Oversea-Chinese Banking Corporation

Price target: RHB Bank Singapore ‘neutral’ $13.20

Near-term headwinds expected

RHB Bank Singapore analysts have downgraded Oversea-Chinese Banking Corporation (OCBC) to “neutral” from “buy”, expecting “near-term headwinds” like subdued loan growth and softening fee income ahead of the bank’s results for 2QFY2023 ended June, to be released on Aug 4. Along with the rating downgrade, RHB has trimmed its target price to $13.20 from $14, which represents a 7% upside.

Ahead of the release of results, OCBC is currently in its blackout period. Hence, leaders like group CEO Helen Wong were unable to provide analysts with more details on its new targets at a July 3 briefing in Hong Kong.

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='/capital/brokers-calls/boustead-singapore-big-bold-and-beautiful-says-ocbc?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>Boustead Singapore is 'big, bold and beautiful', says OCBC</a>

Moving forward, RHB expects much of the trends in 1QFY2023 to continue in 2QFY2023. OCBC’s loan growth will remain subdued, says RHB, chiefly hampered by weaker trade-related financing, given the weakness in China’s macroeconomic data.

OCBC sees continued build-up in liquidity due to strong inflows. “Recall that 1QFY2023 loan growth was flat sequentially while customer deposits rose 5% q-o-q, driven by fixed deposits and new money inflows. We gather that new money inflows remain strong but the shift in the deposit mix from current accounts and savings accounts (casa) to fixed deposits has decelerated, as banks eased up on the rate competition.”

OCBC’s guidance on NIMs suggests a sequential easing, add the analysts. “Its FY2023 NIM guidance of 2.2% (compared to 1QFY2023’s 2.3%), suggests that NIMs will ease in the coming quarters. This would be due to factors such as the ongoing repricing of deposits, casa mix shift, liquidity drag from healthy new money inflows and a generally cautious investor sentiment, which results in money inflows sitting in deposits rather than being redeployed into wealth management products.”

See also: <a class='gtm_see_also_2_inread' style='text-decoration: underline;' href='/capital/brokers-calls/rhb-remains-positive-st-eng-its-strong-earnings-potential-and-well?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>RHB remains positive on ST Eng for its ‘strong’ earnings potential and ‘well-supported dividend yield’</a>

This guidance has assumed no further rate hikes nor any rate cuts this year.

Softness will prevail in OCBC’s fee income, says RHB. 1QFY2023 fee income was down 13% y-o-y, mainly on lower wealth management income.

Finally, OCBC’s asset quality is holding up and so far, seems quite benign, write the RHB analysts. “OCBC continues to monitor all sectors and, so far, there have been no red flags from the ongoing review.”

RHB has left its FY2023 forecasts for OCBC “relatively unchanged” but trim FY2024-2025 net profit by 6%-8%, due to the downward revisions in NIM assumptions. — Jovi Ho

Price targets: DBS Group Research ‘buy’ $1.62 CGS-CIMB Research ‘add’ $1.35 UOB Kay Hian ‘hold’ $1.27

Road to earnings recovery is smooth

For more stories about where money flows, <a class='gtm_see_also_3_inread' style='text-decoration: underline;' href='/section/capital?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>click here for Capital Section</a>

ComfortDelGro’s joint venture in Australia has won an eight-year bus contract worth A$200 million ($180.5 million).

“We maintain our positive view on the counter on the back of our expectations that we will see sequential improvement in its operations and its attractive valuation,” says DBS on July 4, as it maintains its “buy” call and $1.62 target price.

CGS-CIMB has upgraded ComfortDelGro from “hold” to “add”, with a trio of catalysts that will help move the stock towards a fundamental inflection point for earnings recovery to take shape.

In his July 4 note, analyst Ong Khang Chuen expects the land transport operator to report y-o-y growth when it reports earnings for 2QFY2023 ended June, leading further into a stronger showing in 2HFY2023 of 65% gain y-o-y.

At current levels, the stock is trading at an undemanding valuation of -1 standard deviation below the historical mean. Ong’s revised target price of $1.35 is based on 15.4x FY2024 earnings, which is the company’s five-year historical average, up from an earlier valuation multiple of 13.8x.

On the other hand, UOB Kay Hian’s Llelleythan Tan Yi Rong has maintained his “hold” call and $1.27 target price. While the company won the contract in Australia, the potential loss of certain bus packages in Singapore by SBS Transit is an “overhang”.

SBS Transit’s (SBST) Bukit Merah and Jurong West bus packages are set to expire in Nov 23 and Sep 24 respectively and have been put up for tender.

The tenders closed in March and are expected to be awarded in 3Q2023, and both packages could be awarded again to SBS Transit, or to two different operators. This implies potential risks to ComfortDelGro’s near- to medium-term earnings, notes Tan.

He estimates that if ComfortDelGro is re-awarded the two contracts at lower service rates would result in earnings dropping by 2-3% for both FY2023 and FY2024; the loss of both packages would cause earnings to drop by 3% and 10% respectively.

“We recommend investors to take profit on any run-up in share price performance close to our target price. Our key rerating catalysts would be stable and strong margin expansion from the public transport segment,” he adds. — The Edge Singapore

Price targets: Lim & Tan Securities ‘buy’ 50 cents UOB Kay Hian ‘buy’ 55 cents

Initiate calls amid booming co-living segment As co-living properties owner and operator LHN expands its presence in Singapore to ride the co-living boom, analysts are taking notice and initiating their coverage on the stock.

Lim & Tan Securities and UOB Kay Hian (UOBKH) have initiated “buy” calls on LHN with target prices of 50 cents and 55 cents respectively. Analysts Nicholas Yon and Chan En Jie are upbeat on how LHN’s co-living business Coliwoo is poised to be the key growth driver over the next few years with positive uplifts in demand, significant increases in capacities and higher room rates.

Higher residential rents and the return of foreigners have propped up demand for co-living spaces. As the market leader with a 32% share, Coliwoo sees strong occupancy rates of 96.7% despite elevated monthly pricing of about $2,900 to $5,800. FY2022 ended September 2022’s capacity of 1,015 keys will also be boosted by about 663 keys by the end of FY2023 and management aims to add at least 800 rooms per year for the next three years.

Meanwhile, LHN has a track record in buying underutilised properties or undervalued investments and selling them for a premium, such as the sale of Coliwoo Hotel Amber for $46.6 million in November 2022 (purchased for $27 million in March 2021) and GetGo Technologies for $7.9 million in September 2022 (invested $40,000).

“Their solid track record of asset recycling initiatives to enhance ROE for shareholders has allowed the market to re-rate its shares closer to its intrinsic value as well as allow management to implement a new dividend policy to distribute at least 30% of recurring earnings as dividends,” say the analysts, adding that the group’s Golden Mile Tower carpark and industrial property in 55 Tuas South could be potential divestments to boost earnings.

Management gave a special dividend via the IPO of LHN Logistics last year and with the upcoming complete disposal of LHN Logistics in August, Yon and Chan believe that there is a good chance for another special dividend given the huge one-off gain of $21 million or 5.1 cents per share, along with incoming proceeds of $31.9 million or 7.8 cents per share.

According to Yon and Chan, LHN trades at distressed valuations of 5.4x core forward P/E and 0.7x P/B for a growth company with sustainable cash flows and backed by a dividend yield of 6.3% based on 2.3 cents per share. Compared to property peers, this implies a deep discount to larger and more established firms such as UOL and CDL, who are trading at 14–15x forward P/E and have a much lower yield of 2.8% to 4.1%.

Despite a relatively high net gearing ratio of 52.4%, LHN has managed its interest cost very well by locking in interest rates at less than 1.5% for most of their properties until around mid-2024 and possesses a healthy interest coverage ratio of eight times.

As for UOBKH, analyst Heidi Mo expects the group’s Coliwoo to drive FY2023 core earnings by about 46% y-o-y from a 70% increase in several new keys.

Despite competing with established peers such as Ascott’s Lyf and Cove, Coliwoo stands out with its ability to offer accommodations in good locations with a full suite of room amenities at an affordable rate.

“As the new keys will take six to nine months to reach steady state, we expect FY2024/2025’s Coliwoo earnings to grow 211%/76% y-o-y to $11.0 million/$19.4 million, respectively. This will likely lift LHN’s FY2023 core earnings by 46% y-o-y to $25 million,” Mo notes that LHN intends to add 800 keys per year for the next three years.

Meanwhile, LHN’s strategy to further enhance shareholder value by considering capital recycling and moving towards an asset-light model could lead to more special dividends. On June 9, LHN received an offer to take over its 84%-owned subsidiary LHN Logistics. This is expected to generate a disposal gain of $21 million and cash proceeds of $32 million, representing about 21% of LHN’s market cap.

LHN owns 12 properties, estimated to be worth $178 million as of FY2022, which could be divested to unlock more value.

The analyst has yet to factor in any special dividends into her estimates. “We think that LHN’s current valuation of 6x FY2024 P/E and a dividend yield of 6.3% is attractive, given the group’s leading market share in the co-living space, robust expansion pipeline and strong EPS growth,” says Mo. — Samantha Chiew

Price targets: DBS Group Research ‘buy’ $8.40 CGS-CIMB ‘add’ $8.20

Strong sales, hospitality recovery

UOL Group has sold Parkroyal Kitchener Hotel for $525 million to Midtown Properties.

The latter shares the same registered address as Hotel 81 Management and Worldwide Hotels, whose chairman is Choo Chong Ngen, founder of the Hotel 81 chain. His daughter, Carolyn Choo, is the group’s managing director and CEO.

The hotel, with 542 rooms, is held under UOL’s hospitality unit Pan Pacific Hotels Group.  UOL currently holds the hotel at $83 million on its books. Upon completion of the sale, UOL book a gain of $446.2 million.

“The divestment came as a good surprise as UOL took first steps in unlocking its asset value, riding on the recovery of the hospitality industry post-Covid, and optimise its portfolio,” says DBS in its July 5 note.

“While this is UOL’s first divestment in a long while, further asset recycling strategy at above its asset valuation may spur appreciation in UOL’s valuation which is currently undervalued at 0.5x P/B,” adds DBS.

“Following the footsteps of its peers in asset recycling strategy, we hope that UOL will also share the spoils with its shareholders via dividends as its peers had previously declared record distributions,” says DBS.

DBS released a report on July 4, with analysts Rachel Tan and Derek Tan keeping their “buy” calls and $8.40 target price on UOL.

Apart from being upbeat on the latest divestment, the analysts believe that strong sell-through of its residential projects could be a catalyst for the share price to move.

The 520-unit Pinetree Hill, the former Watten Estate Condominium, is the latest project by UOL this year, which is a joint venture with SingLand. Strong presales for these projects will add to the almost $1.5 billion in presales locked in 2022, note the analysts. “We continue to see value in UOL at 0.5x P/B and 0.48x P/RNAV — trading below –1 s.d. (standard deviation) of the mean,” the DBS analysts say.

Separately, Lock Mun Yee of CGS-CIMB has raised her target price to $8.20 from $8 following news of the divestment, which is “significantly higher” than her estimate. “We continue to like UOL for its diversified business model with a high proportion of recurring income,” writes Lock in her July 5 note. — The Edge Singapore

Price target: Maybank Research ‘buy’ $1.12

Still in the recovery game

GENS’s share price has retreated since reporting below consensus results on May 12, notes analyst Yin Shao Yang. “We had a virtual meeting with management to get an update. We understand that operations have been improving steadily. While ebitda margins may come in a tad lower than we expected, absolute ebitda is on track to recover to pre-Covid levels in FY2024,” says Yin. GENS’s financial year ends in December.

Meanwhile, quarter-to-date, the analyst understands that all major operating metrics, such as VIP volume, mass tables gross gaming revenue (GGR), slot machine GGR and non-gaming revenue are trending higher q-o-q.

The high-margin slot machine GGR continues to grow, driven by locals, while non-gaming revenue which dipped 15% q-o-q in 1Q2023 due to Singaporeans travelling abroad in March for the school holidays, is also recovering.

“Curiously, 5M2023 Chinese visitor arrivals came in at only 20% of 5M2019 levels. It follows that there is room for the aforementioned operating metrics to improve as seat capacity from China recovers,” says Yin.

On the other hand, the analyst is cautious as margins may come in narrower than expected.

Thus, the analyst is comfortable with his FY2023 VIP volume/mass market GGR (tables and slots) forecasts, which are based on 88%/105% of FY19A levels (1QFY2023: 76%/100% of FY2019 quarterly average).

“As more Chinese return, we still expect FY2024 mass market to hit 120% of FY2019 levels. Yet, we understand that ebitda margins are unlikely to hit 50% in FY2024. This is because GENS will raise its headcount from 7,208 as at end-FY2022 and incur more marketing expenses to attract more Chinese tourists,” says Yin.

All in all, the analyst has trimmed FY2023/FY2024/ FY2025 core net profit forecasts by 12%/6%/9% (ebitda forecasts by 14%/9%/8%). “Notwithstanding our lower ebitda forecasts, we still expect FY2024 ebitda to return to FY2019 levels by then. This is more meaningful when we consider that gaming tax rates will effectively be 5 percentage points higher by then,” says Yin, adding that he understands GENS will not make a second bid for a Japanese IR (integrated resort) licence and it is too early to tell if it will bid for a Thai one. — Samantha Chiew

Broker’s Digest: OCBC, ComfortDelGro, LHN, UOL, Genting Singapore

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