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Brokers' Digest: Keppel REIT, Genting Singapore, Hutchison Port Holdings Trust

The Edge Singapore
The Edge Singapore • 8 min read
Brokers' Digest: Keppel REIT, Genting Singapore, Hutchison Port Holdings Trust
See what the analysts have to say this week.
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Keppel REIT
Price targets:
OCBC Investment Research ‘sell’ 85 cents
CGS-CIMB Research ‘add’ $1.14
Citi Research ‘buy’ $1.10
DBS Group Research ‘buy’ $1.15
RHB Group Research ‘buy’ $1.10

Office rental upcycle is a plus, but higher interest costs may be a drag

Analysts are optimistic about Keppel REIT’s prospects after the REIT reported a distribution per unit (DPU) of 2.95 cents for the 2HFY2022 ended Dec 31, 2022, 2.4% higher y-o-y. For FY2022, the REIT’s DPU grew by 1.7% y-o-y to 5.92 cents.

Of the analysts, the team at OCBC Investment Research (OIR) is the only one to rate Keppel REIT “sell” with a lower fair value estimate of 85 cents from 87 cents previously. OIR sees several positives, including healthy rental reversions and the REIT’s benefitting from the office rental upcycle in Singapore.

Meanwhile, analysts from CGS-CIMB Research, Citi Research, DBS Group Research and RHB Group Research have kept their “add” or “buy” calls.

CGS-CIMB analysts Lock Mun Yee and Natalie Ong note the REIT’s strong operating performance in its Singapore portfolio and solid rental reversion for Singapore offices. They have kept their target price unchanged at $1.14.

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“Potential catalysts include the redeployment of divestment proceeds to new accretive acquisitions or share buy-backs, while downside risks include longer-than-expected frictional vacancy from tenant movements due to a slower-than-expected backfilling of office space,” they write.

Citi analyst Brandon Lee has kept his target price at $1.10, adding that he sees a “muted share price” following the REIT’s “in-line” results.

“Keppel REIT’s 4QFY2022 results painted a still-healthy Singapore office sector despite the uncertain macroeconomic climate, evidenced by strong rent reversions (which will slow to mid-high-single-digit level in FY2023, albeit still decent), healthy occupancy and resilient capital values,” Lee writes in his Jan 27 report.

See also: RHB maintains ‘neutral’ on Japan Foods Holdings at lowered target price of 26 cents

“While the softer leasing market is a concern, we think Keppel REIT’s prime office portfolio should be able to withstand the headwinds, helped by competitive expiring rents and limited supply through 3QFY2023,” he adds.

Furthermore, the analyst continues to see value in the REIT with its current P/B of 0.7x and an FY2023 yield of 6.3%. The REIT’s anniversary distributions support the yield.

DBS analysts Rachel Tan and Derek Tan remain upbeat on Keppel REIT’s prospects, saying that its best-in-class office portfolio, anchored by Grade A offices in Singapore’s CBD, is “well positioned” to benefit from a potential recovery in a tight net supply market.

Following the merger between the former CapitaLand Mall Trust (CMT) and CapitaLand Commercial Trust (CCT), Keppel REIT is now the only purely office REIT, a valuable trait that investors have yet to appreciate, the analysts add.

Keeping their target price unchanged at $1.15, the highest among their peers, the analysts deem Keppel REIT’s valuations “attractive” at a price-to-net asset value (P/NAV) of 0.7x, close to -1 standard deviations (s.d.) of the REIT’s historical range.

RHB analyst Vijay Natarajan has lowered his target price to $1.10 from $1.14 after the REIT’s results stood slightly below his estimates. He has also lowered his DPU estimates from FY2023 to FY2024 by 4% to 5% due to higher interest costs. The lowered estimates also considered the latest occupancy, rental and recent acquisition assumptions.

Despite the lower target price and DPU estimates, the analyst remains upbeat on Singapore’s office market, which is “expected to stay resilient on low supply and flight-to-quality trends”.

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

“We believe the REIT could also look at asset divestments to lower gearing and recycle capital,” he adds, noting that Keppel REIT’s valuations are “reasonably attractive, at 0.7x book value with an FY2023 yield of 6.2%”.

On Keppel REIT’s entry into the Japanese market following the acquisition of the freehold Ginza 2-chome in October 2022, the analyst believes that the asset was overpaid at a consideration of JPY8.8 billion ($84 million).

“The building is only 36% occupied currently and has an estimated net property income (NPI) yield of 1.2% (3.1% when fully occupied), which we regard as very low,” says Natarajan.

“Debt cost is expected to be around 1.5%, which means the acquisition is not expected to be immediately yield-accretive. When the building is fully occupied, however, the deal will be mildly-accretive with full debt funding,” he adds. — Felicia Tan

Genting Singapore
Price targets:
OCBC Investment Research ‘hold’ $1.06
Maybank Securities ‘hold’ 94 cents

Targets raised following price rally on China reopening boon

Analysts at Maybank Securities and OCBC Investment Research (OIR) have lifted their target prices for Genting Singapore following its share price rally driven by China’s reopening optimism.

OIR analyst Chu Peng, who has maintained a “hold” call with a fair value estimate of $1.06, notes that the optimism may have been largely priced. In anticipation of its 4QFY2022 ended December 2022 results release on Feb 20, Chu expects a sequential recovery for Genting Singapore as it benefits from a strong rebound of tourism during the year-end holiday travel season.

“While visitation from China remained subdued at 2% in 4QFY2022 and full-year 2022, we see the earlier-than-expected reopening in China as a positive to Genting Singapore, which could see a faster-than-expected recovery in 2023,” he adds.

Meanwhile, Maybank’s Yin Shao Yang, who has a “hold” call and a target price of 94 cents, says Genting Singapore is undoubtedly one of the best Chinese tourism proxies on the Singapore Exchange. However, he is unsure if all the Chinese gamblers, especially VIPs, would return.

Yin had previously assumed Genting Singapore’s FY2023 and FY2024 Resorts World Singapore (RWS) VIP volume would stabilise at 75% of FY2019 levels. The analyst had not expected the 25% shortfall to return due to China outlawing cross-border gambling and its weak economy.

Maybank now assumes that half of the shortfall will return, while the FY2023 and FY2024 RWS VIP volume would stabilise at 88% of FY2019 levels. “Our conversations with industry insiders reveal that the cross-border gambling ban will affect casinos that had utilised junkets more than RWS, and migration of wealthy Chinese to Singapore will help,” he adds.

Yin had also revised his assumptions on gross gaming revenue (GGR), expecting RWS’s FY2024 mass-market GGR to recover to 100% of 2019 levels. While he still believes that FY2024 will see more intense competition by regional casino operators for the regional premium mass market after being deprived of the Chinese VIP market, there will also be retention of Singapore gamblers in the country in addition to the return of Chinese mass market gamblers to compensate.

Meanwhile, Yin highlights that the Thai House of Representatives had on Jan 12 endorsed a report by a special committee studying the feasibility of allowing an entertainment complex to be built, which includes legal casinos for further consideration.

This could potentially pave the way for Thailand to legalise integrated resorts (IR), albeit two to three years from now. “If it does, we fear that Thai IRs will draw Chinese gamblers away from Singapore and call the financial viability of the $4.5 billion ‘RWS 2.0’ expansion into question,” he adds. — Khairani Afifi Noordin

Hutchison Port Holdings Trust
Price targets:
OCBC Investment Research ‘hold’ 20 US cents

Recessionary pressures to impact throughput volume

OCBC Investment Research is reiterating its “hold” call on Hutchison Port Holdings Trust (HPHT) with a love fair value estimate of 20 US cents from 26 US cents previously, as analyst Chu Peng has noticed weaker performance at Kwai Tsing and recessionary pressures likely to impact throughput volume.

According to the latest industry data, the throughput volume of Shenzhen’s seaport softened by 2% y-o-y in November 2022, while the throughput at Kwai Tsing fell 22%/14% y-o-y in November/December 2022.

On a m-o-m comparison, Shenzhen’s container throughput improved by 4% in November 2022. Similarly, Kwai Tsing’s throughput improved by 3% m-o-m in November and December 2022. Kwai Tsing’s throughput was 15% below its Covid-19 levels in December 2022.

Management noted that most of the cargo handled at Kwai Tsing in 3Q2022 was for transhipment due to the closure of borders. The lack of local cargo could have made Hong Kong a less attractive port to shipping lines. The analyst believes this trend may have continued in 4Q2022 but could improve in 2023 as China reopens its borders.

As HPHT is expected to report its FY2022 ended December 2022 on Feb 7, Chu believes that 2HFY2022 could continue to be impacted by supply chain and logistics/transportation disruptions due to stringent Covid-19 restrictions in Hong Kong and China.

While an interim dividend of 6.5 HK cents was declared in 1HFY2022, the management is maintaining its full-year DPU guidance of 14.5–15.5 HK cents, which Chu thinks is achievable.

“Looking into 2023, earnings outlook remains uncertain, in our view, given a recessionary environment with major economies such as Europe and the US entering into recession this year. This could impact export demand and throughput at HPHT’s ports,” says the analyst, noting that supply chain disruptions could ease as China exits from its zero-Covid policy. — Samantha Chiew

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