Digital Core REIT
Price targets:
DBS Group Research ‘buy’ 75 US cents
UOB Kay Hian ‘buy’ 88 US cents
Analysts like DC REIT’s decision to acquire added interest in Frankfurt data centre
Analysts from DBS Group Research and UOB Kay Hian (UOBKH) have maintained their “buy” calls for Digital Core REIT (DC REIT) after the REIT announced, on Sept 9, that it would exercise its option to acquire an additional interest of between 0.2% and 40% in a Frankfurt data centre. The acquisition will be fully funded by a Euro-denominated term loan at an all-in cost of 3.6%. The REIT had previously completed the acquisition of another 24.9% stake in the same data centre in April.
The additional interest is priced at an “attractive” discount of 17.8% to the facility’s valuation and the REIT’s net property income (NPI) yield of 5.7% in 1HFY2024 ended June 30, notes UOBKH analyst Jonathan Koh.
In the analyst’s view, DC REIT will likely acquire an additional interest of 10% given current market conditions, bringing its aggregate interest to 59.9%.
The 10% acquisition will provide a distribution per unit (DPU) accretion of 1.7%. DC REIT’s net asset value (NAV) per unit would increase by 4.5% to 70 US cents (90 cents), notes UOBKH analyst Jonathan Koh.
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At present, DC REIT provides an FY2025 distribution yield of 6.1% based on Koh’s estimates.
To him, the merits of DC REIT’s acquisition has been overlooked by the market so far. As at Koh’s report dated Sept 18, DC REIT’s unit price stood at 59.5 US cents.
“DC REIT has been a laggard in the recent rally for data centre REITs, which benefits from increased demand from [the] adoption of generative artificial intelligence (AI),” Koh writes. “We expect the sizeable discount of 17.8% to the refreshed valuation and lucrative NPI yield of 5.7% for the impending acquisition to be a catalyst for DC REIT to catch up with peers in terms of share price performance.”
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With the impending acquisition, Koh has raised his DPU estimate for FY2025 by 2% to 3.6 US cents. The added stake is expected to start contributing in 1QFY2025.
Koh has also raised his target price to 88 US cents from 86 US cents previously.
Meanwhile, DBS analysts Dale Lai and Derek Tan have kept their target price unchanged at 75 US cents.
To them, the option to acquire a further stake of up to 40% in the Frankfurt facility is “too good an opportunity to miss”.
Furthermore, the property’s valuation has increased by over 20%, rising from EUR470 million ($677.8 million) in December 2023 to EUR571.5 million, which is the average of two valuations as of Sept 7.
Overall, the DBS analysts like DC REIT’s prospects, noting that the pure-play data centre REIT is currently riding on structural tailwinds.
“Demand for data centres in key markets remains robust with the lack of available capacity. DC REIT’s presence in some of these key markets throughout the US, Canada, Europe, and Japan means it continues to benefit from such robust demand,” they write.
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“Moreover, the long weighted average lease expiry (WALE) for its assets ensures income stability in the foreseeable future,” they add. “In the event of any vacancy, DC REIT should be able to quickly backfill the space, given the healthy demand dynamics in those markets.”
Furthermore, the REIT enjoys a right of first refusal (ROFR) for the pipeline of assets from its sponsor valued at US$15 billion ($19.36 billion). This means that the REIT has the potential to become the biggest pure-play data centre Singapore REIT (S-REIT).
Given its healthy debt headroom, DC REIT has the financial flexibility to continue with acquisitions, allowing DC REIT to continue growing, Lai and Tan add. — Cherlyn Yeoh
Suntec REIT
Price target:
OCBC Investment Research ‘sell’ $1.19
Downgrade on outperformance
The research team at OCBC Investment Research (OIR) has downgraded Suntec REIT to “sell” from “hold” after the REIT’s unit price outperformed the FTSE ST All-Share REIT Index (FSTREI).
As at the close of Sept 19, the REIT’s unit price rallied by some 16.1% since July 31, outperforming the FSTREI’s increase of 9.8% over the same period, notes the team in its Sept 20 report.
Even though Suntec REIT, with its higher proportion of floating rate debt, could be the first to benefit from the US Federal Reserve’s rate cut cycle, the team notes that there are risks of a rebound in the 10Y US Treasury yields, depending on the outcome of the US presidential elections.
Furthermore, Suntec REIT’s all-in financial costs, which are at 4.02% as at June 30, may not lower significantly in the near term as the REIT has a “sizeable amount” of interest rate hedges that are expiring in FY2025, which were entered at low costs.
With this in mind, the team has lowered its financing cost estimates for the REIT in FY2025 slightly, compared to its FY2024 forecast.
Priced ahead of fundamentals
At this point, the REIT must show “continued improvements” in its business operations to sustain its recent unit price surge.
“Although we believe the backdrop has become more favourable for Singapore REITs (S-REITs) given the reduction of 50 basis points (bps) in the Fed funds rate in September and expectations of more rate cuts to come, we believe Suntec REIT’s share price has run ahead of fundamentals,” the team writes.
In addition, the team expects continued moderation in Singapore office market rents, which does not bode well for Suntec City Office. The building’s expiring rents in FY2025 are $10.05 per sq ft per month, which is higher than FY2024’s expiring rents of $9.47 per sq ft per month as at June 30. While Suntec’s Singapore retail operations should remain “resilient” and its convention business should see “further improvements”, the team notes that there are more uncertainties for its overseas properties.
Based on its closing price of $1.37 as at Sept 19, Suntec REIT is trading at FY2024 and FY2025 distribution yields of 4.5% and 4.8%, respectively. The REIT historically traded at a 10Y average forward distribution yield of 5.7%, the team adds.
Despite its downgrade, the team has upped its fair value estimate, or target price, to $1.19 from $1.15 previously as it lowers its risk-free rate assumption by 50 bps to 2.50%. — Felicia Tan
United Overseas Bank
Price target:
OCBC Investment Research ‘hold’ $33.50
Stock has ‘compelling’ yield
OCBC Investment Research strategist Carmen Lee has kept her “hold” call on United Overseas Bank U11 (UOB) with an unchanged fair value estimate of $33.50 after the bank’s shares reached a new high of $33.38 on Sept 23.
Despite the softer interest rate outlook, the bank’s shares have risen by 17% year-to-date (ytd), per Lee’s Sept 24 report.
“The last time UOB crossed the $33.30 level was in July before it fell 12.2% to $29.25 by August. Since then, it has been on an uptrend and the stock touched a new all-time high yesterday (intra-day high of $33.38 on Sept 23), up almost 14% to wipe off the recent losses,” she says.
With an interim dividend of 88 cents declared for 1HFY2024 ended June 30, UOB’s yield is at a “compelling” 5.3%, ahead of most Singapore-listed stocks and higher than the recent Singapore six-month T-bill cut-off yield of 3.1%.
“We believe part of the funds which have been investing in T-bills will be flowing out and looking for alternative assets that will yield higher returns,” says Lee. — Felicia Tan
DBS Group Holdings
Price target:
OCBC Investment Research ‘hold’ $39.83
Dividend yield should continue to support share price
OCBC Investment Research strategist Carmen Lee has kept her “hold” call on DBS even though shares in the bank hit a record price of $39.70 on Sept 23, coming in close to her unchanged fair value estimate of $39.83.
In her Sept 24 report, Lee noted DBS’s strong price outperformance, as the bank gained some 30% year-to-date (ytd), far surpassing the benchmark Straits Times Index (STI) and other high dividend stocks.
The outperformance came in spite of general market expectations of further rate cuts, which could potentially impact the bank’s net interest income (NII) and net interest margin (NIM). The US Federal Reserve announced a 50 bps rate cut on Sept 18.
In Lee’s view, DBS’s “attractive” annual dividend yield of 5.5% will continue to support its share price in a low-rate environment. The bank as an estimated annual dividend payout of $2.16, or 54 cents per quarter.
Even if the bank reverts back to its 10-year historical average yield of 4.4%, it is still a good yield, Lee writes.
To be sure, DBS’s yield surpasses the recent Singapore six-month T-bill, which closed at a cut-off yield of 3.1% as at its auction date of Sept 12.
“On average, most six-month issues in 2024 were at least two times subscribed with about an average of $14.9 billion applied per issue,” Lee points out. “Assuming this goes back to the pandemic average of $9.6 billion per issue when cut-off yield was an average of 0.9% in 2020, there is still about $5 billion looking for better yields in the Singapore dollar (SGD) market.”
The analyst adds that she remains “fairly comfortable” about the bank’s dividend payout for this year.
“Looking ahead, further Fed rate cuts will put pressure on NIM in 2025 and beyond, and this will be partly mitigated by better outlook for loans and other fee income,” she writes. — Felicia Tan
DFI Retail Group
Price targets:
DBS Group Research ‘buy’ US$2.30
Citi Research ‘buy’ US$2.67
Divestment may see one-off loss but long-term gain
DFI Retail Group may have to account for a one-off loss of around US$130 million ($166.9 million) after its divestment of shares in Yonghui is completed, says the DBS Group Research team. This is based on the carrying value of US$765 million as at the end of June. The team at Citi Research pegs the one-time loss at US$127 million.
On Sept 23, DFI announced that it will be divesting its entire 21.1% stake in Yonghui to Miniso for RMB4.5 billion ($823.3 million). The price works up to about RMB2.35 per share over DFI’s 1.91 billion shares, or 4% higher than the RMB2.25 billion as at the close of Sept 23.
DFI’s shares are indirectly held through its subsidiary in Yonghui Superstores. Shares in the latter are listed on the Shanghai Stock Exchange, while shares in Miniso are listed on the Hong Kong Stock Exchange (HKEX) and New York Stock Exchange (NYSE).
In their respective reports, DBS and Citi recognise that the transaction was in line with the management’s ongoing strategy divesting its unprofitable businesses such as Giant Malaysia and Hero supermarkets.
“Yonghui has been a drag to earnings for the last few years and a return to profitability has been challenging,” says the DBS team.
Despite the “substantial one-off loss” from the sale, the team sees that the move will benefit DFI in the longer term with an annualised earnings uplift of some US$30 million without including Yonghui’s losses in future.
Citi Research analysts Brian Cho, Wei Xiaopo and Tiffany Feng expect the divestment to have a limited impact on DFI’s share loss of associates too.
In 1HFY2024 ended June, DFI’s share of Yonghui’s underlying loss was US$8 million, an improvement from the US$17 million loss in 1HFY2023. The better results were due to the ongoing optimisation efforts concerning costs and store footprints, says DFI in its Aug 1 results announcement.
Once it receives the proceeds, which is likely to be in 1QFY2025, DFI is likely to use them to invest in its subsidiaries across its markets, repay debt, grow dividends and conduct other corporate actions in that order.
“Given the size of the proceeds, we believe a substantial amount would go towards paring down of its US$860 million debt position as of end-June, which could provide a considerable interest savings boost,” says DBS.
“Post-transaction, we believe the company should be net cash; as such, we do not rule out the possibility of a special dividend,” it adds.
The Citi team agrees, noting that the proceeds can enhance DFI’s overall operational efficiency and position the group for sustainable growth, leading to improved earnings in the mid-term.
DBS has kept its “buy” call on DFI with an unchanged target price of US$2.30. Citi has also kept its “buy” call with an unchanged target price of US$2.67.
The divestment is expected to be completed within six months, by March 23, 2025, after the required regulatory conditions are satisfied. — Felicia Tan
Wilmar International
Price target:
CGS International ‘add’ $3.63
Gain from lower finance costs in FY2025
CGS International’s (CGSI) Tay Wee Kuang has kept his “add” call on Wilmar International F34 at an unchanged target price of $3.63, as he sees the company benefiting from lower finance costs in FY2025 due to the US Federal Reserve’s (US Fed) 50 basis point (bps) cut on Sept 18.
“We believe Wilmar’s profitability could further improve with the start of the interest rate cut cycle,” says Tay in his Sept 20 report.
As at 1HFY2024 ended June, Wilmar had US$26.8 billion ($34.6 billion) worth of debt, of which 72.9% was short-term financing required for its origination and merchandising business.
“While [the] breakdown of short-term debt was not provided for 1HFY2024, we note that trade finance-related debt (short-term/pre-shipment loans and trust receipts/bill discounts) made up 90% of its short-term debt as of FY2023,” he writes.
“Given the correlation between Wilmar’s effective interest rate and the US Fed funds rate (FFR), we believe Wilmar should begin to enjoy lower interest rates going into FY2025 following the 50 bps cut in FFR on Sept 18, which should translate to lower finance cost, assuming prices of key commodities for Wilmar, such as wheat, crude palm oil (CPO) and sugar, are stable,” he adds.
Further to his report, the analyst is “hopeful” that there are improvements in Chinese consumption.
In 1HFY2024, Wilmar’s profit before tax margins across all three business segments expanded y-o-y. Quarter-to-date, China’s soybean crush margins improved due to better demand for soybean meal (SBM) as animal feed following higher pork prices. Despite this, soybean crush margins remain negative, but the analyst understands that this may not reflect Wilmar’s operational margins.
“Bloomberg reports crush margins using spot soybean, SBM and soybean oil (SBO) while crushers’ actual margins vary according to the cost of soybeans, which depend on the timing of the purchase as there is typically a lead time of two [to] three months to transport soybeans from source countries, like the US and Argentina, to China,” Tay explains.
At its share price of $3.18, based on Tay’s report, Wilmar’s estimated dividend yield of 5.1% looks “attractive” on the back of interest rate cuts.
His unchanged target price is pegged at an estimated FY2025 P/E of 11 times, which is Wilmar’s five-year mean. He also keeps his estimates unchanged as he had already factored in a lower effective interest rate for FY2024 to FY2026 without pencilling in a decline in overall loans and borrowings observed in 1HFY2024.
Re-rating catalysts, he noted, include a declaration of special dividends on the potential stake sale of Adani-Wilmar. In contrast, downside risks include adverse weather conditions affecting harvest across its palm and sugar plantations in 2HFY2024 and an escalation in key commodity prices, which would translate to a higher debt load, offsetting the impact of expected lower effective interest rates on the group’s finance cost. — Douglas Toh
Singapore Technologies Engineering
Price target:
RHB Bank Singapore ‘buy’ $5.32
Well-positioned to deliver profit growth and steady dividends
RHB Bank Singapore analyst Shekhar Jaiswal has maintained his “buy” call on Singapore Technologies Engineering S63 (ST Engineering) while upgrading his target price from $5 to $5.32, representing a 14.5% increase.
ST Engineering’s share price has outperformed the Straits Times Index (STI) and Jaiswal expects this to continue as ST Engineering remains well positioned to deliver a 15% CAGR on its profit and steady dividends between FY2023 to FY2026.
Jaiswal notes that this growth is supported by strong demand for aviation maintenance, repair and overhaul (MRO) services and possible recovery in the Urban Solution and Satcom (USS) segment. The fall in interest rate provides further earning tailwinds as approximately 39% of its debt is exposed to floating interest rates, Jaiswal adds.
Jaiswal expects that the strong earning growths reported by ST Engineering in 1HFY2024 will continue, given the continuing demand for aviation MRO work, boosting the commercial aerospace business. As a result of strike action, Boeing’s operations have been affected and Jaiswal believes that this could worsen the shortage of jetliners globally, forcing airlines to use older aircraft for longer. In turn, this leads to more work for both airframe and engine MRO service providers.
Additionally, Jaiswal predicts higher aircraft engine nacelle deliveries, with Airbus expecting its A320 production rate to increase beyond the 45 aircraft per month deliveries in 2023. This would likely result in ST Engineering’s passenger-to-freight (PTF) conversions reaching better margins in 2HFY2024, Jaiswal adds.
Despite the USS numbers performing below expectations in 1HFY2024, Jaiswal maintains that ST Engineering’s focus on improving processes and optimising costs is expected to boost ebit. Jaiswal also expects sustained growth in the Defence and Public (DPS) segment as the group continues to deliver on its order book.
Further to the report, Jaiswal notes ST Engineering’s potential for lower interest costs.
In the 1HFY2024 results announcement, ST Engineering estimates the 2024 weighted average borrowing costs at 3.7%, below its estimate of 3.5%, assuming there were no US Federal Reserve rate cuts in 2024. Amid his expectations of two rate cuts in 2HFY2024 and further rate cuts in 2025, Jaiswal sees a possibility of lower interest costs in 2025, with the potential to further increase earnings. This is because 39% of ST Engineering’s debt is subject to a floating interest rate.
Additionally, ST Engineering reported a record order backlog of $27.9 billion as of end June, implying a book-to-bill ratio of 2.8 years. ST Engineering estimates that $4.9 billion of the orders will be delivered in 2HFY2024, accounting for around 90% of its 2HFY2024 revenue estimate, Jaiswal says.
The target price is derived using an average of price-to-earnings ratio (P/E), price-to-book value ratio (P/B), EV/Ebitda and discounted cash flow (DCF). — Cherlyn Yeoh
