AEM Holdings
Price targets:
UOB Kay Hian ‘sell’ $1.10
DBS Group Research ‘buy’ $1.72
Mixed views remain following 3QFY2024
UOB Kay Hian (UOBKH) analyst John Cheong is keeping his “sell” call on AEM Holdings AWX with a higher target price of $1.10 from $1.04. Conversely, DBS Group Research’s Amanda Tan and Ling Lee Keng are keeping their “buy” call at a raised target price of $1.72 from $1.67.
For the 3QFY2024 ended Sept 30, AEM reported a loss of $917,000 and a loss of around $100,000 for the 9MFY2024.
“Earnings appear to be a miss versus our FY2024 estimate of $10 million. 3QFY2024 revenue of $74 million was largely in-line, with 9MFY2024 revenue of $248 meeting 69% of our full-year estimate,” says Cheong.
Despite a 6.5% q-o-q revenue reduction compared with 2QFY2024, AEM managed to achieve a 3.5% q-o-q growth in core PBT due to a favourable product mix and its operational agility in aligning the internal cost structure with external demand.
See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents.
With the results, AEM has also raised its 2HFY2024 revenue guidance to $190 million to $210 million, up from $160 million to $180 million, due to its key customer bringing forward systems’ orders from FY2025 to 4QFY2024 under the noncancellable, long-dated purchase order programme for inventory management purposes.
Cheong notes that this indicates FY2024 revenue of $364 million to $384 million, slightly above his FY2024 estimate of $360 million.
AEM has set forth a few mid-term strategies to achieve revenue growth from customer and market segment diversification, continue to invest in and retain test 2.0 leadership, achieve operational excellence, and cultivate talent and culture to consistently deliver results.
See also: Suntec REIT biggest beneficiary from MAS’s ‘looser’ leverage, ICR rules: OCBC
Industry-wide, the semiconductor space continues to be in a tale of two economies. Artificial intelligence (AI) and high-performance computing continue to gain positive momentum, while other segments, such as smartphones, automotive, traditional computing, and industrials, face headwinds characterised by a slower-than-expected recovery.
With this, AEM continues to bring products to market from its intensive research and development (R&D) efforts over the past several years. This includes its latest AMPS platform, which AEM notes is on track to be online at the customer’s site in late FY2024.
To tap opportunities associated with AI and boost long-term growth, AEM remains steadfast in investing in differentiated test capabilities tailored for AI or high-performance computing (HPC) applications, including thermal management, application-specific test instruments, and high-throughput automation.
“AEM is committed to reaching its mid-term targets through the continued growth and progress in customer deployments of its new product platforms and expansion into new test markets,” writes Cheong.
The analyst has therefore adjusted his FY2024, FY2025 and FY2026 earnings estimates by 1%, 2% less and 1%, respectively, after changing our revenue estimates by 7%, 7% less and 6% lower to factor in the order pull-in from AEM’s major customer, which will result in better 4QFY2024 but weaker FY2025 revenue.
“We also tweak our gross margin estimate to account for slightly better improvement in operating efficiency because of more proactive cost-management initiatives,” says Cheong.
Share price catalysts noted by Cheong include positive surprises in future revenue guidance and AEM’s winning of more new customers.
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Meanwhile, DBS’s Tan and Ling believe AEM is near an inflexion point and foresee its customer diversification strategy yielding more significant returns starting from 1QFY2025 onwards.
They note that a $20 million order, which was initially due for recognition in 4QFY2024, will now be booked in FY2025, while there has been a pull forward of around $30 million in revenue from Intel into 4QFY2024 from FY2025.
“Barring further exceptionals, we believe that we are past the earnings trough as Intel’s contributions remain supported by the non-cancellable purchase orders while new customer contributions gain momentum,” add Tan and Ling, whose target price is pegged to 20 times FY2025 earnings, which is at 0.5 standard deviations (s.d.) below the historical mean, with “further room for upside”. — Douglas Toh
Prime US REIT
Price target:
RHB Bank Singapore ‘buy’ 23 US cents
Primed for a recovery
RHB Bank Singapore’s Vijay Natarajan has kept his target price of 23 US cents and “buy” call unchanged for Prime US REIT OXMU , following the REIT’s 3QFY2024 results ended Sept 30.
Despite a lower distributable income of US$8.5 million ($11.5 million) y-o-y, Natarajan says the REIT is priming for a recovery. Its 3QFY2024 operational numbers were in line with expectations, and there is good leasing momentum, with occupancy improvement expected in the coming quarters. The REIT signed about 210,000 sq ft of leases in 3Q2024 and more than twice that in 2Q2024.
However, portfolio occupancy slightly dipped to 83% as new lease signings were offset by tenant movement in some of its assets. Natarajan believes the REIT is at a near-trough portfolio occupancy level with ongoing discussions on four large leases of about 60,000 to 100,000 sq ft. Two of these will likely materialise by early next year, bringing portfolio occupancy to more than 85%.
Prime US REIT’s rental reversion was 6.5% for the new leases signed during the quarter, with most leases having built-in annual rent escalations of 2%–4%.
Meanwhile, the REIT has completed the refinancing of US$550 million of loans and, as such, has no debt maturing until July 2027, including extension options. “We anticipate year-end valuation to range from 0% to -5%, which should keep gearing below the 50% level,” he says.
The REIT’s asset enhancement of Waterfront at Washingtonian was completed in October, with the modernisation of tenant lounges, conference centres and full-service gyms. Occupancy increased 7 percentage points (ppts) to about 40% with another about 35,000 sq ft of lease expected to be signed in 4Q2024 taking occupancy to about 50%.
Natarajan notes that Prime US REIT is in “active discussion” with a large tenant, which, if signed, could stabilise the asset with about 80% occupancy.
On a broader note, the US election outcome is a “net positive” for office demand, as Trump’s tax cuts are centred on creating more manufacturing jobs in the US, which could, in turn, spur employment for sectors such as R&D, production and sales-related roles, the analyst says.
Tariffs could also prompt more multinational corporations to come onshore, but the downside is that a stronger economy could result in persistent inflation and a slower trajectory of interest rate decline, which could result in delayed recovery for distribution per unit (DPU) and office sector valuations.
Following a recent site visit, Natarajan observes that workers are returning to the office but at a gradual pace, while the attention to safety and homeless situations has positively aided the REIT’s submarkets.
“Flight to quality” trend continues to accelerate as employers have been relocating to high-quality office spaces surrounded by key amenities. Meanwhile, the industry is nearing the tail-end of downsizing and rightsizing of office spaces.
Bigger tenants are placing more emphasis on the landlord’s financial position, and there is consolidation with pockets of expansionary demand.
As such, Natarajan slightly lowers his FY2024–FY2025 net property income (NPI) margin due to lower recovery income, resulting in about 5% lower distributable income. He expects a 10% dividend payout, and his target price is pegged to 0.4 times FY2024 price-to-book value. — Nicole Lim
Hyphens Pharma International
Price target:
CGS International ‘add’ 35 cents
Slowing revenue momentum
CGS International analyst Tay Wee Kuang has lowered his target price estimate for Hyphens Pharma International 1J5 to 35 cents from 40 cents as he sees slower revenue momentum based on the company’s 3QFY2024 ended Sept 30 update.
Hyphens Pharma reported 3QFY2024 revenue of $43.9 million, 2.5% higher y-o-y, due to better sales, mainly from the company’s Singapore and Malaysia businesses. Net profit after tax, however, fell by 5.6% y-o-y to $2 million from higher distribution costs in line with improved sales and higher manpower costs, as well as an increase in administrative expenses.
“Although no segmental breakdown was provided in its 3QFY2024 trading update, we believe the weaker revenue momentum in 3QFY2024 was due to slower sales in Vietnam,” says Tay in his Nov 13 report. “This is due to the expansion in gross profit margins by 3.3 percentage points y-o-y and 5.1 percentage points q-o-q in 3QFY2024, as we understood from the management previously that Vietnam tends to command lower margins due to more pricing pressure in its key hospital sales channel.”
The slowing revenue momentum could suggest that the inventory replacement cycle by customers in Vietnam after the supply chain disruptions in 1HFY2023 may have also eased, Tay adds.
During the quarter, the analyst also notes that Hyphens Pharma incurred higher operating expenses (opex), which weighed on its margins.
“According to Hyphens Pharma, 3QFY2024 opex was higher due to improved sales, while manpower costs and administrative expenses also crept up, although it did not provide the quantum of the increase,” the analyst writes.
“We believe higher manpower costs were likely due to [the] expansion of its sales force across key operating regions such as Vietnam, Singapore and Malaysia where Hyphens Pharma plans to further grow its business, according to our conversations with the management during the 1HFY2024 analyst briefing held on Aug 19,” he adds.
In 9MFY2024, Hyphens Pharma reported a net profit of $7.5 million. While this was 32.6% higher y-o-y, the figure still fell short of Tay’s expectations, at 63.4% of his FY2024 estimates from the higher opex in 3QFY2024.
As revenue growth tapers off, the analyst has lowered his earnings per share (EPS) estimates for FY2024 by 14.8%. He has also lowered his EPS estimates for FY2025 and FY2026 by 10.6% and 10.1%, respectively.
Furthermore, the analyst sees a strengthening US dollar (USD) as a “risk” for the company as its key principal products are sourced from the US and European Union (EU), while its key sales markets are Vietnam, Singapore and Malaysia.
That said, he has retained his “add” call as he sees potential for higher contributions from new products within Hyphens Pharma’s portfolio. These new products include medical aesthetics products under its subsidiary Ardence, as well as new product lines from its proprietary brands such as Ceradan and Ocean Health going forward.
With Hyphens Pharma upping its stake in Ardence to 82% from 65% after FY2024, higher contributions from the subsidiary are a re-rating catalyst, in Tay’s view. Subsequent funding rounds for Pan-Malayan, which houses its digital assets in DocMed and WellAway, is another upside.
At the same time, an unfavourable return on investment (ROI) for the company’s sales and marketing expenses, which may result in subdued profitability, is a downside risk. Supply chain disruptions, as well as poor cost pass-through reducing Hyphens Pharma’s pricing competitiveness, is another negative for the company. — Felicia Tan
Seatrium
Price targets:
Morningstar ‘four star’ $2.66
CGS International ‘add’ $2.69
UOB Kay Hian ‘buy’ $2.80
Eyeing profitability in 2024
Analysts remained positive about Seatrium’s prospects after the offshore and marine (O&M) group released its business update for 3QFY2024 ended Sept 30.
On Nov 11, Seatrium said it had a net order book of $24.4 billion as of Sept 30, comprising 30 projects with deliveries till 2031.
“Seatrium’s third-quarter business update contains no major surprises. It delivered three projects to customers year-to-date, including the fourth newbuild jack-up rig to Borr Drilling and a refurbished floating production unit to Salamanca FPS Infra,” says Lee Chokwai, director of Morningstar equity research.
Lee, who has kept his “four star” rating and fair value estimate of $2.66, believes Seatrium is “on track” to turning profitable in FY2024 after reporting losses since FY2018.
This is due to Seatrium’s “healthy” order book as of the end of September and the interest-rate-cut cycle. With the latter, Seatrium’s management expects its financing costs to continue to decline in FY2025 as the group is able to negotiate favourable rates with the banks.
However, Seatrium still faces uncertainty from the ongoing investigations from the Monetary Authority of Singapore (MAS) and the Commercial Affairs Department (CAD), which is an overhang, says Lee.
Another near-term overhang is the potential to make further provisions for its legacy projects, although most of these projects should be completed by the end of the year.
“We think Seatrium is undervalued currently as the outlook for the offshore industry remains positive,” Lee writes in his Nov 11 report. “We expect a gradual margin recovery for Seatrium as it learns from previous project cost overruns and focuses on series-build projects to improve cost efficiencies. We forecast operating margin to reach 10.3% by FY2028 from our FY2024 estimate of 5.0%.”
CGS International (CGSI) and UOB Kay Hian have kept their “add” and “buy” calls on Seatrium with unchanged target prices of $2.69 and $2.80 respectively.
Like Morningstar’s Lee, the analysts at CGSI and UOB Kay Hian see the investigations by MAS and CAD as an overhang. They add that any finalisation of the inquiry is a catalyst and could lead to a re-rating of the counter if removed in the near- to medium-term.
CGSI analysts Lim Siew Khee and Meghana Kande believe that execution is “still key” for the group. In contrast, UOB Kay Hian analyst Adrian Loh noted that Seatrium’s quarterly update showed that the group has continued to “execute well” on its projects.
On Seatrium’s letter of intent (LOI) signed with Japan-based Penta-Ocean Construction (POC), Lim and Kande estimate US$400 million ($537.3 million) to US$500 million of engineering, procurement and construction (EPC) contract value for the heavy lift vessel. The full EPC contract award is expected to take place in 1Q2025, subject to POC’s final decision. The signing of the LOI was announced on Nov 11, the same day as the release of Seatrium’s quarterly update.
“For comparison, Seatrium secured a semi-submersible crane vessel from Hereema (20,000 ton) for US$1 billion in 2015 that encountered cost overruns due to variation orders and scale of the project,” say Lim and Kande. “We believe project risk for POC is lower as the scale is smaller and design is foundation-based versus Hereema’s floating-based. We expect gross margins of low to mid-teens for POC’s vessel.”
UOB Kay Hian’s Loh also estimates the LOI to be around US$400 million, adding that the project will be a “relatively low-risk” one for the group. “[This is because] it is a foundation-based project compared with the higher-risk US$1.5 billion Heerema project that ran into cost overrun issues due to its more complicated semi-submersible heavy lift hull,” he says.
Following the results of the US presidential election, the CGSI analysts see that Seatrium is unlikely to lose out to President-elect Donald Trump’s win as the group has a complete suite of product offerings, from oil and gas to renewable-related offshore structures.
“Offshore wind projects in the US in order book have achieved final investment decision (FID) with low risk of cancellation. Tightness in global yard capacity also works in Seatrium’s favour with its global network,” they write in their Nov 11 report.
As such, they are keeping their order win estimate of $16 billion for FY2024 unchanged.
This sentiment is also shared by UOB Kay Hian’s Loh, who adds that governments continue to favour offshore wind projects outside of the US. This is aided by potentially lower interest rates and the enabling of higher contracted prices by certain governments, Loh notes.
“Seatrium remains our top pick for a strong turnaround in 2HFY2024,” say Lim and Kande.
Loh also continues to “like” Seatrium as he sees the group benefitting from “stronger offshore marine dynamics as well as demand for offshore vessels and structures related to the renewables industry”.
“In addition, the normalisation of economic activity should result in a greater volume of shipping activities, thus positively impacting its repairs/upgrades segment,” he says.
“While 40% of Seatrium’s current order book is in the renewable energy space (with the remainder related to oil and gas projects), its addressable market is arguably much larger when considering carbon capture usage and storage, floating liquefied natural gas (LNG), and ammonia storage and transport which feeds into the hydrogen energy chain.” — Felicia Tan
Valuetronics
Price target:
PhillipCapital ‘buy’ 78.5 cents
UOB Kay Hian ‘buy’ 78 cents
Benefiting from GPU leasing service
The analysts at UOB Kay Hian (UOBKH) and PhillipCapital have both kept their “buy” calls on Valuetronics BN2 at an unchanged target price of 78 cents and a higher target price of 78.5 cents from 76 cents.
For the 1HFY2025 ended Sept 30, the company reported a 10% y-o-y improved net profit of HK$91 million ($15.7 million), largely meeting UOBKH’s John Cheong and Heidi Mo’s expectations, making up 53% of their full-year forecast.
Meanwhile, revenue dipped 3% y-o-y to HK$862 million due to weak demand from some existing industrial and commercial electronics (ICE) and consumer electronics (CE) customers. Gross profit improved 4% year over year to $145 million, while higher interest income of $30 million led to Valuetronics’ net margin expanding 1.3 percentage points (ppts) year over year.
Cheong and Mo write in their Nov 14 report: “Valuetronics’ more diversified customer portfolio contributed to offsetting the soft demand from existing customers.”
The company’s CE revenue fell 18% y-o-y to HK$193 million, led by poorer demand in end markets for its legacy consumer lifestyle products. For ICE, revenue rose 2% y-o-y to HK$669 million as its new customer, a Canada-based network access solutions provider, contributed more significantly to offset weaker demand from its existing customers.
“Gross margin continued to improve for the fourth consecutive half-year period to 16.8%. This was driven by higher-margin new products, lower labour costs and manufacturing overheads from the depreciation of the renminbi, and lower material costs from an improvement in the component supply chain, according to the UOBKH analysts.
Valuetronics has also entered into a 55:45 joint venture (JV) called Trio AI with Hong Kong graphics processing unit (GPU) and artificial intelligence (AI) solutions provider SinnetCloud Group.
Cheong and Mo note that Valuetronics will also enjoy additional income from leasing GPU servers and hardware to Trio AI over 60 months at a rate of around HK$60 million, which will cover the acquisition cost. Management has guided Trio AI to contribute positively to revenue and profitability from FY2026.
The analysts add that Valuetronics’ Vietnam campus is strategically positioned to meet changing customer needs, as some may wish to de-risk from China given the potentially higher US trade tariffs under Trump’s presidency.
“As of end 1HFY2025, the Vietnam plant was operating at an around 40% utilisation rate. This excess capacity allows room for production ramp-up, whether for existing customers or to add more new customers,” writes Cheong and Mo.
The company has also maintained a robust free cash flow of HK$53 million in 1HFY2025, while net cash improved to HK$1.1 billion, equivalent to around 77% of its market cap.
“While its formal dividend policy dictates a 30% to 50% payout ratio, recall that FY2023 and FY2024 payout ratios were 68% and 64%, respectively.”
Cheong and Mo note share price catalysts, including higher-than-expected dividends, potential mergers and acquisitions (M&A), and proactive management amid market challenges.
Meanwhile, PhillipCapital’s Chew notes that apart from networking products, the volume ramp from Valuetronics’ three new customers still hinges on improving macro conditions and capital expenditure decisions.
“Network access is expanding as the customer takes share from an Asian competitor. Electronic tags in retail stores are held back by hesitancy about large capital expenditures. The cooling solutions for gaming PCs are dependent on new product launches, but a larger opportunity is in data centre solutions,” writes Chew.
He adds: “On the 55:45 AI joint venture with Sinnet Cloud, Valuetronics will spend around HK$222 million to purchase 1000 GPUs from Shanghai-based MetaX. These GPUs will be delivered by early 2025. Valuetronics will lease the GPUs to the joint venture.”
On this, the analyst notes that the potential revenue of GPU processing power as a service is US$11 million ($14.8 million) per annum. — Douglas Toh
DFI Retail Group
Price target:
DBS Group Research ‘buy’ US$3
Higher probability of special dividend with lower debt
DBS Group Research has maintained its “buy” call on DFI Retail Group D01 Holdings while keeping its target price at US$3 ($4.01) despite both softer top and bottom lines flagged by the company in its 3QFY2024 business update.
DFI Retail on Nov 14 reported revenue for 3QFY2024 ended Sept 30 was down 3% y-o-y while underlying earnings fell 4%.
Growth in its health and beauty segment was weighed down by a high base effect last year, when government spending in Hong Kong gave this segment a temporary boost.
“The softness in 3QFY2024 was largely within our expectations considering the soft China macroeconomic headwinds,” says DBS in its Nov 15 note.
“Management continues to demonstrate strong execution despite the macroeconomic headwind in terms of margin expansion through improved product mix and cost discipline,” adds DBS.
For FY2024 ending Dec 31, DFI Retail expects underlying profit to reach between US$190 million and US$220 million, a slight upward tightening from the earlier guidance range of between US$180 million and US$220 million, notes DBS, which is projecting US$198 million.
DBS is further cheered by DFI Retail Group’s progress in reducing its debt, which was US$445 million as of Sept 30 versus US$549 million as of June.
“The current deleveraging trajectory also looks very promising, tracking ahead of our expectations, which could translate to higher probability of special dividend,” says DBS, which was expecting debt level to hold at US$561 million at the end of the year. — The Edge Singapore
ComfortDelGro Corp
Price targets:
Maybank Securities ‘hold’ $1.60
RHB Bank Singapore ‘buy’ $1.70
UOB Kay Hian ‘buy’ $1.83
DBS Group Research ‘buy’ $1.80
CGS International ‘add’ $1.80
OCBC Investment Research ‘buy’ $1.67
Lone contrarian call by Maybank over acquisition worries
Eric Ong of Maybank Securities has downgraded ComfortDelGro C52 Corp from “buy” to “hold” in what he says is a contrarian call.
Ong’s basic premise is that the land transport operator will now incur heavier spending is required with the impending $461 million acquisition of Addison Lee, a taxi operator in the UK.
“While this major M&A may be accretive, we have some reservations given the challenging operating and regulatory landscape in the UK,” says Ong in his Nov 15 note.
He points out that following the completion of the acquisition, ComfortDelGro will move from a net cash to a net debt position.
The deal marks ComfortDelGro’s shift towards an asset-heavy business model with Addison Lee’s relatively low ROE (return on equity) and growth prospects given the competitive London taxi industry and issues concerning the working status of drivers.
“Additionally, we think the group is likely to incur more capex on renewal/replacement of taxi vehicles with its larger fleet now, which could adversely impact its free cash flow,” reasons Ong, who has a new target price of $1.60 on the stock, down from $1.65.
However, unlike Ong, his peers remain overwhelmingly positive on the stock following its 3QFY2024 ended Sept 30 update, when earnings improved 15.2% y-o-y, marking the seventh consecutive quarter of growth.
Shekhar Jaiswal of RHB Bank Singapore notes that while the key Singapore taxi and private hire segment remains soft, the company is working to improve its booking platform and is mulling new features, such as doing away with cancellation fees its competitors charge.
Jaiswal says another way to grow this segment is to introduce booking for more premium and larger vehicles. He is keeping his “buy” call and $1.70 target price.
DBS Group Research, in its Nov 15 note, points out that even though ComfortDelGro will become net debt rather than net cash following the acquisition of Addison Lee, it will maintain its dividend payout ratio — one of the key attributes of this counter for investors.
Following the series of acquisitions over the last couple of years, the company will now focus on consolidating these new businesses.
“Given the guidance to maintain current payout ratio, this removes an overhanging fear of dividend cuts, and shareholders could expect to see continued strong dividend growth in line with earnings growth,” says DBS, which is keeping its “buy” call and $1.80 target price.
In contrast to Maybank’s Ong, Ong Khang Chuen of CGS International believes that the acquisition of Addison Lee will add some GBP8 million ($13.6 million) to the company’s earnings per year. In addition to revenue synergies with another UK outfit, CMAC, Addison Lee is a “strategic move” that can help the company expand into “differentiated premium offerings in the point-to-point (P2P) travel segment,” says CGSI’s Ong, who has kept his “add” call and raised his target price from $1.70 to $1.80.
UOB Kay Hian analysts Llelleythan Tan and Heidi Mo have upgraded their call to “buy” as they see “strong earnings growth” from the transport operator. ComfortDelGro’s 3QFY2024 patmi stood in line with the analysts’ full-year forecast. Tan and Mo have also given the company a higher target price of $1.83 from $1.56, which is the highest among its peers.
The analysts have also adjusted their FY2024–FY2026 core patmi estimates by –3% to –2%, based on higher public transport margin assumptions for FY2024–FY2026 and lower taxi margin assumptions for FY2025–FY2026. Their new FY2024–FY2026 core patmi forecasts are $210.4 million, $241.7 million and $280.1 million, respectively, from $206.3 million, $248.5 million and $275.1 million. — The Edge Singapore
Centurion Corp
Price target:
PhillipCapital ‘buy’ $1.02
Strong operating performance
PhillipCapital has raised its target price for Centurion Corporation OU8 to $1.02, following the company’s 3QFY2024 results ended Sept 30, which saw a strong occupancy and rental reversion rate across all segments.
Analyst Yik Ban Chong has raised his target price from 90 cents to $1.02 and maintained his “accumulate” call.
Yik says that Centurion’s revenue was 78% of their FY2024 forecasts, and the 9MFY2024 revenue from Purpose-Built Workers Accommodation (PBWA) in Singapore was 79% of his FY2024 forecasts due to strong occupancy and rental rate revisions.
He notes that the group’s occupancy is currently 99%, and its 3QFY2024 revenue for the Singapore PBWA and UK Purpose-Built Student Accommodation (PBSA) segments increased 26.5% and 21.4% y-o-y, respectively.
The analyst notes that Centurion has a positive portfolio growth pipeline, with capacity expansions ongoing. About 1,650 Singapore PBWA beds, 680 Malaysia PBWA beds, and 550 Hong Kong PBWA beds are expected to be operational by the end of this year, while 155 Hong Kong PBSA beds have been operational since September and are expected to ramp up occupancy gradually.
Yik adds that 400 units have been secured under master lease agreements in Xiamen, China, under the new Build-to-Rent (BTR) segment and are expected to be operational from December.
Centurion’s interest cover ratio increased by 32% y-o-y from 3.4 for 9MFY2023 to 4.5 for 9MFY2024, showing signs of increased profits, says Yik.
“We expect profit growth to be continually driven by revenue growth and lower interest expenses. We expect interest expenses to decline by $2.8 million y-o-y in FY2024 from improving free cash flows and lower interest rates,” he adds.
With no negatives mentioned, Yik raises his FY2024 revenue and patmi estimates by 3% and 9%, respectively, as he expects strong occupancy and rental reversions across all segments to continue.
He also expects profit to continue to grow and further cuts in Fed fund rates to drive bottom-line profit growth. — Nicole Lim
Sembcorp Industries
Price targets:
CGS International ‘buy’ $7.32
Maybank Securities ‘buy’ $6
Staying positive following divestment of waste management unit
CGS International and Maybank Securities have maintained their “buy” calls on Sembcorp Industries U96 after Sembcorp announced that it was divesting its waste management arm, Sembcorp Environment. CGSI has kept its target price unchanged at $7.32, while Maybank Securities has maintained its target price at $6.
Sembcorp announced on Nov 8 that it entered into a share purchase agreement to sell its entire stake in Sembcorp Environment to SBT Investment 2, a wholly owned subsidiary of PT TBS Energi Utama Tbk.
Sembcorp Environment is the parent company of SembWaste and Sembcorp Enviro Services, which process, collect and recycle industrial, commercial and municipal solid waste.
The total cash consideration will be $405 million, a 43% premium over net asset value (NAV) as of June 30. The consideration implies an 18 times FY2024 price-to-earnings (P/E) ratio based on Sembcorp Environment’s annualised 1HFY2024 ended June, profit before tax (PBT).
Maybank analyst Krishna Guha says that based on pro forma disclosures, the transaction will be 3.4% accretive to net tangible assets (NTA) and 13.4% to earnings per share (EPS), including divestment gains of $114 million.
“Excluding the gains and factoring in financing savings, we estimate 4% to 5% earnings accretion,” Guha adds.
Maybank’s Guha notes that Sembcorp will use the sales proceeds to invest further in the energy business to achieve the 2028 strategic roadmap.
Furthermore, Sembcorp announced in its 1HFY2024 results that its public cleaning contract for the Central-North region has not been renewed.
According to Maybank’s Guha, the proposed sale should mitigate any adverse business impact from the contract’s non-renewal.
On Nov 15, Sembcorp announced that it had completed the acquisition of a 30% stake in local power producer Senoko Energy for $96 million.
Maybank’s Guha believes that part of the proceeds may be used to finance this purchase.
Sembcorp first announced the potential divestment of SembWaste and its energy-from-waste (EfW) plant in June 2023, but this was terminated in July 2023.
CGSI analysts Lim Siew Khee and Meghana Kande believe this could be due to pricing.
According to CGSI’s Lim and Kande, this sale is in line with Sembcorp’s strategy to recycle capital for growth in renewables and reduce debt.
“Assuming 60% of proceeds are used to pay down debt, the loss of income could be offset by savings in financing costs, in our view,” Lim and Kande add.— Cherlyn Yeoh
