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Brokers’ Digest: StarHub, Keppel DC REIT, IHH Healthcare, Elite Commercial REIT, CLAS, E-LOG, Sats, BRC Asia, Delfi, LHN

The Edge Singapore
The Edge Singapore • 25 min read
Brokers’ Digest: StarHub, Keppel DC REIT, IHH Healthcare, Elite Commercial REIT, CLAS, E-LOG, Sats, BRC Asia, Delfi, LHN
StarHub Green. Photo: Samuel Isaac Chua/The Edge Singapore
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StarHub
Price target:
Maybank Securities ‘buy’ $1.44

Upgrade on positive tailwinds

Maybank Securities analyst Hussaini Saifee has upgraded StarHub CC3 -

to “buy” from “hold” as he sees several positive tailwinds for the company. The analyst, who has just taken over coverage of the telco, has also lifted his target price to $1.44 from $1.10 previously.

“StarHub is at the tail-end of its Dare+ investment cycle,” he writes, noting that 2024 will be the last year of the telco’s elevated Dare+ initiative.

“From here on, we expect capex (capital expenditure) levels should drop while legacy costs are eliminated,” he adds in his April 16 report.

Moving forward, StarHub’s targeted benefits should be visible from FY2025 ending December 2025 in the form of lower capex with the analyst estimating a business as usual (BAU) capex of 4% to 7% of sales compared to its current levels of 11% to 13% of sales. StarHub’s operating expenses (opex) should also be reduced as the company progressively eliminates legacy platforms with the newer platforms and links put in place, Saifee points out.

See also: DBS keeps 'buy' on Hongkong Land despite impending writedown

“Dare+ investments should also allow for new enterprise revenue opportunities although we have not factored that in our numbers,” he continues.

On this, the analyst has estimated the telco’s earnings to post a 10% CAGR over FY2023 to FY2026 while its free cash flow (FCF) per share should increase to 6.4 cents in FY2023 and 13.8 cents in FY2026.

“Our projected earnings growth is in line with Asean peers with high visibility linked to the end of Dare+ investments. On P/E and EV/Ebitda valuations, Starhub is trading at –1 to –2 standard deviations (s.d.) below mean and at [a] 10%–40% discounts to [its] Asean peers,” he says.

See also: Singtel's higher dividends keep analysts positive, target prices increase

“On the other hand, dividend yield [of 6%] is at the higher end of its Asean telecom peers with even superior FCF/earnings linked growth,” he adds.

Ready for consolidation?

Beyond that, a consolidation of the telco industry remains a potential catalyst with four operators within Singapore being “highly crowded”, in Saifee’s view. Singapore is also arguably the last market in Asia to skip consolidation, he adds.

With mobile prices down some 30% in the past five years and StarHub having the support of its balance sheet and cross-selling opportunities, the telco is “better placed” to drive consolidation, says Saifee.

“If we assume a scenario whereby Starhub acquires M1 and factor in synergies at 50% of regional telco consolidation experiences, we see 23%–43% earnings accretion for Starhub by FY2025–FY2027,” he writes.

M1, which is a part of Keppel, is “slightly ahead” of StarHub in terms of mobile subscriptions. StarHub, on the other hand, is ahead of M1 in fixed broadband subscriptions.

Although M1’s mobile revenue is not available, Saifee assumes that StarHub’s figures are ahead. This is based on the 4QFY2023 call with StarHub’s management, which revealed that it has a lead of around 500 basis points (bps) over its peer.

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

According to Keppel’s disclosures, M1’s operating revenues stood at $1.3 billion in FY2023, compared to StarHub’s $2.4 billion in the same year.

“Of this, 61% of the revenues were from the consumer segments (mobile, handset sales, fibre etc) almost on par with Starhub at 62%. Based on the past four-year trend, M1’s consumer revenues have declined at a CAGR of -4% (StarHub: +2%) while enterprise revenues have increased at a CAGR of 32% (StarHub: +12%). M1 attributed a part of the decline in consumer revenues to lower handset sales while enterprise growth is partly linked to mergers and acquisitions (M&A),” the analyst writes.

“M1’s ebitda margins are no more disclosed. Based on FY2020 disclosures, M1’s ebitda margins were at 25%. Starhub margins back then were 27%. Starhub margins declined to 20% in 2023, partly owing to faster growth in low-margin Enterprise business as well as Dare+ linked costs. We estimate M1’s margins could have declined as well in the past four years owing to faster growth within its low-margin enterprise services,” he adds.

That said, should a consolidation happen, the possibility of network integration complications may lead to downtime in the network, which could lead to a higher churn rate. — Felicia Tan

Keppel DC REIT
Price target:
DBS Group Research ‘buy’ $2.20

‘Attractive’ Sydney divestment deal $2.20

The team at DBS Group Research has kept its “buy” call and target price of $2.20 for Keppel DC REIT (KDCREIT) after it announced on April 16 that it has agreed to divest its Sydney data centre for A$174 million ($152.1 million).

KDCREIT’s manager entered into a sale and purchase agreement (SPA) on April 15 to divest its 100% freehold interest in Intellicentre Campus to Macquarie Data Centres Macquarie Park Property SubTST, a wholly-owned subsidiary of Australian-listed Macquarie Technology Group. Macquarie Technology Group is the ultimate parent company of Macquarie Data Centres, which is the property’s existing tenant. The group also owns facilities which house data for some of the world’s biggest hyperscalers, clouds and 42% of the Australian Federal Government.

Intellicentre Campus is located in Macquarie Park in the north of Sydney and is 12km from the Central Business District. Macquarie Park is a research and business park with a high concentration of companies in the communications and information technology sectors.

The agreed value represents a 35.4% premium to the property’s valuation of A$128.5 million as at KDCREIT’s FY2023 ended Dec 31, 2023. The amount is also 148.6% higher than the data centre’s purchase price of around A$70.0 million. The divestment represents an exit cap rate of approximately 3.6%.

After the sale, the REIT says it will re-invest A$90 million of the proceeds into an Australia Data Centre note (AU DC note) issued by Macquarie Data Centres Group and guaranteed by Macquarie Technology Group. The REIT will retain its exposure to the Australian data centre market and receive a regular income stream starting from about A$6.3 million per year through the AU DC note. The income stream comes with a consumer price index (CPI)-linked annual escalation mechanism for 8.5 years.

According to the REIT, the income from the note will mirror the rental the REIT would receive from Intellicentre Campus if the asset was held for another 8.5 years.

In line with the sale, the REIT manager will repay its existing loans of about A$43.2 million relating to the original investment of the campus. The remaining net sale proceeds of about A$22.3 million, subject to closing adjustments, will be used for repaying debt, funding acquisitions, capital expenditures and, or working capital.

The transactions are expected to be accretive to Keppel DC REIT’s distribution per unit (DPU) by 0.7%. If the transactions had been completed on Jan 1, 2023, the REIT’s pro forma DPU would have been 9.446 cents, up from its reported 9.383 cents. They are expected to be completed by 4Q2024.

“As a whole, these transactions are DPU-accretive and present a unique opportunity for Keppel DC REIT to crystallise value from its investment in Intellicentre Campus at a highly attractive premium while continuing to earn recurring income,” says Loh Hwee Long, CEO of the manager.

“They also attest to the manager’s proactive portfolio management strategy and commitment to optimise unitholders’ returns, while improving the resilience of Keppel DC REIT’s earnings. Post-transactions, Keppel DC REIT remains well-positioned to pursue further growth opportunities, supported by a strong balance sheet,” he adds.

In its April 16 update, the DBS team notes that the deal is “quite attractive” as it shows the REIT’s ability to unlock value within its portfolio by divesting its assets at healthy premiums and low exit cap rates.

“The investment into the AU DC note serves to offset the loss of income from the divested asset, providing a smoother income stream over the next 8.5 years,” the team adds. Furthermore, the move will reduce the REIT’s gearing by 36.6%.

That said, the team questions the REIT’s manager’s intentions in transitioning to a fixed-income investor from an equity or property investor.

Other questions include the Macquarie Group’s motivation behind the high premium and attractive coupon on the notes as well as the untapped potential within the property. — Felicia Tan

CapitaLand Ascott Trust
Price target:
CGS International ‘add’ $1.17

Big beneficiary of concert fever

The string of performances by Taylor Swift and Coldplay is a “gift that keeps on giving” for CapitaLand Ascott Trust HMN -

(CLAS), which runs a network of properties in cities where these concerts will be held, write CGS International analysts Lock Mun Yee and Natalie Ong in their April 4 note.

Lock and Ong, citing data from Smith Travel Research, note that revenue per available room (RevPar) for the Swift concert days rose 60%, 50%, 120% and 40% y-o-y for Singapore, Tokyo, Melbourne and Sydney.

In contrast, on days without concerts, the cities enjoyed RevPar increases of 12%, 40%, 10% and 15%, the analysts say, as they reiterate their “add” call.

Singapore, for one, is likely to enjoy a 21% RevPar increase for the whole of March to $255, when Swift held her six concerts.

Out of the 46 cities where CLAS operates, Swift is performing in 10 of these cities and Coldplay in six of these cities, according to Lock and Ong.

“We deem properties located within a 40-minute commute to the respective Swift and Coldplay concert venues as concert beneficiaries, accounting for 34% and 18% of CLAS’s total room inventory as of December 2023, making CLAS a bigger beneficiary of concert fever than we originally thought,” they write.

The analysts have revised their RevPAR growth forecast in FY2024 ending December for its major markets Australia, France, the UK and Ireland from 5%–6% to 7%–8%. This translates into $1.3 million, or a 0.3% uplift in gross profit for the current FY2024.

“While events and concerts are ad hoc in nature, Swift’s and Coldplay’s tours highlight the quality of CLAS’s portfolio and investment strategy, which focuses on prime locations in key gateway cities.

“We believe these cities will not only benefit from business and leisure travel demand, but the locations of CLAS’s assets would also allow them to capture upside from large Mice and entertainment events typically held in major cities,” they add.

At current levels, CLAS is trading at –0.6 standard deviations and gives an “attractive” yield of 6.5%.

However, they have trimmed their target price from $1.29 to $1.17, no thanks to unfavourable currency movements assumed, plus delay in the estimated redevelopment of key property Liang Court as well as income foregone from the divestment of another property Citadines Mount Sophia.

“CLAS is our top sector pick as its diversified portfolio provides both stability and upside exposure to the hospitality sector while offering portfolio reconstitution opportunities,” the analysts add.

Potential re-rating catalysts include accretive acquisitions or divestments and stronger-than-forecast RevPAR.

On the other hand, downside risks include lower-than-forecast leisure and corporate travel demand, affecting CLAS’s occupancy and room rates. — The Edge Singapore

IHH Healthcare
Price target:
DBS Group Research ‘buy’ $2.18

Attractive level to ride medium-term growth

Despite softer industry-wide numbers, Rachel Tan of DBS Group Research has maintained her “buy” call on IHH Healthcare Q0F -

, indicating that this counter is preferable over the less diversified Raffles Medical Group BSL - , which has warranted a “hold” call.

In her April 12 note, Tan points out that IHH Healthcare is likely to see softer 1HFY2024 ending June numbers, as the local healthcare industry to normal growth rates following the easing of shortage of hospital beds, with demand easing following the pandemic and new capacity added.

According to Tan, private hospitals showed moderating revenue in 2HFY2023 as occupancy in public hospitals also eased and ebitda margin was pressured due to higher costs.

“While it could be a little early to conclude that the easing is permanent, we believe that private hospitals will likely see a slower start to FY2024, especially in 1QFY2024, both due to moderation in public hospitals and the festive season,” says Tan. She also believes IHH is seeing a normalisation of its earnings post-pandemic.

Earnings for the healthcare giant, with operations across Singapore, Malaysia and many more markets, will see growth resuming at “normal” rates locally this current FY2024.

In addition, IHH can expect a lift from Gleneagles in Hong Kong, which is seen as making a positive contribution to the bottom line.

“With new management in place and IHH embarking on a new growth plan, we are optimistic that it will be able to drive a growth trajectory moving forward,” says Tan.

Her target prices for IHH are $2.18 and RM7.60 ($2.16), respectively, for the counter quoted on the Singapore and Kuala Lumpur exchanges.

She notes that IHH is now trading at below 13 times EV/Ebitda for FY2024, which is below –0.5 s.d. (standard deviations) of its historical mean and close to troughs seen during the pandemic months. “This is an attractive level to ride on its medium-term growth trajectory,” says Tan. — The Edge Singapore

Sats
Price target:
CGS International ‘add’ $3.44

Aiming for 3Rs

CGS International analysts Tay Wee Kuang and Lim Siew Khee have kept their “add” call and $3.44 target price on Sats, on expectations that the ground handler should be able to improve its earnings and when it resumes paying dividends, help improve the confidence of investors.

In their April 8 note, Tay and Lim acknowledge concerns by investors that while Sats has shown steadily better operating numbers, its ebit margin of 8.8% in the most recent 3QFY2024 ended December 2023 remains way below the five-year average of 15.8%.

Sats believes there will be room to improve its profitability via multiple ways. First, by winning over new customers, such as a recent deal with Etihad to handle cargo across 12 stations.

Next, Sats is planning to upscale its operations across newer kitchen facilities in Tianjin and Bangalore, as well as pass on costs through ongoing contract renegotiations and rightsizing of its enlarged portfolio following its acquisition of WFS, thereby driving better operational leverage and cash flow generation.

By doing so, Sats would be able to undertake the so-called 3Rs: repayment of debt; reinvestments in operational capex and the resumption of dividends to further improve shareholders’ returns.

For the current 4QFY2023, the CGS International analysts estimate Sats will report a core net profit of $19.9 million following a seasonally stronger 3QFY2024 core net profit of $31.2 million, which would put full-year FY2024 core net profit at an estimated $51.1 million.

Positive free cash flow of $118.1 million for 9MFY2024, which should further improve at the end of FY2024, will then put Sats in the position to resume dividends and “catalyse” its share price as investors gain confidence that Sats will continue to deliver profitable quarters ahead.

Tay and Lim’s discounted cash flow-based target price, using a weighted average cost of capital of 9.9%, is steady at $3.44.

Further re-rating catalysts include asset recycling activities that would help generate further cash flow and stronger growth in cargo volumes.

On the other hand, downside risks include the deferment of dividends, the weaker performance of Sats’ network of associates and joint ventures across the region, and weaker global trade flows, negatively impacting global cargo demand.— The Edge Singapore

Elite Commercial REIT
Price target:
CGS International ‘add’ GBP0.38

Broader investment mandate

Lock Mun Yee and Natalie Ong of CGS International have kept their “add” call and dividend discount model-based target price of GBP0.38 ($0.65) for Elite Commercial REIT (ECREIT), following its intention to broaden its investment mandate to include so-called living sector properties.

On April 15, ECREIT, which holds a portfolio of commercial properties in the UK largely rented to the local government, will be widening its portfolio mix to include purpose-built student accommodation (PBSA), built-to-rent residential (BTR), senior living and social housing and other government housing.

To reflect this broader investment strategy, ECREIT plans to change its name to Elite UK REIT at a later date to be determined.

“The broader investment mandate would enable ECREIT to benefit from defensive cash flow backed by government tenancies while deepening and broadening its focus into defensive sectors in the UK as a UK pure-play S-REIT,” state Lock and Ong in their April 15 note.

As at the end of FY2023 ended December 2023, 93.2% of ECR’s rental income was derived from the Department for Work & Pensions (DWP) and 96.6% of its portfolio lease is expiring in FY2028.

“In addition, we think broadening its strategy would likely position the REIT for growth and future-proof the portfolio by capitalising on segments with favourable demand-supply fundamentals such as PBSA and BTR,” the analysts add.

Management says the UK PBSA sector is a countercyclical asset class that remained resilient even during the pandemic and is undersupplied due to a growing student population.

The student accommodation market has attracted significant interest from investors other than ECREIT. On April 12, private-held Mapletree Investments announced the acquisition of 8,192 operational beds across 19 cities in the UK and Germany, as well as an operating platform from Cuscaden Peak Investments for GBP1 billion.

The deal will increase the overall bed count within Mapletree’s UK portfolio to over 17,000, solidifying Mapletree’s position as one of the largest owners of student housing assets in the UK.

Meanwhile, the UK BTR segment is underbuilt, accounting for only 2% of the UK’s total private rental stock. It benefits from higher demands from renters and limited supply.

However, instead of purely buying new assets, ECREIT is considering repositioning some of its existing properties.

The CGS analysts estimate that in the medium term, any potential valuation uplift from these enhancement opportunities could enable ECREIT to pare down its proforma post-preferential offer gearing of 43.7%.

Meanwhile, they have maintained their esitimates for its stable income profile with inbuilt growth through its inflation-linked rental structure.

From Lock and Ong’s perspective, potential re-rating catalysts could come from faster than expected completion of value creation opportunities and the earlier than expected resumption of a higher dividend payout ratio.

On the other hand, downside risks include tenant concentration exposure to DWP and the longer and higher interest rate trend. — The Edge Singapore

ESR-LOGOS REIT
Price target:
DBS Group Research ‘buy’ 34 cents

Divestment at above valuation

DBS Group Research has kept its “buy” call and 34 cents target price on ESR-LOGOS REIT J91U -

(E-LOG) following the divestment of a property in Australia at a significant premium to valuation.

On April 11, E-LOG announced the sale of 182–198 Maidstone Street for A$65.5 million ($57.3 million), which is at a 7.4% premium to valuations. Since FY2023, E-LOG has divested around $500 million worth of assets, fetching an average premium of just 1% to valuations.

As this property accounts for just 2.2% of its portfolio value and 0.6% of its revenue, the sale is not expected to materially impact E-LOG’s NAV (net asset value) or DPU (distribution per unit).

Upon completion of the divestment, E-LOG’s portfolio will consist of 71 properties, excluding 48 Pandan Road held through a joint venture, located across Singapore, Japan and Australia, as well as investments in three property funds in Australia.

In its April 11 note, DBS say proceeds from the divestment can be used to pare down debt, finance acquisitions, fund asset improvements and meet general capital working needs.

Following this divestment, E-LOG’s gearing is expected to remain just below 35%, providing sufficient headroom to redeem this series of perpetual securities of $150 million carrying a coupon of 6.63% and to be called on May 3.

“Considering the divestment yield falling between 3.5% and 4%, compared to the coupon rate of the perpetual securities, utilising the proceeds for redemption could potentially result in some accretion to DPU,” says DBS.

Moreover, this divestment underscores the ability of S-REITs to capitalise on the pricing gap between asset values in the physical and public markets, with the current P/B multiple of 0.9 times, thereby strengthening their balance sheets, adds DBS. — The Edge Singapore

BRC Asia
Price target:
UOB Kay Hian ‘buy’ $2.42

Long-term growth

UOB Kay Hian analysts Llelleythan Tan Yi Rong and Heidi Mo in their April 15 note have kept their “buy” call for BRC Asia BEC -

.

As the steel supplier is seen to enjoy steady earnings growth due to an improving construction sector coupled with a generous dividend yield of 9%, they have raised their target price from $2.07 to $2.42.

BRC Asia’s 1QFY2024 ended March earnings of $17.1 million, up 46.5% y-o-y, came in above the expectations of Tan and Mo. Revenue in the same period was up 17% y-o-y, despite a seasonally slow quarter.

“The strong top- and bottom-line growths were largely due to a low base in 1QFY2023 from Singapore’s Heightened Safety period depressing delivery volumes while also driven by the ongoing recovery in domestic construction demand,” reason the analysts, referring to the months when the tempo of construction activities slowed because of a spate of accidents.

Even so, BRC Asia enjoyed better margins, attributed to higher volumes and utilisation rates. Certain reversals of provisions for onerous contracts made previously also helped.

The analysts point out that BRC Asia was able to maintain its dominant market share, as indicated by its order book of around $1.3 billion as at the end of March, versus the preceding quarter ended December 2023.

“We expect the group to deliver half of its current order book in the next 3-4 quarters as domestic construction activity continues to recover,” state Tan and Mo.

Citing government statistics, the analysts note that construction demand in Singapore this year will reach up to $38 billion, exceeding last year’s $33.8 billion.

Growth is driven by the strong pipeline of new public housing, while long-term growth will be underpinned by big infrastructure projects such as Changi Airport Terminal 5, Tuas Mega Port and Cross Island MRT, the analysts say.

They have raised their FY2024 earnings estimates from $76.9 million to $88.7 million. They now see earnings for FY2025 and FY2026 to reach $98.5 million and $102.2 million, up from $84.3 million and $87 million, respectively.

Along with the higher earnings projections, they have accorded a slightly higher valuation multiple of 7.5 times earnings, up from 7 times, to derive the higher target price of $2.42 from $2.07.

“In our view, favourable tailwinds, expected earnings growth, along with BRC’s attractive 9% dividend yield would help support share price performance in 2024,” write Tan and Mo. — The Edge Singapore

Delfi
Price target:
RHB Bank Singapore ‘buy’ $1.33

Deflecting higher cocoa cost

RHB Bank Singapore’s Alfie Yeo has kept his “buy” call on Delfi with an unchanged target price at $1.33, despite reducing his FY2025–FY2026 earnings estimates and surging cocoa prices.

“We believe margin compression risks will be mitigated by existing inventory, price adjustment, right-sizing and passive inventory loading at higher cocoa prices,” says Yeo in his April 9 report.

Yeo anticipates a “slight” impact from rising cocoa prices stemming from supply concerns in Ghana and Ivory Coast. Cocoa prices have more than doubled to US$9,000 ($12,170) per tonne since the end of December 2023.

With Delfi’s position as a manufacturer of chocolate confectionery, surging cocoa prices would reduce its gross margins with all other factors remaining constant. Given the significant rise in cocoa’s market price, Yeo anticipates seeing “some but not significant” impact on Delfi’s future financials.

Additionally, Yeo notes that higher cocoa prices have resulted in “slower” revenue growth and lower margin assumptions, culminating in an 11%–12% decrease in FY2023–FY2024 earnings. Yeo expects FY2024 ending December earnings to remain unchanged due to Delfi’s forward purchase strategy and existing inventory drawdown.

However, Yeo anticipates a decrease in demand growth from potential price adjustments in FY2025, leading the analyst to further trim FY2025–FY2026 earnings by 2%–3%. With Delfi’s three-pronged margin mitigation strategy, the analyst expects no additional downgrades to margin assumptions.

Despite the earnings adjustment, Yeo likes the stock’s “attractive” numbers. As at Yeo’s report, Delfi was trading at 92 cents, putting it at nine times its FY2024 P/E and near –1 standard deviation (s.d.) from the mean of 16 times. His target price is pegged to 13 times FY2024 P/E, at 0.5 s.d. from the mean.

Potential downside risks to Delfi’s earnings identified by Yeo include a decrease in consumption of chocolate confectionery in Indonesia amidst growing raw material prices that could affect Delfi’s gross profit margin.

Delfi scored three out of four for environmental, social and governance (ESG), a slight drop below the country median of 3.1. Based on RHB’s ESG methodology, the analyst’s target price includes a 2% discount on the intrinsic value. — Ashley Lo

LHN
Price target:
Maybank Securities ‘buy’ 45 cents

Two new projects

Li Jialin and Eric Ong of Maybank Securities have kept their “buy” call and 45 cents target price for LHN after the co-living operator announced it is adding two new developments to its portfolio.

First, LHN won a government tender for the former Bukit Timah fire station, which will be refurbished at $7 million to become a mixed-use project with 60 serviced apartment units on levels 2 & 3, and a ground floor commercial F&B and retail operation.

According to LHN, this site will serve as a key community node for both the Rail Corridor and the surrounding precinct. It is expected to be open by June 2025.

“In our view, the Bukit Timah project should capitalise on LHN’s expertise and synergy across its business units in co-living, commercial and facility management,” write Li and Ong in their April 11 note.

Meanwhile, LHN is also teaming up with Oxley Holdings 5UX -

’ CEO Ching Chiat Kwong and his son Shawn Ching in a 50-50 joint venture to acquire Wilmer Place, which is at 50 Armenian Street, near City Hall MRT Station.

According to the Maybank analysts, the office building could remain a commercial building or be re-purposed for LHN’s co-living business.

With a land area of 710.7 sq m, the leasehold building has a tenure of 99 years from May 1, 1947. This should enable the LHN, which is spending up to $24 million on this project, to expand its co-living offerings under its space optimisation business segment.

In total, LHN has six upcoming projects, including the Ministry of Health (MOH) hostel for 700 nursing professionals. To help fund this growth, LHN is offering commercial paper of up to $5 million, at a 6% interest rate.

With MOH proposing another 11 other sites, this suggests possible re-rating catalysts for LHN if it can secure more of these projects, according to the Maybank analysts. Their target price of 45 cents is pegged at eight times forward FY2024 earnings. — The Edge Singapore

Mermaid Maritime
Price target:
UOB Kay Hian ‘unrated’

All-round growth and better margins

Mermaid Maritime (MMT), a Thailand-based subsea and offshore services provider, is enjoying a clear post-pandemic recovery, as it successfully expanded into new markets in the Middle East, West Africa and the North Sea. MMT operates eight subsea vessels, 18 diving systems and 14 remotely-operated vehicles.

“Profitability has grown materially over the past three years with management guiding for ebitda margin expansion in 2024 and 2025. In 2H2023 alone, the company doubled its order book to finish 2023 at US$734 million,” writes UOB Kay Hian in an unrated note on April 12.

In FY2023 ended December 2023, MMT increased its revenue by 23% y-o-y to US$275.4 million ($375.7 million) and reversed from a loss of US$0.2 million to earnings of US$9.7 million.

The better numbers can be attributed to all-round improvements across the different business lines. Revenue between FY2019 and FY2023 grew at a CAGR of 27%.

The leading business segment is subsea inspection, repair & maintenance (IRM), which contributed 56% of FY2023 revenue; cable laying & engineering, and transportation & installation (T&I) and decommissioning, which accounted for 29% and 15% of the topline respectively.

Thanks to better utilisation of its vessels, MMT enjoyed a 4.4ppt y-o-y increase in FY2023 ebitda margin to 13.8%.

“During our recent meeting with management, it appeared very confident that ebitda margin can continue to expand in 2024 helped by higher charter rates, continued high vessel utilisation rates and supported by a robust order book,” says UOB Kay Hian.

In 2HFY2023, MMT doubled its order book from US$337 million to US$734 million, led by a significant contract from Chevron Thailand for decommissioning work in the Gulf of Thailand.

UOB Kay Hian, citing the management, says this contract win will likely underpin its revenues for the next few years.

With oil prices seen to remain above US$80 per barrel, MMT’s revenue and earnings growth will be well supported in FY2024 and FY2025.

As old contracts expire, MMT is able to charge higher rates for new contracts and sustain high utilisation levels with new order wins, says UOB Kay Hian.

Nonetheless, key risks appear to be low daily trading liquidity, a decline in oil prices which could impact spending in the offshore oil and gas industry, and operational risks, the brokerage adds. — The Edge Singapore

Frasers Property
Price target:
DBS Group Research ‘buy’ $1.20

Further UK writedowns

Frasers Property is warning that it is booking further fair value losses in its upcoming 1HFY2024 ended March is a “negative surprise”, says DBS Group Research in its April 10 note.

Even so, DBS expects the company to remain profitable in this current FY2024 with “dividends intact”.

On April 9, Frasers Property TQ5 -

said it would report lower earnings in 1HFY2024 versus 1HFY2023, no thanks to a lower value of its commercial properties in the UK.

This impending round follows just after the company wrote down $446 million in FY2023 for its UK, other European and Australian assets, no thanks to cap rates which have expanded by close to 50 basis points (bps).

This coming round of fair value losses just months after the previous round will raise questions if the last reported fair value losses were truly reflected, says DBS.

DBS says that it had previously flagged that cap rates for UK commercial assets have expanded between 75bps and 90bps, which means slightly more downside if “marked-to-market”.

Overall, DBS is not seeing “marked changes” to Frasers Property’s NAV (net asset value) of $2.52 per share as at September 2023, given how UK commercial assets make up just around 1% of the company’s total assets of $39.8 billion.

Frasers Property closed at 85 cents on April 9, representing a steep discount of 70% off its NAV, close to its record lows. DBS’s current call on this counter is “buy” with a target price of $1.20. — The Edge Singapore

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