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Broker's Digest: SembMarine, Dairy Farm International, Hongkong Land, Rex International

The Edge Singapore
The Edge Singapore • 12 min read
Broker's Digest: SembMarine, Dairy Farm International, Hongkong Land, Rex International
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Sembcorp Marine
Price target:
CGS-CIMB “hold” 9 cents
DBS Group Research “hold” 9 cents
UOB Kay Hian “buy” 11 cents

Turnaround in sight

The worst is probably over for Sembcorp Marine (SembMarine) as it reported deeper losses for the FY2021 ended December 2021, analysts say.

On Feb 25, SembMarine reported a deeper net loss of $523.3 million for the 2HFY2021, 34.1% higher than the net loss of $390.4 million in the 2HFY2020.

The half-year results widened FY2021’s loss to $1.17 billion from a loss of $582.5 million in FY2020.

CGS-CIMB Research analysts Lim Siew Khee and Isabella Tan, who were expecting a loss of $625 million for 2HFY2021, have maintained their “hold” recommendation with an unchanged target price of 9 cents.

See also: UOB Kay Hian and CGS-CIMB analysts stay put on IHH Healthcare

The unchanged target price pegs SembMarine at P/BV of 0.8x for 2022. The valuation represents a 20% discount to its three-year historical average of 1x.

In their Feb 26 report, Lim and Tan say that this will probably be the last round of major provisions as the gradual reopening of borders means an easing of labour shortage in Singapore. This will, in turn, reduce the cost of bringing in new labour.

Therefore, management does not expect further significant provisions as the current manpower level is sufficient to complete existing projects. The easing of labour costs may be a key reason behind SembMarine’s guidance of a “significantly better financial performance for FY2022,” write the analysts.

See also: CGS-CIMB reiterates Boustead Singapore at 'add' and $1.40

In the current FY2022, SembMarine’s prospects look to be shaping up. Year to date, the company has delivered three out of 12 projects scheduled for the year. It is also on track to conclude negotiations on project completion terms with its key customers and is likely to see stronger revenue contribution in 1HFY2022, note the analysts.

“Management sounded positive about some contract wins by 1HFY2022 with contract size on average ranging from $500 million to $1 billion. Some of the contracts underway include the EPC contract for US$2 billion ($2.72 billion) Dorado FPSO and Antarctic support vessel for the Brazilian Navy,” they add. “Rising oil prices [as at Feb 26] could provide an impetus for deferred expenditure by oil companies.”

Lim and Tan see scope “for narrower discount on consistent order win momentum, earnings recovery or clear strategy from enlarged entity with Keppel O&M,” adding that the indicative order book for both yards could reach $6.4 billion.

DBS Group Research’s Ho Pei Hwa has also kept her “hold” call, but with a slightly higher target price of 9 cents from 8 cents due, which is pegged to 0.7x P/BV or 1.5 standard deviation below its mean valuation since 2014.

“We could raise SembMarine’s target valuation multiple on more signs of a firm recovery in orders, operational improvement, and a successful yard merger with synergy creation,” writes Ho in her Feb 28 note.

As at end 2021, SembMarine reported a net order book of $1.1 billion, of which Ho estimates that it secured some $800 million in new orders in 2021.

While the figure is an improvement from the zero orders in 2020, Ho notes that the figure “remains a far cry from [SembMarine’s] breakeven revenue of $2 billion”. As such, order wins are critical for the company, and therefore, to Ho, the pick-up in new orders in the FY2021 are “positive”.

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

To this end “rising oil prices bode well for capex increase by oil majors, leading to potentially stronger order flows for production facilities. Growing offshore renewable orders is a strategic move for long-term growth”.

The next key event for SembMarine, says Ho, is the proposed merger between the company and Keppel O&M, which is pending since June 2021.

The merger is “a long-term positive for SembMarine, creating revenue and cost synergies. However, in the near term, some uncertainties hover around the valuation of yards and potential integration hiccups,” writes Ho.

UOB Kay Hian analyst Adrian Loh appears to be the most bullish, keeping his “buy” call and 11 cents target price, which is pegged to 0.88x estimated FY2022 book value of 13 cents.

With its $1.5 billion rights issue completed, and Temasek’s mandatory general offer at 8 cents per share having lapsed in early-November 2021, we believe that much of the corporate-level risk has dissipated, adds Loh in his Feb 28 note.

Loh has also raised his FY2022 and FY2023 earnings estimates as he expects SembMarine to see breakeven. To him, the key highlights from the company’s FY2021 results were: the promise that 2022 would be “significantly better” than 2021, as well as the solving of the labour issues from the 4QFY2021.

Following the $1.5 billion raised, Loh notes that SembMarine is now in an improved financial position. The proceeds “can be used more ably to execute and complete the projects as well as for working capital needs for new orders and projects,” he says.

Catalysts include new orders for rigs, offshore renewable installations or fabrication works as well as repairs and upgrades work for cruise ships and other commercial vessels. A merger or joint venture with other shipyards may also help. — Felicia Tan

Dairy Farm International
Price target:
RHB Group Research “neutral” US$2.88
CGS-CIMB “hold” US$2.90
DBS Group Research “hold” US$3.01
UOB Kay Hian “buy” US$3.65

Downgrades following FY2021 earnings drop

Dairy Farm International is suffering from a slew of downgrades and price target cuts following its FY2021 ended December 2021 reports card which shows a decline in earnings amid the challenging outlook.

In a March 7 report, RHB Group Research has downgraded Dairy Farm International to “neutral” from “buy” with a lower target price of US$2.88 ($3.93) from US$4.42 previously.

“Dairy Farm’s outlook is now challenging and uncertain in view of the threat of the new Covid-19 variant and the stringent measures taken by governments in its key North Asia markets, which accounted for 75% of FY2021 total sales,” write RHB’s analysts in a team report.

“Notwithstanding our expectation of a slow earnings recovery to the pre-pandemic base level, we believe its current valuation has priced in most of the weakness — which justifies our stock rating,” adds RHB.

On March 3, Dairy Farm, part of the Hong Kong-based Jardine conglomerate, reported earnings of US$103 million for FY2021, down two thirds over FY2020.

Revenue for FY2021 was down 12% to US$9.015 billion. If total sales of its joint ventures and associates are added, revenue would have been US$27.7 billion, down 2% over FY2020.

Yonghui, Dairy Farm’s associate company in China, accounted for some US$90 million of the losses.

In line with lower earnings, the company will cut its dividend, proposing a final dividend of 6.5 US cents, bringing the full-year payout to 9.5 US cents.

Nevertheless, RHB notes that Dairy Farm’s management is confident that it will be able to capitalise on the recovery in consumer spending once conditions normalise, thanks to the various strategies it put in place.

In addition, Dairy Farm is pushing ahead with the development of its house brands such as Meadows and Yu Pin King.

For now, RHB has cut earnings estimates for FY2022 and FY2023 by 24%–33% to account for the lower consensus estimates for Yonghui, and more realistic assumptions — particularly for the North Asia markets. The new discounted cash flow target price is US$2.88 or 18x FY2022 earnings, which is near Dairy Farm’s five-year mean.

CGS-CIMB’s Ong Khang Chuen, meanwhile, has cut his target price to US$2.90 from US$3.50. Similarly, Ong, who has kept his “hold” call, notes that Dairy Farm is on a “bumpy road to recovery”

He sees upside risks with more clarity on Hong Kong reopening its borders with China, which will bring back more shoppers from China. On the other hand, downside risks include Dairy Farm incurring higher than expected losses on its e-commerce ventures.

DBS Group Research’s Woon Bing Yong has also cut his target price on the stock. From US$3.96 previously, Woon has kept his call on this stock a “hold” but with a reduced target price of US$3.01.

He notes that Dairy Farm is trying to transform but the results will not be seen overnight, and meanwhile, the pandemic may have changed consumption patterns.

“In our view, Dairy Farm’s price investment strategy may lead to a period of lower margins and will need time to bear fruit as cost structure changes are implemented,” writes Woon in his March 7 report.

Not all analysts turned negative though. “The key unknown is Hong Kong which could remain a millstone around DFI’s neck in the medium term, although grocery and retail may see a near-term sales bump from panic buying,” notes UOB Kay Hian in a March 7 report, where its “buy” call was maintained.

“Nevertheless, we remain constructive on DFI and believe that we are past its trough earnings,” adds UOB Kay Hian, which has a higher target price of US$3.65 from US$3.60 previously. — The Edge Singapore

Hongkong Land
Price target:
CGS-CIMB “add” US$6.10
DBS Group Research “buy” US$6.61

Positive on Hongkong Land

Analysts have largely kept their calls and target prices on Hongkong Land, with a common view that the developer’s ongoing share buyback will be a support for its share price despite mixed signals of recovery in its core businesses.

Thus far, notes DBS Group Research’s Jeff Yau, Hongkong Land has spent some US$272 million ($371 million) to buy back 50.5 million shares as at the end of last month. Last September, Hongkong Land had announced a US$500 million buyback programme by the end of this year.

“Continued share buybacks should support the share price,” writes Yau in his March 4 note, where he reiterated his “buy” call, but with a slightly trimmed target price of US$6.61 from US$6.64 previously.

He notes that Hongkong Land is now trading at a discount of 53% to his appraised current net asset value. Before the buyback programme, the company was traded below a third of that level.

However, Hongkong Land’s retail rental income this current FY2022 will continue to be affected by the pandemic.

“On the other hand, office market downturn in Central showed signs of bottoming out prior to this recent Covid outbreak,” writes Yau, referring to the crown jewels of the company: A clutch of prime office and retail properties in Hong Kong.

He is optimistic that Hongkong Land’s Central office portfolio is set to benefit from flight-to-quality demand, although he warns that further deterioration in leasing demand for both Hong Kong and Singapore will be a drag on the company’s earnings.

CGS-CIMB, meanwhile, has observed that Hongkong Land has sped up its landbanking activities in China while other mainland Chinese developers remain restrained.

In FY2021 alone, Hongkong Land has acquired nine projects for development in China, write analysts Raymond Cheng, Will Chu and Steven Mak in their March 5 report.

Including the West Bund project in Shanghai, it had 12 investment properties projects in China to be completed between FY2023 and FY2026.

These 12 projects have a planned gross floor area of 1.1 million sqm and when completed will help Hongkong Land build a stronger recurring income base, they note.

Meanwhile, due to slower recovery of office rents in Hong Kong and Singapore, the CGS-CIMB analysts have trimmed their target price to US$6.10 from US$6.30, while keeping their “add” call. — The Edge Singapore

Rex International
Price target:
UOB Kay Hian “buy” 58 cents

Record-breaking profits for FY2021

Oil company Rex International Holding’s “record-breaking” profits for FY2021 ended Dec 31, 2021, has pushed UOB Kay Hian analyst Llelleythan Tan to keep his “buy” call but with a higher target price of 58 cents from 46 cents. The new target price is pegged to 1x FY2022 revalued net asset value, writes Tan in his March 8 note.

The company posted earnings of US$67.2 million ($91.6 million) for FY2021, a reversal from the US$14 million loss seen the year before. The average realised oil price was US$67/bbl in 2021, compared to US$34/bbl in 2020, leading to revenue of US$158.4 million for FY2021, up 238.5% y-o-y.

Other contributions came from a US$20 million increase in other income which resulted from US$18.4 billion in fair value gains from the company’s US$42.6 million acquisition of the Brage field.

Rex plans to pay a maiden dividend of 0.5 cents per share for FY2021, given its strong operating cash flows and healthy net cash position of US$31.3 million. An interim dividend is mulled for 1HFY2022, along with a regular dividend policy for the longer term of 2 cents per share per year to be paid every quarter from 1QFY2023 onwards.

The company’s move from Catalist to Mainboard on the Singapore Exchange on March 8 is also expected to expand its reach to more institutional investors.

Tan adds that Rex stands to gain from its timely acquisition of the Brage field in Norway in January. With this, its overall production volume will be up by around 3,000 bbl/per day.

In January, the Barge field had an average of around 2,496 bbl/day.

“As oil prices soar to historical highs, we reckon that this timely acquisition would help boost Rex’s profitability for 2022, given that operating costs are estimated at US$50,000/day — lower than Oman’s,” says Tan.

Over in Oman, production at Rex’s Yumna field was around 7,518 bbl/day in January, down from the typical level of 9,500 bbl/day due to maintenance works on its production system.

Despite expectations of a further increase in oil prices due to the worsening demand-supply imbalance, Tan is of the view that operating costs for Rex’s activities in Oman will remain constant at US$80,000/day. “Rex is poised to see strong margin and supernormal earnings for 2022, in our view,” he adds.

“We opine that Rex is an attractive pure-play on the ongoing oil supercycle. However, we are mindful that any sharp pullback in oil prices would significantly affect our forecasts,” cautions Tan— Amala Balakrishner

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