Lendlease Global Commercial REIT
Price targets:
Citi Research ‘neutral’ 58 cents
CGS International ‘add’ 74 cents
Lower targets on weaker FY2024 DPU
Following Lendlease Global Commercial REIT JYEU ’s (LREIT) FY2024 ended June results, analysts at CGS International (CGSI) and Citi Research have kept their respective “add” and “neutral” calls at lower target prices of 74 cents and 58 cents from 83 cents and 61 cents.
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CGSI analysts Natalie Ong and Lock Mun Yee note that LREIT’s FY2024 DPU, which came in 17.7% lower y-o-y at 3.87 cents, was a miss. The DPU was 91.3% of their forecast and 94% of the forecast of consensus.
The lower DPU was the result of higher-than-forecast interest expense, they say.
In FY2024, revenue and net profit income (NPI) rose 7.8% y-o-y and 7.4% y-o-y, respectively, due to the upfront recognition of supplementary rent received from the lease restructuring of Sky Complex. Excluding this, revenue and NPI grew 3.2% y-o-y and 1.3% y-o-y, respectively.
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Meanwhile, reversions from the period came in at 14% due to reversions at LREIT’s 313 property.
“Buildings 1 and 2 of Sky Complex will see a 1.2% rental uplift effective April due to the annual rent indexation. This is on top of the 1.5% rental increase secured for Buildings 1 and 2 when tenant Sky Italia’s lease was restructured in December 2023,” write Ong and Lock.
Portfolio committed occupancy also increased q-o-q from 88.7% in 9MFY2024 to 89.1% as at FY2024 due to higher committed occupancy in LREIT’s retail portfolio, offsetting the marginally lower occupancy at Sky Complex.
The analysts add: “We estimate that around 2.4% of Building 3’s net lettable area (NLA) had been committed as at end-June. Management shared that committed rents are around 50% above previous rents and that it is in discussions with two other prospective tenants for some space at Building 3.”
In FY2024, LREIT’s portfolio valuation grew 0.9% or $32.5 million y-o-y, with Singapore properties $79.1 million higher or 2.5% up y-o-y on higher NPI, offsetting the $46.7 million or 10.9% valuation decline at the REIT’s Sky Complex property.
Ong and Lock write: “Valuation decline at Sky Complex was largely due to a change of independent valuer and a 25 basis points (bps) cap rate expansion as well as a largely vacant Building 3.”
Gearing was largely stable q-o-q at 40.9%, while the adjusted interest coverage ratio (ICR) slipped slightly q-o-q to 1.7 times from 1.8 times in March.
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Meanwhile, LREIT’s cost of debt increased from 3.50% in 9MFY2024 to 3.58% in FY2024.
Assuming interest rates stay at current levels, cost of debt in FY2025 could increase by 20 bps to 30 bps to between 3.8 % and 3.9% due to the full-year impact of the EUR loans refinanced in October 2023 on higher rates.
“Based on a cost of debt of 3.9%, we estimate FY2025 adjusted ICR could land at around 1.5 times. In terms of its divestment strategy, management shared that it received enquiries for Jem’s office and provided viewings for several prospective buyers.”
Overall, Ong and Lock have rolled forward their DPS estimates to FY2025–FY2029 and cut DPUs for FY2025–FY2026 by 12.1% and 13.2%, respectively.
Meanwhile, Citi’s Brandon Lee notes that LREIT has brought around 10 or more interested parties to view its Jem office, which is valued at $450 million to $480 million as at FY2024.
He adds that overall occupancy at the REIT’s Sky Complex fell 0.9 percentage point (ppt) q-o-q to 73.9% due to the withdrawal of a committed tenant.
Despite this, a tenant from the steel industry could replace this vacancy by the next quarter, taking up one to two floors, while another tenant from the academic industry is also close to discussion for one to two floors.
“Double-digit occupancy for Building 3 can be achieved if these two tenants commit, though LREIT also has a list of potential prospects, which, if all commit, can bring occupancy to 100%,” writes Lee.
He continues: “Achieved rents can be 50% higher, which we are not surprised by given passing rent of around EUR200 ($289.71) to EUR210 per sq m/year compared to spot rents of EUR280 to EUR300 sq m. Leasing activity in Italy is slow in general now due to the summer holiday period.”
“We cut FY2025/FY2026 DPU by 13.5/5.5% to 3.94/4.14 cents to reflect higher debt expenses, restructured lease at Sky Complex, lower NPI margins and revised forex assumptions; FY2027 DPU of 4.31 cents is introduced,” concludes Lee. — Douglas Toh
HRnetGroup
Price target:
Maybank Securities ‘hold’ 70 cents
‘Hold’ on stock amid growing macroeconomic uncertainties
Maybank Securities analyst Eric Ong has kept his “hold” on HRnetGroup with a lower target price of 70 cents from 80 cents amid growing macroeconomic uncertainties.
In 1HFY2024 ended June, HRnetGroup posted a patmi of $21.7 million, down 23% y-o-y. This is below Maybank and consensus expectations at 41% and 38% of the full-year forecasts, respectively.
Despite the lacklustre results, HRnetGroup maintained its interim dividends per share (DPS) of 1.87 cents, which translates to a record high dividend payout ratio of 80%, Ong highlights.
In 1HFY2024, the company’s professional recruitment (PR) revenue fell 16.4% y-o-y to $28.7 million as hiring freezes and cautious sentiment persisted across its key markets. Meanwhile, flexible staffing (FS) turnover slipped 1.3% y-o-y to $255.3 million. After factoring in the direct cost of contractors’ salaries and social insurance benefits, the FS segment generated a gross profit margin (GPM) of 12.8% compared to 1HFY2023’s 13.8%.
In 1HFY2024, HRnetGroup’s blended GPM narrowed 2.3 percentage points (ppt) to 22% due to the continued shift in business mix towards FS as a result of the economic headwinds. Ong notes that the revenue proportion of FS rose to 89.3% in 1HFY2024 while the gross profit (GP) proportion increased to 52%.
“On a geographical basis, Singapore and Mainland China were the hardest hit as they account for 63.9% and 24% of the GP decline, respectively, with both PR and FS businesses impacted. The group’s business in Mainland China was predominantly in PR, and the economy did not recover as expected,” he adds.
That said, Ong points out that the company’s balance sheet is robust, with net cash of $302 million and no bank borrowings. This allows it to explore accretive merger and acquisition opportunities to capture inorganic growth in other overseas markets.
Maybank has lowered its FY2024 to FY2026 EPS estimates by 12%–17% due to lower placement volume and margin assumptions.
Based on Maybank’s full-year DPS forecast of 4 cents, HRnetGroup’s yield is decent at 6% and should limit further downside to the stock, Ong says. “The share buyback should also help to provide some support, we think.” — Khairani Afifi Noordin
Apac Realty
Price target:
CGS International ‘add’ 45 cents
EPS estimates lowered on topline miss
CGS International analyst Lock Mun Yee is keeping her “add” call on Apac Realty at a lower target price of 45 cents from 54 cents after the company reported EPS (earnings per share) of 1.15 cents in 1HFY2024 ended June, 18.7% lower from 1HFY2023.
Lock notes that this was due to “lower-than-expected topline performance”, as gross profit margin narrowed one percentage point (ppt) to 9.2%.
Lock writes in her Aug 12 report: “Overseas operations, mainly in Indonesia and Vietnam, which accounted for around 1.6% of 1HFY2024 topline, dragged down the group’s performance, posting a net loss, — albeit smaller — owing to a slowdown in Vietnam’s residential market.”
To that end, Apac Realty’s EPS did not meet Lock’s estimate, forming 31.3% of her full-year forecast.
Meanwhile, the company’s patmi fell 18.7% y-o-y to $4.1 million on the back of lower gross profit from a product mix of the lower-yielding resale segment. This was partly moderated by a reduction in operating expenses.
Apac Realty also generated lower new home sales commission of $57.9 million in 1HFY2024, 21% weaker y-o-y due to a 31.8% y-o-y decline in new private and EC (executive condominium) sales volume to 2.484 units due to the slow pace of new launches.
Despite this, the company notes that its market share in this segment remained relatively stable on a y-o-y basis.
On the back of the slow start, Lock has lowered her FY2024 volume sales projections to between 5,000 and 6,000 from between 7,000 and 8,000.
“Management indicated in its results presentation that there are 14 projects in the launch pipeline in 2HFY2024. If fully rolled out, this should bolster volume sales and revenue from new home sales from 2HFY2024, in our view,” adds the analyst.
During 1HFY2024, Apac Realty’s brokerage revenue from resale and rental grew 11.4% y-o-y to $203.6 million in the period due to higher transaction volumes in the private resale, HDB resale and private leasing segments. The company’s uptick in market shares across these segments has also helped boost revenue contributions.
Meanwhile, although overseas contributions remain small, Apac Realty notes that the operating environment in Vietnam has improved. The company has also moved into the Philippines in April.
Overall, Lock cuts her FY2024 to FY2026 EPS by 8.0% to 27.% on lower market volume transactions.
She concludes: “We believe the stronger 2HFY2024 launch pipeline, coupled with the recovery in the Vietnam residential sector, could provide some tailwinds for Apac Realty’s 2HFY2024 operating performance.” — Douglas Toh
