Brokers Digest 907

US$1.05 BUY (Maybank Kim Eng Research)

US$1.00 BUY (RHB Group Research)

US$1.00 OUTPERFORM (KGI Securities)

Although Manulife US REIT (MUST) posted a 2% drop in its 2QFY2019 DPU to 1.48 US cents, market watchers are quick to highlight that this is by no stretch an indication of trouble for the REIT.

See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents

In its latest earnings call on Nov 4, MUST notes that the decline was attributable to an enlarged unit base on the back of the issuance of private placement units as well as new units pursuant to a preferential offering — both of which were to partially finance the acquisition of 400 Capitol Mall in California.

Income available for distribution to unitholders for the quarter came in 7.8% higher at US$20.8 million ($28.2 million), while gross revenue rose 13.3% to US$45.7 million. As a result, net property income grew 11.8% to US$28.1 million.

While the associated equity fundraising may have been responsible for the minor stumble in MUST’s DPU, analysts opine that this could well steer the REIT towards meeting the index inclusion criteria for the FTSE EPRA Nareit Developed Asia Index.

See also: Suntec REIT biggest beneficiary from MAS’s ‘looser’ leverage, ICR rules: OCBC

“This should help in the REIT’s rerating, in terms of liquidity and visibility,” says RHB Group Research analyst Vijay Natarajan in a Nov 5 report. “MUST is also awaiting the finalisation of [the] proposed US tax regulations — the REIT should be able to roll back to its IPO tax structure, resulting in additional tax savings of 1.5%.”

Apart from the potential inclusion, analysts believe that the REIT’s strengths lie in its balance sheet and portfolio. Maybank Kim Eng Research favours MUST for “its DPU visibility, supported by stable income growth and low leasing risks”.

“All assets, except for Michelson [in California], are trading at 5% to 10% below market rents. We expect both occupancies and rents to be supported, owing to limited new supply in each sub-market,” says analyst Chua Su Tye.

NetLink NBN Trust

Price targets:

$1.01 BUY (UOB Kay Hian)

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$1.06 BUY (Maybank Kim Eng Research)

$0.99 ACCUMULATE (Phillip Securities)

$1.04 BUY (DBS Group Research)

$1.03 BUY (OCBC Investment Research)

All five research reports sighted by The Edge Singapore have maintained their “buy” calls on NetLink NBN Trust (NetLink Trust) after its 2QFY2020 results announcement on Nov 1.

The analysts like NetLink Trust’s good earnings visibility, attractive dividend yields and earnings growth potential from Singapore’s 5G rollout.

To recap, NetLink Trust reported a 3.3% rise in 1HFY2020 DPU to 2.52 cents, given higher earnings on the back of robust residential connections and good cost discipline.

Revenue and other income for 2QFY2020 rose 3.8% to $94.07 million and 26.8% to $980,000 from a year ago respectively, but total expenses fell 2.2% to $72.8 million. This resulted in profit before income tax coming in 31.7% higher at $22.1 million.

“We like the stock for its good earnings visibility, attractive dividend yields and earnings upside, as NetLink Trust stands to benefit from the 5G roll-out,” says UOB lead analyst Chong Lee Len in a Nov 4 report.

In its FY2020 outlook, NetLink Trust’s trustee-manager expects revenues from key connection services to be higher than FY2019, mainly owing to higher residential connections and installation-related revenues.

The trustee-manager also says it will continue to invest and expand its network to improve the network’s capability and resiliency, but expects capex in FY2020 to be higher than that in FY2019.

The trust will also support Infocomm Media Development Authority’s objectives to achieve pervasive deployment of 5G infrastructure and grow the 5G innovation ecosystem. As a start, the group will be supporting M1 in its 5G trial at an upcoming new restaurant in Marina Square and TPG Telecom in its 5G trial network across Singapore Science Park I and II.

Oversea-Chinese Banking Corp

Price targets:

$11.94 HOLD (CGS-CIMB Research)

$11.50 HOLD (DBS Group Research)

$11.26 HOLD (Maybank Kim Eng Research)

$11.50 NEUTRAL (RHB Group Research)

Analysts are maintaining their cautious stances on Oversea-Chinese Banking Corp (OCBC), despite the bank reporting a set of 3Q results that were in line with consensus estimates.

OCBC saw its earnings fall 6% y-o-y to $1.17 billion for 3QFY2019 ended September, on the back of a one-time charge of $91 million due to a refinement in the group’s expected credit loss modelling approach for its Indonesian banking subsidiary, Bank OCBC NISP. Excluding this, the group’s core net profit was $1.26 billion, 1% y-o-y higher than a year ago.

In the near term, the analysts say OCBC is expected to see its earnings crimped by lower net interest margin (NIM), weaker loan growth, rising credit charges, an overhang of potential mergers and acquisitions as well as uncertainties in Hong Kong.

CGS-CIMB is cutting its EPS forecast by 4% to 5% for FY2019-FY2021F, on expectations of lower NIMs and weaker loan growth, and lowering its price target by 4.7% to $11.94.

In a report on Nov 5, lead analyst Andrea Choong notes that OCBC expects one more interest rate cut by the US Federal Reserve in the next 12 months. The bank has already seen its NIMs slide two basis points q-o-q in 3QFY2019, owing to policy rate cuts from regional central banks and pressure on loan yields, she adds.

Meanwhile, DBS analyst Lim Rui Wen warns that OCBC could continue to see a drag on its near-term share price performance.

“We remain cautious over OCBC’s non-performing assets coverage, which at 78% remains the lowest among its peers, even after additional provisions written in 2Q20193Q2019,” Lim says. “We see limited catalysts for the stock in the near term.”

StarHub

Price targets:

$1.43 UPGRADE BUY (DBS Group Research)

$1.65 UPGRADE BUY (CGS-CIMB Research)

$2.00 BUY (Maybank Kim Eng Research)

$1.42 HOLD (OCBC Investment Research)

Analysts from two research houses — DBS Group Research and CGS-CIMB Research — are upgrading StarHub to “buy”, from “hold” previously, following the telco’s 3Q results announcement.

The optimism comes on the back of views that StarHub’s earnings pressures have already been priced in, while its enterprise and wireless segments could provide potential catalysts for the counter.

Year to date, shares in StarHub have slid nearly 24% to close at $1.32 on Nov 5, before the release of its results.

For the latest 3QFY2019 ended September, StarHub saw its earnings rise slightly by 1.7% to $58 million, even as revenue dipped 1.6% to $572.6 million on lower contribution from its mobile, pay-TV and broadband businesses.

DBS analyst Sachin Mittal notes that despite weak operating metrics, StarHub’s share price could benefit from significant capex reduction over 2019 and 2020. A potential joint bid for a 5G licence could also be a catalyst for the stock, he adds.

“A joint bid with another major telecom operator for the nationwide 5G licence in January 2020 could rekindle interest in the stock,” Mittal says in a Nov 6 report.

Another new optimist on StarHub is CGS-CIMB analyst Foong Choong Chen, who notes that the recent 3QFY2019 results have beat expectations on the back of higher handset profits and the adoption of the new SFRS 16 accounting standard.

Foong also highlights the resilience of the mobile segment, with revenue only falling 1.2% q-o-q to $190 million.

Factoring in the 5G spectrum and network rollout capex, Foong opines that StarHub’s management is executing opex and capex savings initiatives well.

“This should help to buffer against adverse revenue effects from TPG’s entry, which should give investors greater confidence on earnings delivery and act as a rerating catalyst,” says Foong in a Nov 6 report.

CapitaLand

Price targets:

$4.42 BUY (OCBC Investment Research)

$4.20 BUY (RHB Group Research)

$4.15 ADD (CGS-CIMB Research)

Analysts are keeping their “buy” calls on property giant CapitaLand, on the back of bullish sentiments following its recent merger with Ascendas-Singbridge (ASB) and robust capital recycling efforts.

“CapitaLand’s competitive advantage is its significant asset base and extensive market network, which has been further boosted following the completion of the Ascendas-Singbridge merger,” says OCBC Investment Research in a Nov 6 report.

For 3QFY2019 ended September, CapitaLand reported an 18.8% surge in operating PATMI to $277.6 million, as revenue jumped 37.1% to $1.73 billion. The better performance was attributed to the maiden contribution from ASB, higher contributions from development projects in China and fee income from Vietnam.

However, the group recorded a 7.8% drop in 3QFY2019 earnings to $333.9 million on the absence of a one-time gain of $99.2 million from the divestment of Westgate in August 2018.

Vijay Natarajan, an analyst at RHB Group Research, notes that following the merger with ASB, CapitaLand is now a defensive play, with “a well-balanced portfolio across asset classes and geographies”.

“The key appeal is the growing recurring income base, especially from its fund management business and asset recycling strategy, which should drive ROE,” he adds.

Year to date, the group has already achieved gross divestments of $5.3 billion — nearly double of its $3 billion target. This is also significantly higher than the $4 billion worth of divestments in the whole of FY2018.

Meanwhile, Natarajan also notes that India has emerged as one of CapitaLand’s key growth markets post-merger. The group is aiming to double its assets under management in India to $7 billion by 2024, and increase its commercial portfolio there from 17.4 million sq ft to 40 million sq ft in the next five years.

“Its India exposure mainly comprises business and IT parks as well as industrial logistics properties, which we see as a bright growth spot,” Natarajan says.

SIA Engineering Co

Price targets:

$3.13 UPGRADE BUY (UOB Kay Hian)

$3.00 BUY (Maybank Kim Eng Research)

$3.30 BUY (DBS Group Research)

$3.30 BUY (CGS-CIMB Research)

SIA Engineering Co’s (SIAEC) transformational efforts are starting to take effect, say analysts who are impressed with its 2QFY2019/20 results ended September. They say core operations from Singapore Airlines’ 77.4%-owned aircraft maintenance unit put up another strong showing in 2QFY2019/20, with core operating margins hitting its highest level of 15.2% since 1QFY2018/19. SIAEC’s revenue has also risen for two straight quarters.

To recap, SIAEC reported earnings of $46 million, or 4.11 cents per share, for 2QFY2019/20 ended September. This was 21.1% higher compared with a year ago.

Revenue at $254.6 million was 1.3% higher y-o-y. Revenue from the airframe and line maintenance segment increased $4.6 million, offset in part by a $1.3 million decrease in revenue from the engine and component segment.

Expenditure decreased 2.1% to $235 million, mainly owing to lower subcontract costs and a favourable exchange variance. As a result, operating profit increased 73.5% to $19.6 million.

There were three calls to maintain SIAEC on “buy” and one upgrade to “buy” after the aircraft maintenance company reported its second quarter results on Nov 1.

In a Nov 5 report, UOB Kay Hian analyst K Ajith says SIAEC’s 2QFY2019/20 net profit gains were driven mainly by a 74% y-o-y improvement in operating profit.

“We believe the substantial operating leverage was partly due to automation efforts,” says Ajith, who also highlights SIAEC’s use of automated aircraft towing tugs to trim manpower needs.

In a Nov 4 report, Maybank Kim Eng Research analyst Neel Sinha agrees that transformational initiatives contributed to “the lion’s share of bottom-line growth”, although 2QFY2019/20 revenues grew a pedestrian 1.3% y-o-y and profits from associates and joint venture (JV) partners fell 9%.

Sinha says the poor associate/JV performance should be temporary as associate Eagle Services Asia ramps up its workshop in preparation for the aftermarket maintenance, repair and overhaul of Pratt & Whitney’s relatively new GTF engine family that powers the Airbus A220, A320neo and Embraer E190 aircraft.

CDL Hospitality Trusts

Price targets:

$1.80 BUY (Maybank Kim Eng Research)

$1.78 BUY (RHB Group Research)

Analysts from Maybank Kim Eng Research and RHB Group Research are keeping their “buy” recommendations on CDL Hospitality Trusts, despite the REIT stumbling in its recent 3QFY2019 results.

CDLHT reported distribution per stapled security (DPSS) of 2.09 cents for 3QFY2019 ended September, some 4.1% lower than DPSS of 2.18 cents recorded in 3QFY2018. After deducting income retained for working capital, total distribution to stapled security holders was $25.4 million, down 3.6% from the previous year.

Revenue for the quarter fell 1.8% to $49.1 million, despite full-quarter contribution from CDLHT’s Italian hotel acquired in November last year.

Despite the disappointment, both Maybank and RHB say CDLHT remains their top hospitality pick.

The analysts note that CDLHT saw stronger Singapore performance during the quarter. “Singapore hotels saw a turnaround on stronger occupancies and a 4.9% y-o-y RevPAR (revenue per available room) improvement,” says Maybank analyst Chua Su Tye.

The way Chua sees it, the recovery in Singapore will be driven by easing supply in the hospitality sector. “We see this recovery gaining traction into 2020,” Chua adds. “We see upside to DPUs, as the sector is recovering after a four year down-cycle and from a low base.”

Meanwhile, RHB Group Research analyst Vijay Natarajan believes that acquisitions could provide a potential catalyst for CDLHT in the near term.

“In Singapore, we believe M Social Hotel from its sponsor could be a candidate for acquisition in the near term. For Europe, the attractive yield spreads remain the key draw,” says Natarajan. “Gearing stands at a modest 36.3%, and we expect potential acquisitions to be funded via a combination of debt and equity.”