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Brokers’ Digest: OUE REIT, CSE Global, Sheng Siong, FCT, Singtel, CapitaLand Investment

The Edge Singapore
The Edge Singapore • 21 min read
Brokers’ Digest: OUE REIT, CSE Global, Sheng Siong, FCT, Singtel, CapitaLand Investment
Crowne Plaza at Changi Airport, one of OUE REIT's hotels. Photo: OUE REIT
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OUE REIT
Price target:
CGS International ‘hold’ 30 cents

Hospitality segment’s star performer

CGS International analysts Lock Mun Yee and Natalie Ong have kept their “hold” call on OUE LJ3 -

REIT even though its gross revenue and net property income (NPI) for 1QFY2024 ended March 31 stood in line with their full-year estimates.

OUE REIT’s gross revenue for the quarter, which grew by 9.5% y-o-y to $74.9 million, stood at 26.8% of Lock and Ong’s FY2024 forecast. The REIT’s NPI of $60.5 million, which rose by 6.9% y-o-y, stood at 25.4% of the analysts’ full-year estimates.

The REIT’s hospitality segment was the star performer while its commercial segment also grew steadily. At its results briefing, the REIT’s management was said to remain “beat” on the hospitality sector’s outlook from the recovery in business and leisure travellers.

During the quarter, OUE REIT’s Singapore office portfolio reported positive rental reversion of 12.6% with committed occupancy at 95.1% as at the end of March.

See also: UOBKH starts coverage on Pan-United with ‘buy’ call and TP of 71 cents

The analysts expect this to continue, anticipating that the REIT should still enjoy positive reversions for the rest of FY2024 with the average expiring rents of $10.67 per sq ft compared to CBRE’s Grade A office market rents of $11.95 per sq ft.

Meanwhile, Mandarin Gallery saw a 22% positive rental reversion, while its committed occupancy stood at 96.6% in 1QFY2024, note the analysts. The property’s shopper traffic has exceeded pre-Covid levels by 8% while its tenant sales are still at 85% of pre-Covid levels.

Despite the positives, Lock and Ong have lowered their distribution per unit (DPU) estimates for the FY2024 to FY2025 by 5.54% to 6.85%. The lower estimates were made to reflect a lower payout ratio of 92% and an updated model after the REIT released its FY2023 annual report. As such, the analysts’ target price has also been lowered to 30 cents from 36 cents previously.

See also: Singtel is well connected to its bright outlook with its latest announcements

The analysts are remaining neutral on the REIT’s prospects due to the lack of near-term catalysts, though they see that its unit price will likely be supported by its attractive dividend yield of 7.4%. — Felicia Tan

CSE Global
Price target:
Maybank Securities ‘buy’ 64 cents

Proxy to data centre growth

Jarick Seet of Maybank Securities has maintained his “buy” call and 64 cents target price on CSE Global 544 -

, given how this company is tapping on growing trends in electrification and data centres.

On April 30, CSE announced it had won $186.2 million in new orders in 1QFY2024 ended March, up 16.7% y-o-y. Out of which, the electrification segment secured about $82.9 million of new orders or about 44.5% of total order intake.

Seet, citing the company’s management, says demand for electrification solutions will remain “robust” given the strong pipeline of projects. “We expect electrification to be one of the main growth drivers for CSE in the next two to three years,” writes Seet in his May 1 note.

The order wins announced for 1QFY2024 excludes a $49.2 million data centre contract announced on April 18, which means total order wins for 2QFY2024 could be stronger. The client is likely a main player in this industry and that similar contracts will be won down the road. “AI technology and data centres require huge amounts of energy to develop and run and will benefit power management system integrators like CSE,” says Seet.

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

For its 1QFY2024, which has been its seasonally weakest period, CSE reported revenue growth of 24% y-o-y to $197.5 million, which is above Seet’s blended y-o-y projection of 17%.

With better operating leverage due to strong revenue growth, as witnessed in FY2023, Seet expects CSE’s margins to further improve from 3.1% in FY2023 to 3.5%–4% in the current FY2024, thus, justifying his projection that CSE’s core earnings for FY2024 will grow by 26%.

“CSE offers a unique opportunity to ride the upcycle in attractive growth areas. It also offers a sustainable 6.5% dividend yield. We believe CSE has a clear multi-year growth outlook and we expect further accretive acquisitions, which could accelerate its growth,” says Seet.

“The counter is trading at 7.6 times FY2025 earnings on a 6.5% dividend yield, we think it is under-valued,” he adds. — Douglas Toh

Sheng Siong Group
Price targets:
CGS International ‘add’ $1.88
PhillipCapital ‘accumulate’ $1.66
RHB Bank Singapore ‘buy’ $1.96
DBS Group Research ‘hold’ $1.62
Citi Research ‘sell’ $1.43

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Analysts have mixed sentiments on supermarket operator Sheng Siong, following the group’s latest 1QFY2024 ended March results.

To recap, the group reported earnings of $36.3 million, 8.9% higher y-o-y. Revenue for 1QFY2024 increased by 5.5% y-o-y to $376.2 million, while the group’s net profit margin (NPM) increased 0.3 percentage points (ppts) y-o-y to 9.7%.

The higher revenue was mainly driven by an 8.0% y-o-y increase in same-store sales (SSS) and supported by a longer sales period before the Chinese New Year compared to last year.

The group’s gross profit margin (GPM) for the quarter rose by 0.6 ppts y-o-y to 29.4%.

CGS International is maintaining its “add” recommendation and $1.88 target price, as analysts Ong Khang Chuen and Kenneth Tan see the group benefitting from a later Lunar New Year this year. “We continue to like Sheng Siong for its strong operational execution and expect reacceleration of EPS growth riding on faster store openings in FY2024,” they say.

The two analysts also see more opportunities for store opening for FY2024. “We forecast four new store openings in Singapore and one addition in China for Sheng Siong in FY2024,” say Ong and Tan, while acknowledging the group’s new store opened in 1QFY2024, as well as a store expansion.

The group also sees an opportunity to acquire commercial premises to support its store expansion plan, given its strong net cash position of $352 million as at the end of March.

PhillipCapital has also kept its “accumulate” call and $1.66 target price on Sheng Siong.

Analyst Paul Chew says: “We expect Sheng Siong to continue taking market share from wet markets and peers as the competition from smaller supermarket chains ebbs.”

He expects SSS growth of 4% in FY2024, while gross margins will creep up at a slower pace.

Chew notes that only two stores were opened last year. The lack of new stores will be a drag on revenue this year. With industry-leading margins, it will be challenging for Sheng Siong to expand further. Supply chain bottlenecks include distribution centres.

Another avenue for growth is acquisitions, as the company has built up a record net cash hoard of $352 million. In China, the operation remains profitable. Target customers are the heartlands community but their supermarket concept is different than it is in Singapore. The products are very localised and loose items are commonly sold.

“Sheng Siong’s attractive financial metrics include an ROE of 27%, a dividend yield of 4.2% and net cash of $352 million,” says Chew.

Meanwhile, RHB Group Research has maintained its “buy” call on Sheng Siong with a target price of $1.96.

Analyst Alfie Yeo says: “We remain upbeat on Sheng Siong on the back of steady consumption demand and store opening opportunities. We expect tailwinds from strong SSS growth over the Lunar New Year festive period and recently issued Community Development Council (CDC) vouchers to Singaporean households to drive growth.

Yeo expects the group’s outlet opening to also be “robust”. Already the group opened one new store in 1Q2024 and has four other bids pending. The HDB is expected to put up another five stores for tender in the next six months, which offer opportunities for the group to increase its store network this year. The group also plans to open one new outlet in China in 2Q2024.

“We expect Sheng Siong to secure some of these outlets and assume three outlets per annum in our forecast assumption, adding to the 69 stores it has currently,” says Yeo.

Key downside risks to RHB’s EPS estimates include slower-than-expected store openings, lower sales demand and per sq ft traction, and the inability to maintain gross profit margins at current levels.

DBS Group Research, however, has a “hold” rating on the stock with a $1.62 target price.

Supermarket retail sales value grew about 4.4% from January to February. Assuming 1% growth in March, in line with food excluding services inflation, DBS estimates that the market likely expanded about 3.3% in 1Q2024, and the company grew in line with the overall market based on 3.6% sales growth of established stores.

Of the eight HDB stores up for tender and three awaiting results, DBS is optimistic that the company should be able to secure at least four stores given the seemingly muted bidding environment. “We believe new store contribution will likely be materially reflected in earnings towards late FY2026/FY2027 given [the] estimated two-year breakeven time frame. With utility cost likely to stay at an elevated level on high miscellaneous charges, we see earnings growth largely driven by continued gross margin expansion,” says DBS.

Citi Research has reiterated its “sell” call on Sheng Siong with a target price of $1.43. Despite growth in the latest earnings, analysts Luis Hilado and Chong Zhou note that gross floor area (GFA) quality remains a key concern. Other concerns the analysts highlighted include challenging SSS growth, tapering margin improvements and elevated administrative expense.

In 1QFY2024, the group opened two stores but management viewed one of the new stores in Bukit Batok as an extension of an existing store. Sheng Siong will be attempting to run the neighbouring stores as a “single store” under the same management team via better product placement to prevent sale cannibalisation.

“As the effectiveness of the ‘single store’ concept is unproven, we maintain our cautious view (note that SSS increased by 8.0% y-o-y while revenue only increased by 5.5% y-o-y seems to indicate limited new store revenue growth),” write the analysts in their April 26 report.

With six remaining tenders (three pending outcomes, one lost to NTUC) and two additional re-leasing tenders, the analysts believe that Sheng Siong is well-positioned to reach its target of opening at least three new stores annually.

Meanwhile, the analysts note that the dining-in trend is expected to reverse in 2024, along with the discontinuation of GST absorption will result in moderate revenue growth.— Samantha Chiew

Frasers Centrepoint Trust
Price targets:
CGS International ‘add’ $2.54
DBS Group Research ‘buy’ $2.70
Maybank Securities ‘buy’ $2.40
PhillipCapital ‘accumulate’ $2.38
RHB Bank Singapore ‘neutral’ $2.35

Analysts like FCT’s positive 1H metrics

Analysts are upbeat over Frasers Centrepoint Trust J69U -

’s (FCT) results for 1HFY2024 ended March 31 when the trust reported a distribution per unit (DPU) of 6.022 cents, 1.8% lower y-o-y.

Except RHB Bank Singapore which has kept its “neutral” call, the rest of the analysts have kept their positive calls.

To RHB’s Vijay Natarajan, FCT fell short of his expectations with its DPU “slightly below” his forecasts, although he sees the REIT to be “on the right track”.

In his report dated April 25, Natarajan likes that the REIT’s metrics remained robust in the 1QFY2024 with “very high” occupancy rates and high single-digit rent reversions, which are similar to its peers. The acquisition of an additional stake in Nex is also a plus. Contributions from the acquisition are expected to kick in fully in 3QFY2024.

However, the analyst also sees that FCT is likely to experience persistent finance cost pressures due to its FCT’s below-average hedge position compared to its peers.

Natarajan, who has kept his target price unchanged at $2.35, has tweaked his DPU estimates for FY2024 to FY2026 by 0% to 1%. The adjustment comes after making changes to FCT’s net property income (NPI) margins on its joint venture (JV) contributions.

CGS International’s Natalie Ong and Lock Mun Yee have kept their “add” call and target price unchanged at $2.54. However, they have increased their FY2024 DPU estimate by 1.7%. The estimated change is due to the lower revenue and NPI assumptions due to the asset enhancement initiative (AEI) at Tampines 1 and offset by the higher percentage of management fees that were paid out in units.

The analysts also made minor adjustments to their revenue estimates for FY2025 to FY2026, which were largely offset by marginally higher NPI margin and lower cost of debt assumptions. As such, no changes were made to their FY2025 and FY2026 DPU estimates.

“We remain positive on the demand for space at FCT’s suburban malls and FCT’s active asset management strategy,” write Ong and Lock in their April 26 report.

To them, FCT’s 1HFY2024 DPU stood in line at 51% of their full-year estimates. They also liked FCT’s latest set of results for its strong positive retail reversions, higher tenant sales, healthy balance sheet and expected stable cost of debt.

DBS Group Research’s Geraldine Wong and Derek Tan have also maintained their “buy” call and target price of $2.70 as the REIT’s 1HFY2024 DPU stood ahead of their estimates.

“FCT’s portfolio continues to outperform its peers on several fronts, with tenant sales [around] 15% above pre-Covid levels, unscathed by either the return-to-office trend or broader reopening,” write Wong and Tan in their April 26 report. Other key positives are the higher-than-expected reversions this quarter, along with NEX’s reversions, which outperformed the portfolio average, they note.

“With an occupancy cost of 15.6% for FY2023, below the 16.6%–17% levels seen pre-Covid, we see scope for further rental upside, backed by healthy tenant sales, with more room for reversionary rents to rise,” they add.

In their view, FCT’s recent acquisition of Nex was the right move, as it positions the REIT as the “King of suburban retail malls”.

“With a dominant position in the suburban retail space, supported by robust operational metrics (99% occupancy with strong reversionary prospects), we remain firmly positive on FCT, with forward yields of [around] 5.4%–5.6% on offer,” say Wong and Tan.

Maybank Securities’ Krishna Guha, like his peers, has kept his “buy” call and target price of $2.40.

In his report dated April 26, Guha notes FCT’s “resilient” operations, highlighting its high single-digit rental reversion and near-full occupancy of its retail portfolio backed by a healthy operating performance.

Funding metrics also remained “relatively steady” with higher gearing but lower funding costs as higher-cost debt was pared down with divestment proceeds.

Keeping FCT’s lower borrowing expense and contribution from Nex in mind, along with an enlarged unit base and a higher proportion of fees in units, Guha has raised his FY2024 DPU estimate by 2%.

Finally, PhillipCapital’s Darren Chan has kept his “accumulate” call with the same target price of $2.38, with FCT’s 1HFY2024 DPU in line with his expectations.

In his April 26 report, Chan noted only positives including the strong retail portfolio occupancy of 99.9% in the 2QFY2024, improvements in tenant sales and shopper traffic within the same quarter, as well as the improvement in FCT’s all-in cost of debt. There were no negatives.

Looking ahead, the analyst expects resilient tenant sales and a low incoming supply of new retail malls to support FCT’s ability to increase its rents. In FY2024, he is expecting FCT to report a positive rental reversion of 7% in FY2024 supported by the healthy occupancy cost of around 15.5%

“Inorganic growth opportunities include the acquisition of the sponsor’s stake in Northpoint City South Wing and the remaining 50% stake in Nex. Utility costs are expected to increase slightly in FY2024, from 10% of overall opex to 11%,” he writes. Chan also sees subsequent contributions from Tampines 1 as over 80% of the mall’s AEI space will be handed over to tenants by May this year. The AEI is expected to be fully completed by September.

Based on his unchanged estimates, FCT is trading at an FY2024 DPU yield of 5.6%. — Felicia Tan

Singapore Telecommunications
Price targets:
CGS International ‘add’ $1.88
PhillipCapital ‘accumulate’ $1.66
RHB Bank Singapore ‘buy’ $1.96
DBS Group Research ‘hold’ $1.62
Citi Research ‘sell’ $1.43

Analysts keep ‘buy’ calls despite impairment news

Despite recent news on Singapore Telecommunications Z74 -

(Singtel) booking an impairment of $3.1 billion for its upcoming FY2024 ended March 31, analysts are remaining upbeat on the stock and keeping their “buy” calls.

Singtel, on April 29, announced that it expects to recognise a $3.1 billion non-cash impairment in FY2024, mainly from Optus, which is the telco’s Australian business. Singtel expects to record non-cash impairment provisions of approximately A$540 million ($470 million) on Optus’ enterprise fixed access network assets, non-cash impairment provision of approximately $2 billion on the goodwill of Optus, as well as non-cash impairment provision for the goodwill of approximately $340 million for the Asia Pacific cyber security business mainly from general business weakness on lower corporate spending. In addition, an estimated $280 million of non-cash impairment provision is expected for NCS Australia due mainly to the higher cost of capital.

Arthur Pineda of Citi Research says now is the time to “buy” on the dip. Shares in Singtel opened 3.3% lower on April 29 at $2.33. It has since climbed back about 2% to $2.39 on April 30. The research house has also increased its target price to $3 from $2.88 previously.

Pineda is of the view that the non-cash impairment noise should be overshadowed by better free cash flow (FCF) and yield prospects.

“We highlight this is a non-cash item and does not bear any relevance to its dividends which are paid out of recurring income, nor our sum-of-the-parts (SOTP) with Citi/street valuations likely well below Singtel’s carrying value on Optus to begin with,” says Pineda.

The move to announce impairments ahead of the release of its results in late May likely serves to remove distractions from any potential capital management activities, which Pineda believes can materialise owing to the availability of excess cash from prior asset sales.

In addition, the separate move to strike a network-sharing deal with TPG in Australia serves to create value by optimising capital expenditure and obtaining about A$0.9 billion in net cash inflows from TPG over 11 years.

Meanwhile, Maybank Securities also increased its target price to $3.10 from $3.05 previously, as analyst Hussaini Saifee sees this correction as a “buying opportunity”.

“Optus’ fundamentals have improved on the network pact while the impairment charges are non-cash in nature and thus unlikely to impact Singtel’s dividends,” explains Hussaini, who forecasts an FY2024 dividend of 11.85 cents, translating to a 5% dividend yield.

“More importantly, we forecast FY2024–FY2027 earnings CAGR at 16% and see the potential for dividend per share (DPS) to grow alongside earnings. Following the announcement, we raise our FY2025–FY2026 core earnings by 1%–2%,” says the analysts, also forecasting FY2024 earnings to come in at $123 million, incorporating the asset and goodwill impairment.

RHB Group Research has kept its $3.15 target price. The stock also remains to be its preferred sector pick.

The research team says: “We detected a more cautious tone from management following the revelation of sizeable non-cash impairments to be booked in 4QFY2024. Singtel will elaborate on its ‘refreshed’ enterprise strategy post FY2024 results. Its three-year cost-out programme ($600 million) and focus on new growth engines should lift ROIC to the low teens by FY2026.”

UOB Kay Hian has reiterated its $2.99 target price, as analysts Chong Lee Len and Llelleythan Tan expect minimal near-term earnings impact for Singtel from its 11-year A$1.6 billion network sharing deal with TPG in Australia, receiving about A$900 million of incremental cashflows over 11 years.

As for the impairments, management noted that the group does not expect any further impairments and deems the current impairments sufficient. After the impairment, it was noted that there is still around $5.9 billion of goodwill left for Optus.

With these exceptional non-cash provisions, barring unforeseen circumstances, Singtel expects to report a net loss for 2HFY2024. Stripping this out, FY2024 underlying net profit is estimated at $2.2 billion. “The group remains on track to pay at the upper end of its dividend policy at between 70% and 90% of underlying net profit, unaffected by the non-cash impairments. Based on our estimates, we still expect an FY2024 dividend yield of 5.1%, implying a dividend payout ratio of around 90%,” say Chong and Tan.

HSBC Global Research analysts Piyush Choudhary and Rishabh Dhancholia have also maintained their target price of $2.90 as they see the deal between Optus and TPG Telecom as an “incrementally positive” one for the former. “[The deal] structurally improves competitiveness and free cash flow,” they write in their April 29 report, adding that Optus’ capex intensity is around 19% of its revenue in FY2024.

“If Optus lowers capex intensity by 1% of revenue (versus our forecasts), it increases Singtel’s fair value by 2.5% (almost 7 cents per share),” they note. The analysts have not made changes to their forecasts yet as the deal is subject to regulatory approval.

Overall, the sharing of spectrums is a net positive as it should improve network capacity and quality of service for the telco.

“More importantly, incremental cash flows over the next two to three years should help to accelerate 5G network rollout in regional Australia,” they add. In their view, the deal is a win-win for both Optus and TPG; it improves Optus’ ability to compete effectively and strengthens TPG’s capability to compete in regional Australia.

Like its peers, the HSBC analysts do not see any impact on Singtel’s dividends due to the non-cash nature of the impairment.

Looking ahead, Choudhary and Dhancholia see Singtel’s dividends and profits improving due to growth in its core business and profits from its regional associates.

“Singtel’s core business growth should be driven by cost optimisation, growth at NCS and data centres,” they write, pencilling a core ebit growth of 7.2% y-o-y in FY2024 and 7% y-o-y in FY2025.

“We expect regional associates’ profits to rise as average revenue per user (ARPU) is improving across markets. As such, we expect underlying net profit to expand. We forecast Singtel’s ordinary dividend to rise 21% y-o-y to 12 cents per share in FY2024 and expect a special dividend of 3.5 cents per share as the company has excess proceeds from capital recycling initiatives. Thus, we forecast total dividends to be 15.5 cents per share in FY2024 (+4% y-o-y),” they add. — Samantha Chiew & Felicia Tan

CapitaLand Investment
Price targets:
CGS International ‘add’ $4.30
Maybank Securities ‘buy’ $3
OCBC Investment Research ‘buy’ $3.86
PhillipCapital ‘buy’ $3.38

Analysts stay positive on CLI after 1QFY2024 results

Analysts remain upbeat over CapitaLand Investment’s (CLI) prospects after the group announced its business update for the 1QFY2024 ended March 31.

CGS International analyst Lock Mun Yee has kept “add” on CLI as she likes the group’s strong recurring fee-income base which provides “good income visibility”. Lock also likes CLI for its asset-light fund management model.

“CLI’s 1QFY2024 revenue of $650 million was broadly in line, at 22% of our FY2024 forecast,” writes Lock.

During its results briefing, CLI’s management indicated that it expects its asset recycling and deployment momentum to pick up towards the 2HFY2024, leading Lock to believe that CLI’s fee income-related business (FRB) revenue will improve as the group’s capital recycling momentum accelerates.

On its real estate investment business (REIB), CLI’s management said that it would continue to look for opportunities to lighten its balance sheet through the divestments of its on-balance sheet assets. It will also have a near-term focus on the US and China and “seed new funds” through the recycling of assets, adds Lock.

The analyst has kept her earnings per share (EPS) estimates for FY2024 to FY2026 unchanged. Her target price of $4.30, based on a 10% discount to CLI’s revalued net asset value (RNAV) is also the same.

PhillipCapital analyst Darren Chan has also kept his “buy” call with an unchanged target price of $3.38 for CLI. His target price represents an upside of 32.6% to CLI’s last-reported price of $2.64 as at his April 29 report. It also represents a forward P/E of 16.7 times.

“We like CLI for its robust recurring fee income stream and asset-light model,” Chan writes. “We expect the FRB to continue to improve, supported by the lodging business as more units are opened and the return of event-driven fees.”

The analyst sees CLI to focus on divestments in 2024, with stabilising interest rates supporting its strategy.

“CLI’s current gearing is 0.53 times, improving from 0.56 times as of December 2023. The cost of debt increased 0.1% q-o-q to 4%, and we expect it to stay around this level for FY2024,” he says.

The research team from OCBC Investment Research (OIR) as well as Maybank Securities analyst Krishna Guha have both kept their “buy” calls but with lower target prices.

OIR’s team’s fair value estimate has been lowered to $3.86 from $3.89 while Guha’s target price is now at $3, down from $3.15 previously.

The OIR team has also lowered its patmi forecasts by 1.1% for FY2024 and 0.8% for FY2025 after updating its fair values in CLI’s Singapore-listed REITs and property trust in its valuation model.

Guha’s lowered target price reflects a slower growth in CLI’s assets under management (AUM), which has led to lower estimates as well. However, he still likes the group’s valuations on a “reasonable” 0.9 times P/BV and yield of 4.6%.

In his April 28 report, Guha sees CLI “battling” an “uncertain macro” environment with its flat top line as growth in FRB revenue was offset by a decline in the performance of its on-balance sheet real estate investments.

“Weak capital markets weighed on fund deployment with funds under management (FUM) unchanged from last quarter at $100 billion,” he writes. “However, private fundraising continues apace, CLI is tapping into domestic China liquidity and divestments have accelerated.” — Felicia Tan

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