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Brokers' Digest: KORE, SIA, CDLHT, Netlink NBN Trust, Digital Core REIT

The Edge Singapore
The Edge Singapore11/4/2022 01:26 AM GMT+08  • 12 min read
Brokers' Digest: KORE, SIA, CDLHT, Netlink NBN Trust, Digital Core REIT
Here's what the analysts have to say this week.
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Keppel Pacific Oak US REIT
Price target:
RHB Group Research ‘buy’ 74 US cents
UOB Kay Hian ‘buy’ 74 US cents
DBS Group Research ‘buy’ 65 US cents

Portfolio stays strong but higher rates a risk

Analysts at RHB Group Research, UOB Kay Hian and DBS Group Research have kept their “buy” on Keppel Pacific Oak US REIT (KORE) with lower target prices due to higher risk free rate and interest rates. This follows a “relatively stable” 3QFY2022 ended Sept 30 results announcement.

RHB analyst Vijay Natarajan says KORE’s strong quarter of operational numbers has defied broader market expectations of a sharp negative impact to the US office sector demand from an evolving hybrid working model.

KORE achieved positive rental reversion of 5.3% for 3QFY2022, driven by The Plaza Building and The Westpark Portfolio in Seattle as well as Bellaire Park in Houston, says UOB analyst Jonathan Koh, who has trimmed his target price to 74 US cents from 80 US cents.

He notes that in place passing rents remain 5% below asking rents on a portfolio-wide basis, which underpins organic growth from sustained positive rent reversion. However, the REIT continues to benefit from built-in annual rental escalation of 2.5% across its portfolio.

See also: DBS cuts Yanlord target price from $1.43 to $1.06

Meanwhile, portfolio occupancy saw a slight improvement of 0.5 percentage points (ppt) q-o-q to 92.5%, excluding the divested Northridge Centre. Excluding Powers Ferry, which is slated to be divested, portfolio occupancy would have been 93.2%, DBS analysts Rachel Tan and Derek Tan point out.

KORE completed the divestment of Northbridge Center I & II in Atlanta for US$22.1 million in July. Koh expects KORE to recognise a small divestment gain of US$1.6 million in 3QFY2022. The REIT has also signed a sale and purchase agreement to divest Powers Ferry in Atlanta.

In aggregate, Northbridge Center I & II and Powers Ferry contribute 2.7% of the group’s net property income as of June. Proceeds from the divestment of the properties could be utilised for reinvesting in office properties in growth markets, or share buybacks, Koh highlights.

See also: KGI recommends shareholders take the better offer from GEAR

To factor in higher interest cost, DBS has revised its FY2022–FY2024 DPU estimates by 2%-8% while RHB’s Natarajan has lowered his FY2023–FY2024 DPU estimates by 3%.

“While the US office market remains volatile, KORE has kept its portfolio relatively stable. Currently, it is trading at 0.7x P/B, offering FY2023 yield of 10%, an attractive level to monitor as we await a potential recovery in the US office market,” the DBS analysts add.

Meanwhile, UOB’s Koh has cut his DPU forecast by 8% for 2023 and 7% for 2024 due to the REIT’s change in policy to pay 100% of management fees in cash starting 2QFY2022. — Khairani Afifi Noordin

Singapore Airlines
Price target:
Citi Research ‘neutral’ $5.19
CGS-CIMB Research ‘add’ $6.10

Mixed views on MCB redemptions

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Analysts from Citi Research and CGS-CIMB Research are mixed in their outlook on Singapore Airlines (SIA) after the airline announced that it will redeem the whole of the first tranche of its mandatory convertible bonds (MCBs) on Oct 25.

The redemption amount will total $3.86 billion, which is the sum at 110.408% of the principal amount of $3.5 billion. It will take place on Dec 8.

has maintained his “neutral” call on SIA while lowering his target price to $5.19 from $5.79 previously. The analyst says he has updated his SIA model on the latest trends, which includes revising FY2023 ending March 2023 to FY2025 core earnings to $1.2 billion, $1.09 billion and $1.2 billion from $460 million, $1.5 billion and $1.1 billion respectively.

“Upward adjustments in FY2023 reflect strong pent-up demand where strong passenger yield attracts capacity back to the market from winter 2022/2023, which we expect to result in pricing normalisation from FY2024,” says Choonnawat.

Meanwhile, CGS-CIMB Research analyst Raymond Yap has maintained his “add” call for SIA as well as his target price of $6.10, while retaining his assumption that half of the total MCBs will be eventually redeemed.

“This assumption still stands, as the total face value of MCBs issued is $9.7 billion and a half is $4.85 billion; so far SIA has announced the redemption of $3.5 billion,” says Yap.

Yap says he does not expect SIA to redeem more than half of the MCBs because of heavy capex commitments in future years mainly for aircraft delivery and a potential reduction in operating cash flow generation beyond FY2023 due to possible slowdown in air cargo markets and rising competition in the passenger aviation business. He notes that SIA has a second $6.2 billion tranche of MCBs issued on June 24 2021, which remains unredeemed. “SIA is partially redeeming the MCBs because it has ample cash. As at June 30, SIA had a $16.1 billion gross cash balance and a small net cash position after deducting debt of $15.7 billion,” he says.

Citi’s Choonnawat says he believes and assumes that SIA will call back entire MCBs with uncertainties on how much SIA would prefer to get involved with the Air India and Vistara integration. The way he sees it, there is limited upside at the current valuation of 1.2x FY2024 P/BV in relation to 9.5% prospective core ROE.

CGS-CIMB’s Yap expects SIA’s likely strong 2QFY2023 results, which will be released on Nov 4, to be the key re-rating catalyst, while a key downside risk is the potential for weaker cargo profits. — Bryan Wu

CDL Hospitality Trusts
Price target:
CGS-CIMB Research ‘add’ $1.30
DBS Group Research ‘buy’ $1.35
UOB Kay Hian ‘buy’ $1.37
RHB Group Research ‘neutral’ $1.30
Citi Research ‘sell’ $1.15

Superb 3Q but interest rates risks ahead

Analysts from CGS-CIMB Research, DBS Group Research, UOB Kay Hian, RHB Group Research and Citi Research have given mixed ratings for CDL Hospitality Trusts (CDLHT).

CGS-CIMB has maintained its “add” rating with a lower target price of $1.30 from $1.38, with analysts Lock Mun Yee and Natalie Ong say the REIT is seeing “steady progress towards pre-Covid levels”.

In 3QFY2022 ended September, CDLHT saw revenue and net property income (NPI) grow 46.4% and 54.4% y-o-y to $58.5 million and $31.6 million respectively. During the quarter, the trust’s properties in Singapore and Australia contributed most to its NPI improvement, with revenue per available room (RevPAR) in five out of seven of CDLHT’s geographies exceeding 3QFY2019 levels.

This is an improvement from 1HFY2022, where all geographies except the Maldives were performing below 2019 levels.

However, New Zealand and Japan lagged in the recovery in 3QFY2022, impeded by slower border re-openings.

The analysts say that it was an “exceptionally strong quarter” for CDLHT’s Singapore portfolio, driven by a strong pick-up in meetings, incentives, conferences, and exhibitions (MICE) events, corporate travel and the return of the Formula One Grand Prix. NPI from Singapore grew 153% y-o-y in 3QFY2022 and accounted for 57% of NPI for the quarter.

Australia and Germany also experienced similar corporate and leisure demand while Italy’s hotel demand was driven by domestic, intra-Europe and US leisure travel.

Meanwhile, DBS Group Research’s Derek Tan and Geraldine Wong have maintained their “buy” call but cut their target price to $1.35 from $1.55.

In their report, the analysts “see positives from a multi-year acceleration in RevPAR driving P/NAV multiples higher, and a 12% CAGR in DPU for the FY2022–2024 on lower estimates.”

The analysts also think that CDLHT is “perched to take flight as corporate travel demand returns,” adding that it continues to be one of the top beneficiaries to ride on “record-high RevPARs” in Singapore since June. This is because its prime hotels are well-positioned within the leisure and corporate travel segments in Singapore.

Furthermore, Wong and Tan note that CDLHT has also diversified into the built-to-rent (BTR) sector, saying this highlights the management’s strategic intent to build resilience through diversity and earnings stability post-pandemic. “With varied demand drivers, compared to hospitality assets, we believe the BTR investments will be value accretive and complement the company’s portfolio,” they conclude.

UOB Kay Hian’s Jonathan Koh is also maintaining his “buy” call but trimmed the target price to $1.37 from $1.41. He acknowledges the strong recovery in Singapore but remains cautious over a higher cost of debt and slower recovery in New Zealand.

Despite this, he anticipates a recovery in Japan, Australia and New Zealand, while noting that the UK has experienced a “sustained recovery”.

Meanwhile, RHB analyst Vijay Natarajan is keeping his “neutral” call but dropping his target price to $1.15 from $1.30.

Natarajan says that the portfolio in Europe and the UK saw a strong rebound on the back of pent-up demand. On the other hand, the Maldives portfolio may have experienced a y-o-y RevPAR increase but inflationary cost pressures have “started to bite” resulting in higher NPI loss in 3QFY2022.

The portfolio outlook in Maldives and Europe is also impacted by the Russia-Ukraine war, resulting in high inflation and a weak economic outlook while New Zealand and Japan are expected to see improvements in coming quarters with more events and easing of restrictions.

Most importantly, he notes interest costs and foreign exchange rates as two key risks for CDLHT.

CDLHT has a high proportion of debt ($426 million) due for refinancing, with 18%–21% due from 4QFY2022 to FY2023. Natarajan notes that this is likely to be refinanced at 150–250 basis points (bps) higher than the current average interest cost of 2.5%.

Currently, 64% of its debt is fixed but Natarajan says this “is on the lower side compared to peers” and the proportion is likely to be further lowered post refinancing.

Furthermore, about 20% of CDLHT’s 3QFY2022 NPI is derived in British pounds, yen and euros which have depreciated significantly since the start of the year.

Natarajan lowers his DPU forecasts for FY2023 and FY2024 by 5%, factoring in higher interest costs and slightly lower margins. He also raises his cost of equity (COE) assumptions by 50 bps on the back of higher interest rates.

Finally, Citi’s Brandon Lee has the most bearish view on CDLHT, handing it a “sell” rating and a target price of $1.15.

While he notes the REIT’s recovery and assets enhancement plans for Singapore’s Grand Copthorne Waterfront Hotel, Lee highlights that “supply growth, increasing inflation, cost pressures and labour constraints represent the main headwinds to stronger performance recovery in the near-term”. As such, he expects a “muted share price reaction” due to global macro-environment uncertainty. — Lim Hui Jie

NetLink NBN Trust
Price target:
Citi Research ‘buy’ 91 cents

Negatives already priced in

Citi Research analysts Luis Hilado and Arthur Pineda have upgraded their call for NetLink NBN Trust to ‘buy’ from ‘neutral’, with a target price (TP) of 91 cents.

According to the analysts, NetLink’s negatives are likely priced in and the stock’s sharp decline appears to have fully factored in interconnect rate cuts in 4QFY2023 ending March 2023 while discounting consensus estimates.

Their target price of 91 cents is derived by a valuation methodology based on free cash flow to firm (FCFF). “For our terminal value calculations, we have assumed a long-term growth rate of zero. Our model factors in pricing cuts with every five-year return on asset base review cycle. Our model assumes an 8% cut in residential and non-residential fibre connection pricing for the next regulatory pricing review in FY2023,” say the analysts.

“Our current FY2024 revenue and profit outlook remains below consensus estimates, which we believe are assuming flat interconnect rates. The market, however, has discounted consensus earnings, in our view, taking the stock down 17% ytd,” they add.

“We believe the stock offers value at current levels at a more than 6% sustainable yield even on our more bearish than consensus earnings outlook,” say the analysts, while noting that rising interest rates remain a risk to the share price performance, as the yield gap between NetLink’s dividend yield and 10-year Singapore rates is below the mean.

However, with a rate decision by regulator Infocomm Media Development Authority (IMDA) being eyed closer to the new rate regime date in January 2023 rather than seven months earlier, they say that NetLink’s management has the opportunity to present a case that the current rising rate environment justifies a steady, if not higher, rate of return — unlike the prior process in 2018 and 2019.

“This would put our base-case assumption of an 8% rate cut at risk. As our bull/bear scenario highlights, a rate status quo throughout the forecast period could add 18 cents, or around 20%, per share to our TP,” say the analysts. — Bryan Wu

Digital Core REIT
Price target:
DBS Group Research ‘buy’ 90 US cents

Full occupancy, long WALE

DBS Group Research analysts Dale Lai and Derek Tan have maintained their “buy” call on Digital Core REIT with a lower target price of 90 US cents ($1.27) from US$1.15 to account for expectations of further rise in interest rates and the smaller quantum of debt-funded acquisition.

In their Oct 27 report, the analysts say that they remain positive on the REIT’s operating performance, given its 100% occupancy and long weighted average lease expiry (WALE) of five years.

“With demand still robust in the markets where they operate, we believe Digital Core REIT will be able to continue maintaining its full occupancy and could also benefit from some positive rental reversions,” they say.

They highlight that the REIT has a pipeline that could make it one of the largest S-REITs. With a strong commitment from its sponsor, Digital Core REIT has been granted a right of first refusal (ROFR) for about US$15 billion worth of data centres globally.

In addition, the sponsor has data centre developments worth a further US$5 billion that could be made available to Digital Core REIT when completed. Although the US cap rate spreads are currently in negative territory, analysts believe that the REIT could look at pipelines in Europe and Japan.

DBS has revised their projections to account for expectations of further interest rate increases. The analysts’ revised estimates consider higher all-in financing costs this year, followed by a 110 basis points increase over the next two years.

“Given the uncertain backdrop and difficulty in carrying out accretive acquisitions, we have also taken the opportunity to assume that Digital Core REIT will only embark on the US$140 million debt acquisition (25% stake in the Frankfurt DC), and remove all other acquisitions assumptions,” say Lai and Tan.

Meanwhile, from a valuation perspective, Digital Core REIT offers a forward yield of between 6.5% to 6.7% over the next two years, the highest level since its IPO. — Khairani Afifi Noordin

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