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Brokers' digest: Jumbo Group, China Aviation Oil, Keppel DC REIT

The Edge Singapore
The Edge Singapore • 6 min read
Brokers' digest: Jumbo Group, China Aviation Oil, Keppel DC REIT
See what the analysts have to say this week.
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Jumbo Group

Price target:
CGS-CIMB Research ‘add’ 36 cents

Target price lowered

In anticipation of a China-driven decline in revenue, CGS-CIMB Research analysts Kenneth Tan and Ong Khang Chuen have kept their “add” call on Jumbo Group 42R -

at a lower target price of 36 cents from 40 cents.

The analysts’ target price is pegged at 14x 2025 P/E, which aligns with regional peers. This is down from a previous target price pegged at 20x P/E.

In their Jan 12 report, Tan and Ong note that after a strong performance in FY2023 ended Sept 30, they forecast the group’s 9HFY2024 ended June same-store sales in Singapore to rise 7% y-o-y, on the back of stronger demand from families and businesses, tourist-driven footfall and price hikes for selected items.

See also: More Asean investors positioned in Grab while Singtel remains high on the radar following DC foray: Maybank

According to the group, domestic footfall as of the end of FY2023 had exceeded pre-Covid-19 levels, with all six Jumbo Seafood outlets remaining profitable.

The analysts write: “We see room for tourism spending, which historically formed around 33% of Jumbo’s Singapore revenue, to improve in FY2024, as inbound North Asia tourist volumes ramp up throughout the year.”

Despite the expected footfall of tourists from North Asia or, more specifically, China, Tan and Ong warn of “ongoing softness” in China’s domestic economy. Thus, Jumbo Group’s business in the country may only start to “meaningfully recover” from 2HFY2024 as consumers and corporations become more budget-conscious in the near term.

See also: Analysts mixed on Keppel DC REIT after Japan data centre acquisition

The group will also be closing one of its Jumbo Seafood outlets in Xi’an, China, which the analysts understand should have a “minor impact” on group-level revenue at around $0.5 million per annum, as the outlet is one of Jumbo’s smallest in China.

Meanwhile, Tan and Ong note that the Universal Beijing Resort outlet, which opened in 2021, is still in “gestation mode” given tough Covid-19 policies and a lack of tourist footfall.

They write: “In our view, it will likely need another year to ramp up to optimal scale. We now expect China revenue to decline 2% y-o-y in FY2024, before returning to growth in FY2025.”

Overall, the analysts expect Jumbo to sustain its elevated operating profit margin (OPM) of around 11% from FY2024 to FY2025, as benefits from optimisation of its supply chain such as increasing direct imports into Singapore, offsets higher labour costs.

Correspondingly, Tan and Ong have raised their FY2024 to FY2025 earnings per share (EPS) estimates by 15%-16%, attributing it to the stronger Singapore and weaker Chinese revenue growth and higher OPM assumptions on strong cost controls. The analysts’ new EPS forecasts for FY2024 and FY2025 are 2.4 cents and 2.5 cents, respectively.

Tan and Ong’s re-rating catalysts include the quicker ramp-up in tourist footfall and improving domestic consumption in China, spurring greater restaurant spending.

Conversely, downside risks include prolonged consumption weakness in China, outlet closures, and recessionary fears spurring consumer downtrading behaviour. — Douglas Toh

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

China Aviation Oil

Price target:
CGS-CIMB Research ‘add’ $1.14

Higher earnings seen

Due to a rebound in air travel and trading environment, CGS-CIMB Research analysts Kenneth Tan and Lim Siew Khee have kept their “add” call on China Aviation Oil (CAO) as they expect the jet fuel supplier to report earnings of US$26 million ($34.5 million) for the 2HFY2023 ended Dec 31, 2023, nearly double that recorded in the year-earlier period.

“We think 2HFY2023 gross profit should recover off 1HFY2023 lows to US$14 million (+28% h-o-h, flat y-o-y) on the back of [around] 50% y-o-y increase in jet fuel trading volumes, in line with recovering China outbound flights, and more trading opportunities,” write Tan and Lim, who kept their target price unchanged at $1.14.

“As crude oil prices showed better stability in 2HFY2023 compared to 1HFY2023, we think CAO’s traders were able to capitalise on more margin-optimising trading opportunities in the second half. We forecast 2HFY2023 share of associates profits to rise 75% h-o-h and 76% y-o-y, as 33%-owned associate Shanghai Pudong International Airport (SPIA) likely benefitted from strong passenger throughput growth at Pudong Airport,” they add.

In FY2024, CAO will also likely benefit from the anticipated growth in outbound flight volumes from China. The Civil Aviation Administration of China announced on Jan 4, that it expects international flight volumes to reach 80% of its pre-Covid-19 levels by the end of 2024, giving the analysts “greater certainty” of travel recovery ahead.

“While domestic economic weakness and visa issues have resulted in international flight volumes recovering slower than we had previously anticipated, we think FY2024 volume recovery will be driven by eased visa restrictions for tourists entering China, complete lifting of Covid-19 restrictions within China, and further restoration of flight routes between China and laggard countries (notably US and Japan),” say Tan and Lim.

The analysts like CAO for its robust earnings growth trajectory ahead, which could help re-rate the stock back to its historical average of 10 times FY2024 P/E, which their target price is based on.

“Over the past year, CAO’s share price has fallen 9% on concerns over slow recovery in China international flight volumes, resulting in its forward P/E multiple de-rating from 12 times to 8 times currently (0.7 standard deviations or s.d. below FY2010–FY2019 historical mean),” they note. At its current share price, CAO is valued at around an “attractive” 8 times FY2024 P/E.

CAO is expected to report its results for the 2HFY2023 and FY2023 in the last week of February. — Felicia Tan

Keppel DC REIT

Price targets:
DBS Group Research ‘buy’ $2.45
Citi Research ‘buy’ $2.18

Favourable ruling over rental dispute

DBS Group Research has maintained its “buy” call on Keppel DC REIT, following the High Court’s Jan 12 ruling in its favour over a rental dispute with tenant DXC Technology Services.

The dispute arose from a five-year lease signed by DXC for Keppel DC Singapore 1, which was renewed in March 2020.

“However, a unilateral decision by DXC led to the relinquishment of a portion of the leased space starting from April 1, 2021,” states DBS in its research note on Jan 15, adding that this was an arrangement the REIT did not accept.

The Jan 12 ruling by the court favoured Keppel DC REIT’s claim of $3 million for outstanding rents from April 2021 to Dec 2021.

A related dispute on another $11.8 million will be heard next month.

“The ruling by the High Court in favour of Keppel DC REIT marks a positive development, given that the disputed amount represents approximately 2% of the REIT’s annual distributable income,” says DBS.

The REIT has already provided for the contested rental since April 2021. “Any amounts recovered from this case will be considered additional income,” says DBS, whose existing projections exclude this income.

“Amid lingering concerns regarding KDCREIT’s Guangdong DCs, we believe that the favourable outcome in the DXC case will bring some relief,” says DBS, which has a target price of $2.45.

In his Jan 15 note, Brandon Lee of Citi Research estimates that if DXC resumes payment for the space it gave up, it could add around 2% to the REIT’s current year FY2024’s distributable income on a per annum basis.

Keppel DC REIT could also be able to recoup another $10.2 million of losses for the period from Apr 1, 2021, to Dec 31 2023, adds Lee, who has kept his “buy” call and $2.18 target price. — The Edge Singapore

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