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Broker's Digest: Parkway Life REIT, IHH Healthcare, Keppel Corporation, Yangzijiang Shipbuilding, Kimly

The Edge Singapore
The Edge Singapore9/15/2022 05:01 PM GMT+08  • 11 min read
Broker's Digest: Parkway Life REIT, IHH Healthcare, Keppel Corporation, Yangzijiang Shipbuilding, Kimly
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Parkway Life REIT
Price target:
CGS-CIMB Research ‘hold’ $5.06
Citibank Research ‘neutral’ $5.02

Boost from new acquisitions

Analysts are upbeat about Parkway Life REIT (PLife REIT) following its latest acquisition announced on Sept 13.

PLife REIT announced the acquisition of three nursing homes in the Hokkaido region in Japan for a total purchase price of JPY2.56 billion ($26.1 million), or 12.2% below independent valuation.

CGS-CIMB Research analyst Lock Mun Yee has kept a “hold” rating on PLife REIT with a higher target price of $5.06 from $5.05.

Lock observes that the properties are well-located with transport connectivity within the residential areas of Ebetsu and Asahikawa Cities in Hokkaido Prefecture.

See also: Analysts 'cautiously optimistic' on TDCX’s outlook on FY2023 despite higher-than-expected 3QFY2022 earnings

“The purchase is in line with the REIT’s strategy to acquire healthcare-related income-producing assets and could boost its asset under management (AUM) by 1.2% to $2.2 billion,” explains Lock.

After completion of the purchase, the REIT’s Japan portfolio will expand to $725.3 million, making up around 32% of the total AUM. Under the terms of the agreement, the REIT will take over the properties’ existing lease agreements which have a balance lease term of 19 years. This will likely extend its portfolio weighted average lease expiry (WALE) from 17.01 years to 17.05 years, thus improving its income resiliency, says the analyst.

The REIT expects to fund the acquisition with yen debt to provide a natural hedge for foreign exchange risks arising from yen-denominated assets. “That said, at distribution income level, PREIT income remains well hedged, with its yen net income hedged till 1QFY2027 (as at end 2QFY2022), providing income stability to unitholders,” says Lock.

See also: CGS-CIMB expects stronger 2H for Boustead Singapore, raises TP to $1.35

According to management, the purchase will likely raise PLife REIT’s pro forma leverage ratio from 32.5% (as of the end of June) to 33.4%.“We expect the deal to be DPU accretive,” the analyst writes. “Based on the stated net income yield of 6.5%, we estimate the additional contributions could raise our FY2022–FY2024 DPU estimates by 0.27%–0.48% ... We like PLife REIT for its stability, backed by its defensive income structure with in-built escalation features,” says Lock.

Meanwhile, Citibank Research analyst Brandon Lee has kept a “neutral” rating on the REIT with an unchanged target price of $5.02.Following the acquisition, the REIT’s gearing would expand 0.9 percentage points (ppt) to 33.4%, implying debt headroom of $300 million-$500 million before hitting 40% to 45%, writes Lee. The analyst forecasts AUM contribution from Japan to increase by about 1% to 36%. In comparison, net property income (NPI) is expected to rise by 1ppt to 41%, with Singapore still dominating with an AUM of 64% and an NPI of 59%. — Chloe Lim

IHH Healthcare
Price target:
CGS-CIMB Research ‘add’ RM8.07 ($2.50)

Growth opportunities intact

CGS-CIMB Research analyst Tay Wee Kuang is still recommending investors “add” their positions to IHH Healthcare even after discussions about the acquisition of Ramsay Sime Darby Health Care were terminated. Tay has retained his target price of RM8.07 ($2.50).

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

On Sept 9, IHH announced that the discussions between itself, Ramsay and Sime Darby Holdings had concluded and did not result in a binding agreement.

“IHH’s initial offer price of RM5.67 billion in enterprise value represented an EV/Ebitda of [around] 25x based on Ramsay-Sime Darby’s reported ebitda of RM226 million for FY2021, which is more than an 80% premium to IHH’s current valuation of 14x forward EV/Ebitda,” Tay says.

On the termination, the analyst believes IHH is exercising prudence in its capital use, especially given the rising interest rate environment. He adds that the current environment may make any accretion to earnings from the acquisition less attractive.“We do not foresee any downside risk to IHH’s earnings with the deal falling through as we have not included a contribution from the potential deal in our earnings forecasts.”

The analyst sees “plenty [of] opportunities” for IHH to grow. “IHH remains on the lookout for potential growth, especially with its disposal of International Medical University (IMU) announced in 2QFY2022 that IHH expects to be completed by 1QFY2023. The sale will free up RM1.35 billion in capital for IHH.” Even without the Ramsay-Sime Darby deal, IHH will be boosting its bed capacity with its acquisition of Ortopedia Hospital in Adana, Turkey and opening a new floor at Fortis Hospital, Mulund in India, he adds.

The analyst sees the lockdown in Chengdu as having little impact on IHH’s gestating Chengdu Gleneagles Hospital, given that the Covid-19 pandemic had already impacted the hospital’s operations since its opening in late 2019. However, China’s zero-Covid-19 policy continues to challenge IHH’s operations in the country as private healthcare operators cannot take in Covid-19 patients under current restrictions. This has prolonged the gestation period for Gleneagles Chengdu and could weigh on operations of Gleneagles Shanghai which are slated to open by the end of FY2022.

Meanwhile, Tay is upbeat about IHH’s prospects in Hong Kong, where private hospitals can accept Covid-19 patients for treatments. IHH’s Gleneagles Hong Kong has seen improving ebitda contribution, and management has guided for total operational beds to reach 300 by the end of FY2022. “We believe IHH operates about 200 to 250 beds in Gleneagles Hong Kong currently.” — Felicia Tan

Keppel Corporation
Price target:
UOB Kay Hian ‘buy’ $10.11

Investments set to drive growth

UOB Kay Hian analyst Adrian Loh has maintained his “buy” call for Keppel Corp with a target price of $10.11, representing a 36% upside.

In his report dated Sept 12, Loh says Keppel and its subsidiaries have spent over $3.2 billion on stakes in other infrastructure companies. This expenditure puts the “foundations for the next stage of growth” after the company’s planned divestment of its offshore marine unit, which is expected in 4QFY2022, ending December.

He adds that the company appears to be at an “interesting crossroads” this year, with the exit of its offshore marine segment and moving towards a more asset-light business model with recurring earnings. It also has a 15% return on equity (ROE) target compared to the ROE of 9.1% in FY2021, and the 1HFY2022 annualised ROE of 8.4%.

Loh believes that there will be interest in the pace of its asset monetisation, which could bolster earnings again in FY2022 and lead to another dividend surprise.

He notes that Keppel’s share price has been supported well by its share buyback programme, with the stock near the end of its current $500 million share buyback mandate, having already spent $492 million to buy back 74.8 million shares at an average purchase price of $6.58 per share or 4.2% of its outstanding shares.

“Thus far in FY2022, Keppel has announced a slew of initiatives and acquisitions that, in our view, are intended to set the stage for the company’s next growth stage,” writes Loh.

He highlights that Keppel’s growth capex has been in the infrastructure segment. “In our view, this is understandable given that its offshore and marine segment is being divested and activity in its key business segment of China real estate has been on enforced hiatus given the country’s ‘zero-Covid’ strategy,” Loh adds.

“In our view, the key acquisitions year to date (ytd) were the onshore and offshore wind power acquisitions in Europe and the waste management business in South Korea, where Keppel’s 18%-owned subsidiary Keppel Infrastructure Trust (KIT) has taken key positions in.” Loh says KIT remains a “key growth engine” for Keppel, with over $6.1 billion in assets under management across 12 businesses and concession assets, underpinned by strong secular trends.

He believes that as a business trust, KIT appears to have strong DPU growth momentum over the next two to three years and notes that KIT’s 1HFY2022 results were strong with a 2.7% y-o-y DPU growth and 10% y-o-y ebitda increase.

One of KIT’s key acquisitions this year was a $900 million wind power acquisition in Europe. “With its cashflow visibility and 28 years of economic life, these assets appear to be very timely given the electricity travails that the region is suffering from as a result of the Russian-Ukraine war.” — Bryan Wu

Yangzijiang Shipbuilding
Price target:
DBS Group Research ‘buy’ $1.40

‘Major breakthrough’ into LNG carrier market

DBS Group Research analyst Ho Pei Hwa keeps her “buy” call on Yangzijiang Shipbuilding after the group obtained technical assistance and licence agreement with French naval engineering company, GTT, on Sept 8.

GTT is the global market leader in containment system technology for liquefied natural gas (LNG) carriers.

The license, says Ho, is probably the “most important breakthrough” that paves the way for Yangzijiang’s entry into the LNG carrier market.

Yangzijiang is the first non-state-owned enterprise (SOE) Chinese shipyard to obtain a licence from GTT. Including the group, there are currently 29 GTT-licensed shipyards globally for both commercial vessels and offshore platforms, the analyst notes. There are eight GTT-licensed yards in China alone, with Hudong Zhonghua being the most prominent Chinese LNG carrier builder with 30 units, representing about 11% of the market share.

On the licence award, Ho says it “showcases Yangzijiang’s technical capability to build large LNG carriers”. “The space is currently dominated by Korean shipbuilders, who have 80%– 90% of market share,” she adds.

Following the licensing, Ho now believes that the group is “well positioned” to secure its maiden LNG carrier order with this GTT accreditation and its promise of earlier delivery in 2025.

On the group itself, Ho sees Yangzijiang as a “pure proxy” to the shipbuilding upcycles and trends towards cleaner vessels. “We believe Yangzijiang is poised to re-rate from the current [estimated] 1x P/B and 7x FY2022 P/E towards our target multiples of 1.5x P/B and 12x P/E as the group delivers strong earnings growth, and the shipping market for dry bulk and tankers stage a rebound from 2HFY2022,” she writes.

“The recent GTT accreditation is a testament to Yangzijiang’s technical capability to build large LNG carriers, a big leap in its clean vessel transformation,” she adds while keeping a positive on the group’s prospects on riding the recovering shipping market.

“As we enter the peak season for the shipping market in 3Q, demand and freight rates are expected to improve sequentially. Moving into 2023, while rates for containerships may moderate, the outlook for dry bulkers, tankers and LNG carriers remain robust, despite the economic slowdown, as supply remains tight. This will continue to drive newbuild demand for shipyards,” says Ho.

Meanwhile, Yangzijiang’s yards are fully occupied through 2024, with an order book of over US$8 billion ($11.19 billion). The analyst notes that this is expected to propel an earnings CAGR of 15% in the next three years.

The earnings CAGR will be driven by revenue growth and margin expansion, as 80% of its order book comprises containership orders that command higher value and margins.

“We expect further uplift in its order book, boosted by potential orders for large LNG carriers,” continues Ho. The analyst has kept her target price unchanged at $1.40 and believes that Yangzijiang’s current share price weakness is “unwarranted”. Her current target price is based on a P/B of 1.5x, which implies an FY2022 P/E of 12x.

“The stock is undervalued, trading at 1x P/BV and 8x P/E against 13% ROE, 5% dividend yield, and three-year core EPS CAGR of 15%,” says Ho.

“The market seems to have overlooked Yangzijiang’s earnings growth potential, the structural uptrend of shipbuilding demand, and the segment’s transformation into a clean vessel space,” she adds.

However, she points out that Yangzijiang could suffer from currency fluctuations, as its revenue is mainly in US dollars. — Felicia Tan

Price target:
CGS-CIMB Research ‘hold’ 41 cents

Divestment seems ‘fair’

CGS-CIMB Research analysts Kenneth Tan and Ong Khang Chuen have kept their “hold” call on Kimly at an unchanged target price of 41 cents after the company announced the divestment of its confectionary business.

On Sept 9, Kimly entered into a business transfer agreement with Muginoho Global for the complete disposal of Rive Gauche Patisserie. Initially acquired by Kimly and Tonkichi for $1.82 million in July 2018, Rive Gauche is involved in the operation of French-inspired confectionery outlets. As at end of March, Kimly was operating seven Rive Gauche outlets.

The acquirer, Muginoho Global, is a wholly-owned subsidiary of Japanese F&B group Muginoho Holdings that owns brands such as Beard Papa’s and Cocofrans in its portfolio.

“We believe the disposal of Rive Gauche was largely due to a lack of realisable synergies with Kimly’s core coffee shop operations,” the analysts’ add.

The purchase consideration is $2.8 million, of which $1.8 million will be placed in escrow and disbursed to Kimly based on payment milestones. Rive Gauche recorded FY2021 ended September 2021 net profit of about $400,000 and 1HFY2022 net profit of about $100,000. The purchase consideration represents a one-off disposal gain of $2.6 million for Kimly upon completion of the transaction.

“Assuming flat h-o-h growth in net profit in 2HFY2022, the implied acquisition multiple is about 12x FY2022F P/E, which we deem fair,” say Tan and Ong. Kimly’s net cash remains healthy at $41 million at the end of 1HFY2022. While rising prices could spur some downtrading activities as consumers spend on more affordable food products, the analysts see limited near-term catalysts — given post-Covid-19 footfall normalisation and inflationary pressures weighing on margins.

CGS-CIMB’s target price is pegged to 15.4x 2023 P/E (0.5 standard deviations below its five-year historical mean) because of slowing growth prospects. The stock trades at about 14x 2023 P/E (about 1 standard deviation below its five-year historical mean). — Khairani Afifi

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