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Broker's Digest: SGX, FLCT, HRnetGroup, ComfortDelGro, Ascendas REIT, Kimly

The Edge Singapore
The Edge Singapore6/25/2021 06:30 AM GMT+08  • 14 min read
Broker's Digest: SGX, FLCT, HRnetGroup, ComfortDelGro, Ascendas REIT, Kimly
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Singapore Exchange
Price target:
RHB “buy” $12.30

Better trading momentum

RHB Group Research has raised the target price accompanying its “buy” rating for Singapore Exchange (SGX) from $11.60 to $12.30 following ‘robust’ trading momentum in May.

RHB’s Singapore research team notes that securities and derivatives trading both picked up last month. Total securities trading value rose 12% y-o-y to $30 billion, while securities average daily value (SADV) grew 6% y-o-y. For derivatives, total contracts traded grew 6% y-o-y to $18 million, though derivatives average daily value (DADV) remained flat.

The team highlights that SGX’s trading levels have largely tracked their FY2021 ending June forecasts. “Year to date, FY2021 total securities trading value and SADV are 7% y-o-y higher, largely driven by the cyclical rotation by portfolio managers, in our view,” the team writes in a June 23 research note.

They view that Singapore’s gradual economic reopening should further support SGX’s trading scene, on the back of a return of growth for cyclical stocks.

In addition, RHB believes a “homecoming” may be on the horizon, with homegrown tech companies such as Sea, Razer and Grab reportedly contemplating secondary listings on the SGX. “These listings would attract investors and further boost trading activities on the SGX, although the final outcome and incremental trading volumes are still uncertain now,” the team clarifies.

The team is also bullish on SGX’s environmental, social and corporate governance (ESG) push, pointing to its SGX FIRST (Future In Reshaping Sustainability Together) initiatives such as the launch of a suite of ESG derivatives and its work with DBS, Standard Chartered and Temasek on a carbon exchange.

To that end, the team has raised their FY2022– 2023 earnings forecast by 6% and 3%, based on higher SADV and DADV assumptions, which underpins their higher target price. — Atiqah Mokhtar

Frasers Logistics & Commercial Trust
Price target:
DBS Group Research “buy” $1.85 UOB Kay Hian buy” $1.79

E-commerce driving growth Analysts from DBS Group Research and UOB Kay Hian are maintaining their “buy” calls on Frasers Logistics & Commercial Trust (FLCT).

FLCT invests in income-producing properties that are used mainly for logistics, commercial or office spaces or business park purposes. Its portfolio focuses primarily in the Asia Pacific region and Europe.

As at June, FLCT has a portfolio of 103 properties valued at a total of $6.8 billion across five developed markets — Australia, Germany, Singapore, the Netherlands and the UK.

On June 22, UOB Kay Hian resumed its coverage on the REIT with a target price of $1.79. Meanwhile, DBS is keeping its target price of $1.85.

To analysts Dale Lai and Derek Tan of DBS, FLCT is the cheapest large-cap logistics REIT in Singapore despite its more expensive price per unit. Based on their target price estimate, FLCT’s target yields are between 4.2% and 4.3% for FY2021 and FY2022, “which is fair given its substantially freehold portfolio,” they say in a June 21 report. The stock has a March year end.

“In our view, there is room for further compression if we compare FLCT to its large-cap peers which are trading at target yields of 3.5%–4.0%,” they write.

The REIT’s recent acquisitions will also drive its DPU growth upward going into FY2021 and FY2022. Since the merger between Frasers Logistics Trust and Frasers Commercial Trust, FLCT has acquired over $600 million worth of assets from its sponsor.

Despite this, the REIT still has the largest right of first refusal (ROFR) pipeline that is valued at over $5 billion that could double its portfolio, making this a “visibility like no other” for the REIT.

On this, Lai and Tan project a robust 8% DPU growth in FY2021 that is driven by fullyear contribution from its enlarged portfolio as well as subsequent acquisitions with an additional 2% DPU growth in FY2022 as it builds on its organic growth strategy.

Estimates by the DBS analysts have not factored in any further acquisitions as yet. The potential drop to its P/NAV from 1.3 times to 1.0 times is not priced in yet, either.

That said, the REIT’s significantly larger portfolio of $6.8 billion means it has the capacity to undertake development projects or redevelopment of older assets that could increase its earnings potential in the longer term.

However, one of the REIT’s key risks is its exposure to currency fluctuations in AUD, EUR and the GBP, as it pays its distributions in SGD, something the manager has attempted to reduce by hedging distributions regularly.

To UOB Kay Hian analyst Jonathan Koh, FLCT is a beneficiary of the structural change in Australia as households are increasingly switching to online retail.

Yields of FLCT also compressed by an average of 51 basis points y-o-y in 1QFY2021.

Germany, which FLCT has properties in, is seeing a strong economic recovery. This is supported by the country’s manufacturing sector and continued growth in e-commerce.

“We expect FLCT to pivot toward the New Economy through expansion in logistics and business park properties,” writes Koh.

“FLCT provides a distribution yield of 5.7% and yield spread of 4.2% for FY2022, much more attractive than Mapletree Logistics Trust’s 4.2% and 2.7%. It trades at P/NAV of 1.21 times compared with peers’ 1.47 times,” he adds. — Felicia Tan

Price target:
CGS-CIMB “add” 82.1 cents

Positive job market data

CGS-CIMB Research continues to stay upbeat on HRnetGroup following the 1Q2021 “a positive set of labour market data” reported by the Ministry of Manpower on June 17.

Singapore’s total employment expanded by 12,200 in the 1Q, marking the first positive change after four consecutive quarters of decline, supported by resident employment growth.

Total permanent employee retrenchments declined 28% y-o-y to 2,190 in the 1Q2021.

The ratio of job vacancies to unemployed persons grew to 0.96, representing almost one job vacancy for every unemployed person in Singapore, while recruitment rates grew to 1.9%.

“In our view, we think this set of positive data points reflects the growing strength of the economy which is on a gradual recovery, leading to more job creation in the labour market, and also strong hiring intentions among employers for 2021,” say CGS-CIMB analysts Darren Ong and Lim Siew Khee.

To that end, they view that HRnetGroup should see strong recruitment volumes in both flexible staffing and permanent placements, which will support earnings growth.

HRnetGroup is also expected to benefit from its large exposure to sectors leading employment growth, including health and social services, public administration and education, and food and beverage.

Given the positive outlook, Ong and Lim are keeping their “add” call on HRnet with an unchanged target price of 82.1 cents, pegged to FY2022 ending December P/E of 14 times, based on its five-year historical mean.

“We like HRnetGroup as we believe that the company is a good proxy to play the recovery theme across its key markets supported by improving economic fundamentals, continued declines in unemployment rates, and positive hiring sentiment across its key markets,” the analysts note. — Atiqah Mokhtar

Price target:
RHB “buy” $2

Looks past near term weakness

RHB Group Research is maintaining its ‘buy’ rating on ComfortDelGro as Singapore gradually reopens.

RHB analyst Shekhar Jaiswal believes the reopening of Singapore’s economy over the coming quarters will support higher demand for taxi services as well as public transport. Since June 14, the Land Transport Authority (LTA) has lifted the two-passenger limit for taxis.

“We maintain that ComfortDelGro’s sequential improvement in profit will be sustained over the next 12 months, aided by the aggressive vaccination plan and robust Covid-19 testing, as well as contact-tracing capabilities in Singapore,” he says in a June 21 report.

With the government targeting 75% of the population to be fully vaccinated by October, Jaiswal also views that an earlier-than-expected revival in international travel is possible, which would further boost taxi and public transport demand.

In the meantime, ComfortDelGro will continue providing support to its taxi drivers with a daily rental waiver of 50% until June 29 and 35% from June 30 until July 29. It will also continue to waive the call levy charges for drives until June 30. “While this could drag taxi earnings for another month, it will ensure that its taxi drivers fare better than the competition from private hire car (PHC) service providers,” Jaiswal points out.

Additionally, he views potential value-unlocking of ComfortDelGro’s operations in Australia, changes in the Downtown Line’s financial framework, and on-going restructuring as key catalysts for the counter.

For these reasons, he reiterates his rating with an unchanged target price of $2, implying 22 times earnings for FY2021 ending December — Kayden Whang

Ascendas REIT
Price target:
PhillipCapital “buy” $3.65
UOB Kay Hian “buy” $3.83

Analysts remain upbeat on Ascendas REIT with higher target prices

Analysts from PhillipCapital and UOB Kay Hian have maintained their “buy” recommendations on Ascendas REIT (A-REIT) due to its stable portfolio, and its series of acquisitions and disposals.

PhillipCapital’s Natalie Ong has raised its target price to $3.65 from $3.64 previously while UOB Kay Hian’s Jonathan Koh has upped his estimate to $3.83 from $3.82 previously.

Ong has also adjusted her DPU estimates for FY2021 and FY2022 by 0.5% lower and 0.8% higher to reflect its acquisition of Galaxis in May, as well as the disposal of three Australian logistics properties in June. A-REIT has a December year end.

“Stock catalysts are expected from acquisitions and redevelopment. We forecast DPU growth of 9.2% for FY2021 as acquisitions and redevelopment/AEI start contributing,” writes Ong in a June 21 report.

On May 4, the REIT acquired the remaining 75% stake in Galaxis from CapitaLand, 13 months after its initial 25% acquisition in Galaxis from MBK Real Estate Asia.

The agreed property value of $720 million on a 100% basis represents a 2% discount to the market value of Galaxis and a 14.3% appreciation since A-REIT’s initial investment.

The REIT has since raised some $420 million from private placements and will issue an additional $83 million worth of new units as part of its payment to CapitaLand for the remaining 75% stake.

The issue will increase its share base by 4.2%.

On June 3, the REIT announced that it was divesting three of its Australian logistics assets — two in Brisbane and one in Melbourne — for $104.5 million and $24.2 million respectively.

The assets were 100% occupied as at Dec 31, 2020. The divestment will reduce the REIT’s pro-forma NPI and DPU by $5.1 million and 0.075 cents respectively upon its completion in the 3QFY2021.

Looking ahead, Ong expects demand to remain “muted” as companies exercise caution in the current economic climate. That said, this is mitigated by tenants avoiding relocation costs, leading to higher retention rates for the REIT.

“The electronics and biomedical industries accounted for 29.3% and 34.0% of new demand in 1QFY2021, helping to prop up demand for light-industrial/high-spec and business parks respectively. Singapore/Australia/US/UK will account for 13.9%/3.0%/4.0%/2.4% of FY21 lease expiries by gross rental income (GRI). The bulk of the Singapore expiries will be from tenants located in business parks (43%) and logistics assets (25%),” notes Ong.

To this end, Ong has forecast a 9.2% growth for A-REIT’s DPU for FY2021, upon new contributions from acquisitions and redevelopment as well as AEIs.

“A-REIT remains our top pick for the sector in view of its scale and diversification. The REIT also continues to future-proof its portfolio by increasing its exposure to growth sectors of the economy: knowledge economies, technology and e-commerce,” she says.

For UOB Kay Hian’s Koh, the potential redevelopment of Science Park 1 could provide a ROI of about 7.5%, assuming construction costs around $350 per sq ft, with average rents at $5.50 per sq ft per month and an occupancy rate of 95%.

The redevelopment will start with the TÜV SÜD PSB Building. The lease with TÜV SÜD, a German testing, inspection and certification specialist, expired and the tenant had relocated to the International Business Park in early 2021.

The building contributed gross revenue of some $4.2 million in FY2020, translating to rental of around $1.52 per sq ft per month.

The enhancement to A-REIT’s FY2022 distributable income of the property ranges from 1.5% to 4.6%, depending on the plot ratio approved by the authorities.

Apart from the TÜV SÜD PSB Building, A-REIT also owns other older buildings such as Cintech I to IV.

To Koh, the REIT could jointly redevelop Science Park I with its sponsor CapitaLand.

After factoring the remaining 75% acquisition of Galaxis and the divestment of its Australian properties, Koh says he has raised his DPU forecast for the FY2022 by 0.4%. — Felicia Tan

Price target:
CGS-CIMB “add” 46 cents

New normal, additional positives

CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan have initiated “add” on Kimly with a target price of 46 cents, representing a 20% upside to the counter’s last closed price of 38 cents.

The group, which was established in 1990, is the largest coffee shop operator in Singapore. It was listed on the Catalist board of the Singapore Exchange in March 2017.

In their report dated June 21, Ong and Tan have also forecast a two-year core EPS CAGR of 47% from FY2020 to FY2022.

This, say the analysts, is due to positive tailwinds from continued work-from-home initiatives, higher popularity on food delivery services as well as earnings contribution from Tenderfresh, which was 75% acquired on May 11.

Kimly’s coffee shops are also mostly located within the heartlands, which enjoy a high concentration of public housing.

Its focus on the mass segment offers it greater stability for its topline, especially in terms of economic uncertainty.

“We believe Kimly’s food retail segment can benefit from structurally higher same-store-sales with increasing work-from-home arrangements in the new norm,” write the analysts.

As Singapore transitions to a new normal, where more hybrid working arrangements will take place in future, this could be positive for Kimly as more individuals working from home could mean more patrons to heartland coffee shops for meals, say Ong and Tan.

On this, the analysts have identified Kimly as their top pick within the SGX-listed F&B sector due to its focus on the mass market, giving it a more defensive earnings profile.

As at end FY2020, the group operated 72 coffee shop outlets, which is notably higher than its competitors, and 29 more than its nearest competitor, Broadway.

The group has also boosted its digitalisation efforts by engaging more third-party delivery platforms such as GrabFood and Deliveroo.

As at end FY2020, Kimly had over 125 food stalls offering food delivery services compared to 66 stalls before the “circuit breaker” period from April–June 2020.

“We expect the demand for Kimly’s online food delivery services to continue growing meaningfully in FY21F/22F amid shifting consumer preferences and continued WFH arrangements among companies. We estimate that online food delivery can contribute 10% of Kimly’s overall topline by end-FY2022,” write the analysts.

The group has also been acquiring food outlets to accelerate its expansion, which serves to reduce uncertainties from having to deal with private lessors. This, in turn, helps the group ensure longer-term sustainability of its outlets.

For the FY2021 to FY2023, Ong and Tan say they expect Kimly to grow the number of coffeeshops under management by three to five outlets per year.

In addition, Ong and Tan are positive on Kimly’s acquisition of Tenderfresh, as it allows the group to tap into the halal F&B market in Singapore.

The acquisition will enable the group to enhance its presence in the quick service restaurant segment as well as open up new revenue sources in the form of B2B food production for OEM customers.

“In the medium term, there is also a possibility of Kimly expanding its halal F&B operations into other Southeast Asian countries. We expect the acquisition to be completed by October, and estimate the acquisition to contribute $5.4 million net profit to Kimly in FY2022,” they write.

“We value Kimly using a P/E-based valuation as we believe this allows us to incorporate near-term catalysts and risks. The group currently trades at 14 times FY2022 P/E close to its five-year average vs 25 times at IPO,” say Ong and Tan.

“Our target price of 46 cents is pegged to 16.8 times FY2022 P/E, or 0.5 s.d. above Kimly’s average P/E since IPO in March 2017. We believe Kimly should trade 0.5 s.d. above its five-year average in view of the group’s favourable growth prospects. This represents 20% upside to the group’s current share price,” they add.

The group’s valuation is also cheaper compared to its peers, with a stronger dividend. — Felicia Tan

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