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Broker's Digest: Mapletree Industrial Trust, CSE Global, Emperador Inc, SPH REIT, EC World REIT

The Edge Singapore
The Edge Singapore10/13/2022 05:59 PM GMT+08  • 13 min read
Broker's Digest: Mapletree Industrial Trust, CSE Global, Emperador Inc, SPH REIT, EC World REIT
See what the analysts have to say this week.
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Mapletree Industrial Trust Price target:

Maybank Securities ‘buy’ $3.00

DPU supported by redevelopment projects and AEI

Maybank Securities analyst Li Jialin is keeping her “buy” call on Mapletree Industrial Trust (MINT) as the REIT remains focused on its environmental, social and governance (ESG) targets, which affects the REIT manager’s remuneration as well, the analyst notes.

Li has also kept her target price unchanged at $3 as the REIT receives an above-average score of 54 compared to the average score of 50 under Maybank’s extended ESG 2.0 methodology.

“MINT’s sustainability framework is progressive, with targets validated by net zero (RCP 2.6) and business-as-usual (RCP 8.5) scenario analysis,” Li writes in her report dated Oct 6.

See also: Paragon REIT 'one of the key beneficiaries' of Singapore's reopening; upgrade to 'buy': DBS

RCP, or representative concentration pathway, is a greenhouse gas concentration trajectory adopted by the Intergovernmental Panel on Climate Change (IPCC). The RCP 8.5 pathway is said to deliver a temperature increase of around 4.3°C by the year 2100.

“We believe improvements in greenhouse gases (GHG) emissions, further disclosure on renewable energy and green financing could help drive a higher score,” she adds.

In the FY2021 ended March, the REIT registered a large increase in Scope 2 GHG emissions due to the four additional data centres in North America. The higher emissions were partly mitigated by the lower Scope 2 emissions from MINT’s Singapore portfolio.

See also: Sheng Siong stays defensive amid rising inflation and GST hike, analysts maintain 'buy'

Looking ahead, the REIT needs to deepen its renewable energy efforts against the backdrop of utility rate hikes, taking assets such as data centres and hi-tech buildings into consideration, notes Li.

“We believe scores could be higher with further disclosure on renewable energy usage,” she adds.

As at 4QFY2022 and 1QFY2023, MINT’s gearing stood at 38.4% while the cost of borrowing at 2.5% as at June 31. Li says an increase of 50 basis points (bps) in interest rates would lower MINT’s DPU by less than 1%.

“Total borrowing is $2.94 billion, 72.3% hedged at a fixed rate,” she notes. “Green financing accounted for 13.4% of total borrowing in FY2021; this data wasn’t published for FY2022. Continued disclosure on green financing would be a plus.”

MINT is the third-largest industrial sector S-REIT with 141 properties and AUM of $8.8 billion. Backed by sponsor Mapletree Investments, MINT has a resilient portfolio thanks to its wellspread-out tenant base and lower conversion risk given a greater proportion of multi-tenant assets.

The REIT’s completed redevelopment projects in Singapore together with its US data centre portfolios from FY2019 should also support DPU growth and visibility from FY2022 to FY2024, says Li.

MINT’s strong balance sheet with aggregate leverage at 38.4% and an estimated $1.7 billion in debt headroom (at 45% limit) will help it in supporting acquisition growth opportunities, the analyst adds. — Felicia Tan

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

CSE Global

Price target:

DBS Group Research ‘hold’ 45 cents

UOB Kay Hian ‘hold’ 38 cents

Display of confidence

Systems integrator CSE Global has announced a rights issue that is expected to raise net proceeds of $33.4 million for the company. It intends to issue over 102.4 million new ordinary shares at 33 cents per share.

In response to the announcement, DBS Group Research has maintained its “hold” call on the stock, keeping a target price of 45 cents and 38 cents ex-rights, assuming a full subscription of the rights issue.

The brokerage is of the view that the irrevocable undertaking and expressions of intention for 28% of the rights by some directors and substantial shareholders is a display of confidence in the company.

As for the company’s outlook, DBS says it is still “promising”, except for large greenfield projects in the traditional energy sector, adding that “the flow business is still in recovery mode which should help to mitigate lower contributions from large greenfield projects.”

The flow business refers to “complete, end-to-end ‘program’ solutions developed from concept to final commissioning and handover”, according to CSE Global’s website.

DBS says structural trends such as digitalisation which requires increased connectivity and security will continue to be a key driver for CSE’s infrastructure segment.

Furthermore, the brokerage believes that the company’s 2HFY2022 ending December and FY2023 could be brighter on the backloading of recent contract wins, because of the supply chain disruptions.

On Oct 12, UOB Kay Hian analyst John Cheong also maintained his “hold” call on CSE Global but lowered his target price to 38 cents to account for dilution from the rights issue.

Cheong is of the view that “this cash call amid poor market sentiment will likely create an overhang to share price.” He highlights only Orchid 2 and Orchid 3, which are Temasek entities, along with three of CSE Global’s directors, have given irrevocable undertakings. As such, Cheong says that assuming that no other entitled shareholders subscribe to the rights shares, the rights issue could raise gross proceeds of only $9.5 million.

He notes that the majority of net proceeds are intended to be used for acquisitions, but there is no definitive agreement that has been entered into at this moment. However, just like DBS, he also notes the company’s strong order intake in energy and infrastructure segments. He elaborates that the order intake in CSE Global’s 1HFY2022 surged by 100.3% to $421.7 million, with “broad-based growth” registered in all industry sectors. Specifically, order intake for the energy sector rose by 124% y-o-y to $238 million in 1HFY2022.

This was mainly due to new contracts for the maintenance of integrated control systems for production facilities, as well as a large greenfield order in the renewables space relating to the installation and integration of solar power systems amounting to $79.3 million. — Lim Hui Jie

Emperador Inc

Price target:

UOB Kay Hian ‘hold’ 53 cents

Well-positioned to capture China’s growth opportunities

UOB Kay Hian analyst Llelleythan Tan has initiated coverage on Emperador Inc with a “hold” call and a target price of 53 cents.

Emperador is the largest liquor producer in the Philippines and the world’s top brandy producer by volume.

Primarily listed in the Philippines, Emperador began its secondary listing on the Singapore Exchange (SGX) on July 14.

In his report dated Oct 11, Tan sees several positives in the stock which includes its rich heritage and portfolio of diverse brands across multiple price points.

“The portfolio encapsulates products that range from accessible to luxury and caters to all sorts of consumer preferences. The group also constantly innovates to address shifting consumer preferences, as evident in the recent launch of Emperador Double Light,” says Tan.

In the analyst’s view, the premiumisation of Emperador’s offerings, where its premium single malt whiskies are priced at 10 to 15 times higher than accessible Scotch whisky brands, is a “key competitive advantage”.

“The strategic move was made in response to existing market trends whereby consumers are becoming increasingly well-versed in drinking and appreciating the value of premium liquor. Hence, they are willing to fork out a premium for better quality,” Tan notes.

Further to his report, Tan sees that Emperador is “well-positioned” to capitalise on growth opportunities in China. The group’s offerings are already well received in Europe and have had early success in its expansion into the Middle East and China. With the latter, the group is seeing “robust growth” as it credits its success to its Asian identity. This, says Tan, would “allow for better future market penetration in Asia”.

Emperador’s internationalisation in high-growth markets has also given the group better margins.

“Currently, the company has a huge following in high-growth markets such as China and the Middle East. Its premiumisation strategy has allowed Emperador to enjoy higher margins as compared with most of its peers in the industry,” says Tan. “For instance, Emperador was able to achieve a net margin of 17.8% in 2021 vs 20.9%, 14.8%, 10.5% and 3.6% for its closest competitors Diageo, Pernod Ricard, Ginebra San Miguel Inc and Cosco Capital Inc respectively.”

The group aims to have 50% of its sales come from outside the Philippines by 2025.

In Greater China, Tan notes that foreign spirits present a growth opportunity for the group. Baijiu or white spirits currently dominate the region’s market capturing 99.2% of the overall market in 2021.

According to the analyst, Emperador intends to increase the market share of its brown spirits category in China where Scotch whisky is the most popular type of whisky.

"According to Frost & Sullivan, Scotch whisky sales volume is estimated to have a compound annual growth rate (CAGR) of 7.4% between 2022 and 2026, with sales value estimated to grow at 7.3%,” says Tan. “Within the Scotch whisky category, single malt whiskies are relatively more popular and are predicted to have a CAGR of 9.8% by sales volume relative to 5.7% for blended scotch.”

As Tan sees Emperador enjoying robust revenue growth from contributions from its new key markets, he is expecting the group’s overall revenue from the FY2021 ended December 2021 to FY2024 to grow at a steady CAGR of 5.7%.

To this end, the analyst is expecting the group’s gross margins to improve from 32.8% in FY2022 to 35.0% in FY2024 with gross profit growing at a CAGR of 7.2% from FY2021 to FY2024.

“Similar to pits] gross margin, [Emperador's] net margin is expected to increase from 17.9% in 2021 to 18.8% in 2024 and a net profit CAGR growth of 7.0% from FY2021 to FY2024, driven by greater expected sales of premium alcohol,” he writes.

Tan’s target price, which represents an upside of 10.4% from Emperador’s last-closed share price of 48 cents, is based on an FY2023 P/E of 30x, pegged to a 10% premium to industry peers’ 2023 average P/E.

We opine prescribing a higher P/E multiple as compared with its peers is justified given the high pricing power Emperador’s price inelastic premium alcohol commands,” says Tan.

At its current share price, the stock is trading at an FY2023 P/E of 26.9x, in line with its peers’ FY2023 average P/E.

The analyst adds: “Also, according to Bloomberg, Emperador is trading at +2 standard deviations (s.d.) to its five-year average P/E, five-year average P/B and five-year EV/ebitda, which is considered expensive based on these valuation metrics.”

“However, we think that Emperador is fairly valued at current price levels, and a key re-rating catalyst would be the successful penetration of its key premium products into China and new growing markets,” he continues. — Felicia Tan


Price target:

DBS Group Research ‘hold’ 96 cents

OCBC Investment Research ‘hold’ 90 cents

Strong reopening play

DBS Group Research and OCBC Investment Research have maintained their “hold” on SPH REIT following its FY2022 earnings result. DBS has kept its target price at 96 cents on the back of strong reopening play.

DBS points out that the tenant sales at Paragon continue to recover on the back of higher domestic spending and influx of tourists since borders reopened in April.

DBS says: “We estimate that tenant sales have now reached about 89% of 2019 levels on a full-year basis, with good reasons to expect a festive boost to operating metrics in 1QFY2023 ending December alongside the strong monthly traction of tourist arrivals ... Indonesian and Chinese spenders are the two titans when it comes to tourist spending at Paragon, making up about 16% of mall footfall respectively. We expect developments on China’s border reopening to be a key catalyst for the stock.”

Meanwhile, OCBC has cut its fair value estimate to 90 cents from 93 cents, highlighting that all three of SPH REIT’s assets (Paragon, Clementi Mall, The Rail Mall) registered improvement in rental reversions.

“As tenants’ sales recover, management expects stronger leasing sentiment, potentially supporting improvement in rental reversions in FY2023,” adds OCBC.

Paragon is expected to anchor SPH REIT’s status as a reopening play, given its 65% exposure by asset valuation to Orchard retail. SPH REIT’s Australia portfolio saw tenants’ sales rose 4.2% y-o-y in FY2022. “As sales normalise, we could see rental reversions for Australia assets to stabilise,” says OCBC.

SPH REIT stands as one of the lowest geared within the S-REITs sector, with an aggregate leverage of 30% as at Aug 31. With about 70% of borrowings on fixed interest rate, a 10 basis points (bps) increase in interest rate will translate to a 0.5% impact on DPU, DBS highlights.

“We think that SPH REIT stands resilient in comparison to peers given the hawkish environment.” — Khairani Afifi Noordin


Price target:

RHB Group Research ‘neutral’ 55 cents

Positive on latest divestments

RHB Group Research analyst Vijay Natarajan has kept a “neutral” rating on EC World REIT (ECW) with an unchanged target price of 55 cents.

In June, the REIT announced that it had only managed to extend the maturity date of its expiring offshore loan and onshore loan facilities to April 2023. The extensions came with a condition by banks that the REIT’s sponsor Forchn Holdings provide an undertaking to repay 25% of its offshore loan by December or the REIT will be in default.

Subsequently, the REIT signed a non-binding memorandum of understanding (MoU) for the sale of Beigang Logistics Stage 1 (BL1) and Chongxian Port Logistics (CPL) to Forchn Holdings.

Forchn Holdings agreed to purchase BL1 and CPL at RMB1.2 billion ($242.6 million) and RMB820.1 million respectively. The agreed values are slightly above book value and at par with the average of two independent valuations done in June, observes Natarajan. “It also represents a blended 17.8% premium to the IPO’s (July 2016) purchase price,” he adds.

Management cited that these two assets were picked as they were no longer as attractive due to changing market trends, resulting in a decline in the asset value over the years and the need for major capex to redevelop and repair. Moving forward, this transaction will require unitholder approval at the upcoming extraordinary general meeting (EGM).

“The REIT’s proposed divestment of two assets at a price close to the average of the latest valuations is a mildly positive outcome, in our view, under the current difficult scenario faced by it,” writes Natarajan.

Unitholders are expected to receive a special one-off dividend payment of approximately 11 cents from the sale, following the completion and repayment of 25% of the bank loans. This translates to an approximate 21% yield at current levels.

Natarajan observes how the likely special dividend should support unit prices in the near term. “The transaction also provides the much-needed comfort that Forchn Holdings stands ready to support the REIT in times of crisis,” says the analyst.

However, Natarajan also observes that the sale diminishes its long-term potential with lower annual dividend income, a smaller asset size, and potentially lower liquidity.

With the divestment, the REIT’s total asset size will be reduced by 27% and lowered annual distributable income ahead by approximately 30%. “The REIT also faces limited inorganic growth potential considering the banks’ limited support, and it is likely to face higher interest costs upon refinancing in April 2023,” notes the analyst. — Chloe Lim

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