ESR-LOGOS REIT
Price target:
RHB Bank Singapore ‘buy’ 40 cents
Positive about asset rejuvenation plans
RHB Bank Singapore is reiterating its “buy” recommendation on ESR-LOGOS REIT J91U (E-LOG) but with a lower target price of 40 cents from 45 cents. “E-LOG is still on track to divest a portfolio of Singapore assets, with proceeds likely for the purchase of newer logistics assets from its sponsor,” says analyst Vijay Natarajan in his June 13 report, also noting that divestment plans are progressing, with exclusivity entered with a potential buyer that is now conducting due diligence on assets.
“We understand from market sources that the portfolio under due diligence is slightly smaller than the targeted $450 million. We anticipate that divestment will be done closer to book value or at a slight discount,” adds Natarajan.
The REIT has also recently completed its equity fundraising of $300 million via private placements and preferential offerings. Post fundraising and divestment, gearing is set to fall below 35%, offering over $500 million in headroom.
“We believe E-LOG will likely use the proceeds to acquire assets from its sponsor’s pipeline, potentially in Singapore, where LOGOS has a few modern logistics assets,” says Natarajan.
See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents
However, the equity fundraising exercise has resulted in a temporary earnings dilution, which has caused the overall share price to underperform ytd. This move has strengthened the REIT’s balance sheet against an uncertain macro backdrop. The analyst remains positive on the mid-to-long-term strategy portfolio rejuvenation plans, though this will likely result in some short-term pain.
For the upcoming FY2023 ending December, the analyst expects positive mid-single-digit rent reversions of about 6% to 8%, continuing on the rental upcycle seen from the start of FY2022. The strong rent reversion will mostly be driven by the high-spec and logistics segment, where demand remains resilient and is outpacing supply, he reckons.
In April, E-LOG announced that one of its top 20 tenants, CEVA Logistics, renewed its lease at 15 Greenwich Drive in Singapore at rent reversions of +20%. But portfolio occupancy dipped slightly in the first quarter to 92.1%, falling 0.6 percentage points q-o-q, mainly on non-renewal leases at some of the assets it identified for redevelopment. “We expect it to remain stable around this level,” adds Natarajan.
See also: Suntec REIT biggest beneficiary from MAS’s ‘looser’ leverage, ICR rules: OCBC
The analyst has lowered his FY2023–FY2025 DPU estimates by 3% to 5% to factor in the recent equity fundraising via private placements and preferential offerings. — Samantha Chiew
CDL Hospitality Trusts
Price target:
CGS-CIMB Research ‘add’ $1.54
Robust Singapore and Japan portfolios to drive growth
CGS-CIMB Research analysts Natalie Ong and Lock Mun Yee have maintained their “add” call on CDL Hospitality Trusts J85 (CDLHT) on the back of its robust Singapore and Japan portfolios.
In a June 13 report, the analysts note that the Singapore hospitality sector continues to gain strength, with January to April mid-tier hotel revenue per available room (RevPAR) at around 117% of 2019 levels, ahead of their previous FY2023 ending December forecast of 107% of 2019 levels.
The analysts raised their FY2023 Singapore RevPAR projection to $198 or 116% of 2019 levels, in line with the current RevPAR trend that reflects hoteliers’ strong pricing power. For FY2023, they forecast CDLHT to register a y-o-y net property income (NPI) growth of $32.8 million or 26.5%, mainly driven by Singapore and Japan on the back of higher room rates and improving occupancy. This is despite higher manpower and utility costs. “With 60% of its FY2023 NPI attributed to Singapore hotels, CDLHT is a proxy for the island state’s tourism recovery,” the analysts add.
Based on their forecasts, CDLHT’s revenue will likely grow by 21.1% y-o-y in FY2023. On top of the favourable market conditions that should support the RevPAR of its existing portfolio, the analysts say contributions from its new additions will also support stronger revenue momentum.
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Announced in 2021, contributions from the build-to-rent apartment The Castings in the UK will start from 3QFY2024 with a pro-forma stabilised yield of 5.1% based on a projected cost of $141.9 million. Citing UK property operator urbanbubble’s 4Q2022 Manchester Monitor, the analysts note that Manchester’s residential market registered 20.4% y-o-y rent growth in December 2022, driven by an acute rental supply shortage. Ong and Lock believe there is upside potential to yield when The Castings comes online.
Ong and Lock have lowered their FY2023 and FY2024 DPU projection by 11.% and 1.7%, respectively, while raising the FY2024 DPU by 2.8%. This is because of stronger performance from CDLHT’s Singapore and Japan portfolios, lower UK and Germany earnings projections, and higher operating expenses.
They have also lowered their target price to $1.54 from $1.58 on higher beta and cost of equity assumptions as they factor in more tepid business and consumer spending. “We continue to like CDLHT for its portfolio entrenched in the Singapore hospitality sector, providing FY2023/FY2024 DPU yield of 5.5% and 6.6%,” they add. — Khairani Afifi Noordin
Marco Polo Marine
Price target:
UOB Kay Hian ‘buy’ 6 cents
Encouraging times ahead
UOB Kay Hian analysts Heidi Mo and John Cheong have upgraded Marco Polo Marine 5LY to “buy” with a higher target price of 6 cents from 4.8 cents previously. In their report dated June 12, the analysts see “encouraging times ahead” for the company, noting several tailwinds in the sectors and markets it operates.
The higher oil and gas and offshore windfarm activities in its markets have led to higher charter rates, putting Marco Polo Marine in a good spot. According to consultant Mordor Intelligence, the Asia Pacific offshore supply vessel (OSV) market is expected to record a CAGR of over 7% from 2022 to 2027, which is favourable for the company.
“In 1HFY2023 ended March, we have already seen a 65% y-o-y increase in average charter rates and an eight percentage point y-o-y increase in Marco Polo Marine’s vessel utilisation rates to 66%,” note Mo and Cheong. The company also saw “commendable growth” across its business segments but was undermined by one-off items.
In 1HFY2023, Marco Polo Marine reported a 167% y-o-y surge in its core ebitda to $15.5 million, driven by a 133.3% y-o-y growth in revenue in the ship chartering segment to $24.5 million. The higher revenue for the segment saw $12.9 million contributed by the consolidation from the company’s Indonesian subsidiary PT BBR and Taiwan-based joint venture PKR Offshore. Higher average charter and utilisation rates for its fleet also improved financials.
In addition, the company’s shipbuilding and repair operations also registered a significant 83.6% y-o-y revenue growth to $31.4 million, owing to higher contract values of repair and new shipbuilding projects.
“Upon adjusting for one-off items [which include a] $5.2 million in remeasurement gain on a previously held equity interest in PT BBR in 1HFY2022, $4.2 million in a reversal of impairment loss on receivables due from PT BBR in 1HFY2022, and $2.6 million in unrealised foreign exchange loss in 1HFY2023, we see that core net profit has surged 372% y-o-y from $1.8 million to $8.5 million,” write Mo and Cheong.
According to the analysts, Marco Polo Marine is also in time to meet the increasing demand for support vessels in Asia’s offshore windfarm industry. The company previously announced that it plans to build, own and operate a new commissioning service operation vessel (CSOV), as a shortage of such ships in the market is observed.
“Demand for CSOVs is on the rise, with increased construction of new projects and projects near their final commissioning dates,” say Mo and Cheong. “According to management, the CSOV is at 13% completion as at end-1HFY2023 and is expected to be completed in 1QFY2024, in time to meet the increasing demand for support vessels in Asia’s offshore windfarm industry.”
“The group has also successfully secured several new build contracts for the construction of barges until 1HFY2024, ensuring sustained shipyard utilisation levels. As of 2QFY2023, the shipyard was operating at a higher average utilisation rate of 84% (1QFY2023: 74%),” they add.
Another plus for Marco Polo Marine is its strong cash position of $53 million as of end-March, which provides a “comfortable level of support” for the analysts’ valuation. Mo and Cheong have raised their revenue forecasts for the company by 41% to 55% from FY2023 to FY2025 on higher charter rates. Their net profit estimates have increased by 2% to $17.4 million for FY2024 and 15% to $19.7 million in FY2025.
Mo and Cheong’s latest target price values Marco Polo Marine at an FY2023 P/B of 1.3x, in line with the +2 standard deviation (s.d.) of its historical five-year average on the back of improving charter rates and vessel utilisation rates.
Higher-than-expected ship charter rates and the utilisation of vessels, new ship chartering contracts and higher value of repair projects during the year are all positive catalysts. — Felicia Tan
Sembcorp Industries
Price target:
Maybank Research ‘buy’ $6
More re-rating catalysts
Maybank Research analyst Kelvin Tan has reiterated his “buy” rating for Sembcorp Industries U96 with a higher target price of $6, up from $4.35. In his report dated June 9, the analyst cites more re-rating catalysts ahead for the company, such as Sembcorp’s recent renewables acquisition in the Middle East — its first renewable project in the region.
The Oman Power and Water Procurement Company (OPWP) recently awarded the company a contract to build, own and operate the Manah Solar II Independent Power Project in Manah, Oman. The 500MW solar plant is expected to be operational by 2025 and will be backed by a 20-year power purchase agreement (PPA) with OPWP.
Tan estimates Sembcorp’s investment in the project to be some $400 million, funded by debt and equity, with an estimated ROE of 8% to 10%, which would yield a profit of $10 million to $12 million per annum, or 1.4% to 1.7% of Sembcorp’s FY2025 ending December 2025 earnings.
Sembcorp also recently signed a 10-year PPA with Singapore Telecommunications Z74 (Singtel), with an estimated annual contract value of $180 million. The PPA will be earnings-accretive from FY2023, notes the analyst.
Including the Micron and Singtel contracts, he estimates that around 650MW to 700MW or around 60% of Sembcorp’s generating capacity, is backed by contracts ranging from one to 18 years in length. “But we believe Sembcorp needs to strike a balance and leave some capacity exposed to the spot market,” adds Tan.
As shorter-term contracts roll off, this could lead to Tan’s FY2023 conventional energy profit target of $629 million, a y-o-y increase of 4%. This is as spot prices continue to rise, he explains, pointing to the fact that the Uniform Singapore Energy Price (USEP) has remained strong year to date at an average of $325 per megawatt-hour (MWh).
Considering higher margins from Sembcorp’s recently secured long-term PPAs, Tan has raised his FY2023 to FY2025 earnings forecasts by 9% to 11%. The analyst says that Sembcorp remains “undervalued” as his increased sum-of-the-parts (SOTP) based target price of $, up from $4.35 previously and based on a 12x FY2024 P/E, represents a 10% discount to regional utility peers, which are trading at an average of 13x FY2024 P/E.
With Sembcorp’s renewables portfolio growing to some 11GW, exceeding its 2025 target of 10GW ahead of schedule, Tan foresees positive share price momentum when the company’s new target is set. — Bryan Wu
DBS Group Holdings
Price target:
Citi Research ‘sell’ $26.60
Net interest income risk
Citi Research analyst Tan Yong Hong has resumed coverage on DBS Group Holdings D05 after a restriction period since January. In his report dated June 10, Tan rated DBS with a “sell” call and a target price of $26.60. His target price is based on his FY2023 – FY2024 P/B of 1.12x.
Tan’s “sell” call comes on the back of risks to the bank’s net interest income (NII) as its average interest-earning assets (AIEA) could fall below the consensus estimate of $653 billion for FY2023, which is up by 5% y-o-y.
In 1QFY2023 ended March, DBS’s AIEA stood at $617 billion, down 4% q-o-q. Loan growth risk is another downside factor for Tan as he sees the bank’s loans from Greater China (making up about 30% of the bank’s total loans) remaining soft, with onshore lending rates still low.
Finally, DBS’s superior ROE to its peers could narrow on higher taxes and provisions and a reversal in a $5.2 billion swing in fair-value reserves, which lifted the bank’s FY2022 ROE by 67 basis points (bps).
Despite the negatives, the analyst has recognised DBS’s early digital transformation and its focus on shareholder returns. He is proposing investors conduct a “pair trade” between DBS and Oversea-Chinese Banking Corporation (OCBC), with investors underweighting DBS and overweighting OCBC O39 . “OCBC’s earnings have [a] lower risk. Its 1QFY2023 AIEA was closer to FY2023 cons, and its Greater China loans are a smaller share of the total,” says Tan.
He adds: “OCBC could positively surprise on [its] 1HFY2023 dividend per share (DPS), based on a 50% payout ratio plan and targeted 14% common equity tier 1 (CET-1) ratio plus ongoing risk-weighted assets (RWA) optimisation.”
With its share price trading below 1x P/B, OCBC offers valuation support, in Tan’s view. He also remains “neutral” on OCBC with a higher target price of $12.50 from $12.20. “In a global downturn or recession, Singapore suffers given its large exposure to developed markets. DBS and OCBC tend to suffer and lose any premium over 1x P/B,” Tan writes.
“DBS / OCBC valuations fell to 0.8x P/B in the past two downcycles. With OCBC currently trading below [its] book value, it has downside support. Our economists forecast a US recession in 4Q2023–1Q2024,” he adds. — Felicia Tan
