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Brokers’ Digest: Nanofilm, CDG, CICT, DBS, Singtel, Hong Leong Asia, Centurion, Keppel DC REIT, Marco Polo Marine

The Edge Singapore
The Edge Singapore • 27 min read
Brokers’ Digest: Nanofilm, CDG, CICT, DBS, Singtel, Hong Leong Asia, Centurion, Keppel DC REIT, Marco Polo Marine
Nanofilm's executive chairman Shi Xu (left) and group CEO Gary Ho. Photo: Albert Chua/The Edge Singapore
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Nanofilm Technologies International
Price targets:
DBS Group Research ‘hold’ 63 cents
CGS International ‘hold’ 70 cents
UOB Kay Hian ‘sell’ 56 cents

Revenue growth has resumed but less so for margins

DBS Group Research has upgraded Nanofilm Technologies International from “fully valued” to “hold” following signs of recovery in its key consumer electronics segment in its 1QFY2024 ended March business update. The target price is unchanged at 63 cents.

On April 22, Nanofilm, which provides coating services for parts used in electronics and other products, reported 1QFY2024 revenue rose 19% y-o-y to $39 million.

The gain was led by a recovery in its so-called 3C or computer, communication and consumer segment. Nanofilm made some inroads with new customers and secured additional business from existing customers.

Gross profit for the quarter was up a bigger 31% y-o-y to $12.8 million, partly helped by a higher gross margin of 33% versus 30% in 1QFY2023. Overall, the numbers were broadly in line with the projection of DBS.

See also: Brokers’ Digest: Pan-United, Yangzijiang Shipbuilding, Raffles Medical Group, Frencken, Japfa, Oiltek, CDL, AEM, DFI

Nanofilm’s key advanced materials business unit, which provides coating services, reported a 41% y-o-y jump in revenue, contributing 89% to the total sales. Within this unit, the smartphone product segment was the key growth driver, thanks partly to a “notable” new customer. “The strong performance is in line with our view that the mobile and PC industries have emerged from their trough,” says DBS, referring to the period after 4QFY2023.

Another key product segment, automotive, enjoyed revenue growth of 24% y-o-y.

However, Nanofilm’s other smaller business units, such as the one making and selling the coating equipment to other companies, remained relatively weak, with revenue down 66% y-o-y due to lower orders.

See also: PhillipCapital initiates ‘buy’ call on CSOP iEdge S-REIT ETF with TP of 87 cents

DBS notes that Nanofilm is on track for its so-called “China +1” strategy, where it invests in new capacity in India and Vietnam, other than its main base in China. India will start small batch production in 2H2024 while the first phase of its second site in Vietnam will commence initial production in 1Q2024.

DBS points out that as the new investments are still in the development stage, Nanofilm’s gross margin will still be below its historical average of 52% although it is expected to improve to 40% in FY2024 from 37% in FY2023.

Furthermore, significant contributions from its other new businesses, including hydrogen fuel cells, advanced batteries for electric vehicles and solar cells, are only expected in 2025 and beyond.

DBS points out that following its downgrade last June to “fully valued” from “hold”, Nanofilm’s share price has plunged by 60%.

Now, with the smartphone and PC segments picking up from their respective troughs, DBS believes that the outlook for the company “should improve”. The same price target of 63 cents is still based on 18 times FY2024 earnings, slightly below –1 s.d (standard deviation) of its four-year average earnings.

in his April 23 note, William Tng of CGS International found some positive signs with the resumption of revenue growth in the 1QFY2024 update. He expects FY2024 to be better than FY2023.

However, Tng warns that because of the various investments and uncertainty over volume and mix, Nanofilm’s gross margin will “take a while” to recover back to the 46%–49% levels enjoyed in FY2021 and FY2022.

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

As such, Tng has trimmed his FY2025 gross margin assumptions by 1.3 percentage points, resulting in a 6.8% cut in his FY2025 earnings forecast and a lower target price of 70 cents from 75 cents. The target price is derived from 2025F P/E of 12.1 times, a 10% discount to its peer average as customer concentration risk remains and its operating costs, though being controlled, remain high, says Tng.

Nonetheless, he has upgraded his call from “reduce” to hold” as the resumption of revenue growth raises the prospects that Nanofilm can deliver better-than-expected FY2024–FY2025 EPS growth.

Upside risks include new order wins from customers, faster operational progress at the various joint ventures and strong demand upturn. Downside risks, on the other hand, include high customer concentration, and higher operating costs as the company expands into other countries and businesses.

On the other hand, UOB Kay Hian analysts remain bearish on this counter, as they reiterate their “sell” call. While revenue growth was in line with expectations, the company remains in the red, according to analysts John Cheong and Heidi Mo in their April 24 note.

They expect growth in FY2024 to be driven by the strong consumer segment pipeline, which will further pick up in the late 2Q2024 and 3Q2024 because of seasonal patterns.

However, Cheong and Mo warn the growth rates for FY2024 are also due to the low base in FY2023.

Citing the cost of Nanofilm’s various expansion projects in the likes of India and Vietnam, the UOBKH analysts have trimmed their FY2024 earnings forecast by 6% to $23 million from $25 million.

This leads to a lower target price of 56 cents, from 60 cents previously, as they maintain their valuation of the stock at 16 times FY2024 earnings, which is pegged to –1 s.d. of its long-term forward mean.

“While Nanofilm’s new projects and initiatives point to a recovery, we think that earnings recovery will take some time due to multiple expansion projects and weakness in the higher margin business and coating of wearables,” state Cheong and Mo. — The Edge Singapore

ComfortDelGro Corp
Price target:
UOB Kay Hian ‘buy’ $1.72

Favourable tailwinds

UOB Kay Hian analysts Llelleythan Tan Yi Rong and Heidi Mo have become more bullish about ComfortDelGro Corp, as they kept their “buy” call along with a higher target price of $1.72 from $1.66.

“We maintain our expectations that ComfortDelGro would post a strong 1QFY2024 driven by favourable tailwinds for both the public transport services and taxi segments,” state the analysts in their April 23 note.

The land transport operator has several things going. In its 1QFY2024 ended March, its rail ridership increased by 8.8% y-o-y and up 6.2% q-o-q, which puts this at a level 2% higher than the pre-pandemic 2019.

“Backed by higher rail fares implemented in Dec 2023 along with increased margins from ongoing UK bus contract renewals, we maintain our expectations that ComfortDelGro’s public transport services segment would post higher revenue and profitability for 1QFY2024,” write Tan and Mo. Still, they say ComfortDelGro’s rail business is likely unprofitable for now.

Pre-pandemic, ComfortDelGro’s Downtown Line incurred an operating loss of $46.1 million. They estimate this segment was still unprofitable in the most recent FY2023 with $15 million in the red.

“However, with the higher rail fares implemented in December 2023, we expect margins for  ComfortDelGro’s rail segment to improve and reach near breakeven levels in 2024,” they say.

Another plus point for ComfortDelGro was that it recently won a series of new contracts worth $720 million to run bus services in the UK.

Tan and Mo, using an assumption of 8% operating margins, estimates that these new contracts will help generate an additional $12 million in operating profit and will increase ComfortDelGro’s earnings for FY2025 and FY2026 by around 3 to 4%.

“With improving fundamentals, a lush 5.5% dividend yield and a robust balance sheet, we reckon that most negatives have already been priced in.”

The analysts’ higher target of $1.72 is based on 16 times FY2024 earnings, which is higher than the 15 times used.

“Despite the recent strong share price performance, we opine that there is still upside at current price levels,” state Tan and Mo. — The Edge Singapore

CapitaLand Integrated Commercial Trust
Price targets:
CGS International ‘add’ $2.18
Citi Research ‘buy’ $2.20
Maybank Securities ‘buy’ $2.05
OCBC Investment Research ‘buy’ $2.14
RHB Bank Singapore ‘buy’ $2.20

Resilient operating performance

Analysts are staying positive about CapitaLand Integrated Commercial Trust (CICT) prospects after the REIT announced a “resilient” operational performance for the 1QFY2024 ended March 31.

On April 19, CICT reported a net property income (NPI) of $293.7 million for the quarter, 6.3% higher y-o-y, due to higher rental income and lower operating costs.

CGS International analysts Lock Mun Yee and Natalie Ong have kept their “add” call and target price of $2.18 as they note CICT’s “robust” portfolio performance in 1QFY2024. The REIT’s portfolio occupancy remained high at 97% with positive rental reversions across its property segments.

Lock and Ong have also kept their distribution per unit (DPU) estimates for FY2024 to FY2026 unchanged.

Citi Research analyst Brandon Lee also kept his “buy” call and target price unchanged at $2.20 after CICT’s 1QFY2024 business update revealed largely positive operational metrics.

In their report, CGS’s Lock and Ong also point out that the REIT’s manager indicated that its average funding cost for FY2024 could range from mid-to-high 3% compared to its previous guidance of mid-3% in a higher-for-longer interest rate environment.

RHB Bank Singapore analyst Vijay Natarajan has kept his “buy” call and target price of $2.20 after CICT’s “resilient” quarter.

Like Citi’s Lee, Natarajan also sees asset recycling as a “likely catalyst” with the REIT trading at below book level. The securing of the European Central Bank (ECB) as an anchor tenant for its 38-storey Grade A office building, Gallileo, should result in a “good valuation uplift” during CICT’s year-end revaluation, he adds.

Meanwhile, the analysts at Maybank Securities and OCBC Investment Research (OIR) have kept their “buy” calls although they have lowered their target prices.

Maybank Securities analyst Krishna Guha still likes the REIT for its Singapore-centric “resilient earnings profile”, strong credit and estimated yield of 5.9% for FY2024. He is also positive about CICT’s strong reversions in its 1QFY2024 update.

Calling CICT’s update a “mixed bag”, Guha also notes the lower occupancy and higher funding cost guide. As such, he has lowered his target price estimate to $2.05 from $2.10. The lower target price comes as Guha tweaks his DPU estimates after factoring in slightly higher margin and borrowing costs.

OIR’s research team lowered its fair value estimate to $2.14 from $2.18 after also trimming its DPU estimates by 0.3% and 1.1% for the FY2024 and FY2025 respectively. The lower DPUs come after weaker Australian dollar (AUD) assumptions and after factoring in the ECB lease.

That said, the OIR team remains positive on CICT with its “stable operational performance” and continued positive leasing momentum for its retail operations. — Felicia Tan

DBS Group Holdings
Price targets:
OCBC Investment Research ‘hold’ $35.45
Citi Research ‘buy’ $37.50

Mixed reactions following bonus issue

Analysts have tweaked their target prices for DBS Group Holdings after the bank began trading ex-dividend on April 22. During its results for the FY2023 ended Dec 31, 2023, DBS also announced that it will be proposing a 1-for-10 bonus issue. The bonus shares will also qualify for the bank’s dividends from 1QFY2024 onwards.

OCBC Investment Research analyst Carmen Lee has retained her “hold” call despite DBS’s record set of results for FY2023 and its outperformance of the benchmark and its peers since the start of the year.

As at Lee’s report dated April 22, shares in DBS have been 9.0% up year-to-date (ytd). In comparison, the benchmark Straits Times Index (STI) is down 2.0% while the FTSE ST All-Share Financials is up 5.8% during the same period.

Yet, the analyst has lowered her fair value estimate to $35.45 from $39 previously to account for the new bonus shares.

“For 2024, management is guiding for a dividend per share (DPS) of $2.16 or 54 cents per quarter. This is an increase from $1.92 in FY2023. The new bonus shares will also be entitled to the same dividend payout of $2.16 per share,” Lee notes.

“After the share price adjustment for the bonus issue and based on DPS of $2.16, the dividend yield works out to be 6.5% — this is attractive versus the other big-cap Singapore listed companies and its regional banking peers,” she adds.

At the same time, Citi Research analyst Tan Yong Hong has kept his “buy” call with a raised target price of $37.50 from $36.73 previously. Tan’s new target price implies an FY2024 P/B of 1.7 times.

In his report also dated April 22, Tan likes DBS’s prospects, noting that the bank’s shares peaked at 4% higher than its April 19 closing price of $33.10 during the day on April 22, higher than its peers’ 1% to 2% rise. This compares with the bank’s closing price of $28.81 as at Feb 6 when the bonus issue was announced.

“Since there was no fundamental news driving up DBS’s shares to outperform peers, we expect [DBS’s] share price to normalise ahead,” Tan writes.

Going into the 1QFY2024, Tan expects DBS’s wealth fees to exceed its record FY2021 levels due mainly to robust asset under management (AUM) inflows.

Finally, Tan is expecting the bank to see “constructive” on its net interest margin (NIM) and net interest income (NII) guidance with the market now pricing in under 50 bps of rate cuts this year.

For the FY2024, Tan expects DBS’s total DPS to come in at $2.22, with the bank likely to distribute a DPS of 54 cents per quarter for the 1QFY2024 to 3QFY2024. He also sees a slightly higher DPS of 60 cents for the 4QFY2024.

“We maintain ‘buy’ but prefer UOB due to light investors’ positioning and our expectations for constructive guidance/trends in 1QFY2024,” writes Tan. — Douglas Toh

Singapore Telecommunications
Price target:
Maybank Securities ‘buy’ $3.05

Positive quarterly indicators from Telkomsel

Maybank Securities analysts have kept their “buy” call and $3.05 target price on Singapore Telecommunications (Singtel), after positive 1QFY2024 ended March indicators reported by Telkonsel, its 29.6%-held Indonesia associate.

In 1QFY2024, Telkomsel’s core net income increased by 17.9% y-o-y and up 5.5% q-o-q, thanks to lower costs even as revenue held steady.

“While Telkomsel went through a relatively tough patch in the past 1–2 years, we see improvement on the horizon as reflected in improving mobile momentum and visible Indihome integration synergies on the cost side,” write analysts Hussaini Saifee and Etta Rusdiana Putra in their April note.

Besides the main mobile services, Telkomsel offers home fixed line and broadband services via newly-acquired Indihome.

According to the Maybank analysts, Telkomsel is arresting the dip in its revenue market share experienced over the past five years via “tactical pricing intervention”.

Following the strong recovery of Bharti Airtel, Singtel’s associate in India, its two current operational “pain points” are Telkomsel, and Optus, the subsidiary in Australia.

“A positive Telkomsel delivery should be comforting. We also see competition in Australia improving in addition to cost-cutting opportunities,” the analysts say

“With multiple catalysts on the horizon, we find the 44% holding company discount as unjustified,” they add, referring to how the value of Singtel as a listed company is way smaller than the sum of parts of the value of the associates and other regional subsidiaries.

“For perspective, Singtel’s 29% stake in Bharti itself represents 93% of Singtel’s market cap, suggesting deep value and an arbitrage opportunity,” the analysts add. — The Edge Singapore

Hong Leong Asia
Price target:
CGS International ‘add’ $1

Multi-pronged growth

CGS International has kept its “add” call and sum-of-parts-based target price of $1 for Hong Leong Asia (HLA) on the premise that it is seeing growth from its building materials unit thanks to “robust” construction demand in Singapore and Malaysia.

Via China Yuchai, its separately listed heavy engine subsidiary, HLA is set to see earnings recovery from that business too, albeit from a low base.

“We believe HLA is an underappreciated proxy for the Singapore and Malaysia construction industry upcycle,” state analysts Ong Khang Chuen and Kenneth Tan in their April 18 note.

According to the analysts, cement prices in Malaysia have increased by 20% since early 2023, reflecting “pricing discipline” among the key suppliers amid stronger volumes.

As such, Malaysian cement players recorded strong profit improvements over the past four quarters.

HLA, according to the analysts, is positive on the medium-term outlook for the industry. Significant sources of tailwinds will be from the rollout of key mega projects starting in 2H2024, such as MRT 3, Bayan Lepas LRT and the KL-Singapore high-speed rail.

The industry is similarly buoyant in Singapore, with the official forecast for total construction demand to reach up to $38 billion this year, and remain “robust” for the next five years.

Even with demand well-supported, shifting regulations might lead to some level of industry consolidation of the ready-mix concrete (RMC) and prefabricated prefinished volumetric construction (PPVC) sectors, the analysts say, citing HLA.

Specifically, Singapore aims to transform the industry through integrated construction parks and a requirement for 50% local sourcing in government PPVC tenders.

“We think HLA is well-positioned to benefit from these developments,” the CGS International analysts say, referring to its integrated construction and prefabrication hub, which was completed in 2022, and also the Jurong Port RMC ecosystem batching plant, which was completed last year.

Last but not least, China Yuchai is putting the slump suffered during the pandemic behind.

According to HLA, is seen to achieve volume growth of between 10% and 15% this current FY2024 ending December 2024 and FY2025. In addition, margins will too improve “gradually” with better economies of scale.

China Yuchai is eyeing a bigger share of the export market too by offering engines running on cleaner fuels such as natural gas, electric and hydrogen fuel cells.

Ong and Tan figure that excluding HLA’s stake in listed subsidiaries and associates, the implied valuation of its building materials unit, which accounted for 80% of its FY2023 patmi before corporate costs, is only at $150 million, or 2.5 times trailing P/E.

They project HLA to grow its patmi by another 15% in FY2024, driven by stronger construction activity levels and volume recovery of China Yuchai.

For the analysts, re-rating catalysts include stronger margin improvement at its building materials unit riding on strong demand growth, and corporate actions to unlock value for shareholders.

On the other hand, downside risks include delays in the award of key infrastructure projects in Malaysia or intensified pricing competition. — The Edge Singapore

Centurion Corp
Price target:
RHB Bank Singapore ‘buy’ 64 cents

Hong Kong debut

Centurion Corp’s bid to expand into the student accommodation market in Hong Kong is not seen to have a significant bearing on its earnings for now.

The entry into Hong Kong marks the company’s expansion into this new market, given how its key markets now are Singapore, Malaysia and the UK.

Nonetheless, given its growth outlook with ongoing capacity expansion, RHB Bank Singapore’s analyst Alfie Yeo is keeping his “buy” call and 64 cents target price on this stock.

On April 9, Centurion announced it has set up a joint venture with LionRock Property in a 60-40 mix, which has signed a five-year master lease for a building in Kowloon which will be refurbished into a 66-bed student accommodation.

The refurbishment works will cost around $2 million and the property will be operational in September.

“This development is in line with Centurion’s strategy to grow its accommodation business globally, via an asset-light approach,” writes Yeo in his April 18 note.

“However, with just 66 beds, minimal capex outlay for refurbishment and a 60% stake, the scale of this project is small compared to the company’s other key operations. Hence, we expect minimal change to overall earnings for now, which translates into a neutral stock impact,” reasons Yeo.

This aside, Yeo is keeping his positive stance on this counter on higher bed capacity down the road, with the total number of revenue-contributing beds seen to grow 6.5% y-o-y to 70,166.

The additions will come from Westlite Johor Tech Park and Westlite Senai II, and also the new Singapore site at Westlite Ubi Ave 3.

“We like Centurion for being well-positioned to yield better rental rates in Singapore due to the dormitory supply shortage situation and better occupancy in Malaysia as its increasing number of foreign workers are to be housed in purpose-built dormitories.

“We believe these developments in Singapore and Malaysia will continue to bode well for Centurion,” says Yeo. — The Edge Singapore

Keppel DC REIT
Price targets:
DBS Group Research ‘buy’ $2.20
OCBC Investment Research ‘buy’ $1.74
CGS International ‘hold’ $1.88

Guangdong DC overhang

Keppel DC REIT’s 1QFY2024 ended March distribution per unit (DPU) of 2.192 cents was in line with the expectation of DBS Group Research, which has kept its “buy” call and $2.20 target price.

In a business update on April 19, the REIT’s portfolio occupancy held steady at 98.3%, along with positive rent reversions and rental escalations. The DPU of 2.192 cents for 1QFY2024 was 19.1% higher q-o-q.

DBS warns that the ongoing concerns regarding key tenant Bluesea’s leases at the Keppel DC REIT’s Guangdong data centre will result in a “significant overhang” as rental payments continue to be missed.

On the other hand, the settlement sums of $11.2 million from DXC offer some relief, partially mitigating the income loss from the Guangdong data centres.

“We anticipate that positive rental reversions and escalations will help counterbalance the impact of higher financing costs and less favourable forex hedges this year,” adds DBS.

DBS says it has already assumed no income contribution from Guangdong this year. “Any positive developments in this regard would be considered an upside to our estimates,” says DBS.

CGS International analysts Natalie Ong and Lock Mun Yee have kept their “hold” call due to the lack of catalysts and the lack of clarity on the resolution of Bluesea.

OCBC Investment Research is assuming no income from China this year and next. “We had previously assumed that Keppel DC REIT would seek to novate the master leases of its Guangdong data centres to new leases with the underlying sub-lessees, which now seems unlikely in the foreseeable future,” the team explains. — The Edge Singapore

Marco Polo Marine
Price target:
Maybank Securities ‘buy’ 8.8 cents

Landmark financing secured

Long-time Marco Polo Marine (MPM) bull Jarick Seet of Maybank Securities has kept his “buy” call and 8.8 cents target price after the company secured financing that will help fund its bid to capture impending growth of the offshore wind market.

On April 17, MPM announced that its subsidiary PKR Offshore had on April 15 secured a project finance loan from Bank SinoPac Taiwan for its CSOV.

CSOV is the abbreviation for Commissioning Service Operations Vessel, a specialised ship that can be used to support the operations of offshore wind farms.

The vessel, MP WindArcher, is now under construction at Marco Polo’s Batam yard and will be delivered in September and deployed in Taiwan the following month.

The vessel has been chartered to support the wind farm operations of Vestas Taiwan.

“This is the first financing secured by MPM for a new vessel since its restructuring and demonstrates access to bank financing which frees up cash flow and enables faster expansion,” says Seet in his April 17 note.

According to Seet, the company has been growing thus far with its own cash, which crimps the pace at which it can grow its fleet and therefore its earnings.

“With this landmark financing, we believe MPM will be able to secure financing for the acquisition of new vessels for the offshore wind farm market, differentiating it from existing market players who have no or low access to bank financing,” the analyst reasons.

Citing his own channel checks, Seet estimates that the vessel is financed at up to 70%–80% at a rate of below 4%.

He expects MPM to secure longer-term contracts too for special operation vessels (SOV) and another CSOV.

Other pieces were already in place. Seet recalls that MPM had already signed a crew transfer vessel agreement to support Siemens Gamesa’s offshore wind projects in Taiwan and Korea.

MPM is seen to start providing two crew transfer vessels by the end of this year and the fleet size will eventually increase to 10–15 vessels within four to five years.

Seet estimates each vessel to cost around US$5 million ($6.82 million) and generate up to US$1.7 million in revenue, assuming a utilisation rate of 80%, leading to a gross profit of between US$1.1 million and US$1.3 million per vessel. “This could be significant if the fleet size grows,” he says.

Seet believes MPM has secured Vestas as a “core” charter partner and the company can look towards additional new long-term chartering contracts.

Other catalysts for this counter include strong 1HFY2024 ending June earnings to be reported next and further growth with the CSOV near completion.

With MPM trading at just 8.5 times FY2024 earnings, this counter remains undervalued vs global and regional peers which are fetching 15 times and 25 times on average, says Seet. — The Edge Singapore

United Overseas Bank
Price target:
DBS Group Research ‘buy’ $34.50

Stronger Asean franchise

Lim Rui Wen of DBS Group Research has upgraded her call on United Overseas Bank (UOB) from “hold” to “buy” as growth picks up across Asean.

Along with the upgrade, Lim’s new target price is $34.50 from $30.30 as she factors in other positive attributes including a potential lift in net interest margins (NIMs) with rate cuts delayed, stable asset quality and also active management of deposit costs.

Back in 2023, UOB completed the acquisition of various consumer businesses in key Asean markets from Citi, adding around 8 million customers to its fold.

According to Lim in her April 23 note, betting on UOB’s effective execution in integrating the operations and accelerating growth, the larger banking entity can expect a higher structural return of equity of more than 13% by FY2026 ending December 2026.

Lim lauds UOB’s active management of deposit costs too, which, when combined with later-than-expected rate cuts, would help buffer pressure on earnings.

In 4QFY2023, UOB’s NIMs saw a sharper q-o-q contraction of 7 basis points (bps) on loan yields due to competition for high-quality credit.

In response, UOB has started to adjust its wholesale fixed deposit rates since December 2023. The bank has also led the market in cutting retail fixed deposit rates since 2HFY2023.

UOB had previously assumed three rate cuts and guided for FY2024 NIMs to be at around 2%. “With the increasing possibility of there being no rate cuts during FY2024, we believe there is further upside to UOB’s FY2024 earnings,” states Lim.

Meanwhile, the analyst will keep an eye on asset quality risks amid this uncertain macroeconomic and high-interest rate environment, especially for commercial real estate exposures.

She notes that UOB’s average loan-to-value for office commercial real estate continues to be around 50%, which will be a buffer in the event underlying collateral valuations collapse.

Using a Gordon Growth Model, Lim’s revised target price for UOB is $34.50, representing an “undemanding” 1.1 times FY2025 P/B, which is the average of UOB’s 15-year historical forward multiple for this metric.

“We believe there is further earnings upside and the share price will be well supported by its strong provisions buffer of 101% and forward dividend yield of around 6%,” says Lim, who has also raised her earnings estimate through FY2026 by 1% to 6%.

For Lim, key risks to her call include higher-than-expected NPLs (non-performing loans), high inflationary pressure, and recessionary risks that could unwind expectations of declines in credit cost and NPLs, thus posing risks to earnings.

Another key risk would be if the US Fed, having flagged that rates are staying put longer than expected, ended up cutting earlier instead. — The Edge Singapore

Price target:
DBS Group Research ‘buy’ $1.54

Potential cybersecurity unit spin-off

DBS Group Research analyst Sachin Mittal has kept his “buy” call on StarHub as the telco’s Dare+ expenses are coming to an end.

“Meaningful realisation will start from FY2025 onwards, once costs taper off,” Mittal writes in his April 22 report.

StarHub has lowered its total transformation costs to $270 million with 90% or $243 million of the transformation to be completed by FY2024 ending December 2024.

“We expect transformation costs of $54 million/$27 million in FY2024/FY2025 (60% of capital expenditure or capex and 40% operating expenditure or opex),” says the analyst.

“This transformation has also led to a lower maintenance capex over the last three years, leading to a drop in depreciation and finance costs, boosting earnings growth,” he adds. “We project an 8% earnings CAGR over FY2023–FY2025, coupled with a yield of over 6%. Furthermore, its share buyback plan provides downside protection to the stock.”

To Mittal, StarHub’s cybersecurity business has been largely ignored by the market. Excluding D’Crypt, the business has been profitable. It also has the potential to grow at a CAGR of 20% led by Ensign, he notes. D’Crypt was acquired by Singapore Technologies Engineering for $67.5 million in December 2023.

The cybersecurity business is also a potential candidate for a public listing, given that it achieved operating profit breakeven in FY2023. “We expect the cybersecurity business to go public by FY2024/FY2025.”

Based on Mittal’s FY2024 revenue estimates, StarHub’s cybersecurity business could fetch 23 cents to 35 cents per share with a mid-point of 29 cents per share. The listing could also boost the telco’s share price by 20% to 30%.

“We have assumed two to three times price-to-revenue for Ensign in FY2024. The enterprise value of Ensign is expected to be $0.73 billion–$1.1 billion. StarHub can claim $406 million–$610 million for its 55.73% stake, which equates to 20%–30% of StarHub’s market capitalisation of $2.1 billion,” the analyst explains.

In his report, Mittal increased his target price estimate to $1.54 from $1.25. The new target price is based on a separate valuation for Ensign and is due to a 3% and 4% revision to StarHub’s FY2024 and FY2025 earnings respectively.

“We use [a] discounted cash flow (DCF) methodology with a weighted average cost of capital (WACC) of 8.2% (prev 8.5%) on lower beta and terminal growth rate assumption of 0% to arrive at $1.25 per share excluding Ensign,” he writes.

“We believe StarHub should re-rate from 13 times FY2024 P/E to 17 times, still lower than its last five-year average of 18 times,” he adds. — Felicia Tan

AEM Holdings
Price target:
DBS Group Research ‘hold’ $2.26

Keeping an eye on the bigger picture

DBS reminds investors of AEM Holding not to “lose sight of the bigger picture” as it maintains a “hold” call despite winning a new customer.

Chip-tester AEM announced it has won a new business after an unnamed fabless firm selected its thermal control solution for advanced system-level test insertions.

As announced by AEM, this fabless provider is related to the high-performance computing and AI space. AEM will provide testing services for this customer’s next-gen AI devices.

Initial deliveries are slated to start in the current FY2024 ending December.

According to DBS Group Research in its April 22 note, the timing of the potential ramp hinges on the market’s receptivity to the new product and overall market demand.

DBS had already anticipated more of such announcements as AEM has guided for revenue in triple-digit millions from winning new test insertion contracts in FY2025.

As such, its current earnings estimates have already factored in the growth of new customer contributions at 9% of revenue in FY2024 and to further improve by nearly four times to $145 million the following year, or 23% of FY2025.

According to DBS, AEM has won over five new customers: one in memory, two in processing units, and two in systems and so-called hyperscalers.

DBS estimates high-single-digit growth in new customer contributions this year, albeit from a small base, which it expects will primarily comprise memory-related revenues given the upcycle in memory.

DBS believes that contributions from new processing units and systems and hyperscalers customers will be relatively “minor” this year as they are currently at the production intercept stage.

“As such, we are of the view that the tide will not turn until FY2025 when processing units and systems and hyperscalers customers are expected to enter into the ramp stage,” says DBS.

Thus, despite this latest customer win announcement, DBS has kept its “hold” call and $2.26 target price on this counter, urging investors not to “lose sight of the bigger picture”. This means test spending from AEM’s key customer, believed to be Intel Corp, remains uncertain.

According to DBS, in the middle of last year, Intel announced it identified an annual total savings opportunity of between US$4 billion ($5.45 billion) and US$5 billion, with financial savings from tests estimated at US$500 million per year by eliminating non-standard tests.

Citing a recent presentation from Intel, DBS observes that testing time for a next-generation client product is down 75%, raising the spectre that test times will decline across the board for AEM.

DBS figures that while AEM’s share of revenue from Intel could decline to around 45% in FY2024 and FY2025 from 50% in FY2023, it is still highly dependent on this key customer.

AEM is currently trading at around 13 times blended FY2024 and FY2025 earnings, and DBS does not expect the stock to rerate to 16–17 times around mid-2022 when the ramp-up of new equipment for the key customer led to record profits that year.

“With no ramp-up of new generation equipment for the key customer in the next two years in addition to risks to test spend arising from the key customer’s expense discipline, we reiterate our ‘hold’ call on AEM with a $2.26 target price,” says DBS. — The Edge Singapore

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