OCBC Investment Research analyst Chu Peng has kept her “buy” call on ESR-LOGOS REIT (E-LOG) but with a lower fair value estimate of 38 cents, down from 42 cents previously.

Chu’s lower fair value estimate factors in the impact of an enlarged unit base E-LOG completed its private placement and preferential offering in February and March respectively.

The analyst has also lowered her distribution per unit (DPU) estimates for FY2023 to FY2027 by 8% to 10%. At the same time, she has lowered her risk-free rate assumption to 3.15% from 3.5% previously.

E-LOG had planned to raise gross proceeds of $300 million to pay off its interim debt. The proceeds will also go towards financing its redevelopments, asset enhancement initiatives (AEIs) and further acquisitions.

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E-LOG’s private placement, which was completed on Feb 27, raised the total number of units within the REIT to 7.18 billion units. In its private placement, the REIT had placed 454.5 million units with an issue price of 33 cents per share, which was at the lower end of its indicative range of 33 cents to 33.5 cents.

In addition to the private placement, E-LOG announced a non-renounceable preferential offering where the entitlement ratio is at 64 units per 1,000 existing shares. The issue price for this offering is at 32.5 cents per share.

“E-LOG is currently trading close to the issue price of 32.5 cents but still offers 24% total return to our fair value estimate with 7.7% dividend yield,” Chu writes, adding that the REIT’s fundamentals “remain healthy”.

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“Post the equity fund raising (EFR), E-LOG’s gearing is expected to fall from 41.8% to 38.0%, and further to 32.3% with the EFR and the assumed divestments. Investors could consider taking up the preferential offering to avoid dilution of shares,” she says.

Further to her report, an earlier-than-expected recovery in industry demand-supply dynamics as well as DPU-accretive acquisitions are potential catalysts to E-LOG’s share price. Meanwhile, downside risks include tenant defaults or asset conversions from master-leased to multi-tenanted. A slowdown in macroeconomic conditions, which may dampen business sentiment, is also another downside risk. — Felicia Tan

Near-term profitability unlikely to return to pre-pandemic levels

Although SIA Engineering Company (SIAEC) is expected to enjoy the further recovery in flight volumes, CGS-CIMB Research analysts Kenneth Tan and Lim Siew Kee believe that its profitability in the near-term is unlikely to return to pre-pandemic levels, given high staff costs. They have kept their “hold” call and $2.42 target price on SIAEC.

Citing data from Centre for Aviation, the analysts highlight that flight movements out of Singapore stood at 82% of pre-Covid-19 levels on April 2 while June forward flight movements indicate that volumes could recover to 86% of pre-Covid-19 levels by the end of the month.

Tan and Lim see more meaningful volume recovery in 2H2023, given time lag for airlines to ramp up China-Singapore routes as well as the recent assumption of foreign visa issuance in China.

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CGS-CIMB expects SIAEC to report its 4QFY2023 ended March results in the first week of May. For the quarter, CGS-CIMB forecasts SIAEC to report a 95% y-o-y growth in net profit to $19 million, driven by slight improvement in operating loss and continued associates recovery. The analysts also see strong growth for topline and associates as flight volumes at Changi Airport continue to recover.

Staff costs, however, are expected to remain high at $122 million, a 34% increase y-o-y, continuing to be a drag on earnings. “While we do see a near y-o-y doubling in 4QFY2023 net profit, we expect net profit margin to stay weak at 8.6%,” they add.

The analysts also highlight that labour shortages would be an ongoing concern in the industry. For one, maintenance, repair and overhaul (MRO) provider Lufthansa Technik in its FY2022 results mentioned labour shortage as a key near-term challenge faced, expecting it to persist in 2023 and beyond.

Aircraft engine supplier Rolls-Royce sees a similar situation, with the whole industry facing challenges in tackling labour shortage issues as flight volumes recover, the analysts add. “We see a similar tone from Oliver Wyman’s 2023 MRO outlook — the group expects mechanic headcount deficits to linger or grow over the next ten years.”

To this end, CGS-CIMB believes that SIAEC will continue to face labour issues in the medium-term, given skilled workers leaving and not returning to Singapore and the time lag to develop a pipeline of young technicians.  — Khairani Afifi Noordin

Analysts upbeat on Telkomsel deal

Analysts are upbeat on Singapore Telecommunications (Singtel), following news that Telkomsel, Singtel’s mobile associate in Indonesia, will be merging with a broadband business IndiHome in what is seen to an earning accretive deal.

Telkom, Indonesia’s incumbent telco operator, is the common controlling shareholder of both Telkomsel and IndiHome. The merger will create an entity with a market share of more than 50% in mobile, and around 75% in fixed broadband.

The mobile market, being more mature in Indonesia, has lower growth potential. In contrast, fixed broadband, with a penetration rate of just 14% versus the Asean average of 40%, is seen to have stronger growth ahead. In addition, fixed broadband has an average revenue per user six times that of mobile in Indonesia, says DBS Group Research, citing Analysis Mason.

Singtel now holds 35% of Telkomsel. With the new shares issued to Telkom to pay for IndiHome, Singtel’s stake in Telkomsel will be reduced to 30.05%. However, Singtel will then pay $236 million to subscribe for 0.5% in new shares, bringing its stake to 30.1%, says DBS in its April 6 note.

“Telkomsel contributed around 29% of Singtel’s underlying earnings in 3QFY2023 ended Dec 31, 2022, so it really matters to Singtel that earnings from Indonesia do not decline, adds DBS, which is calling the stock a “buy” along with a $3.18 target price.

The merger will see Telkomsel expanding its business portfolio, especially using 5G backhaul in remote areas. The enlarged entity will also enjoy cross-selling opportunities and cost synergies across sales and marketing, support functions and capex, says DBS.

RHB Bank Singapore, in its April 10 report, says that while Singtel’s stake in Telkomsel will be diluted, it should be seen in the context of access to a larger addressable market.

RHB notes that Singtel is investing only $236 million into this new entity. Thus, the deal will not cast any doubt on Singtel’s dividend-paying capacity, estimated to give a yield of 5.8%.

“Overall, with this deal, we expect Singtel’s Indonesia business to see a mid-single earnings growth compared to a low-single-digit earnings decline without a deal,” adds RHB, which has kept its “buy” call and $3.30 target price.

Similarly, Citi Research, in its April 6 note, says that with the merger, subscriber stickiness can be increased as they buy both fixed and mobile services.

“Moreover, they said the merger could generate potential cost and capex synergies given redundant cost items and investments between the two entities,” it adds.

Even with the reduced stake in Telkomsel, Singtel expects the transaction to be earnings accretive in the near-term even before factoring in any potential synergy savings on opex and capex, the Citigroup analysts say.

CGS-CIMB Research analysts Foong Choong Chen and Sherman Lam Hsien Jin are similarly positive about this deal, as they see Telkomsel benefiting from an additional earnings driver over the longer term. The analysts have kept their “add” call and $3 target price for the stock.

In their April 6 note, Fong and Lam expect Indonesia’s fibre broadband subscriber growth to be healthy in the next five years as household penetration at end-2022 was still relatively low at 14%.

“We believe this will rise to at least 30-40% before the market starts to mature, based on Indonesia’s income levels and the addressable market,” the analysts write.

“In addition, by being able to offer fixed mobile convergence products, Telkomsel will also benefit from improved churn as a result of multi-service bundling,” they add. — The Edge Singapore

High from tourism recovery

UOB Kay Hian analyst Llelleythan Tan is keeping his “buy” call on Thai Beverage (ThaiBev) as Thailand’s tourism recovery remains on track.

The F&B group is a beneficiary of the return of tourists to Thailand. Since Tan’s update in January, the country has seen a spike in tourists from China, which is in line with his earlier expectations.

In January and February, Thailand saw 91,841 and 155,656 Chinese tourists respectively, up by 28.5 times y-o-y and 30.8 times y-o-y.

“Moving forward, we reckon that Chinese tourist arrivals would continue its upward momentum throughout 2023, given that February arrivals were only at 15% of pre-Covid-19 levels,” says Tan.

While there was a slight dip in overall tourist arrivals in February at 2.11 million visitors or down 1.5% m-o-m, Tan attributes this to seasonal factors. In his view, tourist arrivals are expected to continue improving in 2023.

“Thailand’s tourism council expects 25 million – 30 million tourists in 2023. Similarly, we now expect 28 million to 30 million tourist arrivals in 2023, roughly 70%–75% of the 40 million arrivals before the pandemic,” he writes.

On the recovery in Thailand’s tourism numbers, Tan expects ThaiBev’s spirits ebitda to grow by 8% to 10% y-o-y in the 2QFY2023 ending March. The analyst attributes this to the expected higher volumes for its brown spirits, which enjoy higher average selling prices (ASPs), as well as higher ebitda margin assumptions as raw material prices are expected to soften. However, the analyst notes that his forecasts may face potential downsides on the back of higher-than-expected operating costs and lower-than-expected white spirits volumes.

The analyst expects ThaiBev’s beer ebitda to fall by 15% to 16% y-o-y in the 2QFY2023 as he expects margin compressions to continue as competition within the domestic beer industry heats up. That said, better-than-expected cost management may reflect an upside to Tan’s estimates.

Tan also expects ThaiBev’s 2QFY2023 ebitda for the non-alcoholic beverages (NAB) segment to fall by around 20% y-o-y as ebitda margins are expected to compress from higher marketing activities and an overall inflationary cost-push. While the group’s food segment faces the same issues, the analyst is expecting it to report a 10% y-o-y growth in its 2QFY2023 ebitda due to the low base in the 2QFY2022.

Overall, the analyst is estimating ThaiBev’s revenue for the 1HFY2023 to grow by 6% to 8% y-o-y backed by higher revenue contributions from the brown spirits, beer, NAB and food segments.

However, he expects its ebitda for the 1HFY2023 to fall by 8% to 10% y-o-y, which implies ebitda margins of 16.6% compared with the margins of 19.8% in the 1HFY2022. Again, Tan sees a potential upside in the form of better-than-expected cost management.

At its current price levels, Tan says ThaiBev remains “attractively priced” at below -1.0 standard deviation (s.d.) to ThaiBev’s long-term average mean P/E and backed by favourable tailwinds.

The analyst has lowered his target price to 78 cents from 80 cents previously due to lower market valuations for its Frasers Property and Fraser and Neave stakes, along with a stronger Singapore dollar.

Tan adds that share price catalysts include the group gaining market share in the beer segment, the spin-off listing of BeerCo and lower-than-expected operating costs. — Felicia Tan

Maybank Securities analyst Ong Chee Ting has kept “buy” on Bumitama Agri with a target price of 84 cents, highlighting the company’s above-expectations FY2022 ended December 2022 dividends per share (DPS).

In his April 6 report, Ong highlights that Bumitama Agri has announced a final plus special FY2022 DPS of 6.55 cents, bringing the year’s total DPS to 7.8 cents — 22% ahead of Maybank’s expectations.

“Ahead of its upcoming AGM, Bumitama Agri announced a final DPS of 4.42 cents plus a special DPS of 2.13 cents to reward shareholders following its record FY2022 core patmi of IDR3.183 trillion ($285.6 million). Coupled with an interim DPS of 1.25 cents paid in September 2022, this brings the total FY2022 DPS to 7.8 cents,” he elaborates.

The final plus special DPS are subject to the approval of shareholders at the upcoming AGM on Apr 20. Ong notes that the dividends are expected to go ex-date on Apr 26 and payable on May 12.

Bumitama Agri’s FY2022 dividend payout ratio (DPR) is estimated to be at 55% of headline patmi or 49% of Maybank’s core patmi forecast — higher than its dividend policy — to distribute up to 40% of its distributable income, Ong points out.

Maybank is keeping its 40% DPR assumptions as it deems the special DPS to be a one-off — proposed as a way to celebrate Bumitama Agri’s 25th anniversary as well as to commemorate its 10 years of being listed in Singapore.

“Still, at our 40% DPR, Bumitama Agri continues to offer attractive dividend yields of more than 6%,” adds Ong.

Moving forward, Maybank expects Bumitama Agri to report weaker earnings y-o-y in FY2023, given a more normalised crude palm oil environment. Ong notes that Bumitama Agri is targeting 3% to 7% fresh fruit bunches growth for FY2023, following the higher base of FY2022.

Meanwhile, on the cropping pattern front, Bumitama Agri expects FY2023’s 1HFY2023 and 2HFY2023 output ratio at 45%–48%:52%–55%. This suggests a better quarterly earnings trend in the second half of the year.

“1HFY2023 earnings may be burdened by the relatively high fertiliser cost locked-in towards end-2HFY2022, while the present lower fertiliser spot prices may only benefit Bumitama Agri in 2HFY2023,” says Ong.— Khairani Afifi Noordin

Brokers' Digest: ESR-LOGOS REIT, SIA Engineering Company, Singtel, ThaiBev, Bumitama Agri

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