City Developments
Price target:
CGS-CIMB Research ‘add’ $8.97
Another acquisition in Japan
CGS CIMB Research analyst Lock Mun Yee has kept her “add” call and $8.97 target price on City Developments (CDL) following its largest private rental sector (PRS) transaction in Japan to date.
On Sept 28, the company announced it was acquiring a portfolio of 25 residential assets across the 23 wards in Tokyo for JPY35 billion ($321.9 million).
The portfolio just acquired has 832 residential apartments and four retail units. The assets have an average age of less than two years and are all located within a 10-minute walk from a train station. The portfolio now has a 97% committed occupancy and offers stable rental income. The sellers are affiliates of BGO, a leading global real estate investment manager.
CDL had earlier bought something similar in Osaka. Upon the acquisition, CDL’s Japan assets under management will be lifted to $644 million.
“With an enlarged portfolio, CIT is poised to benefit from a recovery of Japan’s economy and net migration into Tokyo,” writes Lock in her Sept 28 note.
According to property consultant Savills’ September Japan residential market updates, average residential occupancy rates in the 23 wards of Tokyo is at 96.6% as at 2Q2023, the highest level since the pandemic started and almost at the highs seen in pre-pandemic times.
The way Lock sees it, the latest acquisition is in tandem with CDL’s growth strategy and the Japan market has been under investors’ radar given the still-positive yield spread over funding cost.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
The purchase is estimated to lift CDL’s AUM in the “living” sector to $1.7 billion and its overall AUM to $3.4 billion.
CDL did not disclose the transaction yield. However, based on Savills’ report, Lock figures that average residential yields could range from 2.5% to as high as 3.7%.
“Based on this range, we believe this acquisition will likely be earnings accretive for CDL,” notes Lock.
For now, she is keeping her FY2023 to FY2025 earnings forecast for CDL unchanged. Her target price of $8.97 is pegged at a 45% discount to revalued NAV.
Lock says potential re-rating catalysts for this stock are faster-than-expected AUM growth and a quicker uptick towards its 8% ROE target.
On the other hand, downside risks include demand for its commercial space dragged by a slow macro outlook and demand for its residential projects affected by more property cooling measures. — The Edge Singapore
Raffles Medical Group
Price targets:
RHB Bank Singapore ‘buy’ $1.75
DBS Group Research ‘hold’ $1.48
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Changi airport contract renewed, acquisition in Vietnam
RHB Bank Singapore analyst Shekhar Jaiswal is keeping his “buy” call on Raffles Medical Group BSL with an unchanged target price of $1.75.
Jaiswal’s report, dated Sept 28, comes after the group beat a total of nine bidders and was awarded the contract to continue providing medical services at Connect@Changi as a transitional care facility or Covid-19 treatment facility at Hall 9 and as a Covid-19 treatment facility at Hall 10.
The contract period begins on Sept 20 and ends on Feb 9, 2025. Raffles Medical had the lowest bid value of $151,392.
According to Jaiswal, the bid was broken down into one-off costs related to setting up the facilities, a monthly retainer fee for maintaining the facilities in standby mode and providing medical treatment services on a per-bed per-day basis for a minimum occupant quantity (MOQ), and per patient per day for a patient load above the MOQ. Each bidder had placed a bid for different levels of MOQ.
“We are upbeat on this win, as it will continue to underpin strong revenue from Raffles Medical’s Singapore unit while its China hospital ramps up operations and heads towards a breakeven point (in two to three years). Raffles Medical’s one-year forward P/E and FY202 implied P/E based on our target price remains well below the regional peer average,” Jaiswal points out.
Assuming that the MOQ levels are utilised at both facilities, the win may bring Raffles Medical a total revenue of $23.3 million over the contract period, he adds.
If the MOQ level of the transitional care facility is utilised only, the revenue for the same period would be at $11.3 million, the analyst continues.
“Our current forecasts already factor in the growth in its Singapore revenue in FY2024 to FY2025, backed by a higher number of medical tourists and the continuation of the current [facility] services,” he writes.
Overseas, Jaiswal sees Raffles Medical’s China operations as a long-term growth driver. The group is managing hospitals in Shanghai, Chongqing and Beijing, and recently opened a centre for assisted reproductive therapy and in-vitro fertilisation in Hainan.
“Our earnings projections remain unchanged. Raffles Medical has a $1 billion multicurrency medium-term notes programme on top of a $208 million net cash position — which will allow it to make earnings-accretive acquisitions if a chance arises in Indonesia, Vietnam, China or Thailand,” says Jaiswal.
In a separate development, Raffles Medical on Oct 2 announced it is taking a majority stake in a hospital in Vietnam that is valued at US$45.6 million ($62.7 million) and will operate it.
“While details of the hospital performance are yet to be known, we believe it is a positive move for Raffles Medical to further expand its existing markets with a smaller acquisition now that both the China hospitals are now fully open,” says DBS Group Research on Oct 3.
“We believe this strategic partnership may potentially lead to further business exchanges or partnerships in the future,” says DBS, referring to the seller, Orion Health, a healthcare technology company from New Zealand and Australia.
For now, DBS rates the stock “hold” along with a $1.48 price target on expectations that Raffles Medical will see a normalisation of its earnings after a “stellar” preceding FY2022. “We remain positive in the long-term and continue to keep an eye on re-rating opportunities,” adds DBS. — Felicia Tan
Delfi
Price target:
RHB Bank Singapore ‘buy’ $1.65
Strong Indonesia consumer play
RHB Bank Singapore analyst Alfie Yeo has initiated a “buy” call on Delfi with a target price of $1.65.
“We like Delfi, as it is Indonesia’s leading chocolate confectionery player with a market share of 45%–50%,” says Yeo in his report dated Oct 3.
The counter is also expected to benefit from the rise in Indonesia’s middle class and disposable income.
“The country has strong demographics and economic growth potential, with a population of 280 million people (urban consumers now comprise 57% of the total population — this is set to hit 71% by 2030), and 2023 and 2024 GDP growth of 5.1% and 4.5% based on our economics team’s estimates,” notes Yeo.
Indonesia, which accounts for 66% of Delfi’s revenue, is also expected to see more demand for chocolate confectionery. According to Statista, the country’s chocolate confectionery revenue stood at US$22.3 ($30.7 million) in 2023 and is set to expand at a compound annual growth rate of 7.4% from 2023 to 2028, largely due to higher volume sales and per capita consumption.
Delfi’s strategy to upsell its products via “premiumisation” and its healthy snacking segments, exposure to regional markets, as well as its ability to generate cash flow are also reasons behind Yeo’s positive take. Furthermore, the analyst likes Delfi’s “attractive” dividend yield of 5% and compelling valuations.
Delfi may be a potential takeover target due to its market leadership and full market coverage in Indonesia, Yeo adds, noting that the factor is a long-term catalyst for the stock. For now, the analyst is forecasting a FY2022 to FY2025 earnings CAGR of 13%.
“The stock trades at a compelling 9.7x FY2024 P/E, which is close to –1 standard deviation (s.d.) from the mean and peer average of 16x. Our target price is pegged to 13x FY2024 P/E,” says Yeo. — Felicia Tan
City Developments
Price target:
CGS-CIMB Research ‘add’ $8.97
Another acquisition in Japan
CGS CIMB Research analyst Lock Mun Yee has kept her “add” call and $8.97 target price on City Developments (CDL) following its largest private rental sector (PRS) transaction in Japan to date.
On Sept 28, the company announced it was acquiring a portfolio of 25 residential assets across the 23 wards in Tokyo for JPY35 billion ($321.9 million).
The portfolio just acquired has 832 residential apartments and four retail units. The assets have an average age of less than two years and are all located within a 10-minute walk from a train station. The portfolio now has a 97% committed occupancy and offers stable rental income. The sellers are affiliates of BGO, a leading global real estate investment manager.
CDL had earlier bought something similar in Osaka. Upon the acquisition, CDL’s Japan assets under management will be lifted to $644 million.
“With an enlarged portfolio, CIT is poised to benefit from a recovery of Japan’s economy and net migration into Tokyo,” writes Lock in her Sept 28 note.
According to property consultant Savills’ September Japan residential market updates, average residential occupancy rates in the 23 wards of Tokyo is at 96.6% as at 2Q2023, the highest level since the pandemic started and almost at the highs seen in pre-pandemic times.
The way Lock sees it, the latest acquisition is in tandem with CDL’s growth strategy and the Japan market has been under investors’ radar given the still-positive yield spread over funding cost.
The purchase is estimated to lift CDL’s AUM in the “living” sector to $1.7 billion and its overall AUM to $3.4 billion.
CDL did not disclose the transaction yield. However, based on Savills’ report, Lock figures that average residential yields could range from 2.5% to as high as 3.7%.
“Based on this range, we believe this acquisition will likely be earnings accretive for CDL,” notes Lock.
For now, she is keeping her FY2023 to FY2025 earnings forecast for CDL unchanged. Her target price of $8.97 is pegged at a 45% discount to revalued NAV.
Lock says potential re-rating catalysts for this stock are faster-than-expected AUM growth and a quicker uptick towards its 8% ROE target.
On the other hand, downside risks include demand for its commercial space dragged by a slow macro outlook and demand for its residential projects affected by more property cooling measures. — The Edge Singapore
UOL Group
Price target:
Citi Research ‘buy’ $9.08
Redevelopment of Marina Square ‘decent RNAV accretion’
Citi Research analyst Brandon Lee has kept his “buy” call and target price of $9.08 on UOL Group after Singapore Land Group U06 , UOL’s 50.4%-owned subsidiary, announced the partial redevelopment of Marina Square on Sept 18. Lee’s target price is set at a 30% discount to its RNAV of $12.97.
Singapore Land Group says it is working on more details to obtain the necessary approvals from the relevant authorities. However, the timeline has not been determined, notes Lee in his Oct 1 report.
“We (and likely investors also given consistent questions regarding this topic) are not surprised by given UOL’s and Singapore Land’s proven track record of asset redevelopment in Singapore, like Clifford Centre, Odeon Towers/KH Kea Building and Faber House,” says Lee.
He adds that the timing of the announcement came as a “pleasant surprise” given that UOL had previously said that any potential redevelopment would be a “long-drawn-out process”.
However, the latest announcement seems to be in line with the group’s recent move to review its portfolio with a view to unlocking value.
“Combined with an increased openness to bring in joint venture (JV) partner(s) to tap on their expertise/network, we believe its discount to revalued net asset value (RNAV) could narrow from here,” says Lee, adding that the redevelopment could yield a “decent” RNAV accretion of 4% to 6%.
“Assuming plot ratio expansion of 25% (from existing 3.4–4.3x, in line with 4.1–4.6x of nearby projects — Suntec City, South Beach, Guoco Midtown and Bugis Junction) for Marina Square shopping mall site and three potential mixed-use redevelopment schemes (with mix of office, residential, retail and/or serviced residences components), we estimate [a] gross development value (GDV) of between $3.8 billion and $4.3 billion, profit before tax (PBT) margin of 21%–31% and RNAV accretion of 4%–6%,” he adds.
“We believe cost savings can be achieved by bringing in JV partners (like CapitaLand Development for its recent mixed-use site at Tampines Avenue 11) and/or doing without land tenure top-up for the non-residential components,” he continues.
Marina Square is a 99-year leasehold mixed-use development along Raffles Boulevard with 56 years left on the lease. It has a total gross floor area of 3.4 million sq ft comprising the 37-year-old Marina Square shopping mall as well as three upscale hotels — the 790-room Pan Pacific Singapore, the 538-room Parkroyal Collection Marina Bay and the 510-room Mandarin Oriental. All components of the development were first completed between 1986 and 1987.
UOL owns a 22.7% stake in Marina Centre Holdings (MCH) while Singapore Land Group owns 77.3% in MCH. MCH, in turn, owns 100% stakes in the mall and Pan Pacific Singapore, as well as a 75% stake in Parkroyal Collection Marina Bay. MCH also owns a 50% stake in Mandarin Oriental. UOL owns the remaining 25% stake in Parkroyal Collection Marina Bay.
As such, UOL owns respective effective stakes of 62% in the mall, 62% in Pan Pacific Singapore, 71% in Parkroyal Collection Marina Bay and 31% in Mandarin Oriental.
“UOL and City Developments (CDL) are the most direct proxies to [the] Singapore property sector, in view of their respective 84% and 51% exposure,” he writes. “Our target price for CDL is currently pegged at a marginally lower 25% discount to its RNAV (due to relatively higher geographical diversification), similar to where it traded during the past few global downcycles.”
In addition, Lee expects UOL to benefit from a “decent” take-up for two of its residential launches in 2023 as well as expectations of more redevelopments of its aged commercial properties.
In his view, the key downsides are an expansion of cap rates as interest rates rise, a sharp economic slowdown, a fall in tourist arrivals, and a prolonged period of existing cooling measures.
As at its last-closed share price of $6.42 on Sept 29, UOL, which is down by 4% ytd, has outperformed Singapore developers, whose shares are down by 16% over the same period.
At present, UOL’s valuations remain cheap as it is trading at a 51% discount to its RNAV and 0.52x P/B, says Lee. — Felicia Tan
Singapore Telecommunications
Price targets:
Citi Research ‘buy’ $2.85
DBS Group Research ‘buy’ $3.18
Getting rid of loss-making Trustwave
DBS Group Research has kept its “buy” call and $3.18 target price on Singapore Telecommunications (Singtel) following news that the telco has divested its loss-making cybersecurity business Trustwave.
In its Oct 2 announcement, Singtel says it has sold its 98% interest in Trustwave to MC2 Titanium for US$205 million or $280 million. The sale of this loss-making business has been on the cards from as far back as 2021 as part of a strategic review the telco made.
Singtel first bought this business back in 2015 for $770 million but failed to gain much headway. In 2HFY2021, the telco had already booked an impairment of $336 million.
According to Singtel, the divestment is expected to be completed by 4QFY2023 ending March 2024 and will not have a material impact on FY2024.
In its Oct 2 note, DBS points out that ahead of the sale, Singtel had already absorbed the Asia Pacific business of Trustwave into its operations.
“So the impairment loss could be less than $100 million in our estimates which is an exceptional loss and does not hurt dividends.
“More importantly, this sale will benefit Singtel’s annual profit by between $120 million and 130 million or 4%–5% annually,” adds DBS, which calls this divestment “quite positive”.
Citi Research analysts Arthur Pinado and Luis Hilado have also kept their “buy” call on Singtel, noting that the divestment will be “beneficial” for Singtel as Trustwave had been loss-making since its acquisition.
“As such, removing the company from its books would serve to improve the group’s profit outlook by eliminating its earnings drag,” the analysts write. “With this transaction, Singtel would have completed its strategic review and exit from loss-making investments in cybersecurity and digital advertising where it had limited competitive advantages.”
Following the news, Pinado and Hilado have raised their target price to $2.85 from $2.78. They have also upped their NPAT estimates for FY2024 to FY2025 by 2% to 5%.
“FY2024 recurring earnings enhancement is relatively limited given its pro-rated benefit to account for the timing of the deal closure. The full benefits of loss removal however should be visible by FY2025,” say the Citi analysts.
“While we do see room for potential impairment bookings in FY2024, this should have no impact on dividends, with likely booking as an extraordinary item,” they add. — Felicia Tan
ESR-LOGOS REIT
Price target:
DBS Group Research ‘buy’ 38 cents
Latest divestment right step ahead
DBS Group Research has kept its “buy” call and 38 cents target price on ESR-LOGOS REIT J91U , following news of its divestment of one of its properties. On Oct 2, the REIT announced it had sold 2 Tuas South Avenue 2 for $53 million. The property has a NLA of 20,192 sqm and is master-leased to LHN Group.
“The divestment at a 35.2% premium to valuation is also a welcome sign, especially as interest rates remain high and we understand that there are more industrial assets put on the market for sale,” says DBS in its Oct 2 note.
DBS estimates the exit yield at a very attractive at around 4%, especially as interest rates remain high and as there is competition from more assets put up for sale on the market.
“The divestment will also help to reduce ESR-LOGOS REIT’s lease expiry exposure to single-tenanted buildings, and allow them to continue benefiting from the strong positive rental reversions seen at its high-spec industrial and logistics spaces,” adds DBS.
If proceeds are used to repay loans, gearing could improve by around 0.8% to 32.8% assuming divestment proceeds from earlier announced divestments are also used to repay loans. The impact on DPU will be minimal as all-in borrowing costs are also close to 4%.
“Overall, we see this as a positive for ESR-LOGOS REIT as they continue to carry out their portfolio rejuvenation and repositioning,” says DBS, adding that including this divestment, ESR-LOGOS REIT would have completed around $400 million in divestments this year, on target of their earlier announced plans to divest up to $450 million.
With gearing brought down to 33%, the REIT will have ample headroom to embark on their planned AEIs and redevelopments, as well as to embark on more accretive acquisitions. And with less than $200 million due for refinancing in FY2024, ESR-LOGOS REIT will only have about 10% of all its loans due for refinancing next year, says DBS.
“Following the unexpected trading volumes and share price weakness last week, this divestment reaffirms the REIT’s ability to continue on its portfolio rejuvenation and repositioning exercise,” says DBS, which is keeping its “buy” call and 38 cents target prices, and estimating that at current levels, the REIT is generating a forward yield of around 9%. — The Edge Singapore
