Microsoft Corp
Price target:
PhillipCapital “buy” US$405
Winning the global enterprise on cloud and security
PhillipCapital analyst Timothy Ang has given Microsoft Corp a “buy” rating and target price of US$405 ($554), as the rising demand for cloud solutions and cybersecurity solutions will be beneficial for the company.
In a Dec 13 report, Ang says Microsoft’s cloud business Azure has doubled its market share, leveraging on the installed base of 72% of global enterprise servers with attractive pricing.
Between 2017 and 2021, Azure has doubled its market share from 10% to 20%. This is expected to expand further as enterprises choose Azure as their primary cloud vendor, due to existing relationships with Microsoft and its attractive pricing. “Customers also choose Azure over concerns about competition from Amazon Web Services (AWS) and Google, whose businesses are built on selling ads and products,” Ang writes.
Furthermore, Azure is Microsoft’s fastest-growing segment at a 66% CAGR in the past five years. Ang expects it to continue strong revenue growth of 41% in FY2022.
On the cybersecurity front, there is also demand for premium licenses. Microsoft’s highest-end E5 license user base — as a percentage of Microsoft’s total commercial Office 365 user base — rose from 5% to 8% in FY2021. Ang says that customers are upgrading for better security, on the back of Microsoft’s reputation as the largest global cybersecurity firm.
Meanwhile, license upgrades also helped drive average revenue per user (ARPU) up 7% and operating margins to a 19-year high of 42% in FY2021. Ang expects license upgrades to drive commercial cloud revenues up 30% in FY2022 ending June 30, sustaining operating margins above 40%.
As for its core productivity software, paid Office 365 Commercial seats are still growing in double digits, at 17% y-o-y to 300 million seats in FY2021. This is despite the high penetration of 89% share in the productivity software market.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
“We expect the productivity and business processes segment revenue to grow 17% in FY2022, higher than the five-year average of 16%.” However, he does highlight some risks like stiffer competition from AWS and Google, as well as the global chip shortage constraining sales of its Surface tablets and Xbox gaming consoles. — Lim Hui Jie
Keppel REIT
Price target:
DBS Group Research “buy” $1.40
Charging ahead with its asset recycling strategy ‘at great speed’
As the only pure-office REIT now, Keppel REIT (KREIT) is recycling assets at top speed, say DBS Group Research analysts Rachel Tan and Derek Tan.
KREIT has announced the acquisition of Blue & William, a freehold Grade A office building under development located in North Sydney, Australia for A$327.7 million ($322.2 million). The acquisition will be fully debt-funded.
The acquisition will increase its Australia portfolio to 19.5% from 16.4% by assets under management (AUM), and the proportion of freehold assets in its portfolio to 32.6% by net lettable area (NLA).
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In a Dec 13 note, the analysts are maintaining “buy” on Keppel REIT, with a target price of $1.40, which represents a 22% upside.
“KREIT had charged ahead with its asset recycling strategy at great speed compared to its peers. Shortly after delivering two acquisitions in FY2020 and divesting its 50% stake in 275 George St in July 2021, KREIT has inked another accretive acquisition before the year ends. This indeed sets a new Keppel paradigm of portfolio optimisation and asset recycling strategy,” say the analysts.
They add: “We view the acquisition as a positive addition to KREIT’s portfolio, delivering approximately 3% accretion upon completion and good portfolio metrics that would ensure earnings visibility in the medium-term.”
“In addition, pro forma gearing at slightly below 40% still has debt headroom for future acquisitions. KREIT’s best-in-class office portfolio, anchored by Singapore Grade A offices in prime CBD locations, is well positioned to benefit from a potential recovery in a tight net supply market. Valuation remains attractive at a 0.9 times P/NAV, close to the sector’s historical mean.” — Jovi Ho
Ascott Residence Trust
Price target:
DBS Group Research “buy” $1.30
Faith in large domestic travel markets
DBS Group Research analysts Geraldine Wong and Derek Tan are remaining positive on Ascott Residence Trust (ART) with a “buy” call, as they see large domestic travel markets sustaining the trust.
Amid the news of the new Covid-19 variant, the analysts believe “large domestic travel markets continue to be well-sheltered from the faltering developments on border reopening”.
In addition, the analysts have upped their target price estimate on the counter to $1.30, from $1.20 previously. The higher target price comes as Wong and Tan estimate a softer earnings recovery trajectory to around 70% of normalised levels in FY2022 ending December, as well as a $300 million acquisition assumption for the year.
In their report on Dec 6, the analysts see ART trading at a compelling value, with the counter currently trading below book at 0.9 times P/NAV and on attractive 5.6% forward FY2022 yields. On this, they peg a 43% y-o-y DPU growth and “on a more resilient income stream from longer-stay lodging assets”.
In the same report, Wong and Tan say they see a softer trajectory to normalisation for the resumption of travel as well as the recovery for hotel sectors from an islandwide revenue per average room (RevPAR) at 50% of 2019 levels for FY2021.
“With border reopening delayed from the Omicron variant development, ART’s 73% exposure to large domestic travel markets will continue to serve as an earnings buffer as domestic lodging demand will still be the most stable income stream for now,” they write.
“Moreover, maiden acquisitions within the student accommodation space and longer-lodging asset segment have fuelled inorganic growth of ART’s stable income contributions this year, en-route to ART’s long-term target of a 15% to 20% portfolio exposure in this space."
Wong and Tan are also positive on ART’s asset recycling to drive upside in earnings and its NAV.
“[A] healthy 35% gearing level and $2 billion debt headroom could mean that the long-awaited acquisition of sponsor’s $1 billion US multifamily portfolio may be considered in 2022.”
That said, one of the key risks to ART’s share price is the ongoing Covid-19 Omicron variant, which may cause a longer-than-expected delay to the reopening of global borders. — Felicia Tan
Singapore Exchange
Price target:
CGS-CIMB “add” $10.40
RHB “neutral” $10.30
Spac boost but higher costs in the near term
CGS-CIMB Research analysts Andrea Choong and William Tng have upgraded Singapore Exchange (SGX) from “hold” to “add”, with an unchanged target price of $10.40.
The analysts believe that SGX’s position as a financial hub in Asia could be boosted through future listings via special purpose acquisition companies (Spacs).
“Incremental listing fees from Spacs may not be material for SGX but we believe the progressive listings of tech-related and new economy companies may lift valuations of the broader market over time,” they write in a Dec 9 research note.
Citing Bloomberg reporting, Choong and Tng note that Tikehau Capital, Vertex Holdings and Novo Tellus are amongst the first to apply for a Spac listing on the SGX, with the aim to raise $200 million via their respective IPOs slated to happen by end-2021.
“Apart from a list of regional unicorns such as Carro, Carousell and Ninja Van that could be likely Spac targets, we opine that the trio could also target their own portfolio of investee companies. For example, Novo Tellus has Novoflex and Tessolve. Tikehau’s investment portfolio centres in Europe and Vertex (or Temasek’s) portfolio of non-core investments are numerous,” they add.
In their research note, Choong and Tng also compared SGX’s Spac regulations to those around the globe, noting that SGX’s rules are largely aligned with the US. “SGX’s Spac listing requirements of limiting the sponsor’s promotion threshold to 20%, allowing public investors the right of redemption regardless of their voting stance on the business combination, and allowing warrants to be detachable from each ordinary Spac share are consistent with the market practices in the US.”
When compared to Hong Kong, the analysts observe that SGX’s regulations are less rigid, as only professional investors with portfolios of over HK$8 million ($1.4 million) are allowed to invest in a Spac until it has merged with a target company.
Meanwhile, RHB Group Research has lowered its target price for SGX from $11.10 to $10.30, despite being sanguine on the company’s growth outlook. “We are positive about SGX’s long-term growth prospects from its latest acquisitions and potential pipeline of ETF, REIT and Spac listings. However, we remain concerned about near-term elevated operating expenses due to the consolidation of various acquisitions, before the revenue catches up in the mid-term,” writes RHB analyst Shekhar Jaiswal in a Dec 10 research note. He has also kept its “neutral” call.
Jaiswal adds that management has guided for higher operating expenses over the next 12 to 18 months before revenue catches up and margins recover.
In addition to costs, he is bearish on SGX’s lower securities trading volumes. “Year-to-date for FY2022 [ending June], total securities market turnover value and securities daily average value stood at $102.7 billion and $1.2 billion, respectively. On an annualised basis for FY2022 ending December, this is 13% below our estimates.”
He has cut his FY2022 earnings forecast by 4% to reflect the lower volumes, while raising his FY2023 to FY2024 earnings estimates by 5% each. His lower target price is pegged to a P/E ratio of 23 times, down from 25 times previously. The lower P/E ratio is close to one standard deviation above its historical average and includes an 8% ESG premium. Jaiswal also notes concerns remain among investors on SGX’s intention to introduce a scrip dividend scheme that would allow shareholders to reinvest in SGX’s shares, especially if the scrip dividend is issued at a discount. — Atiqah Mokhtar
CapitaLand Integrated Commercial Trust
Price target:
DBS Group Research “buy” $2.50
Quicker recovery is ‘around the corner’
DBS Group Research has reinstated coverage on CapitaLand Integrated Commercial Trust (CICT) with a “buy” call and target price of $2.50.
In a Dec 10 research note, analysts Rachel Tan and Derek Tan state that CICT is a key proxy and beneficiary of the reopening play, adding: “We estimate CICT could deliver around 12% of DPU growth in FY2022 ended December and a 9% two-year CAGR, one of the stronger growth rates among peers.”
Despite concerns surrounding the Covid-19 Omicron variant dampening reopening optimism, they believe that quicker recovery is around the corner, underpinned by faster response from pharmaceutical companies and higher levels of vaccination rates.
The analysts also anticipate CICT to benefit as tourists and employees gradually return to the CBD malls, which make up 50% of its portfolio. In terms of office space, the analysts say that office vacancy concerns are a transitioning to a thing of the past for CICT, given that CapitaSpring and Asia Square Tower 2 have achieved almost full committed occupancy. Additionally, the newly completed and refurbished buildings will begin contributions in FY2022, including 21 Collyer Quay and Six Battery Road, the analysts add.
They are also bullish on CICT’s access to good-quality office assets in Singapore from its sponsor. “CICT is one of the few commercial Singapore REITs that has the opportunity to acquire two newly completed prime Singapore office assets (79 Robinson and the remaining 50% stake in CapitaSpring) from its sponsor.”
“As CICT had decided to upsize its latest private placement to $250 million, we estimate that CICT has remaining cash (post divestment of One George St and acquisition of Australia assets) of [around] $250 million, which gives them some firepower to acquire its next asset,” they write.
“The company’s integrated commercial assets drive synergistic value and its size offers a bigger platform to grow with acquisitions of integrated development led by the rising global trend of live-work-play.” Their target price of $2.50 implies a P/NAV ratio of 1.25 times, which is below one standard deviation of its historical range. — Atiqah Mokhtar
