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Brokers' Digest: ComfortDelGro, Sembcorp Industries, Centurion Corp, SGX, PropNex, Sats

The Edge Singapore
The Edge Singapore • 13 min read
Brokers' Digest: ComfortDelGro, Sembcorp Industries, Centurion Corp, SGX, PropNex, Sats
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ComfortDelGro C52 -

Price target:
RHB Group Research ‘buy’ $1.40

Compelling valuations, strong yields

RHB Group Research is reiterating its “buy” recommendation on public and private transport operator ComfortDelGro (CDG) with an unchanged target price of $1.40 on the back of compelling valuations and strong yields.

Analyst Shekhar Jaiswal expects the stock to deliver 11% profit growth in FY2023 ending December, aided by the recoveries in Singapore rail ridership, Australia bus charters, UK coach services, and Singapore and China taxi services.

SBS Transit, the group’s Singapore public transport subsidiary, has reported continuing improvements in rail ridership. The average daily ridership in February was 51% and 38% higher than in the same month for 2022 and 2021, respectively. But on a ytd basis, average daily ridership was 7% lower than in 2019.

“We believe this improvement, which should sustain itself during the coming months, will help support the profits from the public transport business. While Singapore’s taxi fleet is declining, CDG has gradually increased its market leadership position within this segment,” says Jaiswal, adding that the strong demand for taxi services should continue to support driver earnings and enable CDG to taper off rental rebates gradually.

See also: Singtel's higher dividends keep analysts positive, target prices increase

Public transport ridership in Singapore saw a strong recovery last year, with more people returning to work and leisure activities after two years of Covid-19-related restrictions. “We expect the public transport services, especially rail services, to witness a strong increase in ridership on higher tourist arrivals in 2H2023,” says the analyst. He also expects the group’s Singapore and China taxi businesses to benefit from the East Asian nation’s economic reopening. “Despite expectations of higher operating costs, the uncertainty over the timing of indexation formulas, and lower bus service fees, we believe CDG can deliver about 10% profit growth during FY2022 to FY2025,” says Jaiswal, who also expects a higher dividend payout in FY2023. He estimates a 65% payout ratio for FY2023 to FY2025, which implies 5% to 6% yields.

Overall, Jaiswal sees the stock as attractive as its share price has outperformed the rapidly falling Straits Times Index (STI) in the last month, as investors value its ability to deliver growth despite macroeconomic uncertainties and its ability to sustain higher dividend payouts. At this point, the stock is trading at an attractive FY2023 P/E of 13 times compared to its historical mean of 16 times. — Samantha Chiew

Sembcorp Industries U96 -

Price target:
UOB Kay Hian ‘buy’ $4.64

See also: Broker's Digest: Centurion, Food Empire, Frencken, Netlink NBN Trust, Thai Beverage, Singapore Airlines

Post-pandemic recovery play

Sembcorp Industries or Sembcorp’s post-pandemic business recovery and ability to hit its publicly-disclosed targets for renewables provide a bullish outlook for FY2023 ending December and beyond, says UOB Kay Hian analyst Adrian Loh. He maintained his “buy” call with an upgrade in target price to $4.64 from $4.57. This can be attributed to several factors, including the likelihood of Sembcorp conducting a merger as a “likely mode of expansion” to present a higher renewables target to the market in the next few months.

The group already has 9.8GW of renewables, including operational and projects under development, and is close to its target of 10GW. “Investors were also keen to hear that the hurdle rate (on a local currency basis) for Sembcorp’s India projects is in the mid-teens while China’s is slightly above 10% internal rate of return.”

The management has highlighted that its current assets and position in the Middle East are good for generating green hydrogen. Investors have also shown “meaningful interest” in the hydrogen strategy despite the nascent nature of the technology. Its current assets and position in the Middle East (a power and water plant in Oman and a desalination plant in the United Arab Emirates) puts Sembcorp in a good position to generate green hydrogen. While the management stated that it would not participate in storage and transportation, it has engaged with Chiyoda of Japan as a technology partner for its Spera technology, which enables hydrogen transportation via tankers at room temperature.

Finally, Sembcorp’s 18-year power purchase agreement (PPA) signed with Micron on Feb 27 is another plus.“This is a landmark deal for Sembcorp, given that Singapore has traditionally been a spot or short-duration market (one to three years). With this 18-year PPA signed, 37% of Sembcorp’s Singapore generation capacity is contracted and thus should allow Sembcorp to cover the capital cost of new H-class generators and replace its current combined cycle gas turbines and earn a positive carry,” Loh writes.

Sembcorp’s partnership with Lego to create a 40-hectare low-carbon facility incorporating a 50MW solar farm is also a “positive sign”.“Sembcorp will use it to advance its other expansion plans in Vietnam at its four new business parks that it secured licences for in 2022: Quang Tri Industrial Park, VSIP Binh Duong III, VSIP Can Tho and VSIP Nghe An (Park II).”

On concerns that lower gas prices may lead to lower profits, the analyst says he has factored in normalisation in Sembcorp’s conventional energy segment in his FY2024 and FY2025 earnings estimates. He adds the sale of Sembcorp’s coal-fired power plant in India in return for a deferred payment note also appears to be a “non-issue” to some of the group’s investors. “The worst-case scenario would have been the nationalisation of these assets (as they are large at 2.64GW and provide power to 2.5 million people) and Sembcorp’s position being jeopardised in the country.”

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He has upped his FY2023 to FY2025 earnings estimates by 1% to 4% to account for the higher margins from Sembcorp’s agreement with Micron. The revised estimates also factor in a slower-than-expected slowdown in profitability from Sembcorp’s conventional energy segment. Sembcorp also generated a ROE of almost 22% in FY2022 based on assets that are, on average, five years old. Loh believes that this level of ROE would be sustainable in the years to come, and “Sembcorp remains inexpensive as it trades at a 16% to 28% discount to its global utilities peers’ average FY2023 P/E, EV/ebitda and P/B of 14.5 times, 9.4 times and 1.7 times respectively.” — Nicole Lim

Centurion Corp OU8 -

Price target:
UOB Kay Hian ‘buy’ 43 cents

PBWA demand soars amid high rental prices

UOB Kay Hian analyst Adrian Loh has kept “buy” on Centurion Corp with a lower target price of 43 cents from 45 cents previously. This move follows better-than-expected demand for purpose-built workers accommodation (PBWA), the company’s largest profit contributor.

Centurion is experiencing healthy demand for its PBWA assets in Singapore as rents in the private residential sector have increased in the 12 months. Companies that did not previously require accommodation for their workers are now a new source of demand as they assist their workers in more affordable housing options, he writes.

This demand will remain robust in 2023, underpinning Centurion’s results for at least 12 to 18 months. “While Singapore PBWA saw only 2% to 3% rental reversion in FY2022, Centurion expects this to trend higher in FY2023 and FY2024 as some of its contracts roll off in the next six to 12 months and it can re-price to a higher level. In addition, management believes that the demand and supply will take more than six months to get to an equilibrium,” Loh writes. Centurion’s final year ends in December.

Centurion also has a new project with Jurong Town Council (JTC). In January, the company was awarded a tender by JTC to develop and operate a new 1,650-bed purpose-built dormitory (PBD) by 2025, with the former holding a 51% stake.

“The land parcel involves a 30-year lease and is situated at Ubi Avenue 3, which is interesting given that this is in the east of Singapore versus Centurion’s current assets, which are all in the west. Management stated that Singapore’s western area is currently experiencing a shortage of quality PBD supply,” he adds.

On the purpose-built student accommodation (PBSA) front, Centurion notes a trend of students wanting more privacy with en suite bathrooms. The company has plans to cater to this Australia and the UK. Loh also highlights Centurion’s high debt levels: While the company ended FY2022 with over $68 million in cash, it still had a net debt-to-equity ratio of 0.84 times. The company reported that its average long-term bank debt maturity was around six years. Loh forecasts that the company’s interest cover will drop 3.4 times in FY2023 compared to 4.2 times last year.

UOB Kay Hian has largely maintained its net profit forecast for FY2023 but upgraded its FY2024 earnings estimate by 10%. This is because of higher rental rates for Australian and UK PBSA as international students — particularly from China — return to the sector in the next academic year and higher rental reversions in the PBWA sector in Singapore due to higher-than-expected demand conditions. — Khairani Afifi Noordin

Singapore Exchange S68 -

Price target:
RHB Group Research ‘neutral’ $8.60

Volume falls short

RHB Group analyst Shekhar Jaiswal has maintained his “neutral” call on Singapore Exchange (SGX) but has lowered his target price to $8.60 from $9.40, as the group’s latest operating data has come in lower than seen, implying that the exchange’s volume for the current year ending June will fall short.

The revised target price reflects lowered earnings estimates for FY2023 ending June to FY2025. “While we expect growth to resume in FY2024, the near-term outlook for cash equities remains weak amid low market valuations and an uncertain macroeconomic outlook,” writes Jaiswal in his March 14 note.

On March 13, the exchange reported that securities volume for February was down 33% versus February last year, implying that the volume for FY2023 will be 2.6% below what Jaiswal was expecting. “Although the Straits Times Index has outperformed its regional peers, the index was down 3.1% in February amid concerns that the US Federal Reserve could keep interest rates higher for longer, thereby translating into slower economic growth,” he adds.

However, SGX’s derivatives business continues to grow, with 19.9 million contracts traded in February, up 7% y-o-y and 4% over January. SGX says the jump in trading volume was led by optimism over China’s reopening, thereby lifting trading activity across multiple asset classes, especially in commodities and foreign exchange (forex).

The actual FY2023 average daily value for derivatives for February was still 3.4% below RHB’s estimates. With these factors, Jaiswal has lowered his target price amid a weak outlook and an “unexciting” yield of 3.7%. His revised FY2023 earnings, pegged to 20 times earnings, are now 13% below consensus.

“We maintain that SGX’s cash equity business will continue to underperform amidst decelerating global growth. Delays in major new equity listings amid low market valuation further lower the scope for a sharp increase in securities daily average value,” he writes. — The Edge Singapore

PropNex OYY -

Price targets:
CGS-CIMB Research ‘add’ $2.05
Maybank Securities ‘buy’ $2.20
DBS Group Research ‘hold’ $1.88

Mixed sentiments for property group

Analysts from CGS-CIMB Research, Maybank Securities and DBS Group Research have increased their target price for PropNex to $2.05, $2.20 and $1.88, respectively, up from $1.93, $1.95 and $1.61 previously. CGS-CIMB’s Lock Mun Yee and Maybank’s Eric Ong have maintained their “add” and “buy” calls, while DBS’s Ling Lee Keng maintains her “hold” recommendation.

PropNex’s revenue improved by 7.5% y-o-y to $1.03 billion for the full year, while its patmi was 3.9% higher to $62.4 million. The group proposed a final dividend per share (DPS) of 8 cents, bringing full-year DPS to 13.5 cents. CGS-CIMB’s Lock says the company’s agency services benefitted from an improvement in market share.

She has raised her FY2023 to FY2024 net profit estimates by 19% to 22.2% to factor in the stronger launch pipeline and the “robust market share” of PropNex, which trades at a cash-adjusted FY2023 P/E of 8.3 times. Her target price has been raised to $2.05 from $1.93 on a blend of the net cash-adjusted price-toearnings ratio (P/E) and discounted cash flow (DCF) valuation.

In 2022, the transaction volume of the private resale market fell 30% y-o-y while HDB resale activity shrank 10% y-o-y. Despite higher mortgage rates and the impact of the recently announced hike in buyers’ stamp duty, Lock says PropNex expects HDB and private resale market volumes to remain stable going into 2023.

She adds that FY2022 commissions from project marketing services declined 12% y-o-y to $383.7 million due to fewer project launches. As a result, transaction volumes contracted 45.5% y-o-y to 7,099 units due to the impact of the property cooling measures announced in December 2021 and dwindling unsold inventory.

However, Maybank’s Ong sees transaction volumes rebounding in FY2023, with PropNex seeing an 8% y-o-y increase in salesforce headcount to 11,667 at the start of 2023 from 10,796 a year ago. Ong, whose target price is based on a 14 times FY2023 P/E, says the company’s balance sheet is “robust” with a net cash position of $139 million, or 37.5 cents per share, underpinned by its highly scalable and asset-light business model.

Meanwhile, DBS’s Ling says a strong pipeline of new launches will support the resilient property market, but a price increase could be slower.

She expects buyers to remain cautious but overall transaction velocity to remain supported by a strong pipeline of new launches, but that the “swing factor” will come from foreign buyers looking to call Singapore home.

On the back of the resilient property market, she has raised her property transaction volume assumption for the various segments by 5% to 8% for FY2023 and FY2024, raising her earnings forecasts for both years by 17% and 20%, respectively. Her target price has been raised to $1.88 from $1.61 previously, still pegged to an 11 times P/E on FY2023 earnings, about 1 standard deviation (s.d.) above PropNex’s historical mean. — Bryan Wu

Sats S58 -

Price target:
UOB Kay Hian ‘buy’ $3.02

Attractive risk-reward profile

Sats presents a more attractive risk-reward profile after its recent share price decline, says UOB Kay Hian analyst Roy Chen, after the air cargo company saw a 4% decline in its counter over the past week. Chen maintained his “buy” call on Sats with an unchanged target price (for ex-rights shares) of $3.02 based on a 9.7 times FY2025 EV/ebitda. The target price represented an upside of 24.7% against its traded price of $2.42 when it closed on March 10.

This comes after the Asean Gems Conference held on March 7 to March 8, where Sats’s management shared the company’s outlook and clarified investors’ queries about the Worldwide Flight Services (WFS) deal. The deal was announced two weeks ago, where shareholders will be allotted rights to subscribe for 323 rights shares for every 1,000 existing shares held as at March 2. The rights shares were offered at $2.20 each, at a discount of 16% to the TERP (theoretical ex-rights price).

“Management noted that Sats’s share price is undervalued with the overhang of the rights issue,” says Chen. In his note on March 13, Chen adds that the activities of some investors selling off rights during this period had depressed Sats shares’ trading price. However, this pressure would likely be eased after the rights trading ends on March 15.

He adds that the upcoming global leader in air cargo has a stronger business profile than its peers and is currently trading at 8.5 times FY2025 (normalised year) adjusted ebitda by their estimate, based on its closing price of $2.42, 2.4 s.d. below its historical mean EV/ebitda of 12.8 times in 2014 to 2019.

Accounting for uncertainties and risks related to the WFS deal, Chen says the ex-rights target price of $3.02 is based on a relatively conservative 9.7 times EV/ebitda multiple over FY2025 adjusted ebitda, pegged to Sats’s reported acquisition multiple for WFS. Chen also notes signs of improvement in air cargo (global trade) in the second quarter of this year, quoting that the International Monetary Fund (IMF) raised its 2023 global GDP growth forecast to 2.9%, up from 2.7% in October 2022. — Nicole Lim

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