Marco Polo Marine
Price targets:
UOB Kay Hian ‘buy’ 7 cents
RHB Bank Singapore ‘buy’ 7.3 cents
Higher target prices with tailwinds seen
Analysts remain positive about Marco Polo Marine 5LY after the group’s results for the 1QFY2024 ended Dec 31, 2023, surpassed expectations.
The group reported revenue of $29.1 million for the quarter, 22.8% higher y-o-y, while gross profit surged 75.8% y-o-y to $11.6 million as the group’s fleet of offshore supply vessels (OSVs) saw higher charter and utilisation rates.
UOB Kay Hian analysts Heidi Mo and John Cheong have kept their “buy” call as Marco Polo Marine’s revenue and gross profit stood at 20% and 22.1% of their respective full-year forecasts.
“This is above expectations as 1HFY2024 is a traditionally quieter monsoon period for Marco Polo Marine, with 1QFY2024 forming 10%–15% of full-year gross profit over the past two years (disclosed),” they write in their Feb 16 report.
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“Gross profit margin (GPM) saw a marked y-o-y improvement of 12.1 percentage points to 39.9%, primarily from higher average charter and utilisation rates of offshore support vessels (OSVs),” they add.
The analysts also see turning tides for the group with tailwinds in the business such as a favourable OSV market outlook with higher offshore activity.
According to Mordor Intelligence, the OSV market in Asia Pacific is expected to record a CAGR of over 7% from 2022 to 2027, the analysts note.
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“According to Research Nester, the Asia Pacific region is estimated to be the second largest OSV market, with the global OSV market expected to surpass US$27 billion ($36.35 billion) by 2035,” they add. “With its successful expansion into Taiwan and Japan, followed by its partnership in South Korea, Marco Polo Marine stands to benefit from servicing the growing Asia Pacific offshore wind market.”
The stabilisation of China’s reopening will also allow the group to capture the growing demand for ship repairs and shipbuilding and achieve top-line growth.
Marco Polo Marine’s new 240m-long Dry Dock 4 is expected to be completed by the 1QFY2025. The new dry dock will increase its ship repair capacity by up to 25%. The group has also successfully secured several new build contracts for vessel construction to be delivered up till 2HFY2024, ensuring sustained shipyard utilisation levels, the analysts note.
In addition, Marco Polo Marine is tipped to benefit from the growing renewable market upon the deployment of its new commissioning service operation vessel (CSOV). The CSOV is designed to provide charter services in Taiwan, Japan and South Korea and was already 34% completed as of 4QFY2023.
“From Marco Polo Marine’s recent Vestas framework agreement, we understand that the CSOV will be deployed over three years at an agreed utilisation rate once the vessel is fully constructed. This will provide medium-term revenue visibility for Marco Polo Marine’s ship chartering segment,” write Mo and Cheong.
“As a shortage of such vessels and increased construction of new projects continues to drive up both utilisation and charter rates, the CSOV’s expected completion in 3QFY2024 is timely for Marco Polo Marine’s growth.”
At the end of its FY2023, the group displayed excellent cash management with a net cash position of $61 million, providing a “comfortable level of support” for the analysts’ valuation.
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After increasing their GPM estimates by 2 percentage points, 1.5 percentage points and 1.5 percentage points for FY2024, FY2025 and FY2026 respectively, Mo and Cheong’s earnings forecasts are now 9%,7% and 7% higher at $29 million, $31 million and $36 million respectively. Their gross profit estimates have increased by 4%–6% over the same period.
Mo and Cheong have also increased their target price estimate to 7 cents from 6.6 cents previously after changing their valuation methodology to P/E from P/B.
“[The move comes as] Marco Polo Marine has demonstrated its ability to generate sustainable profits. The valuation peg of 9 times FY2024 P/E is +2 standard deviations (s.d.) above its historical three-year P/E range, on the back of higher charter rates and vessel utilisation rates. Marco Polo Marine currently trades at an attractive seven times FY2024 P/E (five times ex-cash),” they write.
RHB Bank Singapore analyst Alfie Yeo has also kept his “buy” call with a lifted target price of 7.3 cents from 6.7 cents before.
“We remain positive on Marco Polo Marine as it remains in a sweet spot to deploy and operate its first CSOV by the end of FY2024, in an environment where such vessels (used to build offshore windfarms) are in short supply. Meanwhile, earnings are expected to remain buoyant, on the back of firm OSV demand for ship chartering and new customers for its shipyard division,” says Yeo in his Feb 19 report.
Like his peers at UOB Kay Hian, Yeo also sees tailwinds for the group, with its chartering business continuing to be in support of offshore oil and gas projects especially in Southeast Asia, as well as wind farms in Taiwan.
Yeo also expects to see a more stable outlook for the group’s shipyard going forward with its target to increase ship repair and maintenance orders for the shipyard division through new customers, especially local shipowners in Indonesia.
“Newbuild contracts secured include the construction of barges for delivery until as late as 2HFY2024,” says Yeo. “Marco Polo Marine’s CSOV is targeted for completion by the end of FY2024 and we expect meaningful contribution from FY2025.”
Yeo has also raised his earnings estimates by 7%–12% in FY2024 to FY2026 as Marco Polo Marine’s 1QFY2024 revenue and margins outperformed his estimates slightly.
“We now ascribe a stronger gross margin assumption as we now see sustainably higher rates, due to the demand for vessels vis-à-vis limited supply in the market. The ship chartering segment is expected to drive growth going forward — from its existing fleet in the oil & gas segment in FY2024, and the new CSOV from FY2025,” he says. — Felicia Tan
UMS Holdings
Price target:
UOB Kay Hian ‘buy’ $1.85
Improving market dynamics
Ahead of UMS Holdings 558 ’ full-year results, UOB Kay Hian (UOBKH) has raised its target price by 19% to $1.85 from $1.65 previously, in anticipation of improving market dynamics in the semiconductor industry.
Analyst John Cheong maintains his “buy” call and expects UMS to report $16 million in its 4QFY2023 ended Deb 31, 2023, earnings, its first q-o-q earnings recovery since the semiconductor industry went into a downcycle in 1QFY2023.
This is on the backing of UMS Holdings’ key customer, Applied Materials (AMAT), reporting its first 1QFY2024 results in February. The firm recorded its second consecutive q-o-q revenue growth since it started declining three quarters ago, notes Cheong.
He adds that its operating margin for the segment also increased by 2 percentage points (ppts) q-o-q to 36% from the low in 2QFY2023.
“In its latest outlook statement, AMAT is hearing that the overall market dynamics are improving. There is a reacceleration of capital investment by cloud companies, fab utilisation is increasing across all device types and memory inventory levels are normalising. In 2024, AMAT expects to be a leading-edge foundry,” says Cheong.
UMS’s latest outlook statement mentions that it expects its performance in the coming months to be supported by the sanguine guidance of some major semiconductor equipment makers expecting to deliver sustainable outperformance going forward, notes the analyst.
In addition, UMS most recently completed a new share placement exercise — in which 40 million shares were 2.55 times covered — with global and regional institutional investors. “This has increased UMS’s share base by around 6% to 710.5 million shares,” says Cheong.
It has also secured an in-principle agreement with a new customer for a new renewable three-year contract. As its Penang facilities have been ready for volume production by September 2023, this production ramp-up enables UMS to take on new orders, which is estimated to reach at least US$30 million ($40.40 million) next year.
On the backdrop of a 2024 rebound that will last through 2026, the Semiconductor Equipment and Materials International (SEMI) expects wafer shipments to set new highs as silicon demand increases to support artificial intelligence (AI), high-performance computing (HPC), 5G, automotive and industrial applications.
For these reasons, Cheong is positive on the stock. He maintains his financial forecasts but has factored in the earnings per share (EPS) dilution of around 6% from the issuance of 40 million new shares in the recent placement exercise.
The analyst’s target price is based on a P/E valuation of 17 times FY2024 EPS, pegged at 1.5 standard deviations above UMS’s historical mean P/E. “The reason for pegging our P/E-based valuation multiple to above mean is to reflect the improving semiconductor industry outlook and improvement in UMS’s earnings quality from new contributions of its new customer,” he says. — Nicole Lim
Frencken Group
Price target:
Maybank Securities ‘buy’ $1.61
Top tech pick
Maybank Securities is keeping its “buy” recommendation on Frencken Group E28 with an increased target price of $1.61, ahead of the group announcing its FY2023 ended December 2023 results.
Analyst Jarick Seet continues to keep the stock as a top pick across the Singapore tech sector as he remains bullish on Frencken amid the semiconductor industry recovery and believes that it will be a key beneficiary despite its share price having picked up in the past few months.
Frencken is expected to release its final year results on the evening of Feb 27. Seet expects 4QFY2023 to show gradual q-o-q improvement with FY2023 revenue expected to come in at $723 million and net profit after tax (NPAT) to be at $25 million.
“However, its key customer Applied Materials (AMAT) just reported a stellar 1QFY2024 result and lifted its 2QFY2024 earnings outlook. We now believe AMAT’s inventory levels will be drawn down, raising the probability of more orders for Frencken,” says Seet. AMAT contributes 30-35% of Frencken’s whole semiconductor segment.
Meanwhile, another key customer in Europe is also trying to move some production to Malaysia, which Seet believes will further benefit Frencken which is assisting in the move.
The automotive segment is also expected to pick up strongly in the next few years with new product innovations (NPI) in the electric vehicle (EV) space. Frencken’s utilisation has been around 50%–55% for its Southeast Asia factories in 2023 and the analyst expects this to rise to 60%–65% in FY2024 on increased auto and semiconductor segment demand.
Seet also views winning awards as good for future business. “We believe that Frencken is in a positive place as a supplier for AMAT as subsidiary ETLA is one of the 12 suppliers globally that won AMAT’s best-in-class performance award for 2023. We believe this shows the good working relationship they have as well as being a testament to the quality and consistency of Frencken’s capabilities,” he says. — Samantha Chiew
Far East Hospitality Trust
Price targets:
CGS International Research ‘add’ 75 cents
PhillipCapital ‘buy’ 79 cents
Swift’s lift and potential acquisitions
With gearing at just 31.3% as at the end of 2023, Far East Hospitality Trust Q5T (FEHT) is looking for acquisitions this year, likely in Japan or Singapore. At the release of the REIT’s results for FY2023 ended Dec 31, 2023, the manager signalled that it continues to look for acquisitions in Japan given the positive yield spread, with asset yields around 4%.
For Singapore, however, the REIT manager says it will wait for interest rates to moderate, likely in 2H2024, before revisiting acquisitions here.
While the manager of FEHT mulls its options, CGS International Research analysts Natalie Ong and Lock Mun Yee are keeping “add” on the REIT but with a lower target price of 75 cents, down from 77 cents previously.
Ong and Lock trimmed their target price to factor in higher interest costs, partially offset by higher net property income (NPI) margin assumptions.
“While assets in Singapore are pricier and come with lower yields, similar to the Oasia Downtown acquisition [in 2018], the sponsor could sell its assets with a partial land lease, thereby lowering the purchase value and making the acquisition more accretive for FEHT, in our view,” said Ong and Lock in a Feb 14 note.
FEHT released its results for FY2023 earlier that day. The REIT proposed distribution to stapled security holders (DPS) of 4.09 cents for the full year, 25.1% higher y-o-y. DPS for the 2HFY2023 also rose by 25.4% y-o-y to 2.17 cents.
The higher DPS comes as the REIT saw higher gross revenue, NPI and distributable income on a y-o-y basis for both the full-year and six-month period.
The distribution was a slight beat to CGS’s estimate, at 106.9% of its forecasts, which the analysts attributed to lower utilisation rates and operating costs for hotels under government contracts.
Gross revenue in FY2023 grew 27.8% y-o-y to $106.8 million due to improvements across all segments. NPI rose 27.7% y-o-y to $98.7 million due to the higher revenue.
Ong and Lock see more occupancy-driven recovery for the hotel portfolio in FY2024.
They note that FY2023 hotel revenue per available room (RevPAR) recovered to just 96% of 2019 levels compared to FEHT’s peers, which reached around 120%. This was because four of FEHT’s hotels were ramping up after exiting their respective government contracts during the year.
Meanwhile, FY2023 serviced residence (SR) RevPAR reached as high as 126% of 2019 levels. Occupancy for the retail and office stood at 80% and 100% respectively, the former depressed due to vacancy at Village Changi, which has not been backfilled since the hotel exited its government contract in March 2023, note the analysts.
The cost of debt averaged 3.3% in FY2023 while the interest coverage ratio stood at 3.5 times. FEHT has refinanced some $225 million of loans maturing in March with three- and seven-year sustainability-linked debt.
With 42.6% of debt fixed at end-FY2023, management has guided for FY2024 cost of debt to average 4% post-refinancing as half of the interest rate hedged will roll off.
Given its low-interest rate hedge, management said the $18 million additional incentive fee from the divestment of Central Square could be used to cushion the impact of higher interest rates. “Nonetheless, we expect the interest coverage ratio to fall to 2.8 times in FY2024 amid higher interest expense,” writes Ong and Lock.
PhillipCapital Research analyst Liu Miao Miao is more optimistic about FEHT, keeping “buy” in a Feb 15 note with an unchanged target price of 79 cents.
Liu notes that in FY2023, FEHT’s hotels saw a recovery in leisure travellers and corporate groups, which led to a higher average daily rate (ADR) of $170, 36.1% higher y-o-y. Average occupancy improved by 6.3 percentage points y-o-y to 80.1%.
“We expect RevPAR to continue trending upward in FY2024, with more support from 2Q2024 onwards due to seasonality. Income from variable rental surged by more than six times, surpassing pre-Covid levels by 1% and contributing to 25% of gross revenue amidst the leisure recovery,” writes Liu.
That said, she expects a decline in contributions from corporate travellers, potentially driving ADR higher in the absence of corporate discounts. “Occupancy is forecast to ramp up in FY2024, thanks to major events such as the Taylor Swift Eras Tour and Singapore Airshow in 2024; current forward bookings appear promising.”
During the Coldplay concerts in January, for example, occupancy improved by 10% on average, and RevPAR showed a 15% uplift, notes Liu.
All hotels have concluded their government contracts and are prepared to make full contributions in FY2024, she adds. “With the upcoming mega events, the occupancy rate is expected to remain resilient, as indicated by a surge in forward bookings. Coupled with the return of Chinese travellers due to the 30-day visa-free policy, there is anticipation for RevPAR to rebound to pre-pandemic levels.”
Chinese travellers and Japanese travellers stand at 40% and 50% of pre-Covid-19 levels, respectively. “However, with the expected recovery of flight capacity, we anticipate positive growth from these demographics,” adds Liu. “Moreover, NPI is projected to remain stable, capitalising on the decrease in electricity costs, which are forecasted to decrease by up to 40% in FY2024.” — Jovi Ho
Keppel Pacific Oak US REIT
Price targets:
DBS Group Research ‘fully valued’ 10 US cents
RHB Bank Singapore ‘buy’ 29 US cents
UOB Kay Hian ‘buy’ 35 US cents
Suspension of distributions
Analysts have slashed their target price estimates on Keppel Pacific Oak US REIT (KORE) although they remain mixed on the REIT’s prospects. Their views come after the REIT said that it plans to suspend its distributions from the 2HFY2023 ended Dec 31, 2023, through to 2HFY2025. The REIT is also looking at recapitalisation options, which it said was “necessary”.
The announcement was made on Feb 15 after KORE postponed its initial results release date from the morning of Jan 31.
For FY2023, KORE’s leverage rose to 43.2% after its year-end valuation, remaining within the Monetary Authority of Singapore’s (MAS) regulatory limit of 50%. Income available for distribution fell by 13.8% y-o-y to US$52.2 million ($70.2 million) for the full year as gross revenue and net property income (NPI) improved slightly.
DBS Group Research analysts Rachel Tan and Derek Tan have downgraded their call on KORE to “fully valued” with a lower target price of 10 US cents, down from 48 US cents previously.
In their Feb 16 report, the analysts said that the REIT’s decision to suspend distributions to build up liquidity came as a surprise even though its operational and financial metrics stood in line with their estimates.
“We see [the move] as a conservative and proactive stance taken to manage its financial liquidity situation. We believe that the manager is probably proactively building up further liquidity to refinance its near-term debt expiry in case there is a ‘funding gap’ when refinancing discussions start sometime in the coming quarters. However, this will cause an overhang on the stock in the interim,” they write.
The analysts were right. Units in KORE plunged when markets opened after the news on Feb 15 by more than 39% to as low as 15.2 US cents in reaction, down from 25 US cents at the close of Feb 14. Units closed at 14.8 US cents on Feb 16.
The analysts’ new target price is pegged to 0.15 times P/B to factor in the suspension of distribution and higher capital management risks.
That said, they remain somewhat positive in the REIT’s portfolio, noting that its assets in the tech hubs of Seattle, Austin and Denver, which contribute over 60% to KORE’s NPI, remain office growth markets in the US.
Furthermore, KORE has delivered a stable performance and resilient distributions per unit (DPU) in the past few years despite a volatile market during the pandemic and amid the high inflationary environment in the US.
“Operationally, KORE has also kept its portfolio at above 90% thus far, a commendable effort given the headwinds impacting the sector. However, unfortunately, the sector’s structural concerns have subsequently impacted its funding,” they write.
RHB Bank Singapore analyst Vijay Natarajan kept his “buy” call on KORE in his Feb 16 report as he sees the distribution suspensions as a “short-term pain” to better preserve long-term value, especially with the REIT’s resilient operational income.
The shock announcement, which resulted in a knee-jerk share price correction is “overdone”, says the analyst, who expects “value-driven investors to enter once the dust settles”. At its current share price, KORE is trading at 0.2 times FY2024 P/B.
Despite the positivity, Natarajan has lowered his target price to 29 US cents from 48 US cents previously. His new target price has buffered in a further 30% decline in KORE’s asset valuations.
UOB Kay Hian analyst Jonathan Koh has kept his “buy” call on KORE, as he sees the distribution suspensions as the REIT’s “best endeavour” to avoid divestments, equity fundraising (EFR) and a potential default.
KORE’s distributable income of US$26.1 million for the 2HFY2023, 10.1% lower y-o-y, stood in line with his expectations.
“KORE will recapitalise its balance sheet by suspending distributions for 2HFY2023, FY2024 and FY2025. It intends to resume distribution in 1HFY2026. Investors are rightfully shocked as aggregate leverage of 43.2% as of December 2023 remains within MAS’s regulatory limit of 50%,” notes Koh.
Like RHB’s Natarajan, Koh sees investors’ “thunderous response” to the temporary suspension of distributions as “misread” by the market.
“The correction of 39.6% yesterday was overly harsh, especially after the drop of 12.5% on Jan 31 when KORE delayed the announcement of its 2023 financial results. KORE provides FY2026 distribution yield of 28.4% and trades at P/NAV (or price to net asset value) of 0.22 times (78% discount to NAV per unit),” he writes in his Feb 16 report.
For FY2026, Koh estimates that KORE will report a DPU of 4.3 US cents.
That said, he has also lowered his target price to 35 US cents from 59 US cents previously, based on a dividend discount model (DDM), which factors a cost of equity (COE) of 10% from 9% previously and a terminal growth of 0% from 1% previously. — Felicia Tan
