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Brokers’ Digest: Sea, ST Engineering, MINT, KIT, Kim Heng, Grab, DHLT, Seatrium

The Edge Singapore
The Edge Singapore • 19 min read
Brokers’ Digest: Sea, ST Engineering, MINT, KIT, Kim Heng, Grab, DHLT, Seatrium
See what the analysts have to say this week. Photo: Bloomberg
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Price target:
Maybank Securities ‘buy’ US$90

Entering the post post-Covid-19 phase

Maybank Securities analyst Hussaini Saifee has re-initiated coverage on Sea with a “buy” call and a sum-of-the-parts (SOTP)-based target price of US$90 ($121.72).

“We see Sea entering the ‘post post-Covid phase’ from a position of strength (multiple competitive moats, scale advantage and financial muscle) to tap the 15% CAGR in the Asean e-commerce and fintech space,” the analyst writes in his June 18 report.

For Sea’s e-commerce segment, Saifee sees a few factors driving a 15% gross merchandise value (GMV) in Asean. One of these factors is a “healthy” 8% growth in Asean retail sales, while e-commerce penetration is just half that of the US and China. Another factor is “rational competition”; the third is the limited risk of “disruptive” entrants.

Furthermore, Sea’s e-commerce platform, Shopee, has enough scale, logistics, and a live streaming competitive moat to place it in a “position of strength” to maintain its leading market share.

See also: Grab Holdings ‘undervalued’ despite multiple growth catalysts and levers: Morningstar

“[Over] 50% of [its] GMV is supported by its own logistics, which allows for superior unit economics and customer experience (short delivery time, return policy),” notes Saifee. “Case studies suggest that having their own logistics had been the key source of a differentiator for players like Amazon and Nasdaq-listed Mercado Libre. We estimate Sea’s GMV to expand at 15% CAGR over FY2023 [to] FY2026.”

Sea’s gaming segment is also poised to see growth. Following its post-Covid reset, revenues for Garena have “turned the corner” with three consecutive quarters of improvements.

“We find management’s strategy to be credible and see the potential for a sustained Free Fire franchise given its i) dominant position in the less crowded emerging markets (EMs); ii) budget-conscious EM gamers; and iii) frequent new content and feature upgrades,” he adds.

See also: RHB maintains ‘buy’ call on Prime US REIT with unchanged TP

The analyst estimates Garena’s bookings to grow by 12% in FY2024 and at a 2% CAGR over FY2024 to FY2026 with stable margins.

As a group, Saifee has pegged Sea’s revenues to expand at a 16% CAGR over FY2023 to FY2026. He also expects the group to report a 24% ebitda CAGR over the same period thanks to a “healthy mix” of scale benefits and steady monetisation improvement.

“Asean market seller take-rates at [around] 5%–7% is 30%–50% below other markets (ex-China). This creates room for improvement, although we note that the near-term focus remains on deepening penetration and boosting GMV growth,” says the analyst.

“We estimate take rates to rise by 80 basis points (bps) in FY2024–FY2025. However, we see room for sales and marketing intensity to fall in light of improving competition and rolling back of elevated live-streaming spending,” he adds.

Based on Sea’s last-traded share price of US$74.42 as at Saifee’s report, the stock is trading at 0.4 times EV/GMV and four times EV/Sales for FY2024 with valuations at a 25%–30% discount to Mercado Libre. — Felicia Tan

Singapore Technologies Engineering
Price target:
Maybank Securities ‘buy’ $4.30

Ammunition boost

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

Maybank Securities analyst Krishna Guha kept his “buy” call and target price of $4.30 for Singapore Technologies Engineering S63 -

(ST Engineering) following news that it won orders worth more than $100 million to supply ammunition to unnamed European customers.

The contracts are for the North Atlantic Treaty Organisation (Nato)-standard 155mm artillery shells and orders for 40mm grenades. “The new order wins will further increase contract wins since the start of the year by the defence and public security segment by more than 6%,” notes Guha in his June 19 report. As of 1QFY2024 ended March, the company’s order book was $27.7 billion.

The company has been making inroads in its other businesses. Earlier this month, ST Engineering held the groundbreaking for its third aircraft maintenance hangar at its Pensacola, Florida, maintenance, repair and overhaul (MRO) complex.

“The new hangar will increase ST Engineering’s operational capacity in Pensacola by a third. Meanwhile, TransCore (under the urban Solutions and Satcom business) has been selected by the Missouri Department of Transportation (MoDOT) to deploy its traffic management system in St. Louis and Springfield.”

He adds: “This builds upon TransCore’s decades-long partnership with MoDOT. Earlier in 1QFY2024, the group had guided for 10% y-o-y revenue growth for TransCore.”

“The new order wins and growing operational capacity further add to the visibility of mid-teens earnings growth. Coupled with 5.3% dividend yield, we think the yield growth thesis is unchanged for the stock,” says Guha.

From his perspective, upside potential will come from several sources: Higher-than-expected passenger-to-freighter (PTF) conversions by airlines, better-than-expected margins if aircraft original equipment manufacturers (OEMs) slow down their aftermarket expansion, and a broader recovery in marine orders driven by a rebound in demand for oilfield services vessels and specialised ship repair. Additional positive factors include new orders from US defence and infrastructure projects, an area that ST Engineering has been actively pursuing, where large contracts have been few and far between.

Conversely, downside risks include the ongoing rise in inflation, which could see a supply crunch in aircraft materials and equipment, structural threat from aircraft OEMs like Boeing and Airbus becoming more aggressive in expanding in the aftermarket-MRO space, and a major disruption in airborne cargo growth due to the aftermath of a US-China trade war could hurt aircraft PTF conversion demand. — Douglas Toh

Mapletree Industrial Trust
Price target:
UOB Kay Hian ‘buy’ $2.93

Steady progress

UOB Kay Hian (UOBKH) analyst Jonathan Koh has maintained his “buy” call on Mapletree Industrial Trust ME8U -

(MINT) as he sees the REIT manager’s “steady progress” in strengthening its data centre portfolio.

MINT has secured a replacement tenant from the healthcare services industry for its Brentwood data centre. The replacement brings the REIT’s occupancy for its US data centres back to 90% after easing 3.7 percentage points q-o-q to 86.2% in 4QFY2024 ended March. The vacancy drop was due to AT&T’s decision not to renew its leases for two of MINT’s data centres at Pewaukee, Wisconsin and Brentwood.

The new lease is for 30 years and provides a rental escalation of 2% yearly.

The REIT is also working to find a replacement tenant for its San Diego data centre for when AT&T’s lease expires in December 2024.

The average rental rate of the North American portfolio increased 3.3% q-o-q to US$2.51 ($3.40) psf/month in 4QFY2024 due to a short-term extension for 12 months by AT&T for the same data centre, notes Koh.

Should there be no replacement tenant when AT&T’s lease expires by then, Koh expects MINT to divest the data centre. After all, potential buyers could be “plentiful” as San Diego is a vibrant biotech-life science market, he writes in his June 14 report.

In Singapore, MINT will also need to backfill its vacant space at Mapletree Hi-Tech Park. At the moment, Berlin-based manufacturer Biotronik is the space’s anchor tenant. It accounts for 29% of its net lettable area (NLA).

Mapletree Hi-Tech Park’s committed occupancy improved 3.1 percentage points q-o-q to 51.9% in 4QFY2024

Koh writes: “Management continues to source for potential tenants in the advanced manufacturing, information and communication and automation and robotics industries, especially those requiring large and contiguous floor plates. It also targets companies engaged in research and development (R&D), testing and engineering services.”

Other key points Koh noted are MINT’s intention to diversify into established data centre markets in Asia Pacific, namely Hong Kong, Japan and South Korea. The REIT is also looking to diversify into Europe, namely the cities of London, Dublin, Frankfurt, Amsterdam and Paris, to reduce its concentration risk.

The analyst adds: “Management plans to increase scale and deepen its presence in Japan. Data centres in Japan provide positive yield spread so funding in Japanese yen (JPY) would reduce its cost of debt.”

The REIT could also tap on its sponsor pipeline. Its sponsor, Mapletree Investments, acquired a 43,056 sq ft site at Fanling in Hong Kong’s New Territories district for HK$813 million ($139 million) through a land tender in 2021. Mapletree Investments subsequently developed a data centre with a gross floor area (GFA) of 216,785 sq ft at the site, which is just 6km away from the Luohu district in Shenzhen, China.

“Hong Kong has reliable telecommunications infrastructure and power supply. The data centre at Fanling could serve cloud service providers based in Shenzhen and is part of its sponsor pipeline for the Asia Pacific region,” Koh points out.

Despite his “buy” call, the analyst has trimmed his FY2026 distribution per unit (DPU) forecast by 3% to factor in Mapletree Rosewood Data Centre Trust’s (MRODCT) interest rate swaps that expire in January 2025. The expiring interest rate swaps would be replaced by interest rate swaps at higher interest rates. When that happens, MRODCT’s all-in cost of debt should increase substantially by 2.5 ppt to 3 ppt to 5%.

As a result, he has a lower target price of $2.93 from $3.02.

On May 30, MINT’s manager announced that CEO Tham Kuo Wei would step down from his position on July 22. Current CFO Ler Lily will be the manager’s new CEO.

At the same time, Khoo Geng Foong, the current head of treasury at Mapletree Logistics Trust M44U -

(MLT) will take over as MINT manager’s new CFO.

Ler was the CFO since November 2011 and has played an “instrumental role” in supporting MINT’s expansion into data centres in North America and Japan and development projects in Singapore, Koh notes. — Douglas Toh

Keppel Infrastructure Trust
Price target:
Beansprout ‘buy’ 59 cents

Resilient assets, attractive yield

Beansprout, an investment advisory platform, has initiated a “buy” call on Keppel Infrastructure Trust A7RU -

(KIT). In her report dated June 13, analyst Peggy Mak likes the trust for its resilient assets that support its “attractive” yield.

“KIT invests in infrastructure assets that provide stable cashflows in developed markets. It offers an attractive distribution yield of 8.5% for FY2024,” Mak writes.

Within its portfolio, about 65% of KIT’s revenue is linked to the consumer price index (CPI) with cost pass-through. Its assets under management (AUM) reached $8.7 billion as at the end of March this year, she adds.

Mak also notes that KIT’s distribution per unit (DPU) is expected to rise in the next two years, thanks to the resumption of distribution from the Keppel Merlimau Cogen Plant. Contributions from the 45% stake in a solar portfolio from German renewable energy company Enpal and contributions from Ventura Bus operations in Victoria, Australia, from 2HFY2024, are also expected to lift KIT’s DPU.

KIT announced on June 3 that it had completed the acquisition of the 97.68% stake in the transport company. This excludes the one-off dividend of 2.33 cents KIT had paid out in FY2023 when its City Energy and Ixom assets returned $131 million of cash to unitholders.

Over the last three years, however, KIT’s DPU has grown at a CAGR of 18.5%. Drivers to DPU growth were cash flows from KIT’s newly-acquired assets and stronger earnings from its existing assets, says Mak.

At present, the analyst sees that the trust is unlikely to conduct an equity fundraising (EFR).

For its acquisition of Ventura Motors, KIT financed the acquisition with a 15-month bridging loan.

“[KIT] has the option to fund this with new equity since unitholders have approved to raise up to $500 million through private placements and/or non-renounceable preferential offerings,” says Mak.

“But at the current share price, we estimate equity yields of 8.5% for FY2024 and 8.9% for FY2025. This makes equity fundraising less compelling than debt,” she adds. KIT’s net gearing as at the end of March stood at 41.1%. Its total debt to total assets stood at 48.6%, well below the bank covenants.

Meanwhile, the average cost of debt inched up by 0.12 ppt q-o-q to 4.37% in the 1QFY2024. This may increase further as some lower-cost hedges roll off, Mak points out. At her target price, KIT’s distribution yield is at 6.6% for FY2024 and 6.9% for FY2025.

In her view, interest rates and a strong Singapore dollar (SGD) are key risks. “If interest rates stay high, higher cost of debt could lower cash flows derived from the assets. Higher rates will also lift required returns from new investments. This limits the scope for new investments. A strong SGD versus the Australian dollar (AUD), Euro and USD would also lower cash flow received from overseas entities,” she writes. — Felicia Tan

Kim Heng Offshore & Marine Holdings
Price target:
SAC Capital ‘unrated’

Favourable valuation

SAC Capital analysts June Yap and Matthias Chan highlight Kim Heng 5G2 -

’s strong earnings and recent wins in its June 13 unrated report.

Kim Heng is an established player in providing engineering, procurement, construction, and installation support for the offshore renewable, marine, and oil and gas industries. It has over 50 years of experience, operating primarily in Singapore with two shipyards and serving customers in 25 countries.

The analysts note that Kim Heng has experienced a sharp increase in its FY2023 ended December 2023 revenue, improving by 26.7 y-o-y to $101.2 million following the retrofitting and upgrading of vessels from offshore support services.

They add that marine and offshore-related services formed the group’s largest contributor, representing 40.5% of its total revenue. Similarly, gross net profit increased by 18.4% y-o-y, coming in at $32.8 million.

However, Yap and Chan note that Kim Heng’s profit dropped from $8.6 million to $2.3 million, resulting from inflationary pressures, higher tax expenses, and increasing administrative expenses and finance costs.

“On more recent wins, the group’s 50%-owned indirect subsidiary, Thaitan International, secured a contract for installing pipe conduits using horizontal directional drilling for optical submarine installation from Alcatel Submarine Networks,” say the analysts.

This win comes in addition to the group securing a shipbuilding contract valued at $10.6 million from TIPC Marine Corporation and partnering with Dyna-Mac to capitalise on opportunities in the floating production, storage and offloading (FPSO) module fabrication sector.

The analysts add that Kim Heng is poised to pivot into renewables following its recent agreement signing between Adira Renewables, the wholly-owned subsidiary of Kim Heng, in partnership with Soiltech Engineering Korea and an established global offshore windfarm developer.

Additionally, this strong contract win momentum is sustained following the group’s win of an award of US$7.8 million ($10.54 million) modification and shipbuilding contract from an established construction company in Taiwan about offshore renewable energy construction projects.

Kim Heng’s current price-to-book (P/B) stands at a multiple of one, which trades favourably compared to its peers trading closer to 2.1 times and Catalist’s current P/B of 3.1 times. — Ashley Lo

Grab Holdings
Price target:
Maybank Securities ‘hold’ US$4

Lower consumer base and increased supply pressure

Analyst Hussaini Saifee of Maybank Securities is downgrading his call on Grab Holdings from “buy” to “hold”, trimming its target price to US$4.00 ($5.41) from US$4.50 previously amid “mild growth” headwinds and monetisation pausing.

Saifee attributes his downgrade to the high take rates against Grab’s global peers. The rising cost and inflationary pressures weighing on consumers’ discretionary spending and the non-competitive take-home earnings of Grab’s drivers and partners are also other factors.

In his June 18 report, the analyst notes that the company’s out-for-delivery (OFD) take rates of 22% were “already on the higher side” of more evolved markets such as those in the US and China, while its ride-hailing services were in line. On this, the analyst writes: “This suggests a potential capping of the rates.”

He continues: “More importantly, we find Grab services could face pricing/commission pressure both from the consumers as well as driver-merchant partners.”

Based on a survey conducted by the brokerage, 65% of Grab’s consumers intend to lower their usage in response to price increases, while channel checks on driver-partner unit economic analysis have pointed to “relative” driver earnings pressure, which exerts supply side pressure.

Meanwhile, Saifee sees a “slight risk” of increased competitive intensity from the “better capitalised” Gojek in Indonesia. “Our survey results reflect a 20% to 30% higher preference for Gojek over Grab versus [a] flat-12% higher market share of Grab over Gojek,” he notes.

The entry of the electronic vehicle (EV) ride-hailing service platform, XanhSM, into Vietnam and Indonesia could also “prompt competitive reactions from the incumbent operators”, with Saifee’s survey check suggesting consumer preference for XanhSM is “already ahead” in Vietnam, relative to the new player’s market share.

Saifee writes: “Grab’s FY2024 revenue growth guidance of 14% to 17% is conservative and we see room for upward revision. Underpenetrated Asean markets, coupled with Grab’s material competitive moats, leave room for sustained high growth despite competitive skirmishes.”

The analyst adds that on the valuation front, Grab is in line with its global peers, offering a similar CAGR.

Upside factors noted by him include softer-than-expected competition from the entry of XanhSM in Vietnam and Indonesia, a better macroeconomy allowing for higher discretionary spending, limited driver-supply pressure leading to a continuous reduction in incentives, better-than-expected ecosystem benefits within the financial services segment, and lastly, an easing to monetary policy by the US Federal Reserve.

Conversely, downside risks include fierce competition from XanhSM in Vietnam and Indonesia, increased incentives for drivers from a tightening supply, a drop in on-demand usage frequency owing to price increases and higher inflation, and an elevated stake divestment by Softbank Group leading to excess stock liquidity.

Further to his report, Saifee notes that his “hold” call goes against the Street’s “buy”, “outperform” and “overweight” calls. Only Autonomous Research has an “underperform” call while KGI Securities has a “neutral” call on the counter. — Douglas Toh

Daiwa House Logistics Trust
Price target:
UOB Kay Hian ‘unrated’

Growth and stability

UOB Kay Hian (UOBKH) analyst Jonathan Koh highlights Daiwa House Logistics Trust DHLU -

DHLU 0.88% Remove Stock’s (DHLT) growth and stability in an unrated report.

In his June 19 report, Koh notes that DHLT has expanded its portfolio to 17 high-quality logistics properties with a net lettable area (NLA) of 4.9 million sqft. Its portfolio of logistics properties has an average age of only 6.3 years.

Out of the 17, DHLT has seven logistics properties located in Greater Tokyo, which account for 42% of its portfolio valuation, with a long weighted average lease expiry (WALE) of 7.4 years weighted by gross rental income (GRI). Freehold properties accounted for 60% of its portfolio valuation, while the average leasehold land tenure is 39.3 years.

All of DHLT’s multi-tenanted logistics properties, which accounted for 77% of its portfolio valuation, are built to modern specifications. This is in stark contrast to the broader market in Japan, where the proportion of modern logistics facilities is still small at 15%, Koh points out.

Growth is supported by third-party logistics and e-commerce, which accounted for 75.7% and 8.1% of DHLT’s GRI respectively. There is huge room for growth as e-commerce penetration remains low at 9% in Japan, he further highlights.

The trust is also backed by a strong and supportive sponsor — Daiwa House Industry (DHI) is one of the largest construction and real estate development companies in Japan. It has developed 231 single-tenanted and 81 multi-tenanted logistics properties in the country, managing real estate funds with an aggregate AUM (assets under management) of $19.6 billion.

By tapping its sponsor pipeline, DHLT is expanding in Japan and Southeast Asia. It made its maiden foray overseas by acquiring cold storage facility D Project Tan Duc 2 in Vietnam for VND483 billion ($25,631).

Koh highlights that DLHT’s NPI grew 4.6% y-o-y in Japanese yen terms in 1QFY2024 due to portfolio occupancy improving 1.4 percentage points y-o-y to 100%, contributions from newly acquired DPL Ibaraki Yuki, as well as the absence of repair expenses due to damages caused by an earthquake in 1QFY2023.

DHLT also had a long WALE of 5.9 years weighted by GRI as at March, while built-to-suit property D Project Kuki S was renewed for 10 years in April.

The trust’s portfolio was fully occupied as of March. That said, occupancy slipped 3.4 percentage points to 96.6% in April due to the expiry of two leases at DPL Kawasaki Yako and DPL Koriyama, which took up a total NLA of 167,670 sq ft. DLHT is in advanced negotiations with a potential replacement tenant, a 3PL provider, to backfill the vacant space at DPL Kawasaki Yako, Koh notes.

He adds that DHLT is currently trading at an attractive 2024 distribution yield of 9% and P/NAV of 0.82 times. — Khairani Afifi Noordin

Price targets:
Citi Research ‘buy’ $1.96
DBS Group Research ‘buy’ $3

New round of ‘Car Wash’

Citi Research analyst Luis Hilado has cut his adjusted profit forecasts for Seatrium after the group revealed new investigations into Operation Car Wash.

On June 15, Seatrium announced that the Monetary Authority of Singapore (MAS) and the Commercial Affairs Department (CAD) are conducting a joint investigation into the offences potentially committed by the group and its officers in connection with Operation Car Wash.

This is in addition to Seatrium already providing for the net penalty of US$57 million ($76 million) for a deferred prosecution agreement (DPA)

In his June 18 report, Hilado lowered his forecasts by 4%, 26% and 18% over his estimates for FY2024, FY2025 and FY2026 respectively. “This differs our expectations of over $1 billion in ebitda to FY2026 (versus FY2025 previously),” he writes.

On March 15, Seatrium announced that it aims to grow its ebitda by four times to over $1 billion by FY2028. The group also targets to deliver a return on equity (ROE) of over 8% by then.

At the same time, Hilado has lowered his revenue forecasts for FY2025 and FY2026 by 2% and 2% respectively. This comes as the analyst estimates that the recent contract wins from Petrobras and TenneT are likely to ramp to peak revenue levels into the mid to later parts of the five- to seven-year contract tenor.

Hilado has also “tempered” his assumptions for any margin improvements for FY2024 onwards to reflect the delay in the positive impact of the new contracts.

“Even without further penalty, we believe the Bloomberg consensus forecasts on reported profit have yet to factor fully for US$68million [or] $92 million in arbitration-related interest charges,” he writes.

Following the lowered profit forecasts, Hilado has also lowered his target price estimate to $1.96 from $2.16 as he expects Seatrium’s shares to trade at a further discount due to the potential risk of further financial penalties. Hilado’s target price is based on 1 times P/B or at a 20% discount to Seatrium’s peers.

The analyst has, however, retained his “buy” call. Hilado upgraded Seatrium to “buy” on May 27 after the group secured $11 billion worth of contracts from Petrobras, Brazil’s national oil company.

In a June 18 update, the team at DBS Group Research notes that shares in Seatrium are likely to react negatively to the news of the joint investigation. It sees near-term support for Seatrium’s shares at $1.58. DBS has kept its “buy” call and target price of $3. — Felicia Tan

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