Broker's Digest: CICT, KORE, SPH, MNACT, Japfa, Far East Hospitality Trust

Following its 3QFY2021 (for the quarter ended September) business update, analysts from CGSCIMB Research, Citi Research, Maybank Kim Eng and UOB Kay Hian have maintained “add” or “buy” on CapitaLand Integrated Commercial Trust (CICT) as they see the REIT as “well placed” to benefit from a macro recovery.

Analysts from PhillipCapital and RHB Group Research have also kept their “accumulate” and “neutral” calls on the REIT as they see it on the mend albeit dampened by the containment measures brought about by the Covid-19 pandemic.

CGS-CIMB analysts Lock Mun Yee and Eing Kar Mei have maintained their target price of $2.56 as CICT’s gross revenue and net property income (NPI) for 3QFY2021 were within expectations at 24.5% and 25% of their FY2021 forecasts.

They see the REIT’s retail segment recovering gradually; while its office segment is well placed to tap into inorganic growth opportunities too. They see the REIT benefitting from the recovery of the economy, given its diversified and stable earnings profile, and are keeping distribution per unit (DPU) estimates for FY2021 to FY2023 unchanged for now.

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“Re-rating catalysts include more clarity on asset enhancement/redevelopment plans. Downside risks include slower-than-expected portfolio value creation and slower rental recovery outlook,” they write in an Oct 22 report.

Citi analyst Brandon Lee, who has a target price of $2.45, sees a mixed operational climate within its two core sectors. The retail sector has seen improved rent reversions although there is also marginal decline in shopper traffic and tenant sales q-o-q.

“On the office side, CapitaSpring is likely to be 90+% pre-committed at low-teens-rent by 4QFY2021, but elsewhere within selected parts of its portfolio, vacancy and negative reversion risks are present,” says Lee, whose top pick among S-REIT is CICT.

See also: RHB still upbeat on ST Engineering but trims target price by 2.3%

Maybank Kim Eng analyst Chua Su Tye, who has a target price of $2.55, finds CICT’s risk-reward still favourable with its DPU recovery gaining traction from tenant expansion on the back of returning office demand.

The REIT’s valuations are also compelling at 5.5% dividend yield for the FY2022 and 1 times price-to-book (P/B) compared to its historical figures, as well as that of its peers.

Its retail segment has room for recovery to grow coming into the 4QFY2021 which is seasonally its strongest-performing quarter. Chua also sees income contribution for its office segment in the 1HFY2022 from 21 Collyer Quay and 6 Battery Road to back DPU recovery.

“We estimate divestment of One George Street could deliver $85 million in gains, at a $2,900 psf transaction value. Further ahead, redevelopment plans are medium-term catalysts to support DPU upside,” he writes.

For FY2021 and FY2022, Chua estimates CICT’s DPU to improve by 20% and 6% y-o-y respectively, due to lower rental rebates to retail tenants and borrowing costs.

The REIT’s negative retail rental reversions are also expected to moderate in the FY2021 to FY2022 due to stronger tenant sales, particularly in its more resilient suburban malls.

Upside factors include an earlier-than-expected pick-up in leasing demand for its retail or office space, better-than-anticipated rental reversions, and accretive acquisitions ore redevelopment projects.

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Downside factors include a prolonged slowdown in economic activity, termination of longterm leases and a sharper-than-expected increase in interest rates.

UOB Kay Hian analyst Jonathan Koh, citing “good things to come” with the economy reopening, has kept his target price of $2.39 on CICT.

While the REIT’s 3QFY2021 business update stood in line with his estimates, Koh has reduced his DPU estimates for the FY2022 by 2%, due to higher negative rental reversion of 8% for downtown malls (from –5% previously), as well as the delay in contribution from CapitaSpring to the 2HFY2022.

To him, a catalyst in the REIT’s share price would be a “gradual but steady recovery in shopper traffic and tenant sales, accompanied by progressive easing of social distancing measures”, as well as “asset enhancement and redevelopment of existing properties”.

The return of vaccinated employees to offices beginning from 2022 will lead to better physical occupancy for CICT’s offices and bring relief to its downtown malls.

Before then, the pressure on its downtown malls are likely to persist till 1HFY2022, as retail leases accounting for 36% of its gross rental income (GRI) will expire in 2022.

PhillipCapital analyst Natalie Ong has also kept her target price of $2.54 as the REIT’s revenue and NPI for the 9MFY2021 stood in line with her forecast for the FY2021. “Catalysts could include stronger-than-expected sales growth, asset enhancement initiatives to unlock value and portfolio reconstitution,” she says.

RHB analyst Vijay Natarajan is the only analyst to up his target price to $2.20 from $2.10, even though he has kept his “neutral” call on CICT. He sees CICT’s 3QFY2021 numbers a slight sequential improvement in terms of tenant sales and office leasing activity, but recovery remains uneven across sectors.

For the FY2021 to FY2022, Natarajan expects rent reversion to stay negative at an average of –5%.

He also foresees the REIT to divest its 50% stake in One George Street in the near term.

“Key catalysts are faster-than-expected retail sector recovery from the economy reopening and return of overseas visitors, while prolonged imposition of lockdown measures remains its key risk. Current P/BV of 1.1 times has priced in most of the positives, in our view,” he writes in an Oct 25 report. — Felicia Tan

Keppel Pacific Oak US REIT
Price target:
UOB Kay Hian “buy” US$1.10
RHB Group Research “buy” 90 US cents

KORE’s 3Q2021 in line with expectations, portfolio occupancy likely to have bottomed out

Analysts from UOB Kay Hian and RHB Group Research have kept their “buy” ratings and target prices unchanged for Keppel Pacific Oak US REIT (KORE) after its 3QFY2021 ended September business updates were released on Oct 27.

KORE reported a distributable income of US$15.9 million ($21.4 million), which was in line with both brokerages’ expectations.

UOB Kay Hian analyst Jonathan Koh highlights that KORE’s net property income (NPI) grew 5.6% y-o-y, driven by the acquisition of properties in Nashville and Denver that were completed in August, as well as better performance from existing properties.

Koh feels that rents at magnet cities like Seattle, Redmond and Austin have bottomed out. “According to CoStar Office Report, average growth in rents for growth markets over the past 12 months has turned around from negative 0.2% in June 2021 to positive 0.2% in Sept 2021,” he remarks.

He also notes that with the acquisition of Bridge Crossing in Nashville and 105 Edgeview in Denver, KORE now has a presence in six out of the 20 fastest-growing states in the US. “Management continues to scout for opportunities to invest in magnet cities, such as Salt Lake City in Utah and Phoenix in Arizona,” he notes.

Given KORE’s attraction distribution yield of 8%, Koh has kept his “buy” rating for KORE with an unchanged target price of US$1.10.

RHB’s Vijay Natarajan has a similarly sanguine outlook on KORE, noting that it “posted another solid set of numbers” for the 3QFY2021.

“More importantly, portfolio occupancy seems to have bottomed out and leasing momentum is gathering pace, with more workers seen returning to the office,” he says in an Oct 29 research note. KORE’s portfolio occupancy improved 1.3 percentage points q-o-q to 91.8%, the first q-o-q recovery since the pandemic started.

Natarajan also highlights that rent reversions strengthened in the third quarter, with a positive rent reversion of 9.3% achieved year-to-date as of Sept 30. “Management guided that it continues to expect rent reversion to remain in the positive mid-single digits for FY2022 on the back of strengthening demand and low in-place rents,” he adds.

Given KORE’s gearing level of 37.7%, which will give a debt headroom of some US$200 million, Natarajan sees room for more acquisitions and redevelopment, including one to two assets in the next six to 12 months in Salt Lake City, Nashville, Charlotte and Phoenix.

KORE is also working with the authorities and design team on a new five-storey multi-family building at The Plaza, says Natarajan, who is keeping his “buy” rating for KORE with an unchanged target price of 90 US cents. — Atiqah Mokhtar

Singapore Press Holdings
Price target:
UOB Kay Hian ACCEPT OFFER

SPH shareholders should accept Keppel’s offer as respective REITs see rally

As a potential bidding war emerges over Singapore Press Holdings (SPH), UOB Kay Hian Research analysts Llelleythan Tan and John Cheong recommend shareholders to accept “the highest offer” on the table: the original bid by Keppel Corp.

On Oct 29, Cuscaden Peak announced that it had submitted a proposal to acquire all of SPH for $2.10 fully in cash per share at a consideration of $3.4 billion, narrowly edging out Keppel’s original cash-plus-share offer of $2.099.

“With SPH’s prized assets on the line, we reckon that a bidding war is imminent. However, barring any new offer, we recommend shareholders to accept the highest offer which is currently Keppel’s offer at $2.15/share over Cuscaden’s,” write Tan and Cheong.

“With the new full cash offer by Cuscaden of $2.10, SPH is valued at 0.9 times FY2022F price-to-book value (P/B), and 19.2 times FY2022F price-toearnings ratio (PE),” write Tan and Cheong. “However, given the recent rally in share prices for Keppel REIT and SPH REIT, we recommend shareholders to accept the highest offer, which is currently Keppel’s offer at a higher valuation of $2.15/share, barring a superior competing offer for SPH as a whole.”

This, however, is dependent on potential share price movements. Unlike the consortium’s all-cash offer, Keppel’s offer is to be met in a mix of 66.8 cents in cash, 0.596 Keppel REIT units and 0.782 SPH REIT units per share, which would leave SPH minorities with odd lots.

SPH has noted that Cuscaden’s offer is not a binding agreement and has not been accepted by SPH. The total consideration for the offer will not be reduced or adjusted for the $34 million break fee between SPH and Keppel.

Some other conditions include the completion of the demerger of SPH’s media business, which has been approved by shareholders in September and is expected to be completed by December. — Jovi Ho

Mapletree North Asia Commercial Trust
Price target:
CGS-CIMB ‘add’ $1.12

Towards a more stable 2HFY2022

CGS-CIMB Research analysts Lock Mun Yee and Eing Kar Mei have maintained their “add” rating for Mapletree North Asia Commercial Trust (MNACT), with an unchanged target price of $1.12.

Lock and Eing have also kept their distribution per unit (DPU) estimates for FY2022 and FY2024 unchanged.

In an Oct 29 note, the analysts say MNACT is trading at an inexpensive 6.8% FY2022 DPU yield and much of the weak retail outlook for Festival Walk has been factored into the current share price.

For its 1HFY2022 ended Sept 30, MNACT reported gross revenue and net property income (NPI) of $215.4 million and $161.9 million respectively, up 13.1% and 15.8% y-o-y. This is due to lower rental relief of $4.7 million granted to retail tenants at Festival Walk, contributions from Hewlett-Packard Japan headquarters as well as a stronger renminbi.

The figures were partly offset by lower average rental rates at Festival Walk and Gateway Plaza as well as a weaker Hong Kong dollar. This led to a higher NPI margin of 75.1% for 1HFY3/22, the analysts highlight.

Distributable income grew 19.1% y-o-y to $119.5 million, translating to a DPU of 3.426 cents. Portfolio occupancy ticked up slightly q-o-q to 97.9%.

In terms of balance sheet, MNACT’s gearing stood at 41.4% at end-1HFY22, with interest cover of 4.1 times, while effective interest cost declined h-o-h to 1.84%.

Gross revenue at Festival Walk grew 21.4% y-o-y to $106.6 million, while NPI grew a higher 26.1% y-o-y, boosted by lower rent reliefs. Retail sales and shopper traffic at Festival Walk expanded 22% and 29% respectively y-o-y, in tandem with overall improvements in Hong Kong’s retail sales.

While occupancy remained fairly stable at 99.9%, leasing conditions were soft as retailers remained cautious on outlook, say Lock and Eing. MNACT reported a 30% decline in rental reversion in 1H.

The company has a remaining 5% of portfolio gross rental income coming from Festival Walk’s lease expiries for 2HFY3/22F. MNACT expects the quantum of negative reversions for 2HFY22F to remain similar to that of 1H.

The analysts add that interior recovery works at Festival Walk have been completed and exterior works are being carried out progressively and are expected to complete by end-2021. Meanwhile, Gateway Plaza saw higher occupancy of 95.4% but recorded a negative reversion of 24%. Looking ahead, with ample incoming supply, the analysts think the weak outlook is likely to continue to drag on upcoming lease renewals.

“MNACT also indicated that one of the major tenants at Gateway Plaza, whose current lease is due to expire by December 2022, has extended its lease in advance by another year. Meanwhile, Sandhill Plaza and the Japan portfolio continue to be steady performers, delivering a 5% and 1% rental reversion and stable occupancy of 99.7% and 87.8% respectively.

“The Pinnacle Gangnam reported a 58% rental reversion on renewal of one lease and the management guided that rental reversions are likely to remain healthy. MNACT has another 1.2% of leases in Japan and Seoul to be re-contracted in 2HFY22F,” the analysts add.— Khairani Afifi Noordin

Japfa
Price target:
CGS-CIMB “hold” 77 cents

Slow recovery expected for Japfa’s Indonesian and Vietnamese markets

CGS-CIMB Research analyst Tay Wee Kuang has kept his “hold” call on Japfa with an unchanged target price of 77 cents.

Tay’s report on Oct 29 comes after the regional food producer reported earnings of US$113.9 million ($153.5 million), down 12.4% y-o-y for the 3QFY2021 ended September.

During the period, Japfa faced a double whammy on poultry margins in Indonesia and Vietnam due to the spike Covid-19 cases, which led to lockdowns in both countries.

To this end, Tay expects margins to remain tight in the near term as cost pass-through has been delayed owing to weakness in consumption patterns.

Swine prices, which fell 27% y-o-y in 3QFY2021, also affected Japfa’s results, although Tay believes swine prices will stabilise at lower levels given the narrowed demand-supply gap.

While Tay sees upside for Japfa as being able to weather the downcycle in the poultry and swine segments due to its larger scale and lower cost base, the group’s outlook “remains clouded by uncertainty”.

“Operationally, Japfa’s sales volume has been relatively insulated from demand shocks within the industry, which could potentially translate to a gain in market share as market conditions improve,” writes Tay.

In an Oct 29 report, DBS Group Research analyst Cheria Christi Widjaja has maintained “buy” on Japfa with a target price of 89 cents, which implies 7.5 times FY2022 of the counter’s price-to-earnings (P/E) ratio.

“Our target price of 89 cents is based on sum-of-parts valuation. We pegged our valuation of Anima Protein Indonesia to our target price for Japfa Comfeed Indonesia (JPFA) at Rp2,180 (20.6 cents), while valuations of its Animal Protein Others and Dairy are based on FY2022 Ev/Ebitda,” she writes.

Based on Japfa’s traded price of 74.5 cents as at Oct 25, Widjaja deems its valuation “attractive” at 4 times Ev/Ebitda and 6 times P/E.

“The market is ignoring the group’s longterm prospects on growing consumption of animal protein and its geographical diversification,” she says.

“Trading at a 4 times FY2022 Ev/Ebitda and 6 times FY2022 P/E, this food supply play is a bargain if we compare to the average of regional peers in the animal protein and dairy sector at a 10 times FY2022 Ev/Ebitda and 14 times FY2022 P/E,” she adds.

That said, Widjaja sees the counter facing temporary headwinds in Indonesia and Vietnam due to the implementation of stricter movement restrictions.

However, the continued strong performance in its China dairy operations will help mitigate the weaknesses in the Southeast Asian segments, she notes.

The way Widjaja sees it, Japfa’s geographical diversification will benefit the counter in a cyclical industry, which will help to mitigate fluctuations.

Meanwhile, potential downsides include a surge in Covid-19 cases, higher-than-expected raw material costs, weaker-than-expected consumer demand and an outbreak of diseases, all of which could lead to volatility in prices.— Felicia Tan

Far East Hospitality Trust
rice target:
UOB Kay Hian “buy” 71 cents

'Green shoots’ of recovery

UOB Kay Hian analyst Jonathan Koh has maintained his “buy” call and target price of 71 cents for Far East Hospitality Trust (FEHT), forecasting a recovery for the stock.

In a Nov 1 report, Koh observes that FEHT reported distributable income of $13.5 million for its 3QFY2021 (up 12.5% y-o-y), which was in line with expectations.

Its hotel segment enjoys stability from fixed rents, Koh highlights, with revenue from hotels being unchanged at $14.3 million with downside protection from its fixed rents.

Occupancy for hotels dropped 18% y-o-y but was flat q-o-q at 79%. The y-o-y drop was due to companies requiring accommodation for stranded Malaysian workers seeking alternative housing options.

Six out of its nine hotels were deployed for government contracts for isolation purposes, and these contracts have been extended till February 2022. The average daily rate (ADR) was stable at $66 in 3QFY2021. Meanwhile, revenue per available room (RevPAR) for the hotel portfolio decreased 22.4% y-o-y to $52 in 3QFY2021.

For its serviced residences (SR) segment, Koh says there is “resiliency from long-stay contracts” despite occupancy for serviced residences dropping 3% q-o-q to 72% in 3QFY2021.

This was due to a temporary decline in demand for accommodation for foreign workers earlier in the quarter, but FEHT was able to secure long-stay business from project groups as a replacement later in the quarter as the government subsequently relaxed border measures for foreign workers from South Asia since Oct 27.

Its serviced residences ADR inched higher by 2% q-o-q to $178, but RevPAR eased 6% q-o-q to $128.

Furthermore, there was a rebound from commercial premises. Revenue from commercial premises increased 12.4% y-o-y in 3QFY2021 due to fewer rental rebates this year. Retail leases were restructured with a larger proportion of variable rents as percentage of gross turnover.

Separately, FEHT (which owns Central Square) and City Developments (owner of the adjacent Central Mall) have jointly submitted a proposal to redevelop Central Square and Central Mall. The JV has received an outline advice from the Urban Redevelopment Authority (URA) for the redevelopment, which comprises SRs (30%) and commercial spaces (70%), including office and retail units.

This will rejuvenate the precinct and involve a potential rezoning and uplift in gross floor area, Koh thinks.

FEHT also saw a steep fall in interest expenses as such expenses declined 18% y-o-y in 3QFY2021.

Koh notes that the average cost of debts has improved by 0.4% y-o-y to 2%, and that discussions with lenders on refinancing term loans of $100 million due in December 2021 are ongoing and should be completed in 2H2021.

Moving forward, he is optimistic about the recovery of FEHT as Singapore opens more vaccinated travel lanes (VTLs), saying they “provide a springboard and platform for the recovery of visitor arrivals in 2022”.

The return of business travellers through VTLs is also likely, as Singapore achieved decade-high fixed asset investments of $17.2 billion in 2020, and more multinational companies are setting up their regional headquarters in Singapore.

These regional headquarters and major infrastructure projects are beneficial over the medium to long term for FEHT’s hotels and SRs.

Some share price catalysts include a recovery in occupancy, ADR and RevPAR in 2023, and acquisition of the remaining 70% stake of three Sentosa hotels from sponsor Far East Organization. — Lim Hui Jie