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Broker's Digest: Singapore Airlines, Sheng Siong Group, CDLHT, Jumbo Group, Digital Core REIT

The Edge Singapore
The Edge Singapore8/5/2022 10:00 AM GMT+08  • 16 min read
Broker's Digest: Singapore Airlines, Sheng Siong Group, CDLHT, Jumbo Group, Digital Core REIT
See what the analysts have to say this week.
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Singapore Airlines
Price target:
DBS Group Research ‘buy’ $6.60
OCBC Investment Research ‘hold’ $5.84
UOB Kay Hian ‘hold’ $5.18

Improving passenger traffic

Analysts from DBS Group Research, OCBC Investment Research and UOB Kay Hian have increased their target prices for Singapore Airlines (SIA) to $6.60, $5.84 and $5.18 from $6.20, $5.57 and $4.88 respectively, with DBS maintaining its “buy” call and OCBC and UOB each maintaining their “hold” recommendations.

The calls come after SIA reversed into the black in the 1QFY2023 ended June with a net profit of $370.4 million, compared to a loss of $409 million a year ago.

DBS analysts Paul Yong and Jason Sum believe SIA is “emerging victoriously” from the air traffic standstill experienced at the height of Covid-19 and that the company’s recovery in passenger volumes should “outpace” that of its regional peers.

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“SIA’s international passenger traffic has been recovering at a faster clip than its peers since Singapore launched its first Vaccinated Travel Lane (VTL) in September 2021. We expect this trend to persist and envisage the group’s passenger traffic, hitting 81% and 102% of 2019 levels by end FY2023 and FY2024 respectively, supported by Singapore’s new Vaccinated Travel Framework and the synchronised reopening of borders in the region and other key markets,” they write.

OCBC analyst Chu Peng says SIA’s 1QFY2023 performance, which benefited from the “boost” in robust air travel demand despite a decrease in air cargo traffic, stood above her expectations for her FY2023 estimate. The analyst also revised her earnings estimates to “reflect a stronger recovery” as SIA had indicated it expects demand to remain strong with forward sales staying buoyant for the next three months up to October.

Although Chu remains optimistic on the airline’s prospects, she sees that a large proportion of the positive outlook has been priced into SIA’s current share price levels.

SIA’s 1QFY2023 results were also above UOB Kay Hian analyst Roy Chen’s expectations, making up 27% of his full-year forecast with its operating profit of $556 million marking the second-highest quarterly profit in SIA’s history.

See also: Ascendas REIT attractively valued, analysts maintain 'buy'

“The upbeat 1QFY2023 earnings performance was mainly attributable to steeper-than-expected pax volume recovery and strong pax yields, with their positive impact further amplified by SIA’s high operating leverage. SIA also benefited from a favourable fuel hedge gain of $202 million (pre-tax) in 1QFY2023. Excluding the fuel hedge gain, SIA’s 1QFY2023 net profit was still a positive $202 million, versus the $303 million net loss a quarter ago,” he says.

With these results, UOB Kay Hian has raised its FY2023 net profit forecast from $1.35 billion previously to $1.85 billion, a level “not seen in the past decade”, notes Chen. He adds that SIA’s operating cash surplus and balance sheet strength is improving, with its operating cash surplus rising to $1.48 billion in 1QFY2023 from $502 million in 4QFY2022, which helped strengthen its balance sheet. “Even with all its mandatory convertible bonds (MCBs) treated as debt, SIA’s net gearing would be near 50% as at end 1QFY2023 by our estimate, down from 63% a quarter ago,” Chen writes.

DBS’s Yong and Sum say that “favourable supply-demand dynamics” are underpinning healthy passenger and cargo yields, justifying their above consensus earnings estimates as they expect SIA’s passenger volumes to “normalise at a faster rate” and assume higher passenger and cargo yields.

Yong and Sum have raised their net profit estimates for the FY2023 and FY2024 by 135.2% and 56.3% respectively to $1.54 billion and $1.70 billion.

“Colossal pent-up travel demand and the gradual restoration of passenger capacity will support passenger yields. Meanwhile, cargo yields should also remain high due to prolonged widespread supply chain disruptions,” they write, adding that they believe SIA’s current valuation does not “adequately reflect” its brighter earnings prospects.

The airline is currently priced at 5.7x EV/Ebitda for FY2023, consistent with its three-year average before the pandemic but at a discount to regional peers. The DBS analysts believe that its relatively promising recovery trajectory and medium-term outlook justify a multiple above its peers.

However, Yong and Sum foresee SIA’s earnings growth in FY2024 will be constrained by a steep increase in fuel costs given the decline in SIA’s fuel hedging ratio from 2QFY2024.

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UOB Kay Hian’s Chen cautions that SIA’s current level of profitability should not be “taken as the norm”.

After the exceptionally strong FY2023, he also expects SIA’s profitability to trend downwards in FY2024 to FY2025 as its currently favourable fuel hedge position ends in 1QFY2024 because passenger yields will be driven down to more “normalised levels” as other airlines add and restore capacity and cargo yields gradually return to normalised levels as supply chain issues are resolved.

“Air travel recovery is also likely to slow down beyond FY2023 if China does not open up or opens up at a very slow pace. We expect SIA’s net profit to see two consecutive years of decline in FY2024 (–26% y-o-y) and FY2025 (–30% y-o-y), before stabilising at a more normalised level of net profit of $963m in FY2025,” says Chen. — Bryan Wu

Sheng Siong Group
Price target:
CGS-CIMB Research ‘buy’ $1.85
Citi Research ‘buy’ $1.79
PhillipCapital ‘buy’ $1.86
RHB Group Research ‘buy’ $1.78
UOB Kay Hian ‘buy’ $1.91

Defensive play amid inflation pressures

Analysts from CGS-CIMB Research, Citi Research, PhillipCapital, RHB Group Research and UOB Kay Hian are positive about Sheng Siong Group’s prospects after the supermarket operator saw its earnings improve for the 1HFY2022 ended June.

On July 28, the group reported earnings of $67.4 million, up 2.2% y-o-y in the half-year period despite revenue returning to more normalised levels before the pandemic.

CGS-CIMB analysts Ong Khang Chuen and Kenneth Tan have upgraded Sheng Siong to “buy” from “hold” with a higher target price of $1.85 from $1.60 previously as the group logged another quarter of record gross profit margins (GPM).

“We view [Sheng Siong] as a defensive play amid [the] current backdrop of rising inflation and potential economic slowdown,” the analysts write in their July 29 report.

“In our view, [the] strong GPM in 2QFY2022 reflects its successful execution of pricing strategy, with cost increments passed on to consumers while retaining its perception of value for money vs. supermarket and wet market peers,” Ong and Tan add, as they lift their GPM estimates for the FY2022 to 29.7%.

Further to their report, the analysts see the recovery of construction activities as an opportunity for the group to open more stores as they expect the Housing & Development Board (HDB) to release more store leases for bidding.

The group has opened two stores year to date, adding another 20,000 sq ft of retail area, and is set to open another in the 3QFY2022. It also has four outstanding tenders, which the analysts think is supportive of its target to open three to five new stores per annum for the next three years.

“Sheng Siong’s China operations saw y-o-y profitability remain comparable in 1HFY2022 despite Covid-restrictions, and it plans to further expand its presence in Kunming,” they note.

On the other hand, Citi Research analyst Jame Osman has also upgraded his call on Sheng Siong to “buy” from “sell” with a higher target price of $1.79 from $1.40.

“We are turning positive on the stock as we see scope for further margin improvement driven by higher fresh sales mix as well as solid cost control; [and] a pickup in [its] store network expansion as reopening drives a resumption in tenders for shop spaces,” says Osman in his July 29 report.

“We believe Sheng Siong’s defensive business acts as a solid inflation and recession hedge given its market positioning as a low-cost operator in suburban residential areas. Its netcash balance-sheet position ($234 million for the 1HFY2022) and sustainable 4% dividend yield are also investment merits,” he adds.

To this end, Osman has lifted his earnings per share (EPS) estimates for FY2022 to FY2024 by 6% to 23% mainly higher gross margin assumptions of 0.9 percentage points to 2.5 percentage points, compared to his previous expectations for margin decline due to operational deleveraging. This is offset by cuts to his revenue forecasts of 3% to 4% for the same period.

“We also raise our risk-free rate to 2.5% (from 1.5%) and the weighted average cost of capital (WACC) to 8.2% (from 7.2%). Our revised forecasts are 9% to 20% above consensus,” he writes.

PhillipCapital analyst Paul Chew is maintaining a “buy” on Sheng Siong with a higher target price of $1.86 from $1.75 previously. The higher target price comes as Chew lifts his earnings estimates for the FY2022 by 6% from Sheng Siong’s higher GPM.

“Despite rising food inflation, Sheng Siong has managed to raise gross margins due to a higher sales mix of fresh food sales,” notes Chew in his July 31 report. “Sheng Siong’s competitive edge or pricing in fresh food stems from direct sourcing from overseas exporters, ability to reduce wastage from repackaging and repricing, value-add from fresh food specialists and tactical purchasing due to seasonality or dislocation in the supply chain.”

As Sheng Siong looks to resume its store expansions, Chew sees this as being “supportive” of its revenue in the 2HFY2022 amid the softening revenue trend with the relaxation of work and social restrictions.

RHB analyst Jarick Seet has kept his “buy” call and target price of $1.78 on Sheng Siong as he too deems the stock a “solid defensive play against inflation”.

“We expect the rise in inflation and recessionary fears to be positive for Sheng Siong, as it should help mitigate any dampener stemming from Singapore’s border and economic reopening. We expect Sheng Siong to also be able to maintain margins and pass on costs to its customers, as it has previously done in the past — and proven as of 1HFY2022,” he writes in his Aug 1 report.

“This counter presents a solid defensive option, especially in such volatile market conditions,” he adds.

UOB Kay Hian analyst John Cheong is also keeping his “buy” call on Sheng Siong with an unchanged target price of $1.91 after the group’s 1HFY2022 earnings came within expectations, as earnings of $67.4 million formed 51% of Cheong’s estimates for FY2022.

As the analyst maintains his earnings estimates, he sees the group benefitting from the inflationary pressures as he believes more consumers may be prompted to dine at home instead.

“Amid a cautious spending outlook, there may be belt-tightening from consumers to focus on essentials and to make price-conscious choices. Consumers may prepare meals at home more frequently or look towards house brand products for affordable value products to ease inflation and wallets,” the analyst says.

On Sheng Siong’s higher interim dividend of 3.15 cents, 1.6% higher than the previous year’s interim dividend of 3.10 cents, Cheong sees the increase as a “positive signal” that the group’s future earnings should remain healthy. — Felicia Tan

CDL Hospitality Trusts
Price target:
Citi Research ‘sell’ $1.15
RHB Group Research ‘neutral’ $1.30
Maybank Securities ‘buy’ $1.40
DBS Group Research ‘buy’ $1.55

Mixed views

CDL Hospitality Trusts (CDLHT) recently announced its 1HFY2022 ended June results and analysts have mixed sentiments on the trust.

To recap, the trust’s manager, on July 29, announced a distribution per stapled security (DPS) of 2.04 cents for 1HFY2022, up 67.2% y-o-y, as travel demand resumes. Net property income (NPI) improved by 37.8% y-o-y to $51 million; revenue was up 49% over the same period to $98.6 million.

Citi Research remains the most bearish as it keeps a “sell” call on CDLHT with a target price of $1.15, as analyst Brandon Lee attributes his recommendation to 2QFY2022 results missing his forecast, which could impact the share price negatively.

RHB Group Research on the other hand continues to have a “neutral” stance on CDLHT with a target price of $1.30, as analyst Vijay Natarajan has a positive outlook on the trust, but is concerned about risks emerging.

“1HFY2022 operational numbers were broadly in line. While CDLHT’s key markets are staging a strong recovery on the back of pent-up demand, we see risks to travel recovery in 2023 from the worsening macroeconomic outlook, inflationary pressures and a drop in pent-up demand,” says Natarajan.

“We see limited accretive acquisition opportunities, with gearing at 40% limiting debt headroom. Valuation has priced in the ongoing recovery, in our view, with the stock trading at 1x P/B,” he adds.

On the other hand, Maybank Securities is bullish on the counter as it keeps its “buy” call on CDLHT with a target price of $1.40, as revenue per average room (RevPAR) strengthened in 1HFY2022. Analyst Chua Su Tye says, “We see long-haul travel recovery determining its earnings trajectory, with risk on the upside, given better-than-expected pricing power, against rising demand. Demand visibility is improving, with better fundamentals in 2HFY2022.”

Chua is upbeat about the trust’s recovery in the Singapore market, as three of its six hotels exceeded 2QFY2019 RevPAR, underpinned by strong demand from leisure and project groups.

Sharing similar sentiments, DBS Group Research continues to rate CDLHT “buy” with a target price of $1.55.

Analysts Geraldine Wong and Derek Tan like the counter as they see positives from a multi-year acceleration in RevPAR, driving P/NAV multiples higher, and a 25% CAGR in FY2022–FY2024 DPU.

“CDLHT continues to be one of the top beneficiaries of a rebound in tourism demand as Singapore reopens its borders and countries in the region ease Covid-19 test requirements,” says the analysts, who also expect staycation demand to remain strong and stronger demand from the return of corporate travellers, allowing the REIT to raise room rates come 2HFY2022.

Its overseas hotels are also expected to benefit from resilient, domestic-driven businesses coupled with an expected boost in international leisure travel demand. Meanwhile, the analysts are upbeat about CDLHT’s venture into lodging asset classes.

“The pivot towards the built-to-rent (BTR) sector amongst other possible future lodging asset classes highlights the management’s strategic intent to build resilience through diversity and earnings stability post-pandemic,” say Wong and Tan. — Samantha Chiew

Jumbo Group
Price target:
SAC Capital ‘buy’ 38 cents

Initiate on several growth drivers

SAC Capital analyst Yeo Peng Joon has initiated coverage on Catalist-listed Jumbo Group with a “buy” call as he sees several growth drivers to the counter. Yeo has also given the group a target price of 38 cents.

“The stock is currently trading at a forward P/E of 30.8x, and EV/Ebitda of 4.5x for FY2023 respectively,” he writes.

In his report dated Aug 1, Yeo is buoyant on the group’s prospects, seeing several growth drivers that include the sales rebound from pent-up domestic demand and tourist arrivals.

Other growth drivers include the rejuvenation of consumption demand at restaurants after two months of strict lockdowns in Beijing and Shanghai, the enlargement of the footprints of Jumbo Seafood and other brands in Asia through the group’s franchise model, as well as the potential for the group to raise its prices in an inflationary environment.

On the back of this, Yeo sees the group’s earnings to improve ahead to a smaller net loss of $5.7 million in the FY2022 ending September and a net profit of $5.3 million in the FY2023 compared to the $11.8 million net loss reported in the FY2021.

That said, Yeo warns that the group may also face headwinds such as a shortage in manpower due to the low unemployment rate and stringent cap on foreign dependency ratio in Singapore, China’s zero-Covid-19 policy, as well as rising input costs due to the higher commodity prices.

“Thus far, Jumbo has been able to pass this on and maintain gross margin, but it could face resistance if the macro environment weakens,” the analyst notes.

In addition, the pressures of an economic recession may lead to consumers cutting back on their discretionary spending, especially on high-ticket meals, which could also dampen Jumbo’s sales. — Felicia Tan

Digital Core REIT
Price target:
UOB Kay Hian ‘buy’ US$0.98
DBS Group Research ‘buy’ US$1.15

Strong fundamentals despite high borrowing costs

Analysts from UOB Kay Hian and DBS Group Research have maintained their “buy” calls and target prices on Digital Core REIT (DCREIT) despite forecasting higher borrowing costs for the REIT.

UOB Kay Hian and DBS’s target prices are maintained at 98 US cents ($1.38), and US$1.15 respectively.

To recap, DCREIT had US$350 million of total debt outstanding as of June 30 consisting entirely of an unsecured term loan due December 2026. In April, the REIT also entered into floating-to-fixed interest rate swaps to hedge a portion of its floating rate exposure. Consequently, 50% of total interest rate exposure was hedged, while the remaining 50% was unhedged.

UOB Kay Hian’s Jonathan Koh notes that DCREIT’s aggregate leverage stands at 25.7%, calling it a “conservative level of gearing”.

As at June 30, DCREIT’s debt headroom based on an aggregate leverage of 35% is US$188 million, with its weighted average debt maturity standing at 4.4 years.

Koh is of the view that the impact of higher interest rates is already priced in, despite forecasting that its cost of debt will rise from 2.3% in 2QFY2022 ended June to 3.6% in FY2023, assuming the US Fed Funds Rate hits 3.25% by end 2022.

Management estimates that every 50 basis points increase in interest rates will reduce distributable income by US$700,000 per year.

Koh says that DCREIT’s 1HFY2022 results are “in line with expectations”, with all 10 data centres remaining fully occupied.

The REIT also reported a DPU of 2.37 US cents, which comprises 2.06 US cents for 1HFY2022 and 0.31 US cents for the stub period from the listing date of Dec 6, 2021, to Dec 31, 2021.

DCREIT provides a distribution yield of 4.9% for 2023, compared to 5.1% for both peers Keppel DC REIT and Mapletree Industrial Trust.

Its management will also be activating its unit buyback programme, authorised by the board in July. DCREIT has an existing unit buyback mandate to repurchase up to 10% of total units outstanding, and this will be funded by its undrawn revolving credit facility of US$200 million at an interest rate of 3%.

On the acquisition front, DCREIT had also disclosed acquisition targets in three core markets, namely Frankfurt, Chicago and Dallas. The sizes of the acquisition range from US$150 million to US$650 million depending on conditions in financial markets.

Koh is still confident in his investment case for DCREIT, noting that despite the bankruptcy of DCREIT’s fifth largest tenant, the REIT and sponsor Digital Realty has entered into a cash flow support agreement, whereby Digital Realty will make good any cash flow shortfall due to the customer bankruptcy till Dec 2023.

DCREIT will repay the cash flow support received interest-free, at DCREIT’s discretion in terms of timing and amount, from Jan 1, 2024, till Dec 31, 2028.

DBS’s Dale Lai and Derek Tan also broadly agree with Koh’s investment thesis, noting its strong sponsor pipeline and its earnings that are underpinned by solid fundamentals.

Lai and Tan also noted that DCREIT’s operations were “stable” and its 1HFY2022 DPU were also “in line with our expectations”.

They do point to some savings in property expenses that led to its 1HFY2022 net property income of US$35.4 million, 5.9% above IPO forecasts.

However, they warn that there may be downside risks to 2HFY2022 earnings, due to rising financing costs.— Lim Hui Jie

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