Brokers' Digest 913

DBS Group Research is raising its price target for Keppel DC REIT (KDC REIT) by 1.4% to $2.23, following a string of accretive acquisitions by the REIT. The new price target translates into a potential 13% upside for the stock.

After its recent acquisition of KDC SGP 4 and DC 1 in Singapore, KDC REIT is embarking on the acquisition of its second property in Germany, Kelsterbach DC.

While the latest acquisition will set KDC REIT back by some $125.3 million, DBS Group Research lead analyst Derek Tan opines that the REIT is in a comfortable position to take on the acquisition.

“Post-equity fundraising in mid-September, KDC REIT will capitalise on its low gearing to fully fund this acquisition by debt,” says Tan in a Dec 18 report. He adds that the acquisition is slated to have an initial yield of 6.5%.

DBS is maintaining its “buy” call on KDC REIT. The brokerage notes that KDC REIT has made three DPU-accretive acquisitions in as many months, which should have a positive impact on several of its financial metrics.

For a start, the acquisitions will see KDC REIT’s assets under management (AUMs) increase to $2.7 billion, while portfolio occupancy will inch up to 96%, from 94.5% previously. And although the REIT’s gearing is expected to reach 35% to 36% post-acquisitions, Tan notes that it still has debt headroom in excess of $400 million.

“Having already acquired close to $770 million of assets in recent months, KDC REIT will be looking forward to a record DPU in FY2020,” says Tan.

To be sure, the brokerage considers KDC REIT as one of the “strongest performers” among S-REITs, despite its relatively short trading history.

“While its share price has diverged from the broader market performance, this can be largely explained by its acquisition announcements, coupled with its exposure to a unique asset class — data centres — which we believe has a structural growth story,” says Tan.

Oxley Holdings

Price targets:
43 cents BUY (RHB Group Research)
50 cents BUY (UOB Kay Hian Research)
47 cents BUY (SooChow CSSD Capital Markets)

RHB Group Research is reiterating its “buy” recommendation on Oxley Holdings, after the property developer on Dec 16 announced it was divesting its leasehold interest of 297 years in No 3 Dublin Landings for €115 million ($173.7 million).

The brokerage is also maintaining its price target of 43 cents, implying a potential upside of 21% and close to 9% yield.

Oxley is entitled to receive 77.8% of the sale price of the property. In a regulatory filing, the group says the proceeds from the sale will contribute positively to its cash flow.

“We expect much stronger quarters ahead, owing to the recognition of the remaining Chevron House sales as well as its Dublin and Singapore projects,” says RHB Group Research analyst Jarick Seet in a Dec 18 report.

No 3 Dublin Landings is the last of the five commercial buildings that Oxley developed at the new commercial centre in the heart of the Irish capital to be sold.

In addition to the commercial space, the group developed 298 residential apartments, which have been sold and are to be delivered progressively from November 2019 to June 2020.

Total consideration from the development and sale of the commercial and residential developments is €745.4 million, with Oxley entitled to receive €591.5 million.

Back home, Seet notes that Oxley’s Singapore portfolio has also been selling well. As at 3QFY2019, nearly twothirds of its Singapore portfolio has been sold, the analyst says.

“Management has also noticed that the property market has picked up and is more positive on the Singapore property market for 2020,” Seet adds. “Oxley has raised prices in a few of its existing projects by 1% to 2% due to new launches around the same area likely to be selling at much higher prices.”

With the cash starting to flow again, the analyst believes the group could potentially pay out special dividends to shareholders — making Oxley an even more compelling “buy”.

“Management guided that excess cash — after paring down gearing — will be used to reward shareholders with special dividends if there are no other suitable opportunities at that time,” Seet says.

In addition, he points out that the counter is trading at a “deep 52% discount” to it revalued net asset value of 74 cents.

Interra Resources

Price target:
8.9 cents BUY (SAC Capital)

SAC Capital is maintaining its “buy” call on oil explorer and producer Interra Resources with a price target of 8.9 cents, representing an upside potential of some 71% for the stock.

In a Dec 12 report, analyst Terence Chua opines that Interra is at a “key inflexion point”, noting that the group has exceeded the brokerage’s forecasts last year.

“Firmer oil prices and contract extensions have led to a turnaround in profitability, which we have already seen in their last two quarters,” says Chua. For 3QFY2019 ended September, Interra clawed back into the black with a profit of US$0.4 million ($0.5 million), reversing from a loss of US$2.13 million in the preceding quarter.

Although the group reported a lower revenue of US$3.63 million, from US$4.3 million in 3QFY2018, Chua says this was “largely expected” given the lower crude oil prices.

However, the analyst remains bullish on an uptick in shareable oil production.

In addition, Chua hones in on the group’s strengthened cash position. Despite recording lower operating cash flows of US$1.1 million in 3QFY2019, compared with US$1.3 million a year ago, Interra’s net cash position has continued to improve, increasing to US$6.5 million in 3Q2019 from US$6.3 million in the previous quarter.

On Dec 11, Interra had also announced the drilling and testing results of its first well in the Kuala Pambuang Block onshore southern Central Kalimantan, Indonesia.

“The company has determined that the drilling and testing results are positive,” says Interra in a regulatory filing.

“Further analysis of the data, including electric wireline logging, lithology and crude analysis, is ongoing.” While optimistic, Chua remains cautious on contribution from the well in the near term. In addition, he notes that the cost of drilling of the exploration well is expected to be funded internally, although the group is also likely to explore alternative funding options.

“The group had previously announced that the local authority has approved the well location and related expenditure, and preparations are underway towards spudding the exploration well later in the year,” adds Chua.

Centurion Corp

Price targets:
47 cents NEUTRAL (RHB Group Research)
52 cents BUY (DBS Group Research)

RHB Group Research is raising its price target for Centurion Corp by 9.3% to 47 cents, on the back of higher forecasts following the dormitory operator’s £15.1 million ($27 million) proposed acquisition of Archer House in Nottingham, UK.

Centurion’s second acquisition in Nottingham, Archer House will bring the group’s UK portfolio to a total of over 2,850 beds across 11 purpose-built student accommodation assets in five cities.

It is also expected to increase Centurion’s total student and workers’ accommodation portfolio to 33 assets globally, bringing the total number of beds under management to more than 65,000.

The way analyst Jarick Seet sees it, the proposed acquisition is right on target and could see a lift in earnings for Centurion.

The analyst is raising his forecasts for FY2020 to FY2022 by 2% to 5% with the inclusion of the 177bed Archer House student accommodation.

“We think that the acquisition is fair,” Seet says in a Dec 17 report. “We like Centurion as a defensive play, while its recurring income provides a buffer from any earnings downside. We also think that this counter is reasonably priced, in view of the size of its accommodation assets portfolio.”

Following the proposed acquisition of Archer House, Seet believes Centurion could shoot for more potential acquisitions.

“We think that the group is likely to add more beds to its current portfolio next year to meet its steady demand,” he says. “However, it could be interesting to see Centurion venturing into other specialised accommodation types as well.”

Even so, Seet warns that Centurion could see higher debt ahead. He notes that the group has total borrowings of $714.9 million as at end-September, compared with $53 million in cash.

“With the proposed acquisition [of Archer House] to be funded by a combination of borrowings and cash, both borrowings and financing cost are set to increase,” Seet says.

Top Glove Corp

Price targets:
$1.68 BUY (AmInvestment Bank)
$1.39 HOLD (DBS Group Research)
$1.56 HOLD (Maybank Kim Eng Research)
$1.48 NEUTRAL (RHB Group Research)
$1.73 OUTPERFORM (Credit Suisse Research)
$1.41 NEUTRAL (JPMorgan Research)

AmInvestment Bank is keeping its “buy” call on Top Glove Corp, despite continued headwinds for the world’s largest rubber glove manufacturer.

Top Glove saw its earnings edge 1.2% higher y-o-y to RM111.4 million ($36.5 million) for 1QFY2020 ended November, even as revenue slipped 4.2% to RM1.21 billion on lower average selling prices (ASP) and lower average raw material prices.

In its results announcement on Dec 17, Top Glove noted that nitrile gloves delivered strong sales volume growth of 20% and significantly higher contributions to group profit.

However, the better performance was offset by weaker contributions from the natural rubber and the vinyl glove segments.

“ASP remained subdued for both nitrile and latex gloves due to increased competition, which has placed downward pressures on selling prices,” says analyst Nafisah Azmi in a Dec 18 report. “Moving forward, we believe that Top Glove will continue to face pressures on operating profit margins.” Nafisah points out that the supply of nitrile and latex gloves by top rubber glove producers in Malaysia and Thailand is forecast to increase by 14.2% in CY2020 — exceeding the organic demand growth expectation of 8% to 10%.

“This will be further aggravated by higher labour cost in CY2020F following the 9.1% upward revision in minimum wage [in Malaysia],” she adds.

Already, Top Glove is adding more automation and digitalisation initiatives, which will improve production efficiency and reduce dependence on human labour.

“We believe improved production efficiency, higher automation and reduced natural gas price from January 2020 onwards will help mitigate margin pressures from weaker selling prices,” Nafisah says.

Rex International Holding

Price target:
21.8 cents INITIATE BUY (UOB Kay Hian Research)

UOB Kay Hian Research is initiating coverage of Rex International Holding with a “buy” call and price target of 21.8 cents, or 1.1 times its FY2020 book value.

That is because Rex has proven its ability to create substantial value from the recent sale of two Norwegian assets for US$45 million, realising a gain of around US$30 million.

In Norway, Rex still owns three assets that are worth an estimated US$20.7 million on its balance sheet. If oil is discovered, the Norwegian assets could be worth a lot more than its estimated current book value, says analyst Llelleythan Tan in a recent report.

According to Tan, Norway is a very supportive country for oil exploration as the government provides 78% cashback for all exploration expenditure annually, regardless of whether oil is found.

In its 2018 annual report, Rex says it was due to receive a cash tax rebate of US$29.1 million in November 2019, which has been included in its trade and other receivables account.

This further increases Rex’s net cash position for 4QFY2019.

“By continuing its exploration activities in Norway, Rex is able to use the tax rebates to de-lever its balance sheet or recycle capital for more exploration activities, ensuring a fundamentally strong balance sheet,” says Tan.

Elsewhere in the Middle East, Rex owns a 92.7% stake in the Block 50 Oman concession and first production could bring in revenue of US$71.7 million per year on average, assuming average production of around 5,000 barrels per day for five years.

“Rex targets to achieve first oil in Oman by 1QFY2020 and we expect strong cash flow if production drilling is successful,” says Tan.