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Broker's Digest: Singtel, Aztech Global, Koufu, SembMarine

The Edge Singapore
The Edge Singapore9/9/2021 05:43 PM GMT+08  • 10 min read
Broker's Digest: Singtel, Aztech Global, Koufu, SembMarine
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Price target:
RHB “buy” $3

Bharti to be key earnings driver

RHB Group Research continues to rate Singapore Telecommunications (Singtel) “buy” with an unchanged target price of $3.00.

In a Sept 7 report, the RHB research team says: “We expect Singtel to subscribe to its portion of Airtel’s right shares with a manageable uptick in net debt/ebitda. The recent disposal of towers by Telkomsel is value accretive. Overall, the green shoots of recovery in the group’s mobile business remain the key investment thesis with core earnings set to rebound in FY2022 after four years of decline.”

Singtel’s Indian associate Airtel has recently announced plans to raise up to INR210 billion ($3.9 billion) via a 1-for-14 rights issue priced at INR535. Similar to its 2019 cash call which raised US$3.6 billion ($4.8 billion), the promoters (Bharti Telecom and Singtel), which hold a combined 55.8% stake, will collectively subscribe to their entitlements.

In approving the latest cash call, Airtel’s board conducted a comprehensive review of the business environment, industry scenario, and financial/business strategy.

“We believe the exercise is timely to beef up its balance sheet ahead of the 5G network rollout and to meet financial obligations including the paring down of debt. The terms of payment for the rights shares will see 25% payable upon application, with the balance spread over 36 months, subject to requirements,” says RHB.

However, Singtel’s stake may see a marginal dilution following the rights issue.

“As before, we expect Singtel to subscribe to its portion of the rights entitlement with a long-term view held on its investment in India. This would entail a total outlay of $529 million or about $132 million (25% initial outlay) with projected net debt/ ebitda set to increase slightly from 2.1 to 2.2 times which we consider as manageable and in light of the ongoing strategic business review,” says RHB, who expects Singtel’s effective shareholding in Airtel to decrease marginally to 31.1% from 31.7%.

To that end, the research house expects Airtel to remain a key driver of the group’s associate earnings, with the Bharti Group having turned profitable.

Meanwhile, Singtel’s 35% Indonesian associate Telkomsel has also announced the disposal of an additional 4,000 towers to PT Dayamitra Telekomunikasi (Mitratel), the towerco subsidiary of its parent, Telkom Indonesia for US$580 million or about US$145,000 per tower. As part of the transaction, Telkomsel entered into a 10-year lease agreement with Mitratel for site rental.

“We view the sale as overall positive and value accretive for Telkomsel to further unlock the value of its passive infrastructure with proceeds channelled towards network expansion. Telkomsel had earlier sold some 6,000 towers to Mitratel with another 7,000 remaining in its books after the latest deal,” says RHB. — Samantha Chiew

Aztech Global
Price target:
CGS-CIMB “add” $1.82

Aztech Global’s current share price is ‘opportunity’ to enter, says CGS-CIMB

CGS-CIMB Research analyst William Tng has kept “add” on Aztech Global with an unchanged target price of $1.82.

Tng’s target price is based on an unchanged P/E of 15 times FY2022 earnings per share (EPS), which is an average for the Singapore technology sector.

To him, the group’s current price of $1.07 as at Sept 3 is an “opportunity” for investors to accumulate.

The counter’s share price has fallen 16.4% from its IPO price of $1.28. It is also a 15.7% drop from its closing price of $1.27 since it announced its results for the 1HFY2021 ended June.

“We believe the current Covid-19- led component shortage concerns are priced in,” writes Tng in a Sept 3 report.

During the pandemic, the company has so far kept its production output in check despite the high number of cases in Malaysia.

Aztech has been managing the situation by ramping up its production capacity in China to make up for any shortfall in its Malaysian factory.

“Aztech’s performance has so far been in line with our expectations,” he adds.

The group has posted revenues of $115.9 million and $133.8 million for its 1QFY2021 and 2QFY2021 respectively.

However, a disruption in its supply chain due to component shortages and logistical constraints could affect its earnings for the 2HFY2021, notes Tng.

“We also believe that in the worst case scenario, Aztech will not lose any orders but see some orders being pushed into 1HFY2022,” he says.

To this end, Tng has identified share buybacks as a re-rating factor for the counter.

“Share buybacks could help lend support to its share price and we believe Aztech is aiming to obtain its share buyback mandate via an EGM before end-2021,” he writes.

“Downside risks to our call are component shortages and Covid-19 related supply chain disruptions. New customer wins and stronger earnings could re-rate the stock.”— Felicia Tan

Price target:
PhillipCapital “neutral” 64 cents
SAC Capital “buy” 77.5 cents

A more positive outlook seen

PhillipCapital analyst Terence Chua says he sees a “more positive outlook” on food court operator Koufu as Singapore moves to an endemic state with the Covid-19 virus.

In a report dated Sept 6, Chua says he expects Koufu to report an improved footfall at its outlets as more measures look set to be lifted in a calibrated manner, including a further relaxation on dining-in limits.

Working from home may also no longer be the default arrangement, which could contribute to Koufu’s revenue.

In FY2022, Chua adds that he expects to see cost synergies in the group as Koufu’s supply chain and logistics will be strengthened together with a broadening and expansion of its production capabilities at its new integrated facility.

In April, the group obtained its temporary occupation permit (TOP) for its integrated facility, which is expected to commence operations progressively.

As this is expected to lead to higher productivity and product margins, Chua has raised his patmi estimates for FY2022 by 1% to account for some of these cost-savings.

In the 1HFY2021 ended June, Koufu reported earnings of $9.9 million, nearly four times the $2.5 million reported in the corresponding period the year before.

Net profit stood 35% higher h-o-h as increased takeaway and delivery sales mitigated the lower footfall during Singapore’s move into Phase Two (Heightened Alert) from May 16 to June 13.

Despite the positives, Chua has maintained his “neutral” call and target price of 64 cents, which is still based on 18.5 times FY2021 earnings.

“We remain cautious on the re-opening roadmap due to a resurgence of Covid-19 in Singapore and China. The stock could potentially be re-rated if there is further relaxation of dine-in measures and an increase in foreign travellers to Singapore,” he says.

SAC Capital, in an Aug 17 report, has maintained “buy” on Koufu with a target price of 77.5 cents.

“Our discounted cash flow (DCF)-derived target price translates into a FY2021/FY2022 P/E of 19.5 times and 15.8 times,” write the analysts.

“We maintained our FY2021/FY2022 topline estimates, with adjustments to bottomline (–7.6%/–7.9%) due to higher rental expenses and staff costs with the new businesses, and higher staff incentives in 1H; slightly offset by the lower depreciation expense.”

“We expect further h-o-h improvements in 2HFY2021, with new outlet contributions, and as Singapore moves towards an endemic state with more relaxation of limits and measures,” they add.

Koufu’s revenue for the 1HFY2021 at $105.7 million stood at 47.0% of SAC Capital analysts Tracy Lim and Lam Wang Kwan’s forecast for the FY2021.

The slightly lower showing was attributable to the Phase Two (Heightened Alert) measures and low footfall at tertiary institutions and tourist-dependent outlets during the period.

As Singapore moves towards an endemic state, Lim and Lam are optimistic that the group will see higher footfall in its outlets.

“With the pandemic fatigue kicking in, we expect overall F&B dine-in to pick up. Furthermore, as Singapore looks to reopen its borders gradually to some countries with its travel corridor plans, we see this boding well for outlets catered towards tourists,” they write.

During the 1HFY2021, Koufu opened one new food court and six F&B kiosks. On this, the SAC analysts estimate that the group had locked in leases at lower rental rates, lowering expenses until they get renewed. — Felicia Tan

Price target:
UOB Kay Hian “buy” 11 cents

Negatives already ‘priced in’

UOB Kay Hian analyst Adrian Loh has upgraded Sembcorp Marine (SembMarine) to “buy” as he deems that much of the negatives have already been priced in.

That said, Loh has lowered his target price to 11 cents from 12.4 cents as he has pegged it to a target multiple of 0.74 times FY2022. The target multiple is a 30% discount to SembMarine’s past five-year average price-to-book (P/B) of 1.07 times.

“We believe this discount is a reasonable reflection of the industry risks that SembMarine faces in at least the next 12 months,” Loh writes in a report dated Sept 6.

Even so, Loh’s target price represents a 28% upside to the counter’s last-closed price of 8.6 cents.

“We have assumed that the company’s rights issue successfully raises $1.5 billion, which results in a FY2022 estimated book value per share of 14 cents,” he writes.

“[Following] its $1.5 billion rights issue, SembMarine should be in better shape to weather market conditions over the next 12–18 months and hopefully enable it to garner new order flow,” he adds.

During SembMarine’s EGM on Aug 23, the majority of the group’s shareholders indicated that they were in favour of the rights issue.

Temasek Holdings, which owns 43% of SembMarine, had pledged to subscribe for the latter’s pro-rata entitlement as well as excess rights. This means the former will take up as much as 67% — or $1 billion — of the rights issue.

DBS Group Holdings had undertaken to underwrite the remaining 33%.

While a mandatory general offer will be triggered, Temasek had indicated that SembMarine will remain a listed company.

To Loh, the rights price, which closed at 0.2 cents on Sept 3, is worth it, to investors.

However, investors buying into SembMarine’s rights issue should “exercise a considerable amount of patience” as the timing of the upturn in the offshore renewables and marine industry remains uncertain.

That said, there has been good news from one of SembMarine’s largest debtors, Borr Drilling, which secured some medium-term work for its jackup rigs. Borr’s results for the 2QFY2021 ended June also “appeared decent” with a 13% q-o-q increase in operating revenue to US$55 million ($73.7 million).

For the FY2021, Loh has kept his earnings estimates unchanged, although he has lowered his earnings estimates for the FY2022. “Our loss expectations [are] now at $133 million vs a loss of $66 million previously, as we forecast the industry upturn to be longer than expected,” he says.

Potential downsides for SembMarine include a more prolonged trough cycle for the offshore marine industry on the back of the oversupply of rigs, which could continue to depress utilisation rates and day rates.

Other downside factors include “a persistent lack of demand for drilling rigs if oil companies continue to hold off on offshore capex spending, and a prolonged Covid-19 endemic which continues to crimp supply of labour for SembMarine’s shipyards”, says Loh. — Felicia Tan

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