Digital Core REIT
Price target:
UOB Kay Hian ‘buy’ 95 cent
UOBKH keeps DCREIT at ‘buy’ with higher target price
UOB Kay Hian (UOBKH) analyst Jonathan Koh is keeping his “buy” call on Digital Core REIT (DCREIT) at a higher target price of 95 cents from 88 cents previously, following its 9MFY2024 ended September results.
“DCREIT reported distributable income of US$12 million ($15.9 million) for 3QFY2024, which is in line with our expectation,” writes Koh in his Oct 28 report.
See also: OCBC, citing potential recovery, initiates coverage on Nanofilm with tentative 'hold' call
The REIT secured a positive rental reversion of 2% to 3% for US$30 million ($39.7 million) in renewal leases with hyperscalers across North America. On a portfolio-wide basis, DCREIT achieved a positive rental reversion of 10.5% in 3QFY2024 and doubled its portfolio’s weighted average lease expiry (WALE) from 2.8 years to 5.0 years.
The REIT has also successfully backfilled its Los Angeles data centre, signing direct colocation leases with 60 end-user customers and leasing out 60% of the capacity. Together, these leases generated annualised rent of US$7 million, 30% above the previous in-place rent.
Come year-end, DCREIT expects the two Los Angeles data centres to be 80% leased and double the in-place rent.
See also: Macquarie revises Singapore earnings growth for FY2024 to 7% from 3%
Meanwhile, US$716 million in loan facilities were recast on Oct 9, comprising a US$363 million senior unsecured multi-currency term loan facility maturing in 2030, a EUR70 million ($100.4 million) senior unsecured term loan facility maturing in 2029 and a US$275 million senior unsecured revolving multi-currency loan facility maturing in 2029.
With this, the average debt maturity has lengthened by 2.5 years to 4.9 years.
DCREIT also bought back 7.6 million units in 3QFY2024 at a 12% discount to net asset value (NAV), generating 50 basis points (bps) of distribution per unit (DPU) accretion.
Aggregate leverage rose 30 bps q-o-q to 34.8% as of September.
Koh notes: “DCREIT swapped US dollar-denominated loans of US$50 million into euro, thereby achieving a 30 bps q-o-q reduction in average cost of debt to 3.9% in 3QFY2024.”
Meanwhile, the REIT is increasing its stake in its Frankfurt data centre at a lucrative net property income (NPI) yield and steep discount to refreshed valuation.
The analyst notes: “DCREIT has exercised its option to acquire an additional stake of 0.2% to 40.0% in Wilhelm-Fay Straße 15 and 24, a fully fitted freehold data centre in Frankfurt, from sponsor Digital Realty.”
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He continues: “Based on existing market conditions, DCREIT is likely to acquire an additional interest of 10.0%, which brings its aggregate interest in the Frankfurt data centre to 59.9%. The purchase consideration estimated at EUR47 million represents an attractive discount of 17.8% to the refreshed valuation. The latest valuation has increased 13% to US$628.7 million compared with US$556.4 million as of December 2023. It generated an NPI of EUR13.4 million in 1HFY2024. The additional stake provides an attractive NPI yield of 5.7%.”
DCREIT has until early December to decide on the acquisition stake size. The acquisition will be fully funded by a euro-denominated term loan at an all-in cost of 3.6% and is expected to be accretive to pro-forma 2023 DPU by 1.7%.
Additionally, NAV per unit would increase by 4.5% to 70 US cents, while the aggregate leverage would increase by 1.3 percentage points (ppts) to 35.8%.
“If market conditions improve, DCREIT could acquire up to 40% of the Frankfurt data centre. In this scenario, the acquisition would be accretive to pro forma 2023 DPU by 7.0%. NAV per unit would jump 6.0% to 71 US cents, and aggregate leverage would expand 6.5 ppts to 41.0%,” writes Koh.
Meanwhile, a lease for a fully-fitted water-cooled data centre at 8217 Linton Hall Road in Northern Virginia is due for expiry in June 2025. The data centre also has a 24-megawatt (MW) NOVEC substation on site, and it accounts for 11.4% of DCREIT’s annualised rents.
The REIT also sees potential long-term value creation by redeveloping the data centre Linton Hall Road, which sits on a 32-acre land space.
“A full-blown redevelopment could increase capacity from 10MW to 50MW but cause DPU disruption. Management estimated a negative impact of 6 US cents to DPU for every month of downtime. A less disruptive alternative is to build an annexe at the parking lot with a capacity of 30MW,” writes the analyst.
Overall, Koh raises his FY2025 DPU forecast by 9% due to rapid progress in the backfilling of vacant spaces at its two LA data centres.
Share price catalysts he noted include yield-accretive acquisitions tapping on DCREIT’s sponsor’s extensive data centre pipeline and organic growth from cash rental escalation of 1% to 3%. — Douglas Toh
StarHub
Price target:
Maybank Securities ‘hold’ $1.30
Telco competition remains elevated
Maybank Securities analyst Hussaini Saifee is keeping his “positive” rating on the Singapore telecommunications sector as competition in the mobile and fixed broadband (FBB) space grows.
Saifee’s Oct 29 report refers to the entrance of Simba, which rolled out its commercial mobile service in Singapore in March 2020. Simba, formerly TPG Singapore, is the fourth telco after Singapore Telecommunications Z74 (Singtel), StarHub CC3 and M1.
“While mobile consolidation was a hope of competitive rationalisation, Simba’s improving fundamentals, balance sheet scale and wide average revenue per user (ARPU) gap versus incumbents suggest it is favourably placed to continue to take market share,” says Saifee.
Even though the telco has garnered a revenue market share of just 4.8%, it has already attained a “healthy” ebitda margin of 42%. Simba is also already free-cash-flow (FCF) positive, which is a plus to Saifee as regional telcos cannot achieve this even with a revenue market share of 15% to 20%, Saifee notes.
He adds that there is “ample room” for Simba to gain the lower end of the sector’s market share, with the telco’s SIM-only plans still priced at 50% below its incumbents and its attractive roaming offers.
“Simba also has room to invest in the network and potentially make inroads in the higher-end market,” the analyst continues. “Simba recently entered the highly commoditised FBB space and is looking at the experience of MyRepublic and M1, and we see room for it to take 5%–6% market share.”
Even though Simba’s entry may result in a less effective move to consolidate the industry, it “raises hopes” that a four-player and highly competitive Singapore market may also improve services.
“However, our game theory analysis suggests Simba may prioritise market share gains over profitability in light of [an] already improving financials in a highly competitive market, balance sheet strength and just 5% market share [which] is not sustainable in the long term,” Saifee writes.
“Given these dynamics, we think the desired results of industry consolidation may not percolate to the incumbents. While Simba’s performance pales on the 5G spectrum, we note that 5G use cases in the consumer space are relatively limited and thus are not a major competitive disadvantage,” he adds.
Saifee has downgraded StarHub to “hold” with a lower target price of $1.30 from $1.44 due to lower mobile and FBB growth expectations from the telco. Saifee has also lowered his NPAT estimates by 4% to 5% for FY2025 to FY2026 for the same reasons.
“Roughly 41% of Starhub’s revenue comes from mobile and the FBB space and likely a bigger portion of its ebitda. A sustained aggressive Simba may continue to weigh on its growth even if the industry undergoes consolidation, in our view,” Saifee writes.
However, with StarHub trading at six times its EV/Ebitda and 13 times its P/E, the telco’s valuations are “broadly in line” with its five-year historical mean.
Meanwhile, Saifee has kept his “buy” call on Singtel with an unchanged target price of $3.70, less than 10% of the telco’s sum of the parts (SOTP) is Singapore-consumer driven, which means it remains “relatively shielded”. — Felicia Tan
Aztech Global
Price target:
CGS International ‘reduce’ 78 cents
3QFY2024 earnings miss triggers downgrade
Following the release of the results for Aztech Global 8AZ ’s 3QFY2024 ended September, CGS International (CGSI) analyst William Tng has downgraded his call on the company to “reduce” from “add” at a lowered target price of 78 cents from $1.21.
Aztech’s 9MFY2024 net profit of $60.4 million was below expectations, forming 67% of Tng’s and 62% of Bloomberg’s full-year forecasts.
He writes: “The miss was due to a 19.7% y-o-y decline in 9MFY2024 revenue to $539.9 million and higher depreciation expenses and foreign exchange (forex) loss. The balance sheet remained healthy with net cash of at $269.8 million as at end-Sept.”
The company’s order book for completion in 4QFY2024 is $142 million, which Tng notes is at its lowest since 4QFY2020.
“Management is cautious on FY2025 outlook, which, in our view, could be due to slower demand/market share saturation in the US market for the Internet of Things (IoT) security camera product of its key customer, which accounted for 80% of the 9MFY2024 revenue,” writes Tng.
Aztech remains committed to pursuing new customers to better diversify its revenue base.
The analyst says: “Given the $269.8 million net cash balance, we think Aztech would be open to merger and acquisitions (M&As) for customer acquisition.”
Regarding the 4QFY2024 order book guidance, Tng has cut his FY2024 revenue by 9.6%, leading to a 22.2% drop in his FY2024 earnings per share (EPS) estimate.
“We also lower our FY2025 to FY2026 EPS forecasts by 34.1% to 35.7% as management is cautious on the demand outlook from its key customer in FY2025, while the pace of customer diversification could be slow.”
Given that Tng expects Aztech’s net profit growth to slow to an average of 3.8% over FY2025 to FY2026, he values the company at an 8.5 times FY2025 price-to-equity ratio (P/E), its four-year average.
He adds, “We also think Aztech could maintain its 8-cent dividend per share (DPS) from FY2025 to FY2026, which could help limit share price downside given the prospective 7.77% dividend yield.”
Key upside risks noted by the analyst include potential new customer wins, more project wins from its main customer, and a potential one-time gain should Aztech dispose of a currently vacated plant.
Conversely, de-rating catalysts include order cancellations due to economic slowdown affecting demand and volatile forex rate movements affecting Aztech’s financials. — Douglas Toh
Wilmar International
Price targets:
DBS Group Holdings ‘buy’ $3.80
UOB Kay Hian ‘hold $3
RHB Bank Singapore ‘neutral’ $3
Lower 3QFY2024, but Kuok’s buybacks signal confidence
Several analysts have trimmed their target prices for Wilmar International F34 following its 3QFY2024 ended September numbers that fell short of expectations due to lower margins, especially from its China businesses.
Furthermore, existing geopolitical and economic risks might crimp its share price recovery, even though its current valuation is deemed “undemanding”.
“Valuation will likely remain at a discount to its China-listed peers until earnings make a significant turnaround,” states RHB Bank Singapore in its Nov 4 note.
On Oct 30, Wilmar reported earnings of US$254.4 million ($335.1 million) for 3QFY2024, down 1% y-o-y. This brings 9MFY2024 earnings to US$834 million, down 3.6% y-o-y. Revenue for 3QFY2024 was held largely steady y-o-y at US$17.75 billion and down 3% y-o-y to US$48.68 billion for 9MFY2024.
In their Nov 1 note, UOB Kay Hian analysts Heidi Mo and Llelleythan Tan Yi Rong maintain their ‘hold’ call but with a lower target price of $3, down from $3.25.
They note that Wilmar’s 4QFY2024 core net profit may be slightly higher q-o-q as tropical oil margins and soybean margins expand. Sugar merchandising and milling operations are also likely to see improvement.
“However, this may be partially offset by the slower-than-expected recovery in operating conditions in China, as well as weaker demand for refined palm oil products,” the analysts state.
On the other hand, the frequent share buybacks by Kuok Khoon Hong, Wilmar’s chairman and CEO, has demonstrated the management’s confidence in the company’s outlook.
Year to date, Kuok, the company’s controlling shareholder, has repurchased 32.6 million shares at between $3.07 and $3.33, add Mo and Tan.
RHB, on its part, cut its forecast for Wilmar’s FY2024 to FY2026 earnings by 9.1%, 3.9%, and 1.2% after ascribing lower margins for the feed and industrial division.
While keeping its “neutral’ call, RHB has lowered its target price to $3 from $3.10. “We believe Wilmar will trade in line with regional valuations until earnings undergo a significant turnaround,” says RHB.
DBS Group Research’s William Simadiputra is more upbeat. In his Nov 1 note, he observes that Wilmar, given its “dominance” in palm oil and soy crushing, possesses a “strong footing” to make more gains in the downstream consumer segment.
“On the back of the recovery of China’s economy and consumption trend, we believe the downstream division will provide a tailwind for earnings in FY2025,” states Simadiputra.
Meanwhile, he lowered his FY2024 and FY2025 earnings projections by 35% and 16%, respectively, to account for 9MFY2024 weaknesses and more conservative assumptions for consumer products in the coming FY2025.
As such, even as he kept his “buy” call on this counter, Simadiputra’s new target price for Wilmar is $3.80, down from $4.30 previously. This new target price is based on 12.1 times FY2025 earnings.
“We believe our multiple is fair, as it largely aligns with Wilmar’s five-year average P/E multiple of 11.8 times.
At the current share price level, we believe the valuation is undemanding, as the market has priced in a slower-than-expected earnings recovery outlook,” states the DBS analyst. — The Edge Singapore
Singapore Telecommunications
Price target:
Citi Research ‘buy’ $3.60
Possible fine arising from allegations of ‘unconscionable’ selling might be ‘manageable’
Citi Research’s Arthur Pineda and Luis Hildao have kept their “buy” call and $3.60 target price on Singapore Telecommunications (Singtel) following news that the telco’s local unit in Australia has been taken to court by local authorities for allegedly selling mobile phones and contracts to customers who cannot afford.
In its Oct 31 statement, the Australian Competition and Consumer Commission said it had commenced proceedings in the Federal Court alleging that Optus Mobile engaged in “unconscionable” conduct in contravention of the Australian Consumer Law.
Singtel has since taken remedial actions, including sacking and disciplining its employees.
“While a fine looks likely, we believe the stock reaction has been overdone,” state the analysts, pointing to the drop of some $1.5 billion in market cap following the news.
“Precedents of similar offences by Telstra had resulted in a manageable A$50 million [$43.5 million] fine in 2021,” add Pineda and Hilado, referring to Australia’s incumbent telco.
“We do not see this event as materially disrupting operations and earnings or dividends. We thus see minimal risk to Singtel’s 6% yield outlook,” they add.
The Citi analysts’ $3.60 target price on the stock is derived using a sum-of-the-parts valuation.
However, downside risks to their view include: first, Singtel’s benchmark stock status renders it vulnerable to broader market selldowns.
Next, volatility in regional currencies may result in varying Singdollar translation of earnings and value.
In addition, Singtel might incur potential earnings risks linked to new expansion areas such as enterprise services.
On the other hand, upside risks include continued monetisation of assets such as data centres and enterprise assets, which could allow for asset revaluations.
Additional improvement in competition in key growth engines such as Indonesia and India is another potential plus point.
Last but not least, a significant easing of interest rates would bring back interest into yield plays. — The Edge Singapore
Oiltek International
Price target:
Phillip Securities ‘buy’ 70 cents
Contract win in Latin America brings order book to a record
Paul Chew of Phillip Securities has kept his “buy” call on Oiltek International HQU after winning an RM45.5 million ($13.73 million) contract in Latin America, which opens up the possibility of more contracts in this market, which is a leading producer of palm oil besides Malaysia and Indonesia.
According to Oiltek, the new contract involves the design, fabrication, delivery, testing and commissioning of one new 400 metric tonnes per day plant required for various processing activities.
This new contract brings the cumulative new contracts secured in this current FY2024 ending December to RM197.8 million and its total order book to a record RM400.9 million.
“We believe the current wave of orders includes more turnkey projects and an investment cycle underway in Latin America,” states Chew in his Nov 1 note.
His unchanged target price of 70 cents is pegged to 15 times FY2024 earnings. — The Edge Singapore
