Manulife US REIT (MUST)
Price targets:
CGS International ‘add’ 22 US cents
RHB Bank Singapore ‘neutral’ 12 US cents
Analysts mixed over Capitol divestment
Analysts are mixed on Manulife US REIT (MUST) after the REIT manager announced that it will be divesting Capitol, a freehold 29-storey Class A office building in Sacramento, California, on Sept 30.
See also: OCBC, citing potential recovery, initiates coverage on Nanofilm with tentative 'hold' call
RHB Bank Singapore analyst Vijay Natarajan has downgraded the REIT to “neutral” from “trading buy” with an unchanged target price of 12 US cents (15 cents).
MUST said that it will be selling the property to a local property player for US$117 million, which is below the property’s value of US$118 million as at Sept 1. The valuation was conducted independently by CBRE.
“Manulife US REIT’s divestment price of Capitol was below expectations, but the sale will lend much-needed liquidity and raises the odds of a successful restructuring,” says Natarajan in his Oct 1 report.
See also: Macquarie revises Singapore earnings growth for FY2024 to 7% from 3%
He notes that MUST purchased Capitol for US$199 million in September 2019, and the building was valued at US$158 million as at December 2023.
“The transaction reflects discounts of 41%, 26% and 1% to the purchase price and the latest two valuations [in December 2023 and September this year],” he points out.
“Capitol is currently part of MUST’s Tranche 2 stable of assets in its portfolio versus Tranche 1, which are identified as more challenging operational assets or markets. Management, however, noted that the divestment was done after taking into account all factors – in particular, the lack of debt financing and institutional buyer pool,” he adds.
In its announcement, MUST said the proceeds from the sale will be used to repay its FY2025 debt of US$131 million. The balance amount will come from the REIT’s internal cash.
The repayment is expected to result in a 42 basis point (bps) savings of MUST’s weighted average interest costs to 4.16% per annum (p.a.) from 4.58% as at 1HFY2024. The repayment will provide a longer runway for the REIT since it will have no debt repayments until 2026, Natarajan says.
After the sale and debt repayment, MUST’s aggregate leverage will be lowered to 54.2% from 56.3%.
Units in MUST closed 0.8 US cents or 6.45% down at 11.6 cents on Oct 1. Since the start of the year to Oct 1, its unit price has surged 45% surge from 8 US cents. On a one-year basis, MUST units have risen 93.3% from 6 US cents.
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“US office conditions are slowly but steadily improving both on the leasing and financing fronts, but with MUST’s share price rebounding [around] 94% (over the last three months), near-term positives are mostly priced in,” notes Natarajan.
“Potential upside may come if further divestments are at closer to book value, while the US economy faltering would be a key risk,” he adds.
Following the divestment, the analyst has lowered his distributable income estimate for FY2025 and FY2026 by 14% and 11%, respectively.
His unchanged target price is pegged to MUST’s FY2024 book value of 0.35 times.
Meanwhile, CGS International analysts Lock Mun Yee and Natalie Ong have kept their “add” call and target price of 22 US cents on MUST as they think the disposal could remove any doubt over the REIT’s ability to monetise its assets and improve its liquidity position.
However, they also note that the “challenging prospects” of the US office market and MUST’s ability to meet its net proceeds targets established under its master restructuring agreement may hamper its share price performance over the next six to 12 months.
“That said, we believe its current valuation of 0.4 times proforma 1HFY2024 P/BV has factored in much of its operational and financial challenges,” they write in their Sept 30 report.
The analysts have kept their FY2024 to FY2026 projections unchanged. — Felicia Tan
Pacific Radiance
Price target:
PhillipCapital ‘buy’ 6 cents
Several favours going in Pacific Radiance RXS ’s favour
PhillipCapital analyst Paul Chew has initiated coverage on offshore and marine (O&M) company Pacific Radiance Limited with a “buy” call and a target price of 6 cents on Sept 27.
Pacific Radiance was established in 2006 and listed on the Singapore Exchange S68 ’s (SGX) Mainboard in 2013. It completed its US$576 million debt restructuring exercise in 2022. Today, the company mainly has three businesses: ship management, shipyard repair and construction and ship chartering of offshore support vessels (OSVs). It currently owns a shipyard spanning 33,000 sqm (355,209.04 sq ft) with over 180m of water frontage in Singapore. The company operates four OSVs, which are largely in the Middle East.
In his report, Chew highlights several factors going in Pacific Radiance’s favour. For instance, the analyst sees the return of earnings from OSV ship chartering services.
“In 2HFY2024 [ending Dec 31], Pacific Radiance will take delivery of three major OSVs that will provide earnings growth in FY2025,” says the analyst.
“The largest vessel is a 400-man accommodation barge, Crest Station 1, to be delivered in October 2024. This vessel has secured a US$31.6 million ($40.5 million) charter contract, including an option for extension for deployment in the Middle East,” he adds.
The other vessels are a 60-man workboat (Crest Mas) and an anchor-handling tug supply (AHTS) named Crest Mercury.
“The vessels are not newly built but reactivated after being laid up for several years. Pacific Radiance has a track record in operating and reactivating vessels,” Chew notes.
In addition, Pacific Radiance is expected to begin construction work on two new crew transfer vehicles (CTVs). Whether the CTVs will be sold or used internally will be determined upon the CTVs’ completion in FY2025, says Chew.
Demand for such vessels is “robust” as Taiwan embarks on a “massive rollout” of offshore wind farms. Chew notes that the country’s wind farm capacity started from 2.1GW in 2023 and is expected to increase to 13.1 GW by 2030, representing a compound annual growth rate (CAGR) of 30%.
Finally, the analyst sees an upside in the company’s off-balance sheet operations.
These operations include its 32.4% stake in Logindo Samudramakmur, which was written off Pacific Radiance’s balance sheet in 2022.
Logindo has been listed on the Indonesia Stock Exchange since 2013, with a market cap of $34 million. It operates 41 Indonesian-flagged OSVs with an average age of 15 years.
“Logindo is undergoing a two-stage restructuring of its operations. Vessels will be marketed globally where charter rates are higher or disposed of to reduce gearing,” says Chew.
“Pacific Radiance also operates four flagged CTVs to maintain and install offshore wind farms in Taiwan. The contribution will be smaller due to a lower equity stake,” he adds.
In FY2024, Chew expects Pacific Radiance’s ship chartering revenue to come in at US$5 million and US$14 million in FY2025. About 44% of the company’s FY2023 revenue came from its ship chartering segment, while its ship management business comprised the remaining 56%.
“The growth in FY2025 will be driven by a jump in ship chartering operations as the three new vessels begin operation and completion of two CTVs,” says Chew. — Felicia Tan
Zixin Group
Price target:
PhillipCapital ‘buy’ 5 cents
Initiate’ buy’ on revenue growth
PhillipCapital analysts Liu Miaomiao and Paul Chew have initiated coverage on Zixin Group with a “buy” call and target price of 5 cents in their Sept 29 report.
For the 2HFY2024 ended March, Zixin’s revenue grew by RMB96.4 million ($17.6 million) or 92.0% y-o-y to RMB201.3 million, thanks to China’s gradual economic recovery and a better harvest.
For the full year, stronger sales from processed sweet potato products and fresh sweet potatoes drove full-year revenue up by 45% y-o-y to RMB318.4 million.
With the Chinese government supporting the agricultural industry to boost food security by allocating land, as well as offering rental-free periods and cold storage, Liu and Chew expect Zixin’s fresh sweet potato sales volume to double due to the introduction of cold storage and cold chains to reduce spoilage, and higher selling prices to offset supply shortfalls.
“With the introduction of cold storage, prices remain resilient even amid intensified competition, as the company can store sweet potatoes for longer periods to meet off-season demand.
In FY2024, revenue from fresh sweet potato sales accounted for 18% of total revenue,” write the analysts.
In the same period, revenue from processed sweet potatoes accounted for 82% of total revenue, with approximately 14,537 tonnes sold, or 56% of the amount sold for fresh sweet potatoes.
The analysts write: “Production capacity for processed products will double by FY2025, with plans to expand into high-margin functional products. We expect gross margins to improve by around 2% y-o-y to 34%.”
The company is also expanding its revenue stream by converting agricultural waste, like stems and leaves, into raw materials for animal feed.
As China aims to reduce soymeal content in feed from 14.5% to 13% by 2025, soybean demand dropped by 9.1 metric tonnes in 2023, with sweet potatoes as a key substitute. Zixin, one of China’s larger producers, manufactures this feed at scale with a proprietary probiotic formula that reduces hormone use.
Liu and Chew continue: “With animal feed consumption at 476 metric tonnes in 2023, we expect around RMB0.9 million in revenue from this segment in 4QFY2025 and around RMB10 million in FY2026.”
Meanwhile, Zixin participates in government projects in Hainan and Henan province, thus expanding its industrial network.
“Partnering with CITIC Construction, Zixin will replicate its biotech-focused sweet potato industrial value chain in Lingao County, Hainan Province, as part of the rural revitalisation project. We expect production to more than double upon completion.”
Liu and Chew expect a compound annual growth rate (CAGR) for revenue growth to be 25% for the next two years, primarily driven by increased sales volumes of fresh and processed sweet potatoes.
With the expected increase in sales volume in fresh potatoes, the analysts note that the average selling price may decrease by around 21% y-o-y to attract customers. Overall, they forecast a sales uplift of around 70% y-o-y in FY2025.
With processed sweet potatoes, however, Lim and Chew see an increase in average selling price with the introduction of higher-value products, at a projected 30% y-o-y growth in sales.
They conclude: “Zixin is well-positioned to capitalise on new facilities and government support to double production capacity by FY2025. We expect patmi to at least double, reaching RMB30.9 million in FY2025, driven by higher fresh sweet potato sales volume, the new manufacturing facility for higher-margin functional food, and animal feed.”
Risks noted include price fluctuations due to adverse weather conditions, foreign exchange (forex) influencing dividends if a policy is implemented, losing the Chinese government’s support should a new policy be decided, and geopolitical difficulties as Zixin is focused on entering Southeast Asia. — Douglas Toh
CapitaLand Ascott Trust (CLAS)
Price targets:
Citi Research ‘buy’ $1.12
OCBC Investment Research ‘buy’ $1.10
Analysts see positives in lyf Funan acquisition
Analysts from Citi Research and OCBC Investment Research (OIR) have maintained their “buy” call on CapitaLand Ascott Trust HMN (CLAS) after the REIT announced the proposed acquisition of the 329-room lyf Funan on Oct 1.
CLAS will acquire the hotel from Ascott Serviced Residence Global Fund (ASRGF) at an agreed property value of $263 million.
OIR’s Ada Lim notes that SG&R Singapore (HVS) and Colliers have separately valued the property at $265 million and $271 million, respectively, and although the agreed property value of $263 million appears favourable compared to other deals in the market, the price accounts for the property’s leasehold tenure which ends on Dec 11, 2078.
In its statement, CLAS also announced that it would enter into a 20-year master lease agreement with a wholly-owned subsidiary of The Ascott for lyf Funan.
Ascott is the hospitality arm of CLAS’s sponsor, CapitaLand Investment (CLI).
The total acquisition will cost the REIT $265.1 million, comprising a purchase consideration of $146.4 million, $113 million in loan repayments, and fees.
The acquisition outlay will be primarily funded by the divestment proceeds from Citadines Mount Sophia Singapore (CMSS), amounting to $142.8 million. CLAS will draw down $119.7 million of debt to repay the existing loan facility while it will pay the acquisition fees with its stapled securities.
The acquisition is expected to raise its aggregate leverage to 39.1% from 37.2% as of June 30 on a pro forma basis.
The acquisition “makes sense” to Lim as CLAS will receive rent at 93.5% of the property’s gross operating profit (GOP).
CLAS will receive no rent should the property’s GOP be zero.
Through its master lease, which has an initial term of 20 years, CLAS — through the master lessor, Victory SR Trust — will be responsible for any related capital expenditure (capex) for the property. lyf Funan’s master lessee, Ascott, will be responsible for any property operating expenses.
Furthermore, the acquisition is expected to be accretive to CLAS’s distribution per stapled security (DPS) as the ebitda yield of the acquisition is 4.7% on a pro forma basis and 1.5 percentage points higher than the exit ebitda yield of CMSS at 3.2%.
The calculations also include a 3.5% interest rate on the loan, Lim notes in her Oct 1 report. The accretion translates to an FY2023 DPS of 6.67 cents from 6.57 cents, which represents a yield of 6.7% and 6.6% based on CLAS’s last-closed price of 99 cents as at Dec 31, 2023. CLAS’s NAV per stapled security remains unchanged at $1.16.
Citi analyst Brandon Lee notes that while the master lease provides some stability, rent payable at 93.5% GOP with no fixed component implies that income may be volatile in the cyclical hospitality sector.
Based on his estimates, CLAS’s DPS accretion would be smaller at 1% or 1.2% if 0% or 50% of management fees were paid in units. Meanwhile, gearing should come in at 38.7% following the divestment of Novotel Sydney’s Paramatta.
In Lim’s view, lyf Funan is a “strong property” thanks to its social living brand that caters to corporate and leisure travellers. According to CLAS, the property has an average occupancy rate of over 80% year-to-date (ytd), outperforming the submarket.
“CLAS views Singapore as a key gateway city with favourable supply-demand dynamics, and the proposed acquisition will increase its proportion of assets in Singapore from 16% to 19% as at June 30,” she notes.
Citi’s Lee is less upbeat on the transaction despite lyf Funan’s positive metrics, including its “decent” average daily rate (ADR) of above $200.
In his report dated Oct 1, Lee expresses his concern that Singapore’s hotel sector has “likely reached or nearing its peak”.
The signal is seen in the country’s 8M2024 revenue per available room (RevPAR) at 22%, which is above pre-Covid levels but mitigated by 8M2024 tourist arrivals that are still 12% below pre-Covid levels. Singapore is also expected to see a lower room supply of around 2% beyond 2024.
However, he likes that lyf Funan’s hotel licence and varied room types allow it to target different guest profiles, with corporate and leisure travellers comprising 20% and 80% to its business, respectively, and 15% and 85% comprising long and short stay travellers, respectively.
He also states that lyf Funan’s GOP of 60% to 65% is relatively high compared to the typical 30% to 50% GOP for hotels and serviced residences.
Furthermore, CLAS says opportunities for divestments and acquisitions have improved, targeting acquisitions in developed markets with existing presence, Citi’s Lee adds.
Besides third-party assets, the analyst notes that CLAS should explore its sponsor’s property pipeline, including CapitaLand Investment Limited’s (CLI) assets and remaining unsold properties with ASRGF.
As this is a major transaction that involves CLI, CLAS’s controlling shareholder, it will require CLAS’s stapled security holders’ approval at the extraordinary general meeting (EGM) in November, OCBC’s Lim says.
OCBC’s Lim leaves the forecast intact ahead of the completion of this acquisition, which is expected to happen in 4Q2024. However, she lowers the risk-free assumption by 50 basis points (bps) to 2.5%, which more than offsets an increase in beta to 0.99, leading to an increase in target price — or fair value estimate — from $1.08 to $1.10.
Citi’s Lee states that his unchanged target price of $1.12 is based on an average dividend discount model (DDM) and revised net asset value (RNAV) valuations. — Cherlyn Yeoh
Sheng Siong Group
Price targets:
DBS Group Research ‘buy’ $1.80
OCBC Investment Research ‘buy’ $1.88
‘Buy’ Sheng Siong as growth accelerates
DBS Group Research is upgrading its call on supermarket operator Sheng Siong to “buy” from “hold” previously with a higher target price of $1.80 from $1.62.
Analysts Chee Zheng Feng and Andy Sim like that the group has an excellent track record of supply chain management and tender bidding.
The group has consistently delivered y-o-y gross margin expansion, leveraging its excellent sourcing capabilities to procure products at competitive prices.
In addition, it has also consistently delivered store count growth, having secured 44% of total HDB tenders for the past five years.
“Together, these two factors have ensured the company is able to deliver steady revenue and profitability growth since 2013, except for 2021 due to an abnormal, Covid-led high base,” say the analysts.
To that end, the analysts are expecting Sheng Siong to deliver “above-norm” 8% earnings growth for FY2024, largely on gross margin expansion, lower utility costs, and higher net interest income.
Moving into FY2025, they believe the continued gross margin expansion and surge in new store count would more than offset lower net interest income and support the above-consensus 5% bottom line FY2025 growth rate.
With stabilising operating costs, Chee and Sim believe the next driver of growth will be new stores. Hence, investors should look out for upcoming HDB tender results.
“Given the current landscape where Giant and Hao Mart are streamlining their footprints, Sheng Siong is uniquely positioned to rapidly expand its network,” say the analysts, while noting that year-to-date (ytd), the group has secured four new stores and is bidding for another four.
They are optimistic that at least two additional stores could be secured, leaving the group with potentially six new stores secured this year.
“We retained our above-consensus earnings estimates and applied a higher 18 times forward P/E [compared to its previous P/E of 17 times], +1 standard deviation of its average four-year forward P/E, on its FY2025 earnings,” say the analysts, who believe that the higher valuation peg is justified, given the lower equity risk premium with the falling interest rate and higher probability of a hike in the dividend payout ratio.
Meanwhile, OCBC Investment Research is reiterating its “buy” call and $1.88 fair value estimate on Sheng Siong as the research team is optimistic about the group’s robust new store supply pipeline.
“We view Sheng Siong as a defensive play amid rising inflation and slower economic growth. We believe demand for groceries will continue to normalise in 2024, but could potentially be supported by a shift in consumption patterns towards a focus on “value for money” due to inflationary pressures and a higher cost of living,” says the research team.
The team also believes that grocery sales could be supported by Budget 2024’s announcement on inflation offset measures such as the CDC vouchers.
The OCBC research team notes that Sheng Siong has already exceeded its opening target of at least three stores a year by opening four with plans to bid for seven more stores in 2H2024.
In China, Sheng Siong opened one store in June 2024, bringing the total number of stores to six.
In the second quarter of the year, the group’s revenue and net profit rose by 1.2% and 5.3% y-o-y to $338.0 million and $33.6 million, respectively, in line with expectations.
Gross profit margin also remained resilient at 39%, hitting another record high during the quarter, compared to 30.6% in 2QFY2023, as the group continued to optimise its sales mix.
“We continue to view Sheng Siong as a defensive play and expect the store growth to pick up from 2H2024, supported by robust new store opening opportunities,” says the research team. — Samantha Chiew
