Econ Healthcare Price target: DBS Group Research “hold” 28 cents

Review on investment strategy

In his Jan 13 note, DBS Group Research analyst Paul Yong has kept his “hold” call on Econ Healthcare (Asia) and 28 cents price target, after the nursing home operator sold all its shares in Hong Kong-listed Crosstec Group Holdings and will book a loss of $3.4 million.

Yong on Jan 12 downgraded the stock from “buy” to “hold” and slashed his target price from 40 cents after Crosstec shares plunged by 84% on Jan 11, turning what was initially a paper gain for Econ into a loss. Crosstec is an interior design firm that reported a loss for its most recent full year ended June 30, 2021. Crosstec shares dropped by another 28.95% on Jan 12 to HK 27 cents ($0.04).

Yong, for now, is keeping his “hold” call pending full year earnings to be announced by Econ and more details on the review of its investment strategy, which the company said late in the evening of Jan 12 it will do.

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According to Econ, it chose to invest in Crosstec shares after having observed that the Hong Kong company’s share price has been trending up, and that by doing so, it was a chance to generate better returns from its idle cash.

Econ first paid $1.99 million for 6.8 million Crosstec shares on Dec 30, or 29.26 cents each. It paid another $2 million for another five million Crosstec shares on Jan 6, or 40.04 cents each. As recent as Nov 16, it was just at HK 40 cents, and hit a recent high of HK$2.65 on Jan 6.

The $3.4 million loss Econ is expected to book is equivalent to 9.1% of its net tangible asset as of Sept 30, 2021.

Yong sees Econ riding on ageing population trends in Singapore, Malaysia and China. Along with planned increase in capacity, Econ’s earnings is seen to grow at a CAGR of 12% from FY2021 to FY2024.

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In his Jan 12 note, Yong writes that Econ Healthcare needs to reconsider this investment mandate, adding: “While the company stated that the investment was intended to improve the yield on idle cash through dividends and share price appreciation, the investment of the majority of its idle cash into a single, lossmaking, small-cap company is a riskier decision than one would expect.”

Investors should wait for further clarity before focusing back on core business, he adds. “We believe that the growth prospects for Econ’s core nursing home business remain intact, but we prefer to wait for more clarity on the company’s plans for its investment strategy before turning positive.” — Jovi Ho

IHH Healthcare Price target: DBS Group Research “buy” $2.32

Overhang on share price temporary

DBS Group Research analyst Rachel Tan has kept her “buy” rating on IHH with an increased target price of $2.32, from $2.00 previously.

IHH is currently trading at a very attractive FY2022 EV/ Ebitda of 14 times, close to -2 standard deviation of its historical range and is positioned to ride on the strong pent-up demand from foreign patients when borders reopen, says Tan.

On Jan 5, IHH announced that it has been in a legal tussle with US fund Emqore Envesecure Private Capital Trust since June 2020. Emqore’s claim against IHH arises from allegations relating to the issuance of the shares of Fortis Healthcare to IHH’s subsidiary in and around 2018.

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Under the amended complaint, IHH says Emqore was seeking damages in excess of US$6.5 billion ($8.7 billion). The sum comprises “compensatory damages plus treble damages and attorneys’ fees pursuant to the US Racketeer, Influenced and Corrupt Organizations Act, against 28 named defendants and 20 non-party defendants.”

However, IHH believes it has strong grounds to seek dismissal and intends to file a Motion of Dismiss on three principal grounds — lack of personal jurisdiction, forum non conveniens (a common law doctrine that allows courts to dismiss a case where another court is much better suited to hear the case) and a failure to state a claim for relief. Tan believes that the overhang on the share price will likely be temporary if IHH is successful in obtaining the dismissal.

Moreover, the analyst sees that IHH is tapping into Asia’s strongest growth markets like China and India moving forward in the coming year. “With strong platforms in India and China, IHH now has exposure to Asia’s two largest economies with the strongest growth potential in the healthcare sector,” says Tan.

In light of Gleneagles HK achieving an Ebitda break even in May last year en route for its next leg of growth, this should start to contribute positively for IHH’s next leg of growth, adds Tan.

Some key risks that analyst notes are weaker-than-expected performance, especially in new markets or hospitals and slower recovery post-Covid-19, in addition to government policy changes by the court to overrule IHH’s acquisition of Fortis Healthcare. — Chloe Lim

United Overseas Bank Price target: RHB Group Research “buy” $33.50

UOB to enjoy broad-based growth this year

The Singapore research team at RHB Group Research has kept “buy” on United Overseas Bank (UOB) with a target price of $33.50, which is based on an intrinsic value of $31 based on a Gordon growth model (GGM)-derived P/B of 1.2 times, near +1 standard deviation from the historical mean.

In a Jan 7 report, RHB says it remains “upbeat” that the bank will enjoy broad-based growth this current FY2022 ending December 2022, despite likely softness in the near-term on the back of the Omicron variant. “Management expects loan demand to stay strong with the pick-up in cross-border activities. Loans are expected to expand by mid to high single digit with growth from regional operations expected to strengthen, while lending in Singapore would moderate slightly,” notes the team.

“Management guided for net interest margin (NIM) to be stable to slightly higher, as rate hikes will be in late 2022, while margins from regional states will be flattish on their slower economic recovery.”

UOB’s management says that a 100 basis points (bps) increase in interest rates over a 12-month period would enhance interest income by $500 million to $600 million (or a 12 to 16 bps NIM expansion).

“The outlook for UOB’s fees — namely wholesale banking and wealth management — remains positive although growth would likely moderate from FY2021. Management also aims to maintain its cost income ratio (CIR), which was at 43.8% in the 9MFY2021 ended September with higher staff costs and digital investments to be mitigated by revenue growth”, it adds.

In FY2022, UOB’s asset quality is expected to stabilise although its management sees its non-performing loan (NPL) edging up to 1.7% to 1.8%, compared to the 1.5% in the 3QFY2021 as some NPLs materialise.

The RHB team also estimates that UOB’s FY2022 credit cost would likely be slightly lower at 23bps compared to the 25 bps in FY2021 as general provisions (GPs) were set aside for these anticipated NPLs.

“Loans under relief assistance are a very manageable 4.5% of group loans while non-performing assets (NPA) coverage was a comfortable 106%. Out of prudence, management plans to raise GP to 82 to 83 bps versus 70 bps pre-pandemic. This points to potential write-backs of $580 million versus current excess GP of over $1 billion.” — Felicia Tan

Food Empire Price target: RHB Group Research “buy” $1.01

Margins expected to rebound in FY2022

RHB Group Research is reiterating its “buy” call on Food Empire with a lower target price of $1.01 from $1.13 previously, to factor in lower earnings due to rising costs.

Analyst Jarick Seet says Food Empire reported healthy revenue growth of 15.1% y-o-y for 3QFY2021 ended September last year, but was hit by high commodity costs and record-high freight rates. “We believe that this issue is temporary, and will likely persist until the end of 1QFY2022.”

To offset higher costs, Food Empire aims to raise its average selling price in several stages but Seet is still expecting a reduction in earnings, and thereby, his updated target price.

Food Empire’s 3QFY2021 gross margin dropped to 25.7%, from 37.7% in 3QFY2020, but Seet expects margins to normalise by 1HFY2022, and profitability to rebound strongly in FY2022. “This is because freight and commodity costs should normalise once the Covid-19 situation improves around the globe, governments around the world are already implementing measures to regard Covid-19 as endemic.”

He also notes that Food Empire has been enjoying robust revenue growth by historical standards. In 3QFY2021, it was up 8.8% y-o-y, with its core market of Russia up by 15.1% y-o-y.

The company’s management is also optimistic on the longer term, as it has been actively buying back its shares. “We believe that this is a vote of confidence by management on the company’s prospects,” he adds.

“We remain confident on Food Empire’s prospects, and believe that it remains an attractive target for privatisation or a takeover, due to its attractive valuation.” — Samantha Chiew

Netlink NBN Trust Price target: Citibank “sell” 90 cents

Interest rate hikes and interconnection rate cuts

Citibank analyst Luis Hilado has downgraded his rating for Netlink NBN Trust from “buy” to “sell”, along with a sharply reduced target price of 90 cents, from $1.08 previously.

In a Jan 7 report, Hilado says that Netlink’s review of its regulated asset base (RAB) rates could come “sooner than expected” from the Infocomm Media Development Authority, and this will cause a “period of uncertainty”.

The RAB pricing model governs the prices set for some of Netlink’s services, such as those related to residential connections, non-residential connections, non building address point (NBAP) and segment fibre connections, as well as ducts and manholes service revenue.

Hilado thinks that the company could see an 8% reduction in rates for residential connections and non-residential connections, down from Citibank’s former prediction of 15% to 20%.

While the rates are expected to see a smaller reduction, he brings forward his prediction of the cuts to 4QFY2023, which ends in March 2024. This is instead of 1QFY2024, which ends in June 2024. “We have assumed similar cuts will recur at such levels in every future review period.”

Aside from the rate revision decision this year, Hilado says there is also the impact of the rising interest rate environment as a potential share price action risk.

He has assumed a 75 basis points interest cost increase for floating rate debts, but adds that the attractiveness of yield plays such as Netlink will be relatively weaker as global and local interest rates rise.

Furthermore, with the stock outperforming the market during the Covid-19 impacted period on a six-month and 24-month basis, he thinks there will be room for profit-taking once risks begin becoming more evident and as reopening lessens the attractiveness of home broadband services.

Hilado acknowledges, however, that there is potential for additional dividends if more capex is financed with leverage. Netlink, at two times net debt to Ebitda, might be “comfortable” raising this ratio four times.

“We believe, however, that instead management will conservatively keep a buffer for uncertainty, protecting yield rather than providing upside,” he says. — Lim Hui Jie

Hyphens Pharma Price target: CGS-CIMB “add” 36 cents

Resilient business model and growing product portfolio

CGS-CIMB is initiating coverage on Hyphens Pharma with an “add” call and target price of 36 cents.

“We like Hyphens Pharma for its resilient business model and growing product portfolio as well as sales and distribution channels that will drive future earnings growth,” writes analyst Tay Wee Kuang in his Jan 6 report.

Tay notes that the target price represents 13.5 times FY2022 P/E and is 1 standard deviation point above the company’s historical mean since its listing in 2018. Presently, the pharmaceutical distributor is trading at 11.1 times FY2022 P/E.

“We believe that Hyphens Pharma’s share price has yet to reflect the value of its business acquisition of Novem, the first since its listing.”

Hyphens Pharma had proposed the acquisition of Novem — a Singapore-based pharmaceutical distribution business — on Nov 9 last year.

Valued at around $16.3 million, the acquisition is priced at 3.6 times P/B, relative to that of Hyphens Pharma’s P/B of 1.8 times. The acquisition is also seen to offer quality earnings with historically superior margins of around 18%, compared to Hyphens Pharma’s historical average of around 5%, says Tay.

He believes that the acquisition could reap Hyphens Pharma further synergies through cross-selling opportunities given the different sales channel exposure between the two companies.

It will also bring Novem’s portfolio to markets such as Vietnam, Malaysia and Indonesia, where Hyphens Pharma has a presence in.

Meanwhile, Tay reckons that Hyphens Pharma could benefit from the long runway for growth that the pharmaceutical allows. For instance, it can reap inorganic growth opportunities such as business acquisitions, brand acquisitions and partnerships with brand principals.

The company has demonstrated a penchant for growth via strategic acquisitions of brands like Ocean Health (health supplements) and TDF (dermatology) in 2016, and CG 210 (scalp care) in 2020.

The acquisition of Novem will see Hyphens Pharma adding over 40 brand principals and 150 products to its portfolio.

Following the acquisition, Hyphens Pharma has been maintaining a strong net cash position of $22 million as of 9M2021 ended Sept 30, which allows it to “remain nimble in the face of future expansion opportunities,” says Tay. — Amala Balakrishner

Brokers' Digest: Econ Healthcare, IHH Healthcare, UOB, Food Empire, Netlink NBN Trust, Hyphens Pharma

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