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Brokers’ Digest: Singtel, Prime US REIT, CDL, LHN, Hongkong Land, Fu Yu Corp, Sheng Siong, Cromwell European REIT

The Edge Singapore
The Edge Singapore • 21 min read
Brokers’ Digest: Singtel, Prime US REIT, CDL, LHN, Hongkong Land, Fu Yu Corp, Sheng Siong, Cromwell European REIT
The Singtel building in Singapore. Photo: Bloomberg
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Singapore Telecommunications
Price targets:
PhillipCapital ‘buy’ $3
RHB Bank Singapore ‘buy’ $3.25
UOB Kay Hian ‘buy’ $2.99
OCBC Investment Research ‘buy’ $3.04
DBS Group Research ‘buy’ $3.50
HSBC Global Research ‘buy’ $3
Maybank Securities ‘buy’ $3.24

Singtel’s higher dividends keep analysts positive, target prices increase

Singtel reported lower earnings for its FY2024 ended March no thanks to impairments but most analysts have not only maintained their positive calls on the stock but have increased their target prices too.

Singtel on May 23 reported earnings of $795 million for FY2024, down 64% y-o-y. If the exceptional items are excluded, Singtel’s underlying net profit for the year was up 10% y-o-y to $2.26 billion. Revenue was down 3.4% y-o-y at $14.1 billion.

Despite the lower bottom line, Singtel plans to increase its total FY2024 payout to 15 cents, an increase of 52% over FY2023. This will be the third increase in dividends. The upcoming payout consists of a final dividend of 6 cents per share plus a so-called value realisation dividend (VRD) of 3.8 cents. This VRD, to be maintained at between 3 and 6 cents a year, is drawn from the excess cash from Singtel’s asset recycling efforts, minus off capex required to invest for new growth.

“In our view, Singtel remains an attractive play against elevated market volatility, underpinned by improving business fundamentals and a lush FY2025 6.8% dividend yield,” says UOB Kay Hian analysts Chong Lee Len and Llelleythan Tan, as they kept their “buy” call and $2.99 price target.

See also: CGS International maintains ‘add’ call on Grab amidst slower ebitda growth in 2QFY2024

Singtel’s Australian business Optus has an improved outlook. In 1QFY2025, management expects mobile service revenue to continue its growth from the price uplifts while also sustaining its subscriber growth. In Singapore, performance has remained soft amid competition.

NCS has also seen a weak quarter in 4QFY2024, although FY2024 was an improvement. But the 4QFY2024 order book amounted to $3.0 billion, up from $2.1 billion in 3QFY2024, which the analysts believe would help support revenue growth moving forward.

Meanwhile, Digital InfraCo is still in gestation. “With the upcoming new additional capacity from DC Tuas, Batam and Thailand, operating costs were higher to support business expansion, leading to a 3.9% y-o-y drop in FY2024 ebitda. We expect a ramp-up in investment costs to weigh on margins till FY2025–FY2026,” say Chong and Tan.

See also: No major negative surprises expected in 2QFY2024, RHB lifts DBS’s TP to $41.20

Singtel has identified some $6 billion worth of assets to be monetised which might come from paring down its stakes in regional associates and non-core fixed assets. Chong and Tan estimate Singtel can pay a larger VRD in the coming years.

OCBC Investment Research had kept its “buy” call and has a fair value estimate of $3.04. One bright spot is NCS, the enterprise tech services unit. “We are constructive on NCS as an important growth driver, though upside to ebitda margins might be challenging in the near term given the cost involved in recruiting suitable talents,” says the OCBC research team.

Management targets low double-digit return on invested capital (ROIC) in the medium term as Singtel further improves efficiency to increase margins in its core business and scale growth engines such as NCS and the regional data centre business. “We see the new dividend policy as a positive surprise, underscoring management’s confidence in its asset recycling initiatives,” they add.

Most of the analysts have revised their respective target prices higher. “We see multiple earnings and share price drivers for Singtel,” says PhillipCapital’s Paul Chew, who has kept his “buy” call and raised his target price to $3 from $2.80 after he increased his FY2025 ebitda projections by 5% given higher market value of Singtel’s associates.

HSBC Global Research too has kept its “buy” call with a higher target price of $3.00 from $2.90. “We expect dividends and profits to rise due to growth in the core business and Singtel’s regional associates profits. Singtel’s core business growth should be driven by cost optimisation, growth at NCS and data centre,” say analysts Piyush Choudhary, Rishabh Dhancholia and Vignesh Gopalakrishnan.

They expect core business ebit CAGR of about 7% over FY2024–FY2027. They also expect regional associates’ profits to rise as average revenue per user (ARPU) is improving across markets, leading to possibilities of higher dividends estimated to grow by about 9% y-o-y in FY2025 to 16.4 cents and 8.4% y-o-y in FY2026 to 17.8 cents.

RHB Group Research has also reiterated its “buy” call along with a new target price of $3.25 from $3.15. RHB is positive on the further expansion of FY2024 ROIC to 9.3% and is expected to rise to more than 10% in FY2025, based on RHB’s estimate.

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

Maybank Securities has also raised its target price to $3.24 from $3.10. It has a “buy” call on the stock, after how the results and guidance surprised positively.

While the growth outlook and dividend commitments are at a multi-year high, the holding company discount is also close to an all-time high of over 40%. This is a buying opportunity, according to analyst Hussaini Saifee. He expects FY2025 and FY2027 dividends per share to range between 16 and 18 cents, implying a yield of 7%.

DBS Group Research too recommends to “buy” Singtel with a higher target price of $3.50 from $3.27 as analyst Sachin Mittal factors in a 20% rise in Bharti Airtel’s share price over the last three months. Overall, regional associates, are worth $2.74 (previously $2.51) after a 20% holding company discount.

“Our fair value for Singtel’s core business in Singapore and Australia remains unchanged at 76 cents per share. Bharti comprises 49% of our sum-of-the-parts (SOP) valuation and 22% of FY2025 group earnings,” says Mittal, who sees Singtel as a cheap proxy to Bharti especially with its core operating profit resuming growth led by NCS, data centre and cost-cutting measures.

Meanwhile, Morningstar had rated Singtel three stars out of five with a higher target price of $2.50 from $2.40. The increase was due to the increased share prices of its listed associates since the previous update, particularly Bharti Airtel and an increase in underlying earnings due to reduced depreciation following $513 million of asset write-downs made in FY2024, partially offset by higher capital expenditure.

“The stock looks broadly fairly valued at these levels and we suspect the company will need to show persistent earnings growth from its core operations before it will get a positive rerating,” says analyst Dan Baker.

“We retain our narrow moat rating for Singtel. Our fair value implies a P/E for Singtel of 12 times underlying earnings, which is below its average over the past 10 years, but reasonable for a low-growth telecom company,” adds Baker. — Samantha Chiew

Prime US REIT
Price target:
RHB Bank Singapore ‘buy’ 23 US cents

Divestment a ‘positive step’ despite discount to valuation

Prime US REIT has cleared the first major hurdle in its turnaround bid, says RHB Bank Singapore analyst Vijay Natarajan, with the divestment of One Town Center (OTC) in Boca Raton, Florida, albeit at a slight discount to valuation.

This is a positive step, says Natarajan in a May 21 note, as it will lower gearing and provide additional capital buffers against further asset value declines. Natarajan is keeping “buy” on the US office-focused REIT, with an unchanged target price of 23 US cents (31.05 cents), which represents an 82% upside. The fair value includes a 2% ESG premium, which is based on RHB’s proprietary methodology.

The REIT sold the property for US$82 million, excluding sellers’ credit of US$4 million, a 3% discount to the end-2023 valuation of US$84.8 million.

The refinancing of Prime US REIT OXMU -

’s July debt is in advanced stages, with management remaining confident of extending it before maturity, says Natarajan.

The REIT has US$480 million of debt, representing 64% of a total loan book, which is due for refinancing in July, of which US$330 million has hedges in place until June 2026.

For FY2024, RHB has assumed 5% overall financing costs, up from FY2023’s 4%.

Natarajan notes that Prime US REIT’s leasing enquiries are still healthy, with more interest seen at key assets Park Tower, Tower 1 at Emeryville, One Washingtonian Center (OWC) and 101 South Hanley, “albeit with relatively longer lead times”.

Prime US REIT’s portfolio occupancy (ex-OWC) in 1QFY2024 ended March 31 dipped slightly to 84.7% from 85.4% as at end-2023.

Asset enhancements are planned for OWC, with an estimated US$6 million capex, which saw the exit of major tenant Sodexo at the start of 2024.

Overall rent reversions were a slight negative for 1QFY2024 at –1.8% and are set to be around these levels for the full year, with a focus on net effective rents and longer leases, says Natarajan.

Natarajan has trimmed his FY2024-FY2026 distributable income forecast by 10%–13%, factoring in divestments and higher financing costs, and only expecting a 10% dividend payout this year with the balance used to fund capex. The former CEO of Prime US REIT’s manager, Harmeet Singh Bedi, is resigning. The new CEO is Rahul Rana, a shareholder of KBS Asia Partners, the sponsor of Prime US REIT and holds 40% of the shares of the manager. — Jovi Ho

City Developments
Price target:
PhillipCapital ‘buy’ $6.87

CDL and JV associates see strong 1Q property sales

PhillipCapital analyst Darren Chan is keeping “buy” on City Developments (CDL) with a target price of $6.87 following the company’s 1QFY2024 ended March business update.

In his May 23 report, Chan cheers CDL’s strong sales under the property development segment. During the quarter, CDL and its joint venture associates sold 429 units with a total sales value of $737 million — driven by the launch of Lumina Grand with 381 units sold to date while Tembusu Grand and The Myst continued to sell well. The analyst also highlights CDL’s plans to launch two projects in 2HFY2024.

Meanwhile, CDL’s hospitality segment continues to improve, with 1QFY2024 portfolio revenue per available room (RevPAR) up 5.3% y-o-y due to strong growth in Australasia and Singapore.

However, Chan also points out CDL’s higher gearing and lower interest cover. As at March 31, CDL’s net gearing on fair value on investment properties inched up to 63% compared to 61% as at December.

“The interest coverage ratio fell to 1.2 times in 1QFY2024 from 2.8 times in FY2023. Nevertheless, CDL maintains a strong liquidity position with $2.4 billion in cash,” Chan says.

Looking ahead, CDL is targeting $1 billion in divestments in 2024 to recycle capital. Successful divestments could translate into significant divestment gain as it carries assets at cost in its books — some of which were held at book value for several decades, Chan highlights.

He also notes that the hospitality segment should continue to improve on the back of mega concerts and meetings, incentives, conferences and exhibitions events in Singapore as well as the upcoming Paris 2024 Olympics.

Chan continues to view CDL as a proxy for the Singapore residential market and hospitality recovery. The stock is trading at an attractive 53% discount to PhillipCapital’s RNAV/share of $12.50. — Khairani Afifi Noordin

LHN
Price target:
PhillipCapital ‘buy’ 42 cents

Co-living profits tripled, more growth expected

PhillipCapital is upbeat on local co-living operator LHN, as the research house has kept its “buy” call while raising the target price to 42 cents from 39 cents previously.

Analyst Paul Chew says: “We raised our FY2024 earnings by 7% to account for the better-than-expected earnings from Coliwoo … We expect growth to remain stable for LHN in 2HFY2024, supported by stable room rates.”

Chew’s high expectations of the stock come on the back of its latest 1HFY2024 ended March results announcement, which saw revenue increase by 27.2% y-o-y to $57.5 million, driven by the group’s co-living business, which saw revenue doubled and earnings tripled. Earnings dropped by 23.4% y-o-y to $13.0 million.

The commencement of the 411 keys in Coliwoo Orchard in February 2023 was a major boost to room rates. The residential rental index in Singapore is up 33% over the past two years but has started to stabilise.

The group’s profit before tax declined 25.0% y-o-y to $15.3 million. Further removing the effect of fair value loss, gain on disposal of associate and discontinued operations from the logistics group, the group would have recorded a 13.7% y-o-y growth in 1HFY2024 adjusted profit before tax to $17.7 million, compared to $15.6 million in 1HFY2023.

Revenue came in within Chew’s expectations but earnings exceeded. “Revenue and adjusted PATMI were 51%/65% of our FY2024 forecast, respectively. Margins for co-living were higher than expected due to the high occupancy and room rates,” says Chew.

Chew sees FY2025 as a banner year of growth for LHN. The number of keys in co-living will expand by at least 900 (187 in Coliwoo GSM Building and 700 healthcare professionals).

After a stellar rise in residential rents of 50% over the past three years, rents have started to move sideways. Nevertheless, Chew sees that the demand for co-living remains healthy. Demand is now coming from corporate accounts, as Coliwoo focus its marketing efforts on this segment.

Another driver is the increased number of residents in the country. In 2023, the population rose by 281,000 to 5.91 million, the highest annual increase on record and 6x the pre-pandemic average of 47,000. LHN targets to grow co-living by 800 keys every year.

In addition, the sale of 49 food processing industrial units will be another one-off gain from the property development business.

The Coliwoo franchise is also scaling up and expanding into third-party management contracts. The stock pays a dividend yield of 6% and trades at a P/E of 5.2 times and a 40% discount-to-book value of 55 cents.

On the other hand, Chew is cautious about the group’s weaker facilities management earnings, which saw a 32% y-o-y decline to $1.7 million despite revenue growth of 14% y-o-y to $17.2 million. The number of car parks under management rose from 74 (about 20,000 lots) to 81 (about 25,000 lots). “We believe the margin weakness was due to a loss of government grants. Nevertheless, the number of car park lots will grow with the recent contract award of another 900 car park lots,” says Chew. — Samantha Chiew

Hongkong Land Holdings
Price target:
DBS Group Research ‘buy’ US$4.05

Unjustifiably low valuation

Hongkong Land is expected to book a write-down of between US$200 million and US$300 million, led by poor sentiment of the mainland property market.

Even so, DBS Group Research, citing its already “unjustifiably low valuation”, is keeping its “buy” call on this counter and has even raised its target price to US$4.05 from US$3.98.

“The current valuation is unjustifiably low even allowing for continued office market headwinds in Hong Kong and property impairment in China,” state analysts Jeff Yau, Percy Leung and Cherie Wong.

Hongkong Land now trades at a discount of 69% off the RNAV of US$11.1 per share estimated by the DBS analysts.

In their May 24 note, DBS points out that market sentiment in China has continued to deteriorate with lower sales and pricing. In 1QFY24 ended March, attributable contracted sales fell 36% y-o-y to US$262 million, which means contracted sales for the whole of 2024 might be lower than in 2023 with lower selling prices to dent the profit margins.

The company is undertaking an “extensive review” of its projects in China and expects an impairment charge of US$200-300 million which should lead to lower earnings when it reports its 1HFY2024 results.

Next, the company, as a key landlord in Hong Kong, continues to suffer from pressures felt by the office market. No thanks to new capacity in the Central business district, overall vacancy increased by 0.7 ppts q-o-q to 10.6% in March. Yet, Hongkong Land’s vacancy improved slightly to 7.1% in Mar from 7.4% last December.

DBS notes that the company has concluded the renewal of several leases expiring in 2024. In March, just 7% of the portfolio remains subject to expirations towards the end of the year, which implies relatively lower occupancy risk.

“That said, negative rental reversion continued to work its way through the portfolio which resulted in lower office income,” says DBS.

The company’s retail tenants in Hong Kong, on the other hand, enjoyed improved sales in the quarter to March, even taking into account slower-than-expected tourist spending recovery.

Hongkong Land’s Singapore office portfolio remains the bright spot. Thanks to tight supply and “flight to quality”, the company was able to extract higher revised rental rates. This segment’s physical and committed vacancy stood low at 2% and 1% respectively in March, similar to December’s 1.9% and 0.9%. “Improved income from luxury retail and Singapore office portfolios should offset the shortfall from the Hong Kong office portfolio, pointing to resilient rental income,” says DBS.

All in, DBS has lowered its FY2024 earnings for Hongkong Land by 35%. Nonetheless, the DBS analysts point out that at current levels, Hongkong Land’s share price is trading at a 69% discount off its appraised current NAV, which is 1.5 sd below its ten-year average NAV of 49%.

The stock’s estimated dividend yield for FY2024 stands at 6.4%, and DBS’s target price of US$4.05 is based on a target discount of 63% to the analysts’ June 2025 NAV estimate.— The Edge Singapore

Fu Yu Corp
Price target:
SAC Capital ‘unrated’

Back in the black

SAC Capital analysts June Yap and Matthias Chan are encouraged by the 1QFY2024 ended March turnaround of precision plastics manufacturer Fu Yu Corporation F13 -

after the company reported a net profit of $5,200 compared to a net loss of $2.4 million a year ago.

For now, Yap and Chan have kept the stock unrated in their May 20 note.

“Previously a dominant force, the company had experienced stagnation in capabilities and manpower over the last 10 to 15 years,” write Yap and Chan.

They add: “However, with a new team on board and a newly-opened smart factory, the group has revitalised its capabilities, enabling entry into new markets such as MedTech and internet-of-things (IoT) consumer electronics.”

Fu Yu Corp’s improved figures have come about from its supply chain arm achieving a $400,000 net profit in the 1QFY2024 and its significantly y-o-y reduced loss from $2.4 million to $400,000 in its manufacturing business.

The analysts point to the company’s strength of establishing a new products introduction (NPI) team and its four-level smart factory in Tuas as “significant advancements”, with the factory boasting reduced yield loss, minimised human error and enhanced precision manufacturing levels.

Additionally, Fu Yu Corp has been appointed as the exclusive contract manufacturer for Singapore’s start-up, myFirst, facilitating its expansion into North America.

Furthermore, the company secured two new projects with international partners, one for producing microfluidic chips for medical diagnostic devices and another for manufacturing high-precision tools for drug delivery devices, while the other signed in 1QFY2024 was with a Singapore-based medical device manufacturer.

Yap and Chan note that group CEO David Seow has expressed optimism about the company’s future growth trajectory, emphasising the importance of expanding the project pipeline and executing strategic initiatives. — Douglas To

Sheng Siong Group
Price target:
UOB Kay Hian ‘buy’ $1.88

Consumers’ shift towards value

UOB Kay Hian (UOB KH) analysts John Cheong and Heidi Mo have kept their “buy” call on Sheng Siong Group OV8 -

following its 1QFY2024 results ended March, which was “largely in line” with their expectations. The analysts have kept their target price at $1.88 too.

As the cost of living rises, Cheong and Mo believe that consumers may shift towards the group’s value-for-market products. The supermarket operator reported revenue and earnings of $376 million (+5.5% y-o-y) and $36 million (+8.9% y-o-y) respectively for the 1QFY2024, both forming 27% of UOB KH’s full-year forecasts.

The group’s 1Q results typically form around 26% of their full-year earnings from higher seasonality, they say. This top-line growth comes from higher comparable same-store sales by 8% y-o-y and 0.1% y-o-y in Singapore and China respectively. Sheng Siong’s gross profit margin climbed 0.6 percentage points (ppt) y-o-y to 29.4%, a testament to the group’s effective cost controls like the diversification of supply sourcing, say the analysts.

Meanwhile, operating expenses rose 8.8% y-o-y due to higher staff costs from the increment of staff variable bonuses because of better financial performance.

Cheong and Mo note that Sheng Siong secured one new store in 1Q2024, with 70 stores in Singapore as at the end of March, totalling a retail area of 623,677 sf (+1.7% y-o-y).

“We think that Sheng Siong will be able to achieve growth through the continuous expansion of its network of outlets in Singapore and reach its target of at least three store openings annually,” say Cheong and Mo.

“In China, its operations remain profitable, making up 2.3% of 1QFY2024 revenue. Sheng Siong expects its sixth store in Kunming to be operational by 2Q2024.”

“As consumers cut back on dining out, Sheng Siong will stand to benefit from boosted sales,” they say. As such, the analysts keep their target price at $1.88, pegged to an unchanged 2024 P/E of 21 times, or five-year average mean P/E. — Nicole Lim

Cromwell European REIT
Price target:
RHB Bank Singapore ‘buy’ EUR2.05

Minimal impact with change of sponsor

RHB Bank Singapore analyst Vijay Natarajan has kept his “buy” call and target price of EUR2.05 ($3) on Cromwell European REIT. Natarajan’s report dated May 27 comes after the REIT announced that its sponsor, Cromwell Property Group, sold its entire stake to the Stoneweg Group.

The consideration for Cromwell Property Group’s 27.79% stake was EUR280 million, or EUR1.52 per share, which is at a 7% premium to the REIT’s three-month volume-weighted average price (VWAP). Stoneweg is a Swiss headquartered real estate manager and advisory group that was established in 2015.

“The move does not come as a surprise to us and is mainly on the back of Cromwell’s plan to lighten its balance sheet and focus on the core Australian real estate market. The sale was done via a bidding process with Stoneweg emerging as the winner among several bidders. The transaction is subject to regulatory approvals and is expected to be completed by 3Q2024,” writes Natarajan.

To the analyst, the change of sponsor should have a “minimal impact” on the REIT’s strategy and operations. In addition, the stake, which was acquired at a premium to the REIT’s current traded price, indicates that Stoneweg sees “good value” in the REIT.

“We expect Cromwell European REIT to continue its deleveraging and asset enhancement strategy, with a pivot towards the logistics and industrial sector, and see tailwinds to its share price from interest rate cuts in 2H,” says Natarajan.

He adds that the REIT is expected to achieve its stated EUR400 million divestment plans by next year. Since 2022, Cromwell European REIT has divested 11 assets for EUR262 million, at a blended 14% premium to valuation. Another EUR60 million of assets are currently in advanced stages, the analyst notes. — Felicia Tan

Frencken Group
Price target:
Maybank Securities ‘buy’ $1.77

Bullish semiconductor outlook

Analyst Jarick Seet of Maybank Securities is keeping “buy” on Frencken Group E28 -

at an unchanged target price of $1.77.

In his May 27 note, Seet writes that the company will be a “key beneficiary” from its strategic partnership with semiconductor manufacturer, Applied Materials (AMAT) in the coming years.

The analyst is also encouraged by the US company’s positive outlook in its recent 2QFY2024 results and plans to open a new $600 million facility in Singapore.

“We also believe the ramp-up of some of these existing new product introductions (NPIs) should start by FY2025 which could potentially see Frencken’s growth leapfrog going forward. In our view, it is the best proxy for a semicon recovery even for FY2024 and remains our top pick in the Singapore tech sector,” writes Seet.

Due to higher sales from its key customer in Europe and improving sales from Asia, Frencken’s semiconductor segment “did well” in its 1QFY2024 ended March results, with management expecting a gradual recovery in the full FY2024 for the segment from its various NPIs in progress in Europe and Asia.

Seet highlights that the company has also relocated its US operations to a larger facility and expanded its motor business, supporting semicon equipment customers.

He adds: “It is also working with a US front-end equipment customer to expand its range of programmes, which is likely to translate to higher revenue in the future.”

Seet maintains a bullish outlook, noting that certain NPIs are “slated to” ramp up in the FY2025, and he expects 2QFY2024 to perform better than 1QFY2024, while subsequent quarters in 2HFY2024 to be stronger q-o-q, mainly due to new NPIs, in Frencken’s semiconductor, automotive, life science and medical segments.

“Margins should also continue to pick up due to higher operating leverage. Southeast Asia utilisation has picked up to 60% to 70% from above 50% in 3QFY2023, which is highly encouraging and should point to a stronger 2QFY2024 y-o-y,” highlights Seet.

Upside factors include stronger-than-expected semiconductor and industrial automation contributions, robust margin accretion from new products and improving efficiencies, as well as improving institutional interest. These factors could help the stock re-rate towards the valuations of peers.

Conversely, downsides include a drop in demand, supply chain disruptions that could impede production ability and revenue recognition, and lastly, a lower-than-expected dividend pay-out. — Douglas Toh

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