Oversea-Chinese Banking Corp

Soft 1Q seen but valuation compelling

RHB Group Research has kept a “buy” rating and $14.40 price target on OCBC Bank as it sees its valuation as “compelling”. Singapore’s transition to living with Covid-19 as an endemic and the opening of its borders point to better earnings in the quarters ahead.

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Despite the positive outlook, the team expects 1QFY2022 ended March to be a softer quarter due to subdued demand for loans. The bank will report its results for the quarter on April 29.

The lower demand is attributable to the greater caution seen among businesses with the Omicron virus dampening economic recovery and the Russo-Ukraine war. Residential mortgages have also slowed down due to the recent spate of cooling measures introduced by the Singapore government in December 2021.

That said, OCBC’s management is expected to maintain its guidance for mid-to-high single-digit loan growth in FY2022, notes the team. Meanwhile, the RHB team expects OCBC’s current account savings account (CASA) deposits to hold up, with rising rates in the US expected to lead to an outflow of funds. “To date, OCBC has yet to see any material drop in deposits with excess liquidity parked in CASA deposits instead,” notes RHB.

Next, net interest margins (NIM) are estimated to be stable, with benchmark rates in Singapore only on a gradual uptrend since late January. That said, the positive impact from higher rates would only be more significant from 2HFY2022 or FY2023, according to the research team. “For 1QFY2022, the healthy CASA balances should help keep NIM stable,” says the team.

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OCBC’s asset quality is also seen to be resilient. “Having cleaned up its loans in 4QFY2021, management has guided for normalised credit cost of 20–25 basis points (bps) in FY2022. With no signs of stress within its portfolio, provisions are expected to be meaningfully lower in 1QFY2022,” the team adds.

Meanwhile, the team is mixed on the outlook for OCBC’s non-interest income. The bank is seeing a strong pickup in trading income from customer flows as the economic uncertainty has led to increased hedging activities, says the research team. On the flipside, fee income from wealth management would be lower q-o-q as most investors are staying risk-off while its insurance operations could be impacted by rising bond yields.

In other news, OCBC has completed the audit on the December 2021 phishing scam and implemented measures mandated by the Monetary Authority of Singapore (MAS) to boost security.

The RHB team understands that the bank has not heard from MAS about any supervisory action like that of DBS Group at the time of writing.

“Unlike peers, OCBC does not have a standalone digital bank. Instead, the bank has invested heavily in technology to ensure that it can provide offerings similar to those of digital banks,” says the team. “Management [will] closely monitor developments by digital banks to ensure that OCBC continues to effectively engage its customers.”. — Chloe Lim

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Reopening and redevelopment

UOB Kay Hian analyst Jonathan Koh has kept his “buy” rating on Suntec REIT along with an increased target price of $1.88 from $1.74.

Suntec REIT owns a portfolio of assets that include Suntec City, and stakes in parts of One Raffles Quay, Marina Bay Financial Centre Towers 1 and 2 and the Marina Bay Link Mall.

According to Koh, Suntec City, which has retail and office space, received more queries from MNCs inclined to relocate their regional headquarters from Hong Kong to Singapore.

Recent additions include Samsonite and New Balance. Koh expects Suntec City’s office space to enjoy an occupancy rate of 98% for 1QFY2022 ended March 2022, up 0.8 percentage points over 4QFY2021.

Over at Marina Bay Financial Centre, key tenant Standard Chartered is reportedly giving up 200,000 sq ft of office space. In turn, an unnamed tech company is taking up 100,000 sq ft while other new tenants are likely to come in. Koh says the new tenants will likely pay a higher rate than what Stanchart had paid.

With the rapid opening up of Singapore to vaccinated visitors, the retail business is expected to enjoy an uplift. “We expect the return of tourists to lead to further recovery of shopper traffic and tenant sales in 2HFY2022,” says Koh, adding that Suntec REIT is unlikely to again give a rental waiver to its retail tenants worth some $6 million in FY2021.

In addition, Suntec REIT is likely to share with unitholders divestment gains from sale of its stake in 9 Penang Road. Koh estimates this payout to be $20 million each for FY2022 and FY2023. He sees Suntec REIT paying a yield of 5.5% for FY2022, while trading at a discount of 15% to its net asset value of $2.11 per unit. — Chloe Lim

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‘Minor near-term hiccup’

CGS-CIMB Research analysts Eing Kar Mei and Lock Mun Yee are keeping their “add” recommendation on Keppel DC REIT after the REIT reported a DPU of 2.466 cents for the 1QFY2022 ended March. They have also kept their target price unchanged at $2.62.

To the analysts, the DPU stood lower than their expectations at 23% of their full-year DPU estimate.

During the quarter, the REIT saw gross revenue decline 0.9% y-o-y to $66.1 million while net property income (NPI) fell 1.4% y-o-y to $60.1 million.

The lower figures were due to provisions made for a client payment under dispute at KDC SGP 1 and higher electricity costs.

As such, the analysts have lowered their DPU estimates for the FY2022 to FY2023 by 1% to 5% as they factor in higher electricity costs, litigation provisions, as well as on the back of their updated FY2021 numbers.

“While its near-term DPU could be impacted by higher electricity cost, the strong demand for data centre will underpin its income resilience in the longer term,” the analysts write in their April 19 report.

They add that they deem the REIT’s current situation as a “minor nearterm hiccup”.

In the 1QFY2022, Keppel DC REIT saw an improvement in its portfolio occupancy and weighted average lease expiry (WALE) which stood at 98.7% and 7.7 years respectively, from 98.3% and 7.5 years in the previous quarter.

Rental reversion in the 1QFY2022 was also stable, to which Eing and Lock expect the REIT to “continue to deliver stable rental reversions in FY2022, as it continues to see strong demand for data centres”.

The REIT’s balance sheet also remains supportive of acquisitions, which the REIT manager is actively seeking.

According to the analysts, re-rating catalysts include a faster pace of acquisitions, while a larger-than-expected impact from the higher electricity costs is a downside risk. — Felicia Tan

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Nanofilm Technologies International

Upbeat expectations following 1QFY2022 update

Analysts have remained upbeat on Nanofilm Technologies International’s prospects following its business update for its 1QFY2022 ended March 30. DBS Group Research has kept its “buy” rating and $4.12 target price while Citibank’s Jame Osman has a similar “buy” call but with a slightly lower price target of $3.92. CGS-CIMB’s William Tng, meanwhile, has an “add” call and $3.50 target price.

According to Nanofilm, revenue for its 1QFY2022 was up 27% over the year earlier, which was a faster pace versus the overall FY2021 revenue growth of 13% over FY2020.

The revenue growth was seen across its various business segments and not restricted to one or two specific areas. Under Singapore’s half-yearly reporting obligations, Nanofilm’s earnings were not disclosed.

“Despite investor concern that supply chain and production disruptions could persist due to the recent Russia-Ukraine conflict and the impact from lockdowns, revenue trends disclosed by the company appear healthy and broadly within our expectations,” writes Citi’s Osman in his April 20 note.

Nanofilm’s biggest business segment by revenue, at 81%, is its so-called advanced materials business unit, which provides coating services for its customers. Out of which, 63% of the revenue comes from customers in consumer electronics, communication and computers.

DBS notes that the growth was mainly driven by the communications and wearable and accessories sub-segments, as the market is back to operating in a normalised cycle with the easing of the supply chain disruptions.

“Barring any potential challenges arising from the COVID-19 situation in China, business pipeline visibility is strong for the 3C segment with the easing of supply chain disruptions, as the group enters into its typical peak season in 2H22,” states DBS.

DBS notes that Nanofilm, having invested to expand its capacity in Shanghai with a second plant with a capacity double that of the first plant, is “well-positioned” for growth. There is still a lot of room for expansion in Plant 2, which is not running at optimal capacity yet.

DBS, saying the worst in supply chain disruptions is likely behind, expects earnings growth of 29% this current FY2022, followed by another 17% for the following FY2023. “Growth is supported by a strong balance sheet with net cash of $146 million as at end December 2021 and the new Shanghai Plant 2, which still has ample room for expansion,” notes DBS.

CGS-CIMB’s Tng is maintaining a slightly cautious stance. He notes that the company is optimistic about its FY2022 outlook. However, Tng sees possible earnings risks from disruptions caused by the pandemic and possible dampening of customer demand as end buyers’ appetite gets eroded by inflation.

Krishna Guha of Jeffries International is also somewhat cautious. He worries that rising input costs and investments in new products would limit the upside. “Though valuation is in line with peers, limited clarity on new demand and margins keeps us on ‘hold’,” writes Guha in his April 20 note. He has trimmed his target price to $2.90 from $3.

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Strong orderbook to tide through uncertainties

Aztech Global’s 1QFY2022 earnings and revenue ended March fell short of the expectations of some analysts as the numbers came in at a level lower than historical trends. Nevertheless, they have kept their upbeat view on the stock on the back of the company’s robust order book and healthy balance sheet.

On April 18, Aztech Global reported revenue in the same period was up 10.4% y-o-y to $128 million as the company was partly affected by a six-day stop-work order in Dongguan, China, where Aztech has a manufacturing site. Earnings in the same period were up just 5.3% y-o-y to $13.9 million as margins were hit by higher costs.

Maybank Securities analyst Gene Lih Lai has kept his “buy” rating on Aztech with an unchanged target price of $1.13. While Lai notes that the 1QFY2022 earnings were at the lower end of his estimates, he believes the earnings would have been in line if not for the temporary closure of the Dongguan factory in March.

Citing Aztech’s order book, Lai is raising his FY2022 revenue estimate to $797 million. However, to take into account less upbeat US consumers’ sentiment and lingering cost pressures, Lai has cut his FY2023 operating earnings estimate by 10%. “We see upside to our forecast if growth from new products, customers or geographies can offset effects of slower organic growth and if components become less costly as supply chain problems dissipate,” says Lai. “Conversely, key risks include the underestimation of supply-chain disruptions, and/or demand destruction from the macroeconomic slowdown,” he adds.

CGS-CIMB’s William Tng notes that Aztech’s 1QFY2022 revenue was just 16.8% of his fullyear estimates, and is at a level that is also lower than what the company was able to generate this time last year. Similarly, Aztech’s earnings for 1QFY2022 were just 15.4% of Tng’s full-year estimates. Aztech’s 1QFY2021 earnings were 17.7% of what the company eventually reported for FY2021, notes Tng, who has kept his “add” call and $1.59 target price on the stock. The company, as of April 18, has an order book of $713 million, which will underpin its medium-term prospects.

DBS Group Research’s Ling Lee Keng is keeping her “buy” call, but she has lowered her target price to $1.33 from $1.48, citing the combination of margins compression and supply chain bottlenecks.

Nevertheless, she expects margins to improve along with bigger volumes in the subsequent quarters beyond the seasonally softer 1Q.

“Though the 1Q22 net margin of 10.8% is a tad lower than expected due to inflationary cost pressures alongside supply chain bottleneck, we expect margins improvement going forward as volume improves, given that 1Q22 is traditionally the weakest quarter,” adds Ling,

From 1QFY2022’s net margin of 10.8%, Ling expects this number to recover to 11.4% for the whole of FY2022 and 11.5% for FY2023, thereby, driving earnings growth of 15% for FY2022 and 20% for FY2023. — Chloe Lim

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Brokers' Digest: OCBC, Suntec REIT, Keppel DC REIT, NanoFilm Technologies International, Aztech Global

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