Oversea-Chinese Banking Corp
Price target:
RHB Bank Singapore “neutral” $13.70
Top pick among peers
RHB Bank Singapore expects Oversea-Chinese Banking Corporation (OCBC) to report stronger earnings for 3QFY2023 ended September.
OCBC boasts the “strongest asset quality metrics” among the three Singapore banks, which RHB analysts believe will be a potential differentiating factor in a higher-for-longer interest rate environment.
While OCBC remains RHB’s top pick among its peers, the research house remains “neutral” on OCBC in an Oct 16 note with a target price of $13.70, which represents a 6% upside against its last traded price. RHB’s target price includes a 2% environmental, social and governance (ESG) premium, based on RHB’s in-house methodology.
OCBC is scheduled to announce its results on Nov 10. Loan growth is expected to stay muted, say the analysts, mainly due to softness in trade-related financing given the weakness in China’s economic environment.
“For now, mortgage growth is still stable thanks to steady drawdowns in the mortgage pipeline while certain non-trade loans have been decent. OCBC had guided for low- to mid-single-digit loan growth in its 2QFY2023 results briefing and we expect the 3QFY2023 trend to be within guidance,” they add.
Meanwhile, OCBC’s healthy liquidity should lead to the easing of deposit cost pressures. “OCBC has seen further net new money inflows in 3QFY2023 and coupled with the softness in loan growth, funding cost pressures remain benign.”
Fixed deposit rates have slipped from a peak of over 4% earlier this year to under 3% currently. Together with July’s US Federal Funds Rate hike, management was cautiously optimistic that net interest margin (NIM) could stay elevated in 2HFY2023 and match the 2.28% level in 1HFY2023, which would comfortably meet the guidance of above 2.2%.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
OCBC’s fees will soften, says RHB. “Despite some earlier optimism in early 3QFY2023 that market sentiment could be turning for the better, this had been dampened by subsequent concerns with respect to a higher-for-longer interest rate environment. As such, wealth management activities have been subdued with net new money inflows largely parked in fixed deposits.”
Meanwhile, trade- and loan-related fees will reflect continued softness in loan growth, adds RHB. “We see insurance and non-customer flow trading income as the key swing factors that could impact the 3QFY2023 bottom line trend.”
OCBC’s operating expenses are “well-controlled” but catch-up spending in 2HFY2023 is a possibility, according to RHB analysts. “1HFY2023 opex was well-controlled, up 5% y-o-y compared to 1HFY2023 operating income growth of 30% y-o-y.”
Consequently, OCBC’s 1HFY2023 cost-income ratio (CIR) improved “massively” to 37.8% from 47.1% in 1HFY2022. “Assuming operating income growth stays robust, there could be some catch-up spending in 2HFY2023 relating to IT and talent, among others. However, OCBC does not expect opex growth to exceed high-single-digit.”
RHB is still comfortable with OCBC’s asset quality. “OCBC has still not seen any red flags on asset quality and expects to meet its 20 basis points (bps) credit cost guidance. Recall that 2QFY2023 credit cost rose 19 bps q-o-q to 31 bps as the bank bulked up on loan loss coverage. We expect credit cost to trend lower towards the guided run rate in 3QFY2023, and this would be the key driver for sequential net profit growth.” — Jovi Ho
Centurion Corp
Price target:
RHB Bank Singapore ‘buy’ 62 cents
Dormitory upgrades
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RHB Bank Singapore analyst Alfie Yeo is keeping his “buy” call on Centurion Corp as he remains positive on the counter after the Singapore government announced that dorm operators are to upgrade the facilities by 2030.
According to the Ministry of Manpower (MOM), it wants to transition around 1,000 existing purpose-built and factory-converted dormitories approved or operational before Sept 18, 2021, to improved standards under the Dormitory Transition Scheme (DTS).
These dormitories are to enhance their occupancy to below 12 residents a room, with living space upgrades of more than 3.6 square metres (sqm) per resident, along with isolation spaces such as ensuite toilets, showers, and kitchen facilities. With the changes, Centurion will have to reduce its current capacity of 14 to 16 beds per room to 12 beds per room. However, the transition will only begin in 2027 and end by 2030 as the bed supply situation remains tight.
“We believe the overall impact on Centurion is neutral due to the longer-term nature of this development,” writes Yeo, adding that the immediate impact on the stock as well as his current earnings outlook and forecasts, is neutral.
To the analyst, delaying the transition till 2027 will let new dormitories come on-stream in the market and boost overall bed supply. “There are at least seven new purpose-built dormitories with a total of 47,000 beds expected to be completed over the next five years before the existing bed supply marginally reduces due to the current development,” says Yeo.
Of Centurion’s nine dormitories in Singapore, five of its purpose-built dormitories (PBDs) with a total capacity of 27,530 beds will be affected, while four of its quick-built dormitories (QBDs) will remain unaffected. Excluding the Ubi Avenue 3 dormitory and QBDs, this amounts to an estimated 3% to 11% reduction in Centurion’s Singapore PBD capacity by 2030. “Centurion is well placed to comply with the new standards ahead of time,” says Yeo.
Furthermore, Centurion has already planned to re-develop the Westlite Toh Guan and Mandai dormitories and can now conveniently incorporate the latest changes into its plans. “There may also be government grants to help defray the transition costs,” says Yeo, who likes this stock for its “leadership position” in Singapore’s worker dormitory market, where supply remains tight. “We make no changes to our forecasts for now,” he adds.
Key drivers noted by the analyst include the expansion of purpose-built workers accommodation (PBWA) or purpose-built student accommodation (PBWA) assets while key risks rest on the analyst’s earnings forecasts, which are premised on better occupancies at the company’s PBSA assets and bed rates. Failure to achieve these revenue drivers poses downside risks to estimates.
In addition to his “buy” call, Yeo has kept his target price unchanged at 62 cents. His target price is pegged to 7.5x Centurion’s FY2024 P/E, which is below its seven-year historical mean. At its share price of 40 cents as at Yeo’s report on Oct 13, Centurion is trading at an attractive –1.5 standard deviation (s.d.) of its mean P/E with a 5% dividend yield. — Douglas Toh
Frasers Property
Price target:
DBS Group Research ‘buy’ $1.21
Negatives already priced in
DBS Group Research has maintained its "buy" call on Frasers Property TQ5 despite a warning it will book fair value losses on its UK portfolio when it reports its FY2023 ended Sept 30 on Nov 10.
The way DBS sees it, much of the negatives have already been priced in at current valuations, which is at 0.3x P/B or 0.2x P/RNAV. DBS on Sept 14 reinstated a “buy” on Frasers Property with a target price of $1.21.
Even so, Frasers Property says that its overall business performance and core operating earnings have not been significantly impacted as compared to the previous financial year, and it expects to remain profitable for FY2023.
For DBS, the profit warning may be a “natural bummer” but most developers have already begun to report fair value losses for their property exposures in the UK and Europe in the 1HFY2023.
“We note that Frasers Property reported core operating earnings of $398 million in [its] FY2022 results ($928 million including fair value gains) and as of 1HFY2023, reported $200 million in core operating earnings after accounting for perpetual coupons,” says DBS.
“Compared against our FY2023 estimate of $277 million, we remain comfortable that our overall estimates are conservative. We do not see a significant deviation in dividends of 3.0 cents (in FY2022) which is backed by recurrent operating cashflows,” it adds.
However, DBS estimates that the upcoming fair value losses are expected to impact Frasers Property’s net asset value (NAV) of $2.57 per share negatively.
Based on the last reported results in the 1HFY2023, its exposure to Europe including the UK is about 20% of its overall asset base of $34.2 billion. “If we assume up to a 30% decline in valuation in Europe, its overall financial metrics will still remain comfortable (Net debt/equity will still remain [less than] 0.9x) compared to its requirement to keep net debt/equity to [less than] 1.5x,” says DBS.
“Even if we assume that its Australian assets (which account for 27% of assets), together with its European properties are revalued lower by up to [around] 30%, we will see its debt-to-equity (D/E) ratio rise to [around] 1.0x, which still provides for comfortable headroom from its financial covenants,” it adds.
Meanwhile, the reported revaluation losses from Frasers Property is also a possible read-through to the results for the group’s REITs, Frasers Logistics & Commercial Trust BUOU (FLCT) and Frasers Hospitality Trust ACV , both of which are due to report sometime in late October.
“Per our report [which states that the concerns on Australia and Europe are overdone for Singapore industrial REITs], we anticipate some form of NAV erosion to happen for FLCT but compensated by stronger rent growth potential in Australia logistics assets, improving overall cashflows,” says the team.
“Its low gearing of [less than] 30% puts FLCT in a good position to weather any storm on the valuation front. For FHT, we believe the erosion is likely to be even lesser, as we expect robust operating metrics for its hospitality assets to more than compensate for the rise in cap rates for its UK/European hotels ([around] 20% of assets),” it adds. — Felicia Tan
Aztech Global
Price targets:
UOB Kay Hian ‘buy’ $1.11
DBS Group Research ‘buy’ $1.25
Record quarterly earnings
Analysts at UOB Kay Hian (UOBKH) and DBS Group Research have raised their target prices for Aztech Global 8AZ , following the firm’s record earnings for the 3QFY2023 ended September at $30.9 million.
John Cheong and Heidi Mo of UOBKH’s new target price for Aztech is now at $1.11 from $1 previously while Ling Lee Keng of DBS has a new target price of $1.25 from $1.05 previously.
The UOBKH analysts’ new target price is pegged to 8.2x FY2024 earnings, in line with Aztech’s long-term mean P/E. Meanwhile, Ling’s new target price is still pegged to 8.5x Aztech’s FY2024 earnings, slightly below the average since its listing in 2021.
In their Oct 17 report, Cheong and Mo say that Aztech’s 3QFY2023 net profit exceeded their forecast while the firm’s 9MFY2023 net profit of $73.8 million, which is a 15.9% y-o-y increase, accounts for 82% of their full-year estimates.
“The strong results came from a 10.7% y-o-y growth in revenue, driven by sales of Internet of Things (IoT) devices and data-communication products. Aztech also enjoyed greater economies of scale, higher interest income and lower net fair value loss on its foreign exchange contracts,” the analysts say.
They note that despite higher income tax expenses incurred due to a one-time deferred tax provision worth $5.5 million from an overseas subsidiary’s retained earnings, Aztech recorded an improvement in net margin to 10.9%, a 2.3 percentage point (ppt) increase y-o-y.
In addition, Aztech’s order book remains resilient with $322.7 million worth secured as at Oct 16 versus $595 million as at July 21. Most are scheduled for completion in 2023 across its facilities in Dongguan China, and Johor, Malaysia, with order lead time normalising from 9–12 months to 2–3 months.
Likewise, Ling from DBS cheers Aztech’s earnings despite the challenging environment. “We expect the order momentum to remain decent, translating to revenue growth of 14% in FY2024 and 10% in FY2025,” the analyst says. “Going forward, we expect net margins to remain above the 10% level, much higher than the average low single-digit net margin of its peers in the downstream space.”
However, as the external environment remains volatile and fraught with geopolitical tensions, Cheng and Mo say Aztech remains cautiously optimistic about its near-term business prospects.
“The operating environment remains challenging with higher interest rates, inflationary cost pressures and foreign currency fluctuations. Aztech continues to strengthen its balance sheet, with net cash of $215.4 million as at end September (32.6% of market capitalisation), and stringent cost and foreign exchange management,” they add.
Cheng and Mo note two factors that will contribute to Aztech’s stock impact. These include the acquisition of the 300,000 sf Pasir Gudang facility, which was completed in April, with the commencement of production in 3Q2023.
They say that this, alongside other Malaysian and Chinese facilities, meets Aztech’s total production requirements. The additional capacity at Pasir Gudang has lifted Aztech’s total manufacturing built-up area to 846,000 sf for growth and for production diversification to meet the needs of customers, they add.
The other factor is Aztech’s launch of a new vision technology product line under its Kyla brand on Aug 28. The two new products are power-over-Ethernet internet protocol (IP) CCTV, which targets Singapore’s preschool educational segment, and digital microscope, which is slated to launch overseas by the end of 2023.
As the video surveillance market is projected to reach US$157.1 billion ($215.16 billion) by 2030 (seven-year CAGR of 12.9%), Aztech’s new product line is therefore likely to contribute to earnings growth moving forward, according to the analysts.
As such, Cheng and Mo from UOBKH have raised Aztech’s 2023/2024/2025 revenue forecasts by 3%/5%/5% respectively, on the back of its better-than-expected results and steady order book. Accordingly, their net profit estimates have increased by 5%/7%/7% for the same period.
“We continue to like Aztech as it is a proxy to high-growth IoT products, for which we believe orders will continue to grow in FY2024,” they write. — Nicole Lim
Sats
Price target:
UOB Kay Hian ‘buy’ $2.99
Looking forward to return to profitability
UOB Kay Hian analyst Roy Chen in his Oct 16 report has kept his “buy’’ call on Sats with an unchanged target price of $2.99 as he expects the ground handler to show sequential earnings improvement in the next few quarters. However, a full realisation of its earnings potential may only happen much later, says Chen.
The analyst’s target price is based on 9.7x of Sats’ FY2025 EV/Ebitda. The 9.7x multiple applied is at 1.7 standard deviations (s.d.) below the group’s FY2014 to FY2019 mean EV/Ebitda of 12.8x.
At a recent conference, Sats reiterated that its priority now is to speed up synergy realisation between itself and recently acquired WFS to return to profitability and resume dividend payments.
Since acquiring WFS in early April, Sats has become the leading handler of air cargo across major global airports. By leveraging on the enlarged network, Sats has won more than $15 million worth of new contracts per annum and it is now working closely with a major global freight forwarder customer to explore cross-border services to enhance speed and efficiency and realise the potential of multimodal logistics.
Although global air cargo demand has notably been lacklustre in the past 12 to 15 months, Sats is seeing positive signs that the contraction of cargo volume is reducing. According to the International Air Transport Association, or IATA, global air cargo volume, measured by cargo tonne-kilometres or CTK, declined 6% y-o-y in the first eight months of this year.
However, on a monthly basis, y-o-y contraction has been narrowing for the past few months and in August, y-o-y growth returned to a positive 1.5%, although absolute cargo volume was still 1.3% lower than pre-pandemic levels.
As the global economic outlook improves, Sats remains hopeful that cargo volume will continue to pick up although the analyst remains careful, as inventory destocking in the US took longer than thought, and EU retail confidence remains weak, notes Chen.
Consequently, although Chen expects air cargo demand to firm up in the seasonally strong October to November period, more meaningful air cargo recovery may only be seen in FY2025 and for Sats to only realise its full-earnings potential in FY2026.
Meanwhile, Sats is likely to report its 2QFY2024/1HFY2024 results ended September on Nov 10 and Chen’s “best guesstimate” is for its core earnings to possibly break even in 2QFY2024 and achieve earnings of $90 million for the current FY2024.
Key re-rating catalysts noted by Chen include the sequential sequential earnings improvement as regional air traffic recovers further and the global air cargo outlook improves, as well as the delivery of Sats’ forecast synergies for the WFS consolidation. — Douglas Toh
Singapore Airlines
Price target:
CGS-CIMB Research ‘reduce’ $5.66
Higher fuel costs and softer yields
CGS-CIMB Research’s Raymond Yap has maintained his “reduce” call on Singapore Airlines C6L with a lower target price of $5.66 from $6.78 previously.
In his Oct 17 note, Yap estimates that SIA’s earnings had peaked for its 1QFY2024 ended June 30, because of higher fuel costs on one hand, and softer yields on the other.
Yap figures that SIA may on Nov 7 report 1HFY2024 core ebit of between $1.36–$1.4 billion, a drop from the preceding 2HFY2023’s $1.46 billion.
Specifically, given how SIA has reported a core ebit of $755 million for its 1QFY2024, Yap says 2QFY2024 will likely range between $600 million and $650 million.
Yap notes that spot jet fuel prices had increased by 20% q-o-q to an average of US$110 ($150.7) per barrel in 2QFY2024. He estimates that for every increase of US$1 per barrel in oil prices, SIA’s current FY2024 earnings will drop by 1.8%.
Yap notes that SIA has hedged about 39% of its fuel requirements for the nine months from July to March 2024 and this would have helped mitigate the rise in jet fuel prices.
“However, the rally in oil prices arising from the Saudi Arabia and Russia export cuts in the second half of 2023 and a further rally on the back of Middle East geopolitical risk after the outbreak of the Hamas-Israel war, could nevertheless raise SIA’s operating costs in the months ahead,” says Yap.
According to the US Energy Information Administration (EIA), the benchmark Brent crude for 2024 is seen to increase from US$88 to US$95 per barrel.
On the other hand, SIA’s passenger and cargo yields are seen to gradually decline, as other airlines continue to reactivate aircraft and increase competition. Yap estimates that passenger yields in 2QFY2024 had contracted by 1.5% q-o-q. Cargo yields had similarly contracted.
These factors would have likely offset the 5.5% q-o-q growth in revenue passenger kilometres (RPK) demand for SIA and Scoot combined, as both airlines increased their flight capacities and passenger load factors.
Yap’s previous target price for SIA was based on 1.12x P/BV, which is 1.5 s.d. above the mean.
His new target price of $5.66 is based on a target P/BV of 0.91x (average since 2011) and rolling forward to the end of 2024. — The Edge Singapore
