and $1.63 target price.

CDG’s earnings were 23.8% higher y-o-y at $40.6 million, marking its fourth consecutive quarterly improvement post-pandemic. Revenue was 10.8% up y-o-y at $1 billion, led by broad-based improvement across its public transport and taxi businesses.

Patmi margin in the same period increased to 4% from 3.6%. With that, analysts Andy Sim and Chee Zheng Feng from DBS Group Research are keeping their “buy” recommendation on CDG with a target price of $1.80.

See also: UOBKH ups Keppel DC REIT’s TP to $2.20 after seeing silver lining for Guangdong data centres

The way Sim and Chee see it, the years 2023– 2024 marked a strategic capital management shift for CDG to deploy its net cash position towards bolt-on acquisitions of $100 million or more.

“We regard the two recent acquisitions announced — A2B and CMAC — as rational. They are earnings accretive and align with CDG’s geographical and transport domain expertise. We believe the company will continue to seek out opportunistic acquisitions to complement its overall long-term growth strategy,” they say.

While the analysts have raised concerns about the group’s larger-than-expected q-o-q contraction, they still believe CDG’s y-o-y growth trajectory should remain in subsequent quarters in FY2024 as it unfolds.

See also: UOB Kay Hian raises Yangzijiang Shipbuilding's target price to $2.86

“We retain our above consensus FY2024 earnings growth of 24% y-o-y contributed mainly by its point-to-point (P2P) and the UK bus business segments. Within these, the P2P should continue to benefit from higher commissions, fares and improved mobility in Singapore, as well as recovery in China post a seasonally slower 1Q,” say Sim and Chee.

Similarly, Maybank Securities is reiterating its “buy” call and $1.60 target price on CDG. Analyst Eric Ong notes that given the seasonally weak first quarter, he has deemed core Patmi of $40.6 million to be roughly in line with his and market expectations.

Net profit margin improved by 0.4 percentage points (ppt) to 4% on the back of stronger net interest income with interest rates set to remain higher for longer.

In April 2023, CDG said it would partner Gojek to introduce a cross-dispatch model allowing jobs from either platform that are not taken up to be sent to the other platform.

“This will help to tackle driver shortage and enhance reliability in the point-to-point industry. The tie-up means drivers will be able to earn more, owing to more rides being available, without having to download any additional app,” says Ong.

Both companies will also explore other areas of partnerships, which include electric vehicles (EVs) and other revenue opportunities, as well as areas such as insurance, driver training and vehicle maintenance.

Meanwhile, CGS International continues to rate CDG “add” with a target price of $1.70, as analyst Ong Khang Chuen expects CDG to deliver strong EPS growth of 15% y-o-y in FY2024 while providing a decent dividend yield of 5.4%.

For more stories about where money flows, click here for Capital Section

While he shares similar sentiments with the street about the slow 1QFY2024, Ong is upbeat on the group’s UK business being a bright spot for FY2024.

“We expect further margin recovery for CDG’s UK business in FY2024 on bus service fee indexation and tender environment in London remaining favourable,” he says.

In April, CDG was awarded $720 million worth of contracts to operate a public bus service in Manchester (starting January 2025).

“We believe this marks the first step in a trend of regions in the UK retaking control of bus services under public authority, and we see more tender opportunities for CDG in the UK over the next three to five years,” says Ong.

Assuming 20%–30% net gearing, CDG has debt headroom of a further $1.2 billion–$1.7 billion, allowing it to carry out more earnings-accretive M&As in adjacent businesses.

On the other hand, UOB Kay Hian has downgraded its call on CDG to “hold” from “buy” previously with a lower target price of $1.56 from $1.72.

Analysts Llelleythan Tan and Heidi Mo are less optimistic about the stock, as it lacks nearterm catalysts.

In the 1QFY2024 results, the analysts note that despite improved rail ridership and higher fares, the public transport segment suffered from lower contract margins in Australia and increased operating costs.

The taxi segment benefitted from higher commission and platform fees, offset by lower booking volumes. However, they do take into account that 1Q is a seasonally weaker quarter and has shown q-o-q decline in revenue, core operating profit and headline Patmi.

“However, 1QFY2024 core operating margin fell 2 ppt q-o-q, a negative surprise given that a full quarter’s contribution from increased taxi commission rates and higher rail fares in 1QFY2024 would have boosted overall margins, in our view,” say the analysts.

For Tan and Mo, the group has had a weak start to 2024, as operating profit came in weaker than expected, dragged by inflationary cost pressures and lower margins from bus contract renewals in Australia.

Little tailwinds are also left for the rest of the year, but 2HFY2024 is expected to see better seasonal operating performance, specifically from the group’s UK bus chartering business, while UK bus contract renewals, which are ongoing, could lead to better margins for the rest of the year.

While the analysts have recognised robust growth in the group’s taxi segment, it has been offset by stiff competition from ride-hailing peers. “Moving forward to 2QFY2024, we expect the taxi segment to continue its upward growth momentum, supported by higher platform fees and booking commission, coupled with new contributions from the A2B acquisition coming through,” say the analysts. — Samantha Chiew

Frasers Property
Price targets:
CGS International ‘add’ $1.41
DBS Group Research ‘buy’ $1.20

Better 2HFY2024, deeply undervalued

CGS International and DBS Group Research have kept their respective positive calls on Frasers Property TQ5 -

following lower-than-expected 1HFY2024 ended March earnings, no thanks to fair value losses booked for its properties in the UK.

In 1HFY2024, the company’s revenue dropped by 20.4% y-o-y to S$1.55 billion. Earnings were down 81.8% y-o-y to $36 million. Besides fair value losses, Frasers Property incurred higher financing costs too.

Despite the lower earnings, DBS Group Research expects a rebound in 2HFY2024, driven by higher revenue recognition of developments in Singapore, China and Australia where some $2.3 billion in presales have been booked.

Frasers Property is also seen to enjoy steady returns from its industrial, logistics, and commercial properties in Europe, the UK, Australia and Asean.

Further lift can be expected as well from its hospitality business, state DBS analysts Derek Tan, Rachel Tan and Tabitha Foo in their May 14 note, where they kept their “buy” call and $1.20 target price, which is pegged to a 60% discount of its RNAV.

The analysts observe that Frasers Property, as part of its active capital management, is continuously recycling assets to its listed REITs, with $1.1 billion divested in 1HFY2024.

“We believe its listed REITs can benefit from having a visible inorganic pipeline,” they say, adding that Frasers Property is trading at a record-low valuation of just 0.3 times book value.

“Frasers Property is deeply undervalued and an attractive privatisation candidate. There may be an upside to dividends with higher profitability in the coming years,” the analysts say.

In her May 15 note, Lock Mun Yee of CGS International is somewhat more bullish, as she kept her “add” call and $1.41 target price for this counter.

Unbilled residential revenue of $2.3 billion provides earnings visibility, says Lock, while the other key business, industrial and logistics, is supporting the growth of the recurring income stream.

Demand is coming from the tenants in the electric vehicle and logistics industries, according to the management.

Lock has kept her FY2024 to FY2026 earnings as well as her RNAV estimate of $2.56. Her target price of $1.41 is a 45% discount to the RNAV. Upside catalysts could come from active capital deployment and improvement in its free float and trading liquidity.

On the other hand, downside risks include slower value-unlocking activities due to the weaker macro outlook and dampened demand for its logistics and industrial space which could moderate its rental income growth. — The Edge Singapore

Bumitama Agri
Price targets:
OCBC Investment Research ‘buy’ 78.5 cents
Maybank Securities ‘buy’ 77 cents
UOB Kay Hian buy ‘buy’ 70 cents
RHB Bank Singapore ‘neutral’ 70 cents

Decent start to the year

Analysts at OCBC Investment Research, Maybank Securities and UOB Kay Hian (UOBKH) have maintained “buy” on Bumitama Agri P8Z -

while RHB Bank Singapore has downgraded the stock to “neutral” following the planter’s 1QFY2024 ended March results.

In her May 14 note, OCBC analyst Ada Lim says Bumitama had a decent start to the year on higher sales volume. This is despite the 23% decline y-o-y in net profit due to foreign exchange headwinds from a stronger US dollar.

For 1QFY2024, Bumitama’s revenue rose 7.7% y-o-y to IDR3.9 trillion ($327.6 million), with crude palm oil (CPO) and palm kernel (PK) performing well. Bumitama’s productivity also improved on a y-o-y basis, Lim points out.

While operating metrics were sequentially weaker q-o-q, it improved y-o-y, in line with the seasonally low 1QFY2024 cycle for palm oil production.

During the quarter, Bumitama processed 1.15 million tons of fresh fruit bunches (FFB) representing an 8% increase y-o-y. This was led by external contributions, which spiked 20% y-o-y while internal FFB volume increased by a smaller 2% y-o-y.

CPO and PK production volumes were up 9.2% and 12.1% y-o-y respectively, while oil extraction rates rose 0.4 percentage points y-o-y to 22.5%. In the near term, CPO prices could remain resilient with the futures market trading in backwardation — suggesting short supply, says Lim.

In the medium to longer term, Indonesia’s president-elect Prabowo Subianto is planning to hike the biodiesel mandate further to B40, eventually reaching B50 by 2029. The hike to B40 is estimated to increase demand by 3.2 million kilolitres.

Given the 18.4% gain in share price over the last six months, RHB analysts believe valuations are now fair, with Bumitama trading at 8 times 2024 P/E, which is at the mid-end of its peer range of 7–9 times.

Its dividend yield of 6.5% for FY2024 should, however, provide share price support, the analysts add.

For 2QFY2024, UOBKH analysts Jacquelyn Yow and Leow Huey Chuen expect Bumitama’s earnings to be higher q-o-q and y-o-y.

This is on the back of higher CPO average selling prices and higher sales volume, which is in line with UOBKH’s expectations of higher CPO production q-o-q as well as higher mill utilisation.

They also point out the rise in PK prices, which have increased by 25% since December due to the limited supply.

That said, the analysts believe the earnings growth may be partially offset by higher fertiliser volume being applied.

Bumitama applied 75% to 85% of its initial target in 2023, hence there would be a catch-up in fertiliser application in 1HFY2024. The company has locked in about 75% of its 2024 fertiliser volume at prices that are lower by 15% y-o-y.

Meanwhile, Maybank’s Ong Chee Ting expects Bumitama’s earnings to play a significant catch-up in 2HFY2024 on stronger output and lower unit costs. — Khairani Afifi Noordin

Paragon REIT
Price target:
CGS International ‘hold’ 86 cents

Firm position as luxury retail landlord

CGS International is reiterating its “hold” recommendation and 86 cents target price for Paragon REIT, as analysts Natalie Ong and Lock Mun Yee remain positive given its firm position as a luxury retail landlord despite the lack of near-term catalysts.

This report comes from the REIT announcing its 1QFY2024 ended March business update.

The analysts note that the REIT’s portfolio occupancy has remained unchanged q-o-q at 98.1%, with Singapore malls boasting 100% occupancy.

No reversion numbers were reported in 1QFY2024 but management shared that luxury tenants continue to view Singapore as an important market, with some shifting emphasis from Hong Kong to Singapore.

Some brands, such as Saint Laurent and Burberry, have expanded their footprint within Paragon over the past 12 months, said the company.

Management also shared that Burberry is converting its space into a duplex unit, doubling its footprint and elevating the retail offering on Level 2 of Paragon, which could draw footfall to higher levels in the mall, the analysts believe.

Meanwhile, some stores on Level 2 will relocate to Level 3. On the other hand, gearing remained low at 29.9% as of 1QFY2024, with 85% of debt on fixed rates.

Cost of debt increased q-o-q from 4.30% to 4.57% in 1QFY2024.

Management did not provide interest rate guidance for FY2024 but said it intends to maintain the proportion of borrowings at similar levels as it refinances $220 million in borrowings maturing in FY2024.

Regarding its $300 million 4.1% perpetual with a reset/call date in August, management commented that it would likely refinance the instrument with bank borrowings, which currently has the lowest cost of debt.

“Post refinancing of the perpetuals, management estimates gearing will increase to about 37%-38%, still at comfortable levels, in our view. While management remains keen on portfolio rebalancing, we think opportunities are limited in the near term,” say Ong and Lock. — Samantha Chiew

Cromwell European REIT
Price targets:
CGS International ‘add’ EUR2.02
RHB Bank Singapore ‘buy’ EUR2.05
PhillipCapital ‘buy’ EUR1.91

Portfolio transformation stays on track

Analysts from CGS International, RHB Bank Singapore and PhillipCapital have kept their “add” and “buy” calls on Cromwell European REIT (CEREIT) after its results for 1QFY2024 ended March 31.

However, CGS International analysts Natalie Ong and Lock Mun Yee, as well as RHB analyst Vijay Natarajan, have lowered their target prices after the REIT’s 1QFY2024 distribution per unit (DPU), which fell by 10.2% y-o-y to EUR0.03505 (5.1 cents), missed their expectations.

“CEREIT’s indicative 1QFY2024 DPU came in slightly below on a timing mismatch from divestment income losses and contributions from redevelopment projects,” notes Natarajan in his May 2 report.

“Nonetheless, the REIT has been making steady progress on its EUR400 million divestment plans, with another three asset divestments since the start of 2024,” he adds.

After his DPU estimate, Natarajan’s target price is lowered to EUR2.05 from EUR2.10. CGS’s Ong and Lock have also lowered their by 5.1%, 5.7% and 5.9%, respectively after the three divestments announced in April.

The lower DPU estimates also include the higher cost of borrowing. As such, their target price is lowered to EUR2.02 from EUR2.06 previously. CEREIT’s 1QFY2024 DPU stood at 23% of its full-year forecast.

The CGS analysts also continue to like the REIT, seeing its portfolio transformation being on track.

“We remain positive on Cromwell European REIT’s clear divestment and redevelopment strategies, which we believe will rebalance its portfolio to a 60%/40% industrial/ Grade A office composition, allowing it to capture leasing tailwinds,” write Ong and Lock in their May 3 report.

RHB’s Natarajan also sees some light, estimating that contributions from the three asset redevelopments of Nervesa 21 (Italy), Lovosice ONE Industrial Park I (Czech Republic), and Novo Mesto ONE Industrial Park I/III (Slovak Republic) to kick in from the 2QFY2024.

“Pre-leasing for these assets stands at 70% - 90%, with full leasing expected by mid-2024 based on current active leasing interest. Cromwell European REIT expects a return on investment (ROI) of [around] 6.5% on these redevelopments, well above market comparable cap rates of [around] 5%,” he writes.

He also notes that the REIT has been among the performers, with its unit price gaining 5% this year to date.

“We see share price recovery continuing with the European Central Bank well poised to begin rate cuts in 2H2024,” he says.

PhillipCapital analyst Darren Chan has kept his target price unchanged at EUR1.91 as the REIT’s 1QFY2024 DPU exceeded his expectations at 25.5% of his full-year forecast.

“We like CREIT for its clear divestment and redevelopment strategies, which will help to keep gearing below 40% and foster organic growth,” says Chan in his May 3 report. “Despite accounting for the loss of income from the divestments, CEREIT still trades at an attractive FY2024 DPU yield of 9.2%. There is no change in our estimates.” — Felicia Tan

Price target:
PhillipCapital ‘unrated’

Growth in water infrastructure

With earnings that have doubled in two years and new market expansion plans on the horizon, PhillipCapital analysts Paul Chew and Liu Miaomiao believe that Memiontec will ride the wave of growth in the coming years, state the analysts in their unrated May 13 note.

Memiontec was established in 1992 and operates across Singapore, Indonesia and mainland China.

It specialises in water treatment and waste management services. Chew and Liu note that Memiontec has four main business segments: total solutions with engineering, procurement and construction (TSEPC); operations, maintenance and service (OMS); sales and distribution of water treatment systems and trading (SDS); and sales of water (SOW) through transfer-own-operate-transfer (TOOT) and build-own-operate-transfer (BOOT) projects.

Chew and Liu highlight three investment thesis they have for the company.

Memiontec’s earnings doubled in two years, in which for FY2023, contract assets increased by 130% y-o-y to $27 million, and inventory multiplied by 80% to $2.6 million due to additional equipment and parts temporarily stored in a third-party warehouse for a project in Singapore. 

The analysts add that revenue for the TSEPC business segment in FY2023 increased by 63% y-o-y, driven by higher contributions from Singapore’s TSEPC operations, but was partially offset by a decrease in revenue from Indonesia’s TSEPC operations due to the completion of significant work for larger projects in Indonesia in 2H2022.

Memiontec’s additional income surged by 39.8% from $0.2 million to $0.3 million in FY2023, primarily driven by government grants, particularly those aimed at expanding into new overseas markets.

They note that its OMS revenue and SDS businesses decreased during the period but highlight that the company has expanded into new markets such as Vietnam. In addition, Chew and Liu say that they believe the group’s growth will come from an increase in water capacity in Indonesia and Singapore.

“Indonesia plans to expand its water pipeline, dams, sanitation, and drinking water. The estimated cost of water infrastructure investment until 2030 is US$1 trillion ($1.35 trillion),” they say.

Singapore’s water demand is projected to double by 2065 — NEWater supplies 40% of Singapore’s needs and is expected to reach 55% by 2060, and desalination will double from 25% to 50% by 2030.

While projects in Indonesia have mostly been drinking water treatment plants and a desalination plant in Bali, the model in Indonesia includes taking an ownership stake in the project to secure additional recurrent income aside from long-term maintenance contracts, they add.

As the company holds investments in several foreign subsidiary corporations, Chew and Liu cite currency risks as notable. They say there is no formal hedging policy to mitigate this risk.

In addition, most projects by Memiontec are government-backed. Therefore, a change in government may lead to a divergence in policy direction, affecting project pipeline and revenue, they note.

Finally, Memiontec’s operation in Singapore, Indonesia and China presents a concentration risk to the analysts, in which the company may be more vulnerable to economic downturns due to regulatory changes. — Nicole Lim

CSE Global
Price targets:
Maybank Securities ‘buy’ 64 cents
UOB Kay Hian ‘buy’ 56 cents
CGS International ‘add’ 57 cents

Healthy orders, poised for acquisitions

UOB Kay Hian and Maybank Securities have kept their “buy” calls and respective target prices for CSE Global 544 -

following its 1QFY2024 ended March business update, where revenue growth was in line.

Thanks to higher recognition of contracts from the infrastructure segment, CSE Global reported revenue of $197 million for 1QFY2024, up 24% y-o-y. In 1QFY2024, the company won new orders worth $186.2 million, up 17% y-o-y, bringing its total order book to $719.3 million, up 49.8% over 1QFY2023.

About 45% of the new orders were secured by the electrification segment while automation-related orders surged 65% yoy to $52 million.

“CSE’s healthy order inflow attests to its established track record, which has allowed it to expand its customer base and achieve further order book growth,” write UOB Kay Hian analysts John Cheong and Heidi Mo in their May 13 note.

They have maintained their “buy” call and 56 cents target price, pegged to 15 times FY2024 earnings, which is +1 standard deviation (s.d.) above the mean.

Given the projected full-year dividend payout of 2.75 cents per share, the target price translates too into a yield of 6.7%.

Jarick Seet of Maybank Securities has a more bullish target price of 64 cents.

Besides the attractive dividend yield, CSE has a “clear multi-year growth outlook” says Seet, who expects the company to execute further accretive acquisitions, especially in the critical communications segment in the US and Australia, which could accelerate its growth.

In his May 10 note, Kenneth Tan of CGS International is maintaining his “add” call but trimmed his target price to 57 cents from 62 cents to reflect an enlarged share base of 9% from a recent placement of new shares.

The placement, completed in March, helped raise $24 million, which CSE plans to use for acquisitions.

Tan, citing the company’s management, says that CSE is still in talks with potential targets, which are in the critical communications sectors in the US and Australia.

“We believe CSE’s targets will likely be profitable, similar to its past acquisitions,” says Tan, adding that the targets’ net profit could be between $2 million and $4 million each.

His new target price of 57 cents is based on 12 times FY2025 earnings, which is the average of the valuation multiple achieved between FY2012 and FY2019. — The Edge Singapore

Lendlease Global Commercial REIT
Price targets:
PhillipCapital ‘buy’ 83 cents
Maybank Securities ‘buy’ 70 cents
Citi Research ‘neutral’ 61 cents

Mixed views following 3Q

Analysts are mixed on Lendlease Global Commercial REIT JYEU -

(LREIT) after its business update for the 3QFY2024 ended March 31, with PhillipCapital and Maybank Securities keeping their “buy” calls.

Citi Research, on the other hand, has maintained its “neutral” call.

PhillipCapital has an unchanged target price of 83 cents, Maybank has an unchanged target price of 70 cents, and Citi has a target price of 61 cents.

In 3QFY2024, LREIT’s portfolio committed occupancy plunged 11% y-o-y to 88.88% in the face of the departure of the anchor tenant of Sky Complex, which returned one-third of the space.

However, on a q-o-q basis, it improved 0.9% due to the backfilling of Sky Complex by 8.1%.

Liu Miaomiao of PhillipCapital cites two positives that have led her to maintain her “buy” call.

First, Liu notes that LREIT has a robust retail rental reversion of 15.3%, with Somerset 313 achieving about 20% and Jem delivering a resilient performance of about 10%.

Although rental reversion for offices saw a slight cooling down, landing at 1.5% in 3QFY2024, stable support came from tenants with long lease periods, contributing to about 22% of the total gross rental income.

“We expect rental reversion for the whole year FY2024 to be about 15%, up from the 4.8% in FY2023,” says Liu.

Next, Liu anticipates rental upside from Building 3 Sky Complex Milan, driven by healthy office demand in the surrounding area and lower-than-average rental rates previously signed by Sky Italia.

LREIT secured 8.1% of the net lettable area (NLA) leases through internal sourcing and expects backfilling to be completed by 50% by the end of 2024, with the rental reversion of about 30%–40% to match current market rates.

Jem is also reviewing its rental at the end of 2024, and the current market rental is about 20% higher than the previous rent signed five years ago, Liu notes.

“We expect rental escalation to be in the high teens, resulting in an improvement in revenue by about 2% upon successful negotiation,” says Liu.

On the redevelopment of the Grange Road carpark, LREIT issued an update that there is some delay in the construction.

As such, the analyst expects it to be introduced by 2H2025. LREIT will work with live entertainment company Live Nation to establish a calendar of events such as concerts, films and events.

With the capacity of more than 2,000 concertgoers per event and four events per day, this will translate to an additional footfall of 1 million per year, or about 2.5% of the total 313@ Somerset footfall, Liu adds.

“This would lead to higher gross turnover rent (GTO) and a reduction in occupancy rates, paving the way for future rental reversion,” says Liu.

Meanwhile, Liu says that if all current negotiations for Sky Complex in Milan are secured, occupancy rates will surge to about 50%.

LREIT is expected to engage with agencies moving forward, and Liu expects the building to be fully backfilled by 2025.

“LREIT is currently trading at FY2024 yields of 7.56% and 0.7 times P/NAV. We expect that Singapore’s strong rental reversion momentum will persist in FY2024, with upside expected from the backfilling of Sky Complex Milan,” says Liu. “Our dividend discount model (DDM)-target price remains unchanged at 83 cents, with projected FY2024–FY2025 distribution per unit (DPU) of between 4.16 cents and 4.59 cents.”

Likewise, Krishna Guha of Maybank says LREIT’s business update indicates that operations remain steady amid a challenging funding environment.

Guha notes that gearing and funding costs for the REIT went up from 40.5% to 41% as about $20 million of debt was drawn down for capex in Sky Complex Building 1 and 2, while tenant Sky Italia also contributed to the capex.

Funding cost increased from 3.37% to 3.5% q-o-q and the adjusted interest coverage ratio fell to 1.8 times from 1.9 times, notes Guha, who expects gearing and funding cost to rise as capex related to Building 3 is drawn down unless funding comes from the about $13 million of supplementary rental income received from the restructuring of leases.

“That, in turn, will pose downside risk to distribution,” says Guha. “While management can acquire an incremental stake in Parkway Parade, divestment is more in focus.”

He notes that LREIT set up a $500 million multi-currency euro commercial paper programme to issue short-term (less than a year) notes last week.

Guha says that LREIT yields 7.7% and trades at a 40% discount to book, which he thinks compensates for the higher gearing, though he remains watchful on capex drawdown and distribution support.

As such, the analyst leaves his forecasts, target price and ratings unchanged.

Finally, Brandon Lee of Citi similarly cites that LREIT has underperformed in the year to date due to its relatively high gearing, which he believes needs to be addressed via asset sales before existing valuations can move closer to the mean.

He notes that both LREIT’s Singapore properties secured a two-year electricity tariff contract at a lower rate, which should lower its utility costs by about 30% per year.

However, while LREIT has no refinancing risks on its committed debt facilities until FY2025, its “relatively high gearing” which is the second highest among Singapore REITs (S-REITs) in Citi’s coverage, and low fixed/hedged debt proportion implies DPU falls by more than 2% by Lee’s estimates, for every 50 basis points rise in floating interest rates.

Lee’s target price of 61 cents for the REIT is based on an average of his DDM and reappraised net asset value estimates.

He makes the following assumptions in his DDM valuation: risk-free rate of 3.5%, overall cost of equity of 10.1%, and terminal growth of 0%. “We have not factored in any potential earnings accretion or dilution from any unannounced acquisitions,” he says. — Nicole Lim

Soilbuild Construction Group
Price target:
SAC Capital ‘buy’ 4 cents

‘Remarkable recovery’ in 2H

SAC Capital analysts June Yap and Matthias Chan have initiated a “buy” on Soilbuild Construction Group S7P -

with a target price of 4 cents.

The May 2 report highlights Soilbuild’s “remarkable recovery” in 2HFY2023 ended Dec 31, 2023.

“After a 1HFY2023 turnaround in profitability, the group has reaped the rewards of its labour by quadrupling its net profit for 2HFY2023 h-o-h,” write Yap and Chan.

Soilbuild reported earnings of $6 million for the 2HFY2023, reversing from the loss of $28 million in 2HFY2022.

The group reported full-year earnings of $7.3 million, reversing from the previous year’s total loss of $31.7 million. “Following the turnaround, the group has proposed a dividend of 0.1 cents per share for FY2023 that translates to a dividend yield of 3.1%. This is a dividend payout of 18.2%,” they add.

In addition, the group is poised to benefit from the positive outlook for Singapore’s construction industry.

The industry is expected to grow at a CAGR of 2.7% from 2023 to 2027, say the analysts.

The group’s growing order book, which Yap and Chan forecast to grow by 5% y-o-y to $652.8 million by the end of FY2024, as well as its digital transformation initiatives to increase productivity and its focus on high-specification and high-value projects, are other growth drivers.

Soilbuild has been in the construction business for over 40 years since its opening in 1976. The group is graded A1 under CW01 (general building) requirements by the Building and Construction Authority (BCA).

Soilbuild is also graded A1 under BCA’s CW02 (civil engineering) requirements. This allows the group to tender for all types of buildings with an unlimited contract value and civil engineering projects with a contract value of up to $105 million.

Some of the group’s flagship properties are Solaris at One North and Eightrium @ Changi Business Park, industrial development West Park BizCentral as well as Tuas Connection, a land-based factory.

According to Yap and Chan’s report, the group’s share price of 3.2 cents reflects a P/E ratio of 5.5 times, which compares “favourably” to the mean P/E of its peers of 7.4 times. “Referencing peer P/E gives us a price target of 4 cents, a 26.4% upside from current levels,” the analysts write. — Felicia Tan


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