DBS Group Research analyst Ho Pei Hwa is convinced that Sembcorp Industries can sustain its higher power prices. With that, Ho has raised her FY2023 and FY2024 earnings estimate by 13%–14%. Based on a higher target valuation multiple of 15x on the revised FY2023 earnings, Ho has increased her target price on Sembcorp to $6.50 from $4.60 previously. The company has a December year-end.

The new target price is in line with regional peers’ average and implies a 26% upside potential. However, its target price of $6.50 could be tougher to reach as this is close to the counter’s all-time high, which was achieved in October 2007.

On the recent share price correction, Ho says: “This seems overdone, in our view, considering the relatively limited impact from TPCs, and still constructive power market dynamics in Singapore.”

See also: <a class='gtm_see_also_1_inread' style='text-decoration: underline;' href='/capital/brokers-calls/s-reits-not-yet-vogue-dbs-continues-favour-industrial-and-retail-subsectors?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>S-REITs not yet in vogue, DBS continues to favour industrial and retail subsectors</a>

Ho has a “buy” call on the stock as she sees the company as “the best renewable proxy listed on the SGX”.

Citi Investment Research has also kept its “buy” call and $5.98 target price on Sembcorp, despite EMA’s news.

In his note dated June 21, analyst Jame Osman says that Citi’s fundamental view on Sembcorp remains “intact” and that the share price drop also reflected the opportunity some investors have taken to take profit given the group’s strong year-to-date outperformance.

See also: <a class='gtm_see_also_2_inread' style='text-decoration: underline;' href='/capital/brokers-calls/uob-kay-hian-lifts-comfortdelgros-tp-161-upon-seeing-improving-rail-and-taxi?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>UOB Kay Hian lifts ComfortDelGro’s TP to $1.61 upon seeing improving rail and taxi ridership</a>

The analyst says the energy price cap will potentially limit the “supernormal” upside to spark spreads for power generation companies, particularly when input costs are lower compared to spot prices. “Considering that the Singapore power market has been transitioning to an ‘Open Electricity Market’ model over the past decade or so, the proposed price cap policy is admittedly surprising as price intervention has traditionally not been an approach, as it perceivably creates a crutch mentality among consumers,” says Osman.

Osman estimates that an 8% reduction in spot tariffs, assuming all other factors remain equal, would pose an estimated 13% downside risk to Citi’s FY2023 patmi forecast for Sembcorp and an estimated 15% downside to its target price from lower spot electricity sales. — Samantha Chiew and Bryan Wu

Stronger-than-expected sector upcycle

In her latest report, Lim also notes strong catalysts for Dyna-Mac, including its strong balance sheet and healthy net cash position, which she sees the company using to expand its existing yard space or acquire synergistic peers in a manner accretive to its earnings.

Lim also highlighted Dyna-Mac’s recent interview with The Edge Singapore, where CEO Lim Ah Cheng shared that the company’s management is open to increasing its dividend payout ratio to as high as 50% under the right conditions. The CEO also said that the company was open to share buybacks.

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>

“We note that Dyna-Mac has been amongst the top institutional net buy stocks recently, part of which can perhaps be attributed to an ongoing rotation from financials into industrials and capital goods names,” says Lim.

“Dyna-Mac stands out amongst its peers given its resilient growth profile and strong net cash position. Institutional funds tend to be stickier, which could support Dyna-Mac’s share price in the longer term,” she adds.

Lim says she has adjusted her model to reflect expectations that Dyna-Mac will secure bigger orders in terms of dollar value going forward. “We think this is achievable given the strong upcycle and the fact that Dyna-Mac had already secured firm contracts worth $270 million from repeat customers in May 2023, representing the total orders it secured in FY2022.”

“Dyna-Mac currently has a net order book of $609.1 million, with deliveries stretching into 2025,” she adds. “We maintain our key assumptions (cost of equity at 8.67% and terminal growth rate of 2%) and, using the discounted cash flow (DCF) model, derive a higher fair value estimate of 41.5 cents.”

“Despite its recent rally, Dyna-Mac is trading at an FY2023 and FY2024 P/E ratio of 19.4x and 15.2x, which are still around one-tenth and slightly more than half a standard deviation below its five-year historical average of 20.7x respectively. We think this still presents an opportunity for investors to gain exposure to the FPSO upcycle through a local small-cap proxy,” says Lim. — Felicia Tan

Defensive play amid market volatility and downturn

In addition, many of KIT’s assets are backed by long-term concession agreements, with more than 90% of its portfolio insulated against inflation due to cost pass-through mechanisms or strong price-setting capabilities.

“This translates to stable, recurring cash flows that are relatively unaffected by the ebbs and flows of the business cycle,” says Lim.

During the 1QFY2023 ended March 31, Lim notes that KIT reported strong results driven by strong performances across all three of its business segments. KIT’s ebitda rose by 40.5% y-o-y to $125.9 million, excluding one-off acquisition-related costs. The trust’s distributable income rose by 65.5% y-o-y to $73.9 million.

KIT is also an attractive proxy for the increase in infrastructure spending in Singapore and beyond. She notes that global infrastructure spending is projected to reach US$9 trillion ($12.07 trillion) by 2025. In her view, acquisitions remain a key growth driver for the trust, which is “well supported” by its experienced management team and ability to tap into the Keppel ecosystem.

In the FY2022 ended Dec 31, 2022, KIT made several “impressive” acquisitions, adding Aramco Gas Pipelines Company, EMK, and wind farm assets from Germany, Norway, and Sweden to its portfolio alongside three bolt-on acquisitions from Ixom. The acquisitions resulted in an increase in portfolio assets under management (AUM) to $6 billion as at Dec 31, 2022, 33.3% higher than the AUM of $4.5 billion as at Dec 31, 2021.

According to the independent third-party valuer engaged by KIT to conduct an inaugural revaluation of its portfolio, KIT’s enlarged portfolio AUM stood at $7.3 billion as at Dec 31, 2022.

“While KIT is unable to book the revalued figure under the Singapore Financial Reporting Standards (SFRS), the exercise aims to provide more relevant and transparent asset values, which we think could be beneficial for when KIT taps into capital markets in the long run,” Lim notes.

The analyst is positive about KIT’s growth profile as its assets “provide exposure to long-term secular investment themes”. “Most notably, KIT entered the renewable energy space with its maiden foray into Europe in FY2022 and aims to increase its investments in renewable energy from 10% to 25% of AUM by 2030. Through its subsidiary, City Energy, KIT is also growing the business of electric vehicle (EV) charging infrastructure and forging partnerships to explore the development of a long-term sustainable supply chain of green hydrogen,” she writes.

“The continued improvement of KIT’s environmental, social and governance (ESG) credibility should bode well for its share price in the long run, given the policy support and increasing interest in sustainable investing,” she adds.

Though KIT’s ESG rating was downgraded in August 2022 due to a lack of disclosure on its employee turnover rate and policies on executive compensation and employee grievance mechanisms, Lim points out that the trust has “robust initiatives” to reduce its carbon emissions.

“While its generation portfolio is more carbon intensive than peers due to its heavy reliance on natural gas, the company plans to halve emissions by 2030 (with 2020 as the baseline) and to achieve carbon neutrality by 2050. Additionally, KIT has plans to increase its investment in renewable energy by [around] 1.26 GW in the next five years,” she says.

Lim likes KIT as it is a defensive play amid heightened market volatility and a potential economic downturn. The trust will also benefit from the secular tailwind of rising infrastructure spending, providing further support. — Felicia Tan

The group is also deemed as a defensive hedge against a potential recession.

While the analysts have kept their target price unchanged at $1.89, they see Sheng Siong’s shares as attractive for re-entry amid the recent selloff. The target price is based on a P/E multiple of 21x on Sheng Siong’s estimated earnings for FY2023, at –1 standard deviation (s.d.) of the group’s average pre-Covid-19 P/E multiple.

As at the time of the analysts’ report on June 19, shares in Sheng Siong closed at $1.63 on June 16. However, shares in the group have since risen to $1.69 as at 1.13pm on June 20.

That said, there are still several positives for the group, which is the third-largest supermarket chain in Singapore.

The group has successfully established itself as the go-to value grocery chain as its scale enables it to benefit from significant economies of scale in terms of procurement while its suburban HDB footprint, which has low rental rates, puts it in a good spot to supply price-competitive offerings.

Sheng Siong’s new stores are also well-positioned to support steady revenue and earnings growth. The group has opened one new store year to date and is expected to open at least two new stores by the end of the year. Six HDB-located stores are up for bidding with tender completion by the end of the year.

“Based on our assessment, we believe these stores offer attractive growth opportunities. On average, we estimate that each store can deliver $14 million and $1.3 million to top and bottom-line respectively upon full ramp up,” write Sim and Chee.

While the doubling of utility costs is expected to put margin pressures on Sheng Siong in FY2023 ending December, easing natural gas prices should mean that the group’s electricity costs should normalise by the end of the year when its electricity contract is up for renewal.

“Assuming natural gas prices stay at current levels, we estimated that Sheng Siong can enjoy [around] $8 million [in] cost savings in FY2024,” the analysts note.

“Overall, with the above estimates in mind, we believe our forecast for FY2024 which assumes $9 million bottom-line growth in FY2024 is an achievable one,” they add. — Felicia Tan

Following the share price surge, which gained 31.6% after SIA’s full-year results, Chen notes that SIA’s valuation is “very lofty” with its FY2024 P/B of 1.58x and 2.8 standard deviations (s.d.) above its historical mean. At current price levels, SIA’s valuation now matches its historical peak just before the Global Financial Crisis (GFC) and is unlikely to be sustainable in the long run given Chen’s core ROE estimates of 12.1%, 8.5% and 7.0% for the FY2024, FY2025 and FY2026 respectively. His new target price is “favourably valued” based on an FY2024 P/B of 1.44x, 2 s.d. above SIA’s historical mean.

On the airline’s share price gain, Chen notes that there were two legs. The first took place between May 17 to 22 after SIA’s FY2023 results and was driven by the surprise of a strong dividend. The second leg of uprun began on June 1, which coincided with the sharp share price decline of the three major Chinese Airlines.

In FY2024, Chen expects SIA’s earnings to moderate on a y-o-y basis driven by moderating passenger yields, lower cargo yields and weak cargo volume. However, given the airline’s strong passenger operation data in May and noting the slower-than-expected catch-up by some of its regional competitors, the analyst now expects SIA’s pax load factor and pax yields to stay upbeat for longer.

In 1QFY2024, Chen expects the sharp decline in jet fuel prices (19% q-o-q) to support SIA’s core earnings, despite the moderation of passenger and cargo yields. “Although the benefits of fuel cost savings are likely to be passed down to end-customers in the long run driven by airlines’ competitions, airlines should be able to largely retain the benefits of fuel cost savings in the short-term horizon since their near-term airfare revenue would have been somewhat secured by forward-booking of air tickets.” The analyst is forecasting SIA’s 1QFY2024 net profit to come in at around $600 million to $700 million, compared with its 4QFY2023 net profit of $602 million and 1QFY2023 net profit of $370 million.

In line with his expectations of upbeat passenger load factors and yields staying upbeat for longer, Chen has raised his net profit forecasts for FY2024, FY2025 and FY2026 by 10%, 31% and 10% to $2.87 billion, $1.24 billion and $1.04 billion respectively.

“Our FY2024 net profit forecast includes a one-off accounting gain of $1.11 billion from the planned Air India-Vistara merger, excluding which SIA’s FY2024 earnings would have been $1.76 billion,” he says. — Felicia Tan

Brokers' Digest: Sembcorp Industries, Dyna-Mac Holdings, Keppel Infrastructure Trust, Sheng Siong Group, SIA

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Brokers' Digest: Sembcorp Industries, Dyna-Mac Holdings, Keppel Infrastructure Trust, Sheng Siong Group, SIA

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