DBS Group Holdings
Price target:
RHB Bank Singapore ‘buy’ $38.30
Higher dividend seen
The Singapore research team at RHB Bank Singapore has kept its “buy” call on DBS Group Holdings with a higher target price of $38.30 from $36.70. Despite the higher estimate, the team expects the bank’s earnings for the FY2024 ending December to remain muted.
The team writes in a March 26 report that the bank’s shift to non-interest income-led income growth from net interest income (NII) should free up capital and support capital return initiatives.
“The growth of its assets under management (AUM) has been healthy and improved market sentiment should allow for better wealth management opportunities and help drive the double-digit fee income growth guided for 2024,” it adds.
On its operating expenses (opex), the bank’s $80 million commitment for its tech uplift programme should be largely done by March. The main opex pressure for this year would be from the full-year consolidation of Citi Taiwan, continues the team.
“While opex growth was guided to be at a high single digit, DBS was confident that the full contribution from Citi Taiwan at the topline level plus non-interest income growth should help cap the cost-to-income ratio (CIR) at a low 40% level. Also, with no red flags on asset quality, management was comfortable with its specific provisions charge off guidance of 17 basis points to 20 basis points,” it says.
In 1QFY2024 ending March, the team sees no surprises to DBS’s earnings. Loan growth during the quarter should still be muted, meeting DBS’s guidance of low single-digit growth amid the ongoing trade-off between net interest margin (NIM) and increase in loans.
“The trend of higher repayments has persisted, and the softer growth environment has led to competitive pricing pressure in the mortgage segment – which, so far, DBS has avoided competing aggressively in aggressively in,” says the team.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
DBS’s NIM guidance will also remain unchanged even though the market now expects the US Federal Funds Rate (FFR) to cut rates three times, down from the expectation of six to seven cuts earlier. DBS expects that there will be five cuts in its NIM guidance. According to the bank, the difference will not be meaningful enough to impact its NIM guidance as the additional cuts it expects would have been towards the tail-end of 2024.
With DBS reiterating its commitment to increase its absolute dividend per share (DPS) by 24 cents after including its 1-for-10 bonus issue, the RHB team has raised its dividend estimate for FY2024 to FY2026 by 6 cents per annum as it brings forward the uplift in DPS by a quarter.
“We expect FY2024’s absolute DPS to rise by 30 cents, followed by 24 cents per annum from FY2025 to FY2026. These figures exclude further initiatives to return excess capital since its common equity tier one (CET-1) ratio will move up by 2 percentage points when the Basel IV regime kicks in later this year,” says the team. — Felicia Tan
First REIT
Price target:
Lim & Tan ‘accumulate’ 30 cents
Many “firsts” in Indonesia’s healthcare sector
Analysts are generally positive about First REIT’s prospects after visiting its four hospitals in Jakarta last week. The hospitals, Mochtar Riady Comprehensive Cancer Centre (MRCCC), Siloam Hospitals Lippo Village, Siloam Hospitals Kebon Jeruk and Siloam Hospitals TB Simatupang, are operated by Indonesia-listed Siloam International Hospitals.
Following the visit, Lim & Tan Securities analyst Chan En Jie has maintained his “accumulate” call with an unchanged target price of 30 cents, pegged to a forward yield spread of 2.6% and 0.5 standard deviations (s.d.) of its five-year average.
For more stories about where money flows, click here for Capital Section
In his report dated March 26, Chan notes that the REIT stands to reap the benefits from Siloam Hospitals’ status as the largest private healthcare provider in Indonesia. About 63% of the country’s hospital market is made up of private providers, and Siloam has an estimated 9% share in these private hospitals.
Chan says the hospitals, which have also undergone various asset enhancement initiatives (AEIs) to cater to Indonesia’s growing affluent, have healthy patient volumes that usually peak in the morning.
For the FY2023 ended Dec 31, 2023, First REIT’s revenue of $108.6 million and distributable income of $51.4 million were in line with Chan’s expectations.
Chan has estimated the REIT to report revenue of $111.8 million for FY2024 and a distributable income of $51.7 million. His FY2024 distribution per unit (DPU) estimate is unchanged at 2.48 cents.
PhillipCapital analyst Paul Chew sees First REIT as benefitting from the “virtuous cycle” in Indonesia’s healthcare sector.
In an unrated report dated March 25, Chew notes that the REIT’s four hospitals were “bustling with activity, well equipped [and] nicely furbished”. They also offered advanced specialist care including neurology, oncology, gastropathy, urology and fertility.
“Indonesia faces an acute shortage of specialists. Specialists are drawn to modern healthcare equipment and patients. Investing early in private hospitals allowed Siloam to establish a reputation and location that draws patients,” he says.
In addition, First REIT, which collects its rents from these hospitals in rupiah, could see rental income grow faster in FY2024 as Siloam’s revenue grows by 18% y-o-y in the 9MFY2023.
To Chew, the four macro drivers for healthcare demand are the growing population, the rising rate of chronic diseases, expanding middle income and the spread of health insurance.
UOB Kay Hian analyst Jonathan Koh also sees First REIT benefitting from the transformation and growth of healthcare in Indonesia.
In his unrated report dated March 25, Koh notes that the country’s healthcare sector is booming due to the increasing awareness towards preventive care, rising affluence and successful healthcare reform.
“First REIT is able to capture the growth in Indonesia through its performance-based rent, which is calculated based on 8% of preceding financial year gross operating revenue,” Koh writes.
“Three of its hospitals currently contribute performance-based rent. The stock trades at 2024 distribution yield of 10.2% and P/NAV of 0.82 times,” he adds. — Felicia Tan
RH Petrogas
Price target:
UOB Kay Hian ‘buy’ 24.2 cents
Inexpensive valuations
UOB Kay Hian analyst Adrian Loh is maintaining his “buy’’ call on RH Petrogas T13 with a raised target price of 24.2 cents from 23.8 cents previously, citing the group’s successful yielding of one well for its 2023–2024 drilling programme. The result is “in line” with historical global exploration success rates, notes Loh.
In mid-March this year, the group announced that its Piarawi-1 well, located in its Salawati Production Sharing Contract (PSC) and the fourth and final well of its 2023–2024 drilling programme, found good-quality oil within a tight carbonate reservoir.
Currently, the well is pending approval for testing and fracking by Indonesian oil and gas regulators, with a possibility to begin production as soon as 4QFY2024 ending December.
Loh writes: “RH Petrogas estimates around two million barrels (mmbbl) in recoverable reserves at Piarawi which is in line with our pre-drill estimate and potential production rates of 300 to 500 barrels per day (bpd), 6% more from 2023 levels. We highlight that global exploration success rates range from 10% to 20%, thus we deem RH Petrogas’ exploration programme as being an in-line result.”
Meanwhile, RH Petrogas’s FY2023 results beat the analyst’s expectations.
Excluding the nearly US$18 million ($24.2 million) in exploration write-offs from the drilling of its three non-commercial wells in 2HFY2023, the group would have registered a net profit of US$13.8 million, thus beating Loh’s US$11 million profit estimate for the year.
Without the write-offs, net profit for the year came in at US$3.2 million. “We highlight that RH Petrogas’s operations continue to perform well with FY2023 production rising by 3.5% y-o-y to 4,990 bpd or 1.44 mmbbl while production costs were largely in line with our estimates at over US$37 per barrel.”
Moving forward, RH Petrogas has planned for a two-well drilling programme in 2HFY2024 at the Basin PSC oilfield in Indonesia, in which the group has a 70% stake.
One well will target a shallow reservoir with potential unrisked recoverable reserves of eight to 10 mmbbl for US$4 million and the second one will target a deeper reservoir of eight to 10 billion cubic feet (bcf) of gas for US$8 million to US$10 million.
On this, Loh writes: “It is important to note that Pertamina drilled two successful oil and gas wells that were only 2km to 4km away near RH Petrogas’s first planned shallow well and thus it would appear that the likelihood of a positive result is high in our view.”
Meanwhile, although the group’s Karuka exploration well failed to find any commercial gas to supply the nearby nickel smelting plant, Loh notes that it appears RH Petrogas has enough contingent gas resources nearby to supply the plant with minimal capex outlay.
He adds: “While negotiations with the smelting plant should commence in the near term with production rates and gas prices yet to be determined, we believe that any positive outcome should bode well for RH Petrogas’s medium- to long-term production outlook.”
As such, the UOB Kay Hian analyst has raised his earnings estimates for FY2024 to FY2025 by 22% to 23% due to higher oil price estimates as well as slightly higher oil production forecasts.
“We highlight that the company had zero debt at the end of FY2023 and US$54.6 million in cash which equates to over half of its current market capitalisation,” writes Loh.
He continues: “Based on our forecasts, RH Petrogas trades at very inexpensive multiples with its 2024 P/E and EV/Ebitda of 6.2 times and 4.4 times respectively at 23% to 36% discounts to its regional oil and gas peers.”
Although Loh understands that the group’s inexpensive valuation might be due to its small market capitalisation and low daily trading liquidity, he also points out that its management has “a good track record” of delivering on production growth and cost control.
Presently, the analyst prefers RH Petrogas to fellow oil producer Rex International, due to its better oil and gas production management, better quality assets, lack of corporate governance issues, inexpensive valuation and most importantly, exploration upside.
“In our view, the next few months may see RH Petrogas’s share price trading in line with oil price movements until at least 2HFY2024 when its drilling programme commences,” concludes Loh.
Share price catalysts noted by him include the successful drilling results of the group’s two wells in 2HFY2023, which could add to its valuation in the near term and profits and cash flow in the medium to long term. Conversely, risks include fluctuating oil prices which could negatively impact profits and cash flow in the event of a prolonged downturn, as well as operational risk, regulatory risk and sovereign risk, among others. — Douglas Toh
Thomson Medical Group
Price target:
PhillipCapital ‘buy’ 6.6 cents
Well-poised for regional growth
PhillipCapital analyst Peggy Mak has initiated coverage on Thomson Medical Group A50 with a “buy” call and a target price of 6.6 cents.
Mak’s sum-of-the-parts (SOTP)-based target price is pegged at an industry average of 12.5 times FY2025 EV/Ebitda.
The group is one of the largest private healthcare providers for women and children in Singapore. It operates three tertiary hospitals in Singapore, Malaysia and Vietnam with a total of 757 licensed beds.
The group also runs specialist medical clinics and diagnostic imaging centres in Singapore and Malaysia. Furthermore, Thomson Medical Group owns freehold land spanning 1 million sq ft in Johor Bahru, Malaysia, which could be developed into an integrated health and wellness city, including a medical hub under Bursa-listed TMC Life Sciences (TLS), the group’s 70%-owned subsidiary.
In her March 25 note, Mak cites several positives including its Malaysian operations, which she sees as the “key growth engine”.
“Bursa-listed TLS has enjoyed strong growth since FY2020 ended June 30, led by increased bed count, higher patient load, and bigger bill size with a larger scope of treatment,” says the analyst.
“Improved quality of healthcare services and a weak Malaysian ringgit (RM) are drawing both domestic and foreign patients to seek treatment in Malaysia. TLS has room to increase bed count by more than 50%, from 350 currently,” she adds.
Mak also sees strength in the group’s Franco-Vietnam Hospital (FV) in Ho Chi Minh, Vietnam, due to its geographical coverage of not only Vietnam but also the “burgeoning economies” of Cambodia and Laos with a total regional population of 120 million.
She adds: “A full-year contribution from FV in FY2025 could lift ebitda to 12.6% above that of FY2023. Founded in 2003, FV is one of Vietnam’s six Joint Commission International (JCI) accredited hospitals.
It has 200 doctors offering more than 30 specialties. FV is adding a new wing to raise floor space by 33% from FY2026.” The acquisition of FV was confirmed on Jan 17.
Finally, Thomson’s land in Iskandar could yield a gross development value of $3.6 billion and a development gain of about $1.1 billion once its plans to build its integrated health and wellness city are realised.
Other factors that could lift the value of the land are the proposed special economic zone between Johor and Singapore as well as the completion of the Johor Bahru-Singapore Rapid Transit System Link (RTS) at the end of 2026.
“The development of the land could also free up cash for the group and lower debt. Net debt has risen to $835 million, and net gearing 1.48 times as at December 2023, after the acquisition of FV at end-2023,” notes Mak.
As at the end of last year, the company’s annualised Net debt/Ebitda was 10.9 times, and interest coverage was 1.9 times. With contributions and cash flow from FV from 2HFY2024, Net debt/Ebitda is expected to fall to 7.5 times in FY2025 and interest coverage improves to 2.5 times, estimates Mak.
However, she expects a dip in its net profit for FY2024 after the tapering off of its Singapore government contracts for Covid-related work in 2023.
“The absence of this income stream and cost incurred in FV purchase could lead to a 65% decline in FY2024 net profit but +157% rebound in FY2025 with FV contributions,” concludes Mak. — Douglas Toh
Riverstone Holdings
Price target:
RHB Bank Singapore ‘buy’ 93 cents
Semiconductor sweet spot
The Singapore research team at RHB Bank Singapore has resumed coverage of Riverstone Holdings AP4 with an upgraded call to “buy” from “neutral” as it is in a “sweet spot” to capitalise on the recovery of global semiconductor sales.
In their March 21 report, the RHB team, citing figures from the Semiconductor Industry Association (SIA), notes that the industry is poised to grow 13% this year following a 9% contraction in 2023. More recently, the industry worldwide chalked up sales of US$47.6 billion ($63.8 billion) in January, up 15% y-o-y.
“As such, Riverstone is expecting its cleanroom gloves average selling price (ASP) to hold up steadily at US$90 per thousand pieces driven by solid customer demand from various technology industries such as hard disk drive, sensor, chip manufacturing, among others,” says RHB.
Riverstone is also tipped to benefit from the pick-up in demand in the healthcare segment as the demand-supply dynamics are expected to reach equilibrium by 2H2024.
“Positively, customers’ orders for healthcare gloves have been picking up (for April and May) mainly driven by the increased demand for speciality healthcare gloves for de-contamination use. More so, the company successfully raised its healthcare gloves ASP to US$28.50 from US$26.50 in 4QFY2023,” says RHB.
“Moving forward, it intends to prioritise its speciality products after decommissioning 13 old and inefficient lines in 4Q2022,” it adds.
RHB projects Riverstone to generate a core profit growth of 23% y-o-y in FY2024 underpinned by the robust recovery of global semiconductor sales and better demand visibility for healthcare gloves by 2H2024.
“Positively, Riverstone is the only Malaysian glove maker that is still posting double-digit core profit margin while continuing its consistent dividend payout,” it writes.
“We like the company for its unique exposure to the cleanroom segment, above-industry margin profile, and consistent dividend payout,” it adds.
RHB has increased its earnings estimates for FY2024 to FY2025 by 14% to 24% to account for improving sales volume with a better product mix like customised healthcare gloves and cleanroom gloves, which should sustain its ASP moving forward.
RHB has also upped its target price estimate to 93 cents from 74 cents previously. The target price implies 18 times Riverstone’s FY2024 P/E, which is 0.7 standard deviations (s.d.) from its pre-Covid-19 five-year historical mean of 14.8 times. — Felicia Tan
Delfi
Price target:
RHB Bank Singapore ‘buy’ $1.33
Lower margins but positive outlook
RHB Bank Singapore’s Alfie Yeo is reiterating his “buy” recommendation on Delfi, given its compelling valuation and earnings growth outlook which, in turn, is based on the recovery in regional consumption and Indonesia’s rising middle-income segment. However, he has trimmed his target price to $1.33 from $1.55 on lower margin assumptions.
“Despite our earnings estimate cut and imputing higher raw material prices, Delfi still has an FY2023–FY2026 earnings CAGR growth of 7.5%, and trades at an attractive nine times FY2204F P/E,” says Yeo, adding that this is –1 standard deviation (s.d.) from the 16 times mean.
Referring to the group’s latest FY2023 ended December 2023 results, earnings were 5.4% higher y-o-y at US$46.3 million ($62.3 million), while revenue was 12.7% higher y-o-y at US$538.2 million, with growth driven by Indonesia and regional markets.
On a half-year basis, 2HFY2023 earnings were 14.1% lower y-o-y, while revenue was 9% higher at US$255.2 million. This is due to higher trade promotions during the year to counter increasing competition as well as to strategically increase investment to strengthen its core brands and build products which the company believes have the strongest growth opportunities.
The board has proposed a final dividend of 1.74 US cents and a special dividend of 0.52 US cents per share. Together with the interim dividend of 2.06 US cents, the total dividend for FY2023 would be 4.32 US cents per share, representing 57% of the patmi.
Meanwhile, gross profit margin was below Yeo’s forecast, at 28.5% due to increased trade promotions and reclassification. As a result, its operating profit margin (12%) came in below forecast at 13%.
“Following misses in revenue growth and operating margins, we now impute slower revenue growth as well as narrower margin assumptions to reflect the current hike in cocoa prices. As we believe higher cocoa prices may pressure margins going forward, we pared down our gross margin assumptions,” says Yeo.
However, Yeo is not overly pessimistic as he notes that Delfi does have a strategy for hedging against price hikes, as well as the ability to right-size its products and defend margins.
On the outlook, Yeo is upbeat as he sees a positive upside for growth. “Delfi continues to be a beneficiary of the growth of Indonesia’s middle-income segment and rising disposable incomes, while its growth strategies like premiumisation, healthy snacking and introducing product variants remain intact,” says Yeo, who also sees Delfi as a potential M&A target.
RHB’s economists expect Indonesia’s GDP to grow by a robust 5% y-o-y in 2024, driven by an increase in private consumption. “We continue to like Delfi for its market leadership in Indonesia; positioning to capture Indonesia’s rising middle-class consumption; strong and comprehensive general trade network nationwide; premiumisation and healthy snacking strategies; exposure to regional markets; and strong cash flow-generative abilities,” says Yeo. — Samantha Chiew
