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Broker's Digest: Grab Holdings, Digital Core REIT, CapitaLand Ascott Trust, ST Engineering

The Edge Singapore
The Edge Singapore9/30/2022 11:00 AM GMT+08  • 11 min read
Broker's Digest: Grab Holdings, Digital Core REIT, CapitaLand Ascott Trust, ST Engineering
See what the analysts have to say this week.
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Grab Holdings
Price target:
CGS-CIMB Research ‘add’ US$4.10
Citi Research ‘buy’ US$5.40
DBS Group Research ‘hold’ US$2.85

Still grabworthy?

On Sept 27, superapp Grab Holdings held its first investor day, during which it assured investors that it has a plan to reverse out of the red.

Amid its several years of losses and declining share price since its listing via a special purpose acquisition company or spac, analysts are still somewhat positive on the stock.

CGS-CIMB Research is keeping its “add” recommendation on Grab with an unchanged target price of US$4.10 ($5.75), while Citi Research is reiterating its “buy” call and US$5.40 target price while cautioning “high risk”.

DBS Group Research, on the other hand, is less bullish as it keeps its “hold” recommendation with an unchanged target price of US$2.85.

See also: Broker's Digest: Nanofilm Technologies International, ESR-LOGOS REIT, Japan Foods Holding

During its investor day, Grab said it expects slower revenue growth of 45% to 55% for FY2023 ending December 2023, as it adjusts to the market downturn and speeds up efforts to reverse several years of losses.

CEO Anthony Tan expects the group to break even in 2HFY2024 on its adjusted ebitda (excluding one-offs). Its group-adjusted ebitda loss is expected to be US$380 million for 2HFY2022, a 27% improvement compared with 1HFY2022.

It also intends to break even in its digital bank operations by FY2026.

See also: DBS prefers Sea over Grab in its Asean internet coverage

According to CGS-CIMB analysts Ong Khang Chuen and Kenneth Tan, this would bring FY2022 adjusted ebitda loss to US$901 million, as compared to their expectations of US$900 million and Bloomberg’s consensus of US$980 million.

Grab’s guidance expects US$1.25 billion to US$1.30 billion in revenue for FY2022, which, according to DBS Group Research, implies an average growth of 89%, compared to 106% in its model. DBS’s FY2023 projections imply a 77% revenue growth, hence even the high end of the guidance is much lower than the research house’s expectations.

Citi’s Alicia Yap and Nelson Cheung, however, have estimated FY2023 revenue to come in at US$1.77 billion, lower than the US$1.85 billion to US$1.98 billion Grab expects for FY2023. “With a mix of higher margins revenues and improving operation efficiency with optimisation of discretionary spending, Grab targets to achieve group-adjusted ebitda breakeven in 2HFY2024, compared to our forecast of FY2024 ebitda loss of US$324 million,” writes Yap and Cheung.

Meanwhile, for its core business of ride-hailing, food deliveries and financial services, Grab intends to maximise users’ lifetime value while lowering the platform’s cost to serve. It has rolled out initiatives such as GrabUnlimited and GrabForBusiness to promote customer loyalty, usage frequency and promote cross-selling across services.

Meanwhile, technological advancements such as just-in-time driver allocation, order batching, and route optimisation (through its proprietary GrabMaps) are helping to increase drivers’ hourly earnings, and reduce subsidies. Grab is also scaling back on services with weaker unit economics (such as dark store formats for grocery deliveries, and off-platform payment services that are contribution-negative).

“The achievement in GrabMaps and partnership traction from leading global brands demonstrate Grab’s technology and operation expertise,” says Citi’s Yap and Cheung.

CGS-CIMB’s Ong and Tan are positive on this aspect too as they believe that this is a key initiative to drive growth for the group.

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

Grab is working closely with regulators on gig worker protection policies, as it notes that governments have recognised the importance of the gig economy. Hence, Grab expects potential implementation of mandatory retirement benefits and insurance benefits to be carried out in a gradual manner, at a level playing field for all platform players. It has baked the potential impact into its medium-term steady state margin guidance.

In addition, the analysts see potential in Grab’s upcoming digital bank with Singapore Telecommunications, GXS Bank.

The way CGS-CIMB’s Ong and Tan see it, Grab can leverage its partners’ ecosystem in Singapore, Malaysia and Indonesia, and potentially reach 120 million micro, small and medium enterprises upon launch.

Additionally, it will enjoy benefits such as lower costs, compared to peers on distribution and customer acquisition, as well as better credit scoring models. “Rollout will be done prudently, with digital bank operation losses peaking in FY2023 ending December 2023 and breakeven achieved by FY2026,” note the CGS-CIMB analysts.

“On ads, Grab is working on unifying its merchant marketing offerings into a self-service platform, which is expected to help the segment scale faster,” they add.

However, DBS Group Research expects that there could be some slowdown in the financial services segment as ebitda losses have been rising due to more intense competition.

Grab for the first time has guided an adjusted ebitda for digital banking in FY2026, although adjusted ebitda losses are expected to worsen in FY2023 with new launches in Singapore and Malaysia. Grab does not expect the overall fintech segment, excluding digital banking, to break even in FY2026.

Overall, Citi is positive on Grab’s outlook, as Yap and Cheung write: “We come away positively given management’s confidence in financial outlook, stable competitive landscape, and solid relationship with relevant authorities. More important, Grab does have an experienced and dedicated management team to execute and expand its superapp ecosystem to strengthen its reach in lower-tier cities.”

CGS-CIMB Research shares the same sentiment as Ong and Tan say: “Grab will continue to maintain a strong balance sheet by preserving cash prudently. Investments will continue to be made in developing products and technological innovations. On the M&A front, Grab will remain selective and only consider targets which are earnings-accretive and possess elements that support Grab’s current ecosystem.”

DBS, on the other hand, sees this as the right strategy for Grab to implement amid an impatient market. The research house expects revenue growth from the delivery segment to “take the hit” followed by fintech. — Samantha Chiew

Digital Core REIT
Price target:
UOB Kay Hian ‘buy’ 98 US cents
DBS Group Research ‘buy’ US$1.15

Nod to maiden acquisition

Analysts are positive on Digital Core REIT after the REIT announced that it will be acquiring data centres in Frankfurt, Germany and in Dallas, Texas, US, from its sponsor Digital Realty.

The German data centre is valued at about EUR558 million ($781.5 million) at 100% share while the Dallas data centre is valued at US$199 million ($281.4 million) at 100% share.

In its statement, Digital Core REIT’s manager posited two scenarios. First, it may acquire 25% of the Frankfurt facility, fully funded by debt. This will increase the REIT’s portfolio by 10% and increase its aggregate leverage from 25.7% (as at June 30) to 33.0%.

Second, the REIT may acquire 89.9% of the Frankfurt data centre and 90.0% of the data centre in Dallas. This will be supported by an equity fund raising (EFR) exercise, with a 60:40 mix of debt and equity funding. The move will grow the REIT’s portfolio size by 48% with a higher aggregate leverage of 37.5%.

While the deal is expected to be accretive to the REIT’s distribution per unit (DPU), UOB Kay Hian analyst Jonathan Koh also notes that the current market conditions are not conducive for an EFR exercise. The analyst has kept his “buy” call with an unchanged target price of 98 US cents.

The analyst believes scenario A will be the “most probable outcome” given the current volatile market conditions for Singapore REITs and rising government bond yields. Moreover, steep rate hikes are expected to continue for the rest of the year, and the next possible rate hike on Nov 2 could neutralise the REIT’s positive impact on its Frankfurt acquisition.

Hence, Koh has trimmed his DPU forecast for the FY2023 ending December 2023 by 1.5% to 4.0 US cents. This comes after factoring in the REIT’s proposed acquisition under scenario A and a higher cost of debt at 3.9%.

“We expect the Fed Funds Rate to hit 4.25% by end-2022,” he writes. “Digital Core REIT’s cost of debt is expected to increase from 2.3% in 2QFY2022 to 3.9% in FY2023.”

On the other hand, DBS Group Research analysts Dale Lai and Derek Tan believe scenario B is a more likely outcome. They have kept their “buy” call with an unchanged target price of US$1.15.

To them, scenario B is preferred as the REIT is able to raise equity at a unit price of at least 83 US cents. This scenario is expected to generate a DPU accretion of about 3.1%, which could potentially be higher if the placement is done at a higher price.

Meanwhile, with the acquisition expected to be completed earliest at end-November, the REIT’s earnings may be vulnerable to near-term downside risks. Despite that, they note that the REIT’s earnings are underpinned by solid fundamentals with its portfolio of fully occupied data centres and long weighted average lease expiry of 5.5 years. — Felicia Tan

CapitaLand Ascott Trust
Price target:
UOB Kay Hian ‘buy’ $1.36

Upbeat on latest acquisitions

UOB Kay Hian is keeping its “buy” on CapitaLand Ascott Trust (CLAS), previously known as Ascott Residence Trust, with a higher target price of $1.36 from $1.35 previously. The new target price represents a 24.8% upside.

This comes on the back of the trust’s recent acquisition, which analyst Jonathan Koh believes will improve its resilience, as it pivots into longer-stay accommodations.

CLAS is acquiring three serviced residences — Quest Cannon Hill in Brisbane, Australia; Le Clef Tour Eiffel Paris in France; and Somerset Central TD Hai Phong in Vietnam — as well as five rental housing properties in Kyoto, Osaka, Hyogo and Nagoya in Japan.

The trust has also acquired an additional 45% stake in student accommodation The Standard at Columbia in the US for $318.3 million, bringing the trust’s stake in the property to 90%. This property is slated for completion in 2Q2023.

In a Sept 26 note, Koh says: “The nine properties have 1,018 units and expand CLAS’s total assets by 7.8% to $8.3 billion. Longer-stay accommodation will expand from 17% to 19% of portfolio valuation, bringing CLAS closer to its target of 25%–30%.” He notes that the student accommodations have an average stay length of one year, while the five rental housing assets in Japan have typical lease tenure of two years.

The acquisitions strengthen CLAS’s position as the largest hospitality REIT in Asia Pacific, writes Koh. The weighted average ebitda yield for the acquired properties was 4.5% in FY2021 ended December 2021, without contribution from The Standard at Columbia. Ebitda yield would improve to 5.0% on a stabilised basis when The Standard at Columbia is completed and starts contributing.

Meanwhile, CLAS has hedged 79% of its borrowings to fixed interest rate. Unfortunately, the Fed increased rates by 75 basis points to 3.00% on Sept 21. “We expect the Fed Funds Rate to hit 4.25% by end-2022. CLAS’s cost of debt is expected to increase from 1.7% in 2QFY2022 to 2.15% in FY2023,” writes Koh, who still expects distribution yield to improve from 4.9% for FY2022 to 5.8% for FY2023. — Jovi Ho

Singapore Technologies Engineering
Price target:
RHB Group Research ‘buy’ $4.60

Promising CAGR

RHB Group Research analyst Shekhar Jaiswal has kept his “buy” rating and target price of $4.60 on Singapore Technologies Engineering (STE), despite describing the share price as “underperforming”.

In a Sept 23 report, Jaiswal says the underperformance was due to concerns over a potentially “unexciting” 2HFY2022 ending December earnings amid a weakening macro environment and a sharp rise in debt, especially given the rising interest rates. The concerns were cited by some investors, along with their disappointment on the group’s 1HFY2022 earnings miss.

Jaiswal also remains concerned about the rise in STE’s debt levels to fund the TransCore acquisition. As at Sept 27, the group’s gearing stands at 87.7%, while net gearing comes up to 48.7%.

Nonetheless, he expects the company’s net debt to equity to improve on the back of higher earnings and improvement in cash flows but still estimates it to remain above 1.5x in FY2024. Jaiswal is forecasting a CAGR of 8% on STE’s core profit in FY2021–FY2024.

Jaiswal says he remains confident of STE’s defensive characteristics, which are supported by “a record-high order book, growing defence revenue, and Urban Solutions & Satcom Security’s (USS) potentially sharp recovery.” He expects the group’s DPS of 16 cents to stay steady.

He notes that the commercial aerospace business has secured a five-year component maintenance-by-the-hour contract to service Thai budget carrier Nok Air’s Boeing 737-800 fleet.

“This will further strengthen its commercial aerospace order book, in our view, which has reported an average of $930 million in order wins each quarter since 1QFY2021,” Jaiswal says.

He also expects strong recovery in the group’s USS unit, along with a sustained improvement in the defence and public security wing to drive earnings growth for FY2023 to FY2024.

He also points out the $3.1 billion worth of new contracts in 2QFY2022 , which is 69% higher y-o-y, and 28% higher q-o-q. This is STE’s highest order backlog of $22.2 billion, which implies a book-to-bill ratio of 2.7 years. Moreover, $4.6 billion of this order book is expected to be delivered in 2HFY2022, representing 100% of his 2HFY2022 revenue estimates. — Lim Hui Jie

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