CapitaLand China Trust
Price targets:
DBS Group Research ‘buy’ $1.05
OCBC Investment Research ‘buy’ 95 cents
Recovery to pan out over multiple years
CapitaLand China Trust (CLCT) has seen its price target cut by analysts following a weaker FY2023 that lowered distribution per unit (DPU) by 10.1% y-o-y. When calculated in renminbi (RMB), CLCT reported higher gross revenue and net property income of 5.9% and 10.5% y-o-y respectively.
However, with the RMB weakening against the Singdollar (SGD), which is the reporting currency, CLCT ended FY2023 with 2% lower revenue than FY2022. Still, net property income (NPI) rose 2.5% to $117.5 million. Due to higher interest costs and forex, the REIT reported a lower distributable income of $113.8 million, down 9.4% y-o-y.
Backed by CapitaLand, CLCT owns a portfolio of 10 malls, five business parks and logistics parks across 12 cities in China. While its retail assets continued to do well following the end of the pandemic, CLCT’s so-called “new economy” logistics assets did not.
In her Jan 30 note, Ada Lim of OCBC Investment Research says CLCT is still seen as a beneficiary of China’s reopening and future pro-growth policies.
She expects recent stimulus measures by the Chinese government to yield green shoots of growth but expects the recovery to pan out as a multi-year story.
“We turn more conservative on our forecasts and increase our cost of equity assumption amidst a more operating challenging environment,” adds Lim, who has lowered her fair value from $1.02 to 95 cents while keeping her “buy” call.
In their Jan 31 note, Geraldine Wong and Derek Tan of DBS Group Research point out that CLCT continues to experience weakness in the new economy segments and a depreciating RMB against the SGD.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
They have lowered their target price from $1.20 to $1.05 to factor in slower negatives for CLCT’s logistics segment and the divestment of Shuangjing mall, among others.
Nonetheless, with a yield of more than 8%, and with the counter trading at just 0.6 times book value, they have kept their “buy” call. — The Edge Singapore
CDL Hospitality Trusts
Price targets:
Maybank Securities ‘buy’ $1.10
UOB Kay Hian ‘buy’ $1.48
CGS-CIMB Research ‘add’ $1.25
Rates growth slowing
Analysts have trimmed their target prices for CDL Hospitality Trusts J85 (CDLHT) following its FY2023 ended December 2023 results with distributions that came in lower than expected. Distribution per unit (DPU) for 2HFY2023 came in at 3.19 cents, down 11.1% y-o-y.
While CDLHT was able to continue to improve its room rates in Singapore, demand has eased, as seen by its lower occupancy rate of 79.3% in 4QFY2023, down 6.2 percentage points. RevPar in the most recent 2HFY2023 rose just 3.5% y-o-y, although it enjoyed longer stays on average.
For its UK properties, CDLHT managed to grow RevPar at a stronger pace of 4.1% y-o-y in 2HFY2023. Net property income for UK assets rose 15.4% y-o-y, thanks to an increase in inbound visits.
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Japan was the star performer. Net property income rose 115% y-o-y in 2HFY2023 as foreign visitors came back in force from October 2022. RevPar rose 75% y-o-y, with a cheerier outlook for the rest of this year.
Thanks to the better performance, CDLHT grew the value of its portfolio by 7.8%.
UOB Kay Hian’s Jonathan Koh expects a strong lineup of events to help paint a positive outlook for CDLHT and with China and Singapore in a bilateral 30-day visa exemption arrangement, the number of foreign visitors is likely to increase further.
“We believe CDLHT is well positioned to capture upside” from drivers such as asset enhancements at Grand Copthorne, say CGS-CIMB Research’s Natalie Ong and Lock Mun Yee, who have maintained their “add” call.
However, using their dividend discount model, they have cut their FY2023 to FY2025 DPU projections by 15.6% and 17.6% due to higher interest and tax expenses, which leads to a lower target price of $1.25 from $1.43 previously.
Similarly, Koh, using his version of a dividend discount model, has reached a new target price of $1.48 from $1.57 previously. He is maintaining his “buy” call.
Meanwhile, Krishna Guha of Maybank Securities has a “buy” on CDLHT although he has trimmed his DPU estimates by 7%. However, after applying a lower discount rate, his new target price is $1.10, up from $1.05 previously. — The Edge Singapore
Singapore Exchange Group
Price targets:
Citi Research ‘sell’ $9
Maybank Securities ‘hold’ $10.09
OCBC Investment Research ‘hold’ $10.16
CGS-CIMB Research ‘hold’ $10.50
At the crossroads
The Singapore Exchange S68 ’s (SGX Group) adjusted net profit of $251.4 million for 1HFY2024 ended Dec 31, 2023, came in below the expectations of some analysts.
In addition, given how trading volume is not forecast to pick up in a big way yet, they have mostly maintained their calls to “hold” the stock.
Underlying profit came in at 47% of Citi Research’s full-year forecast for SGX’s FY2024 ending June 30. This was due to a “softer top line”, says Citi analyst Tan Yong Hong, but the drivers are “unclear” as SGX has reclassified its operating segments.
In a Feb 1 note released before SGX’s results briefing that morning, Tan has a “sell” call on the bourse operator with a $9 target price. SGX has adopted four new operating segments from 1HFY2024: fixed income, currencies and commodities (FICC); cash equities; equity derivatives; and platform and others.
Up until FY2023, SGX had classified revenue under three segments: FICC; equities; and data, connectivity and indices.
A surge in treasury income drove SGX’s results for 2HFY2023 ended June 30, 2023, to beat expectations but the h-o-h trajectory is unclear due to the reclassification, writes Tan.
The daily average value for cash equities fell 14% h-o-h and 12% y-o-y to $962 million in 1HFY2024 while revenue fell 6% y-o-y. Total derivative contracts rose 6% h-o-h and 1% y-o-y.
SGX’s operating expenses came in softer, as expected, says Tan. 1HFY2024 opex fell 8% h-o-h but rose 4% y-o-y, which came in at 46% of Citi and FY2024 estimates by consensus. SGX has also lowered its FY2024 opex guidance to 3% from the mid-single-digit opex growth forecast given at the last results briefing.
Maybank Securities analyst Thilan Wickramasinghe is a tad more optimistic. He is maintaining a “hold” on SGX with a lower target price of $10.09, down from $10.24 previously. SGX is “at a crossroads”, says Wickramasinghe in his Feb 1 note, citing its “low yield and slow growth”.
SGX has declared an interim quarterly dividend of 8.5 cents per share, payable on Feb 20. This brings total dividends in 1HFY2024 to 17 cents per share. SGX raised its quarterly dividend to 8.5 cents at the release of its results for FY2023 ended June 2023, ending 12 consecutive quarterly payouts of 8 cents. At the latest briefing, CEO Loh Boon Chye reiterated his plan to maintain “mid-single-digit” CAGR growth in dividends over the medium term.
Wickramasinghe says SGX’s 1HFY2024 dividends were below expectations. “Management is guiding for mid-single-digit DPS growth in the medium term, partly as a means to preserve dry powder for M&A.”
However, SGX’s past M&A are still integrating and have yet to make material contributions, he adds. “As a result, the value proposition as a growth stock versus a yield stock (just 3.8% FY2024 yield versus 5.7% for the Straits Times Index) is unclear at this time, in our view.”
Writing in a Feb 1 note, OCBC Investment Research says the results came in within expectations and has kept its “hold” call and $10.16 target price.
OCBC says SGX’s management reiterated their target to grow the dividend payout by a CAGR of mid-single-digit percentage range over the medium term, subject to its earnings growth trajectory.
On the other hand, SGX has guided for FY2024 costs to increase at a lower magnitude of 3% from “mid-single” digits previously.
OCBC also notes that capex guidance has been lowered from $75 million–$80 million to $70 million–$75 million. “We believe this reflects the effectiveness of SGX’s cost controls and this will also help to support its ability to grow its dividends.”
SGX’s balance sheet showed a net cash of $258.9 million, down from $341.3 million as at September 2023. Nonetheless, OCBC still deems this “healthy”, given how gross debt to ebitda stood at 1.0 time as at end 1HFY2024, lower than the same period a year ago (1.1 times).
Andrea Choong of CGS-CIMB says the results missed her expectations, partly due to lower-than-expected treasury income even with interest rates elevated. However, the interim dividend of 8.5 cents came in within her expectations.
In her Feb 1 note, Choong has kept her “hold” call with a slightly reduced target price from $10.60 to $10.50 to take into account weaker-than-expected treasury income.
Her target price of $10.50 is pegged to 22 times earnings, a level that is SGX’s 10-year mean. As interest rates are still held high, Choong expects trading volume to remain weak. “Dwindling treasury income when US Fed rate cuts set in is a downside risk,” she warns. — Jovi Ho
ESR-LOGOS REIT
Price targets:
DBS Group Research ‘buy’ 34 cents
RHB Bank Singapore ‘buy’ 38 cents
Recalibration strategy
Analysts from RHB Bank Singapore and DBS Group Research have maintained their “buy” calls on ESR-LOGOS REIT J91U , following the REIT’s post-merger asset recalibration strategy which they believe will drive share price re-rating.
RHB analyst Vijay Natarajan has an unchanged target price of 38 cents while DBS analysts Dale Lai and Derek Tan have an unchanged target price of 34 cents.
Natarajan names several factors that have led to his “buy” call. He says that the REIT offers an attractive value proposition with strong sponsor backing and a healthy acquisition pipeline, presenting good medium-term growth potential.
The REIT’s distribution per unit (DPU) for the 2HFY2023 ended Dec 31, 2023, met Natarajan’s expectations. He adds that FY2023 was “a good year” in terms of execution of its portfolio recycling strategy, with the divestment of 10 assets placing its balance sheet in a comfortable position.
“The REIT has been actively recycling its portfolio with 16 asset divestments since 2021 for a total value of about $600 million and redeploying capital into newer and longer-leased assets. Asset rejuvenation plans are on track with two of its planned four redevelopments completed,” says Natarajan.
ESR-LOGOS REIT’s latest acquisition of a stake in the Japan portfolio presents further diversification opportunities into newer freehold logistics assets, Natarajan notes. The REIT’s US$70 million ($94 million) investment into the ESR Japan income fund, which currently holds five fully occupied and recently completed logistic assets with an aggregate valuation of $1.75 billion.
Meanwhile, after two years of double-digit positive rent reversion, Natarajan expects FY2024’s rent reversion to be in the high single digits of about 7%–9% as rents for Singapore’s industrial market continue to rise with favourable demand-supply dynamics.
Portfolio occupancy remains healthy at 92.8% (+0.1 basis points y-o-y) and is expected to be flattish in FY2024, he adds.
The REIT’s FY2023 DPU declined 14.5% y-o-y as higher revenue (+13%) and net property income growth (+12) was offset by new unit issuance and higher financing costs while overall valuation on a same-store basis fell slightly (about 2%) due to a lease decay effect for Singapore assets and forex impact, the analyst notes.
Its financing cost saw a marginal q-o-q decline of 2 basis points to 3.91% and is expected to peak at about 4%, while about 82% of its debt is currently on a fixed rate with a hedge tenor of 1.3 years.
With that, the RHB analyst has revised his FY2024/FY2025 DPU by 2% and 3%, factoring in the recent acquisition and divestments, and fine-tuning interest cost assumptions. His target price remains unchanged at 38 cents.
Likewise, Lai and Tan from DBS note that ESR-LOGOS REIT is now the fifth largest industrial S-REIT with a total asset base of about $5.5 billion, and a dividend yield of more than 10%, or about 400 basis points higher than its large-cap industrial S-REIT peers. “It looks attractive,” they note.
“The rejuvenation of its portfolio entails redevelopment projects and asset enhancement initiatives (AEIs) to drive organic growth in earnings and net asset value,” say Lai and Tan.
While the REIT’s peers find it increasingly challenging to make accretive acquisitions given the negative cap rate spreads in most major markets, ESR-LOGOS REIT can look to its “enviable” sponsor’s pipeline that is valued at about US$2 billion, the analysts note.
As the REIT continues to actively look at redeploying its proceeds into assets of better quality in the long term, Lai and Tan note that earnings may remain depressed if this happens slower than anticipated.
But despite the near-term challenges as interest rates continue to rise, and the REIT’s recent $300 million equity fundraising exercise leading to a dilution in DPU, the analysts see the REIT’s ongoing AEIs and redevelopment projects as key drivers to its earnings in the future. Their target price remains unchanged at 34 cents.— Nicole Lim
Parkway Life REIT
Price target:
OCBC Investment Research ‘buy’ $4.27
Stable, defensive portfolio
Ada Lim of OCBC Investment Research has kept her “buy” call and $4.27 fair value estimate on Parkway Life REIT, following a robust FY2023 driven by both organic and inorganic drivers.
In 2HFY2023 ended December 2023, PLife REIT grew its gross revenue by 4.7% y-o-y to $73.1 million and net property income (NPI) by 4.8% y-o-y to $69 million.
The REIT enjoyed higher contributions from newly-acquired nursing homes in Japan and higher rent from the Singapore hospitals under the new master lease agreements. However, the takings were partially offset by the yen’s depreciation versus the Singapore dollar (SGD).
While financing costs were higher, 2HFY2023 distributable income was up 2.1% y-o-y to $45.3 million and distribution per unit was 7.48 cents, bringing the full-year payout to 14.77 cents, representing a yield of 4.2% based on unit price on Feb 2.
Lim likes PLife REIT for its prudent and pre-emptive capital management strategy. Its gearing improved by 0.4 percentage points (ppt) q-o-q to 35.6% as at Dec 31, 2023, which is likely due to a gain of $15.8 million recorded during the year-end portfolio revaluation exercise.
This implies a debt headroom of $400.4 million before the REIT reaches the 45% gearing limit. All-in cost of debt inched down 5 bps (basis points) to 1.27% in the same period, with an interest coverage ratio at a healthy 11.3 times.
Besides taking out longer loans, the REIT manager has also entered into several interest rate swaps, which is expected to increase its proportion of fixed rate borrowings from 74% as at Sept 30, 2023, to a very high 90% level by March 31.
Lim continues to like the REIT for its defensive, stable portfolio and steady track record of DPU growth.
“We remain comfortable with PLife REIT’s stable fundamentals and look forward to significant growth come FY2026 once renewal capex works at Mount Elizabeth Hospital are completed,” adds Lim.
She estimates the REIT to give an FY2024 distribution yield of 4.3%, which is around one standard deviation (s.d.) above the five-year historical average.
The REIT is now trading at a forward 12-month P/B ratio of 1.2 times, which is more than one s.d. below its five-year historical average, which Lim interprets as “an attractive entry point” for long-term investors seeking a stable and defensive income stream. — The Edge Singapore
Mapletree Pan Asia Commercial Trust
Price targets:
DBS Group Research ‘buy’ $2
Citi Research ‘buy’ $1.72
OCBC Investment Research ‘buy’ $1.59
Maybank Securities ‘hold’ $1.40
Operational improvements seen
Mapletree Pan Asia Commercial Trust (MPACT) reported lower distribution for its 3QFY2024 ended Dec 2023 over the year-earlier period but analysts are cheered by its ongoing operational improvement and therefore recommending investors to “buy”.
In 3QFY2024, MPACT grew its revenue and net property income by 0.8% and 1.7% y-o-y respectively. However, distribution was weighed down by higher debt costs and unfavourable forex.
Distribution per unit for the quarter was down 9.1% y-o-y to 2.2 cents although that was in line with what the analysts were expecting.
Portfolio occupancy was slightly higher by 0.4%pts q-o-q to 96.7%. All properties saw improvements except VivoCity, which was down 0.3% percentage points to 99.7%. Portfolio rent reversion improved by 4.1% in 9MFY2024, with more significant gains generated by VivoCity and Mapletree Business City here in Singapore, versus a similar gain of 3.2% in 1HFY2024.
On the other hand, rental reversions dropped for its properties in Hong Kong, China and Japan.
Brandon Lee of Citi Research, who has a “buy” call and $1.72 target price on this counter, expects FY2024 valuation to remain flat with no major changes in cap rates or discount rates for its properties, subject to forex changes.
However, a couple of other sore points remain. Traffic at Festival Walk, MPACT’s key retail asset in Hong Kong, improved by 5% y-o-y in 3QFY2024 but tenant sales were still down 3% y-o-y, which puts it at just 71% of pre-pandemic levels.
For now, Festival Walk had to make do with a negative 8.1% rental reversion for 9MFY2024, although that was a lower drop versus -9.5% suffered in 1HFY2024. According to Lee, the negative trend will only be “flushed out” in the coming FY2025.
Meanwhile, MPACT is also trying to win tenants to take up vacant space at Mapletree Business City given up by major tenants Google and Unilever.
The REIT, according to Citi’s Lee, will seek a share buyback mandate from its unitholders at its coming AGM but the way he sees it, buybacks are to be weighed against high gearing and alternative uses of funds.
Lee commends MPACT’s move to lower its debt costs by reducing the proportion of pricier HKD debt but he believes that investors prefer lower gearing instead, most likely via the divestment of one of its major assets. “However, it seems to us near-term likelihood is not high, given divestment window in China is still closed,” says Lee.
Nonetheless, Lee notes that MPACT has underperformed S-REITs as a whole, and as such, keeping his “buy” call on valuations.
DBS Group Research, which alludes to MPACT’s yield of 6.4% for FY2025, is more bullish. In a Jan 30 note, DBS sees some “glimmer of hope” for Festival Walk.
That aside, the strong presence of Singapore assets within MPACT’s portfolio will help anchor the REIT as investors await clearer recovery from the overseas assets. VivoCity, for one, will continue to be a “strong anchor” and “on track to chart new highs”, says DBS, which has a “buy” call and target price of $2.
Krishna Guha of Maybank Securities has also turned slightly more positive on MPACT. In his Jan 30 note, he raised his FY2024 and FY2025 DPU estimates by 3% after factoring in lower borrowing costs. Coupled with a lower discount rate, his target price has been lifted from $1.25 to $1.40.
Nonetheless, “with headwinds persisting for refinancing and performance of overseas assets and the recent rally closing the valuation gap with peers, we maintain our ‘hold’ rating,” says Guha.
OCBC Investment Research, after inputting a bigger ESG valuation discount, has increased its fair value estimate from $1.58 to $1.59. MPACT remains a “buy” for its “steady improvement in recovery efforts”. — The Edge Singapore
OUE REIT
Price target:
DBS Group Research ‘buy’ 35 cents
Recovery to continue
Rachel Tan and Derek Tan of DBS Group Research have kept their “buy” call and 35 cents target price for OUE LJ3 REIT, as they expect recovery to continue and therefore further upside for investors.
In FY2023 ended December 2023, OUE REIT reported a distribution per unit (DPU) of 2.09 cents, down 1% over the preceding FY2022, as the REIT manager chose to retent a higher quantum of working capital.
In 4QFY2023, its revenue was up 7% y-o-y to $70.5 million and net property income was up 4% y-o-y to $57 million, mainly due to higher contributions from Hilton Singapore Orchard (HSO).
However, compared to the preceding 3QFY2023, revenue and net property income were down 7% q-o-q and 9% q-o-q, respectively, mainly due to lower contributions from hospitality.
Despite a softer 4QFY2023, management is optimistic about 2024 and believes that there is still an upside for hospitality, riding on the major concerts and Mice events, especially in the first half of the year.
“In addition, management believes that more Chinese tourists will return, especially with the 30-day visa-free travel,” adds DBS in its Jan 31 note.
OUE REIT is upbeat about its office segment and expects resilient rental given the lack of supply. It expects to achieve mid-single-digit positive reversions in FY2024, given the expiring rents of $10.43 psf. It does not expect major risks from its top 10 tenants in the near term, as most of the leases were renewed over the past year.
While OUE REIT is mulling potential acquisitions to grow its hospitality sector, the preference for now is to look at ways to recycle its assets before pulling the trigger.
Meanwhile, despite a softer quarter for the key hospitality asset Hilton Singapore Orchard, the DBS analysts continue to believe that OUE REIT can still ride on the growth in the hospitality sector and deliver core DPU growth, which, in the absence of refinancing risks this current FY2024, should see growth of 1% to 5%.
DBS has trimmed its FY2024 and FY2025 DPU estimates by 1.6% to factor in higher retention of distribution.
OUE REIT now trades at close to an 8% FY2025 yield, 0.5 times P/NAV, at an attractive entry level, given its operational improvements. — The Edge Singapore
Keppel REIT
Price target:
RHB Bank Singapore ‘buy’ $1.08
‘Mispriced’ REIT
RHB Bank Singapore analyst Vijay Natarajan is keeping his “buy” call on Keppel REIT with an unchanged target price of $1.08.
As at his report dated Jan 31, the REIT is trading at a unit price of 92 cents, which Natarajan believes, is “mispriced”. At its current unit price levels, the REIT is trading at a discount of over 30% to its book value. According to the analyst, this is due to investor scepticism towards the office sector.
The REIT’s results for the 2HFY2023 and FY2023 ended Dec 31, 2023, also met Natarajan’s expectations.
On Jan 30, Keppel REIT reported a distribution per unit (DPU) of 5.80 cents for the FY2023 ended Dec 31, 2023, 2% lower y-o-y. The REIT’s 2HFY2023 DPU fell by 1.7% y-o-y to 2.90 cents due to higher borrowing costs, offsetting the “healthy” 7% net property income (NPI) growth from operational improvements.
The REIT’s operational performance also remains robust with improvements in occupancy as well as healthy positive rental reversions. These are expected to remain strong in 2024, says Natarajan. The REIT’s property in Japan, KR Ginza II, achieved full occupancy, broadly outperforming the analyst’s expectations.
While borrowing costs should increase in FY2024, this is likely to be mitigated by organic income growth and contributions from the REIT’s new developments, the analyst notes.
After adjusting his occupancy and interest cost estimates, Natarajan has lowered by FY2024 DPU expectations by 1% and increased his FY2025 DPU forecast by 1%. His estimates have also been rolled forward by a year.
His target price includes an environmental, social and governance (ESG) premium of 2% as the REIT’s ESG score of 3.2 is above the country median. — Felicia Tan
