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Brokers' Digest: HRNetGroup, Ascendas REIT, Sembcorp Industries, Raffles Medical Group, CDL, ST Engineering

The Edge Singapore
The Edge Singapore11/25/2021 05:01 PM GMT+08  • 11 min read
Brokers' Digest: HRNetGroup, Ascendas REIT, Sembcorp Industries, Raffles Medical Group, CDL, ST Engineering
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Price target:
CGS-CIMB “add” $1.15
RHB “buy” 93 cents

On upward trajectory into FY2022

In light of HRnetGroup’s strong rebound in FY2021, analysts from CGS-CIMB Research and RHB Group Research are optimistic on the group’s growth and staff expansion moving into FY2022. The company has a December year-end.

For 1HFY2021, HRnetGroup reported that its revenue and patmi grew by 30.8% and 71.2% y-o-y to $275 million and $35.9 million. The counter is also trading at 13.3 times FY2021 earnings, which is lower than global peers’ average, according to RHB’s estimates.

CGS-CIMB Research analysts Kenneth Tan and Lim Siew Khee are keeping their “add” call on HRnetGroup with an unchanged target price of $1.15, based on 17 times FY2022 earnings.

Tan and Lim note that the group is seeing good momentum for its flexible staffing segment, with both volumes and bill rates looking strong presently. “HRnetGroup’s professional recruitment segment is steadily recovering, with both volumes and gross profit (GP) per placement gradually increasing,” say Tan and Lim.

Heading into FY2022, the analysts say that the group expects its permanent placement volumes to gain traction as borders reopen and organisations ramp up their bench strength. “Companies would also need to rehire to replace employees who were retrenched or left during the pandemic,” say the analysts.

This is consistent with the overall upbeat hiring sentiment in Singapore, where notable sectors seeing hiring demand include technology, FMCG, finance, and healthcare.

Additionally, given the group’s net cash position as at end-1H2021, the analysts noted that HRnetGroup is open to M&A opportunities. “Potential areas highlighted include social recruiting companies and companies in the professional recruitment space,” they say.

RHB analyst Jarick Seet has also maintained a “buy” rating on HRnetGroup with an increased target price by 13% to 93 cents with a dividend yield of 4.5% for FY2021.

On Nov 19, HRnetGroup announced a special dividend per share of 1 cent, which signals a potential change in the group’s mindset on rewarding shareholders.

Seet observes that this could be a signal that its dividend payout ratio may increase ahead, compared with the 50% since its IPO. “With its net cash balance sheet and strong cash flow generation, on top of a brighter outlook and the expectation of improved results ahead, we expect dividends for FY2021 to be higher than that of FY2020, which should result in a 4.5% yield for FY2021,” he says.— Chloe Lim

Ascendas REIT
Price target:
DBS Group Research “buy” $4
UOB Kay Hian “buy $3.83

Science Park redevelopment

Analysts from DBS Group Research and UOB Kay Hian are positive on Ascendas REIT (A-REIT) after the REIT on Nov 15 announced that it will redevelop 1 Science Drive in a joint venture with CapitaLand Development (CLD).

DBS analysts Dale Lai and Derek Tan have kept “buy” with an unchanged target price of $4 as they deem the redevelopment a “longterm catalyst”.

To them, A-REIT is attractively valued compared to its other large-cap peers. The REIT currently offers an attractive 5.2% yield, which is among the highest compared to the larger cap industrial Singapore REIT (S-REIT) peers.

“Having acquired more than $1.7 billion year to date, A-REIT is on track to deliver distribution per unit (DPU) compound annual growth rate (CAGR) of more than 4.0% between FY2020 to FY2023,” they write in a Nov 16 report. A-REIT has a December year-end.

The REIT’s structural tailwinds from e-commerce, data centres and office decentralisation could also drive higher earnings, as well as growth in capital values in the longer term, add the analysts. “While A-REIT can tap its sponsor for an attractive pipeline of new economy properties, there is significant value from the potential redevelopment of its Science Park assets,” they write. “The redevelopment of 1 Science Park Drive together with its sponsor paves the way for $5.6 billion in gross development value to be unlocked for its assets at Science Parks 1 and 2.”

In addition, Lai and Tan believe that investors have not “priced the net asset value (NAV) uplift from the redevelopment of its other Science Park assets into properties with higher specifications and higher plot ratios”.

UOB Kay Hian analyst Jonathan Koh has also kept “buy” on A-REIT with the same target price of $3.83.

“On a stabilised basis, [A-REIT’s] 34% stake provides net property income (NPI) yield of 6.3% post-transaction cost and increase pro forma 2020 DPU by 0.5%. A-REIT provides 2022 distribution yield of 5.3%,” writes Koh in a Nov 17 report.

The way he sees it, 1 Science Park Drive is an ideal location for biomedical research and development (R&D) due to its close proximity to National University of Singapore (NUS) and National University Hospital (NUH).

As it is, 80,000 sqm or 71% of the 112,500 sqm of its business park space is designed for biomedical R&D activities (wet lab-ready).

“Several reputable technology and biomedical R&D players have expressed strong interest for the upcoming spaces at Science Park 1,” he says.

Koh has also kept his DPU estimate forecast for A-REIT unchanged as 1 Science Park Drive will only be completed in 2QFY2025.— Felicia Tan

Sembcorp Industries
Price target:
CGS-CIMB “add” $2.51

Undemanding valuations

Following a visit to the Tengeh floating solar farm by Sembcorp Industries (SCI) on Nov 17, CGS-CIMB Research analyst Lim Siew Khee has reiterated her “add” call for the company with an unchanged target price of $2.51.

In a research note, Lim notes that the 60 megawatt-peak (MWp) farm, which is owned and operated by SCI, is the largest floating solar farm in Singapore, with 122,000 solar panels spanning 45ha.

The solar farm officially opened on Jul 14 in partnership with the National Water Agency Public Utilities Board. “Electricity generated from the floating solar farm will power Singapore’s five local water treatment plants, offsetting [around] 7% of PUB’s annual energy needs,” she notes.

The farm is part of the 390MWp worth of solar energy projects SCI has in Singapore, including those still under development.

The way Lim sees it, the farm is a positive indicator for SCI’s shift towards renewable energy assets. “We like SCI’s execution on greening its assets so far,” she remarks.

SCI has allocated some $4.4 billion towards renewable projects, or 80% of its five-year, $5.5 billion investment target.

As a renewable energy proxy in Singapore, Lim points out that SCI is trading at an undemanding valuation compared to Sunseap, which owns the only other commercial floating solar farm in Singapore. SCI is currently trading at an FY2022 ending December EV/Ebitda of eight times, compared to Sunseap’s recent acquisition by EDP Renewables that saw it valued at an EV/Ebitda of 31 times. SCI is also among CGS-CIMB’s mid-cap environmental, social and governance (ESG) picks.— Atiqah Mokhtar

Raffles Medical Group
Price target:
RHB “buy” $1.65

Take advantage of current price weakness

RHB Group Research analyst Shekhar Jaiswal says this is a good time for investors to buy Raffles Medical Group (RMG) shares given its recent share price weakness.

“[Raffles Medical’s] valuation looks compelling, especially amidst a sustained estimated earnings growth over the forecast period,” he remarks in a Nov 19 research note.

He has maintained his “buy” call and target price of $1.65 for the counter, which implies an upside of nearly 20%. He notes that the target price is set at 39 times the company’s FY2022 ended December earnings.

The way Jaiswal sees it, this is an opportunity for investors to buy into the company’s sustained earnings growth story that is underpinned by the increased use of Covid-19 testing as borders reopen, the normalisation of the group’s domestic healthcare and hospital business, and the return of medical tourism in Singapore.

In addition, he points out that Raffles Medical is banking on growth in China. Its Chongqing hospital is expected to break even in ebitda terms in 2022 while its Shanghai hospital, which commenced operations early this year, is expected to break even in ebitda terms in three years. — Atiqah Mokhtar

City Developments
Price target:
RHB “buy” $9
CGS-CIMB “add” $8.97

Positive catalysts emerging

Analysts from RHB Group Research and CGS-CIMB Research are upbeat on an improving outlook for City Developments (CDL) following its 3QFY2021 ended September business update.

In a Nov 22 research report, Vijay Natarajan notes that more positive catalysts are emerging for CDL, including strong residential sales across its new launches in Singapore. For one, more than 500 out of the 696 units at CanningHill Piers sold on the development’s launch day on Nov 20 at an average selling price of $2,900 psf.

Canning Hill Piers is jointly developed by CDL and CapitaLand Development. The healthy launch for Canning Hill Piers follows similarly well-received launches for CDL’s earlier Irwell Hill Residences and Penrose projects.

Natarajan also estimates that CDL will book gains of over $500 million from the divestment of Millennium Hilton Seoul to IGIS Asset Management Co for $1.15 billion. should strengthen its balance sheet. “We expect part of the proceeds to be used to fund redevelopments of Fuji Xerox towers and Central mall in Singapore,” Natarajan says.

Another positive indicator is green shoots emerging for the hospitality sector as global travel restrictions ease. “We expect the hospitality sector to recover to 50% to 70% levels of pre-Covid-19 in 2022 with a near full recovery for the sector anticipated in 2H2023. This should be incrementally positive for CDL’s earnings and also likely to result in a possible uplift to its RNAV,” says Natarajan, who notes that CDL’s valuations are attractive at 20% and 54% discounts to book value and RNAV respectively.

He has upped his target price for CDL from $8.50 to $9, factoring in an environmental, social and governance (ESG) premium of 6%. Based on RHB’s in-house ESG rating methodology, CDL scored highest among Singapore developers in terms of environmental and social efforts, though it ranked lower on corporate governance.

Meanwhile, CGS-CIMB analyst Lock Mun Yee has kept her “add” rating for CDL with an unchanged target price of $8.97, citing its “relatively optimistic outlook” as borders gradually reopen.

Similar to Natarajan, Lock highlights the stronger residential sales booked by CDL for the first nine months of 2021, while occupancies remained high for its investment properties.

CDL’s Singapore office and retail portfolio occupancy stood at 91.5% and 93.3% respectively as of end 3Q2021. “Demand for its office space continues to be supported by wealth management, family office and technology/fintech companies,” notes Lock.

Hotel performance improved q-o-q with revenue per average room surging 117.1% y-o-y for the 3QFY2021. The outlook is expected to strengthen as travel restrictions ease further.— Atiqah Mokhtar

ST Engineering
Price target:
DBS Group Research “buy” $4.60

Upswing in growth trajectory

DBS Group Research analysts Suvro Sarkar and Jason Sum have maintained a “buy” rating on ST Engineering with a slightly higher target price of $4.60. At its current price, the counter offers a “decent” dividend yield of 3.8%. To Sarkar and Sum, the counter also has the potential to experience stronger growth.

ST Engineering has set a target for their annual revenue to grow at 2–3 times GDP growth rate (compared to the base year of FY2020) to surpass $11 billion in FY2026, as it goes about capturing new opportunities across the board in smart city projects, defence and aerospace contracts.

This $11 billion revenue target represents a compounded annual growth rate of 7% from FY2020. Out of this, more than $3.5 billion each will come from the commercial aerospace and smart city business segments.

Additionally, contract flows have been positive year-to-date in 2021, say Sarkar and Sum. “The order book continues to breach record levels quarter after quarter, and at $18.2 billion as of end-3Q2021, it is much higher than pre-Covid-19 levels,” say the analysts. “9M21 order wins stand close to $5.2 billion and the order book increased to an all-time high of $18.2 billion at end September, up from $15.7 billion as of end March 2021 and $15.3 billion as of end FY2020,” they add.

ST Engineering also announced contracts worth a total of $5.2 billion y-t-d in FY2021, which is a significantly higher run rate than the FY2020 trends, despite the slow recovery in the commercial aerospace sector.

The analysts said that ST Engineering’s prioritisation of the crucial global needs of digitalisation, urbanisation, sustainability and security stands “to drive robust organic growth across segments of at least 4%–5% even further out in this decade to 2026.”

However, Sarkar and Sum also noted that key risks included slower-than-expected demand recovery in international air travel that could pose downside risks to earnings and valuations. — Chloe Lim

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