Oversea-Chinese Banking Corp
Price target:
RHB Bank Singapore ‘neutral’ $13.40
Dividend surprise?
The Singapore research team at RHB Bank Singapore has kept its “neutral” call on Oversea-Chinese Banking Corporation (OCBC) ahead of the bank’s results for the 4QFY2023 and FY2023 ended Dec 31, 2023, on Feb 28.
To RHB, the bank’s results for the final quarter should come in as expected although its dividends may be a surprise. For FY2023, RHB expects the bank’s results to meet their estimates as well as that of the consensus.
“A peaking rates cycle will likely lead to income pressures and dampen share price performance of Singapore banks under coverage. However, decent dividend yield should provide downside support,” it writes.
On a q-o-q basis, RHB expects a slight easing in the bank’s 4QFY2023 bottom line on the back of lower non-interest income and catch-up on operating expenditure. However, OCBC’s earnings should still register y-o-y growth from a stronger net interest income (NII) and lower loan impairments.
For the quarter, RHB expects to see sustained loan growth with weakness in trade-related loans cushioned by stable mortgage and non-trade corporate lending.
Meanwhile, the bank has ample liquidity (with a loan-to-deposit ratio of 79.9% for the 3QFY2023), which has allowed it to run off some of the costlier fixed deposits to keep funding cost pressures manageable.
The final quarter of the year is a seasonally soft one for wealth management activities and OCBC’s 4QFY2023 results are no exception. RHB also expects the bank’s trade- and loan-related fees to reflect the continued softness in loan growth.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
Overall, non-interest income in the 4QFY2023 is unlikely to excite, unless insurance and non-customer flow trading income surprises positively.
While RHB has no changes to its earnings forecasts, it expects a final dividend per share (DPS) of 38 cents, which would bring OCBC’s DPS for FY2023 to 78 cents, above the 68 cents dividend for FY2022. FY2023’s estimated dividend represents a yield of 6% and a payout of 49.5%.
The team has lowered its target price to $13.40 from $13.70 to reflect its new 0% environmental, social and governance (ESG) premium and, or discount after a change in the country’s median ESG score. — Felicia Tan
Mapletree Industrial Trust
Price targets:
OCBC Investment Research ‘buy’ $2.69
Citi Research ‘buy’ $2.60
CGS-CIMB Research ‘add’ $2.61
Maybank Securities ‘hold’ $2.30
Strong rental reversion
Analysts at OCBC Investment Research, Citi Research, CGS-CIMB Research and Maybank Securities are keeping their “buy”, “add” and “hold” calls on Mapletree Industrial Trust ME8U (MINT) following the release of its 3QFY2024 results ended December 2023.
MINT achieved positive rental uplifts for its renewal leases for all reported business segments in Singapore in 3QFY2024, ranging between 4.1% and 10.5%. The average rental rate for its Singapore and North American portfolios rose 0.9% and 0.4% q-o-q respectively.
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However, MINT’s portfolio occupancy slipped 0.6 percentage points q-o-q to 92.6%, OCBC analysts highlight. Although its Osaka data centre remained fully occupied while its occupancy in Singapore rose to 93.8%, these were offset by a dip in its US portfolio by 2.8 percentage points q-o-q to 89.9%.
“The decline was likely due to the return of space by AT&T, as evidenced from the decline in proportion of its gross rental income contribution from 5.1% as at Sept 30, 2023, to 2.6% as at Dec 31, 2023,” the analysts add. OCBC has lifted its fair value estimate to $2.69 from $2.59 previously on higher net property income estimates.
The trust’s management indicated that it is in talks with a potential replacement tenant at one of its US data centres, CGS-CIMB’s Lock Mun Yee and Natalie Ong point out. However, they note that the impact of contributions would likely be felt from the latter part of FY2025.
Currently, no significant tenants in the US have signalled the intention to leave. However, Vanguard (in Pennsylvania) is MINT’s next major lease expiry by end 2024, Citi’s Brandon Lee points out. The trust has also seen a slowdown in enquiries in 3QFY2024 due to the festive season, although demand remains for small spaces.
While higher occupancy in hi-tech parks is encouraging, vacancy in US data centres, further non-renewals, and absence of divestment gains next year will negatively impact distributions, in Maybank’s view. Analyst Krishna Guha lowered his MINT estimates but raised his target price to $2.30 due to a lower discount rate. — Khairani Afifi Noordin
Keppel DC REIT
Price targets:
CGS-CIMB Research ‘hold’ $1.88
OCBC Investment Research ‘hold’ $1.81
Citi Research ‘buy’ $2.07
DBS Group Research ‘buy’ $2.20
Tenant default
CGS-CIMB Research analysts Natalie Ong and Lock Mun Yee have downgraded their call on Keppel DC REIT to “hold” from “add” previously as they see the “high likelihood” of the REIT’s tenant, Guangdong Bluesea Data Development defaulting on rent.
In their Jan 27 report, the analysts note that the REIT’s positive reversions were wiped out by margin compression and provisions for doubtful receivables accrued by Guangdong Bluesea.
“[The REIT’s] FY2023 [ended Dec 31, 2023] distribution per unit (DPU) of 9.383 cents (–8.1% y-o-y) missed [expectations], at 91.7% of our FY2023, largely due to higher finance cost ($17.5 million/+56% y-o-y) and the Bluesea provision, which accounted for 0.649 cents, or 6.3% of our FY2023 DPU,” the analysts write.
Ong and Lock expect to see the worst for Guangdong data centres (DCs) 1, 2 and 3. The REIT’s management shared that the tenant paid just RM0.5 million ($94,940.85) compared to its letter of demand (LOD) of RMB48.3 million.
As such, they think that the tenant would be unable to fulfil its rent obligations and Keppel DC REIT would eventually need to replace the tenant. “We have assumed no rent contribution from Bluesea for FY2024 and for Keppel DC REIT to take over Guangdong DCs 1 and 2 from FY2025 onwards and gradually lease out the asset,” write Ong and Lock.
“The management said that it is reserving its right to terminate the purchase of Guangdong DC 3 (as a fully fitted asset), which has exceeded the long stop date of Oct 31, 2023, and would consider divestment of Guangdong DC 3 (as a shell and core asset) as a potential option,” they add.
While the valuation for the REIT’s China assets was not impaired in FY2023, it could see the risk of devaluation if the master lease at Guangdong DCs 1 and 2 are terminated, in their view.
In addition to their downgrade, the analysts have slashed their target price estimate to $1.88 from $2.53 as they lower their DPU estimates for FY2024, FY2025 and FY2026 by 22.6%, 18% and 17.5% respectively.
The team at OCBC Investment Research has kept its “hold” call but with a lower fair value estimate — or target price — of $1.81 from $2.02 previously. While OCBC likes the REIT for its strong proxy to the growing demand for data centres and its relatively lower refinancing risks compared to its peers, it remains concerned over the credit profile of its master lessee at its Guangdong DCs.
“[The] following rental arrears have created uncertainties over Keppel DC REIT’s distributions outlook,” says the team in its Jan 26 report.
Keppel DC REIT’s 2HFY2023 and FY2023 results also fell short of the OIR team’s expectations due to the rental arrears. On operational metrics, the team believes that the outlook is uncertain despite “robust” headline metrics.
With “scant” details on working with the master lessee on a recovery roadmap and amid the current challenging macro and industry conditions in China, the team believes the prospects remain “dim” and thus expects more provisions ahead.
However, all is not lost. The team points out that there were positive developments on its litigation with one of its tenants DXC Technology Services Singapore (DXC), with the Singapore High Court issuing a judgment in favour of Keppel DC REIT in January. The dispute is scheduled for trial in February 2024, which is largely to determine the actual quantum to be paid to Keppel DC REIT by DXC.
Unlike his peers, Citi Research analyst Brandon Lee has kept his “buy” call unchanged, as he likes the REIT’s valuations. That said, he has cut his target price and DPU estimates as well, seeing that the REIT needs earnings mitigators in China.
“We believe it may be challenging for Keppel DC REIT to fill up China’s income gap (11% - 14% of DPU) in the near term, but three drivers (DXC settlement, acquisitions and SG occupancy improvement) could mitigate the fall,” Lee writes in his Jan 28 report.
The analyst has cut his FY2024 DPU estimates by 3% to 8.90 cents and his FY2025 DPU estimates by 7.9% to 9.31 cents on expectations of lower occupancies. Alongside a higher discount rate, Lee’s target price is lowered to $2.07 from $2.18 previously.
DBS Group Research analysts Dale Lai and Derek Tan are the most bullish of the lot with an unchanged “buy” call. While their target price is lowered to $2.20 from $2.45, it is still the highest among the target prices estimated by their peers.
While Keppel DC REIT’s FY2023 DPU missed their projections by 6% due to the rental default at the Guangdong DCs, Lai and Tan remain positive on the REIT’s outlook. Among the factors is the REIT’s priority towards a “collaborative but firm” approach in its discussions with the Guangdong tenant rather than opting for litigation.
Keppel DC REIT, which has a portfolio of quality data centres in Asia Pacific (APAC) and Europe, will continue to benefit from the structural tailwinds of the sector, note the analysts.
Accretive acquisitions made over the past year will drive earnings while the REIT’s asset enhancement initiatives (AEIs) will generate organic growth.
“For FY2023, the full-year contribution from acquisitions will support earnings growth, and the protracted completion of Guangdong DC 3 will lead to a higher income contribution from the asset,” write Lai and Tan.
Furthermore, the resumption of accretive acquisitions - which slowed down notably over the past year due to stubbornly low capitalisation rates and rising financing costs - will be the main catalyst. “With interest rate hikes seeming to have slowed and potentially stabilising, Keppel DC REIT could resume accretive acquisitions in the near future,” say the analysts. — Felicia Tan
Mapletree Logistics Trust
Price targets:
UOB Kay Hian ‘buy’ $1.98
DBS Group Research ‘buy’ $1.88
Citi Research ‘buy’ $1.85
Maybank Securities ‘hold’ $1.70
Near-term headwinds, easing occupancy
Analysts at UOB Kay Hian (UOBKH), DBS Group Research, Maybank Securities and Citi Research are mixed on Mapletree Logistics Trust M44U (MLT) following its results for 3QFY2024 ended December.
UOBKH analyst Jonathan Koh, who has maintained a “buy” on MLT with a higher target price of $1.98, says the 3QFY2024 results were a mixed bag. MLT suffered from a drag in China but was able to generate healthy rental reversions of 3.8% driven by Singapore, Australia and South Korea.
China’s overall occupancy levels remain the lowest across MLT’s markets at 93.1%. This is due to the still subdued operating conditions, especially in Tier-2 cities in China where the current oversupply situation remains a key overhang, state the DBS analysts, who are maintaining their “buy” call and target price of $1.88.
Citi’s Brandon Lee points out that China’s leasing environment will remain challenging, with negative reversions expected to persist over the next few quarters with a blended rate of low teens and a very murky bottom. Hence, MLT needs to see greater clarity before deciding on its optimal exposure in China over the long term, he adds.
MLT is focusing on rejuvenating its portfolio towards modern and high-spec logistics properties, Koh highlights. The trust management intends to expand in growth markets, such as Malaysia, Vietnam and India while Hong Kong and Japan remain attractive due to tight supply, especially at prime locations.
DBS remains positive given MLT’s diversified exposure, as the outlook for developed markets such as Singapore, Japan, Australia and Asia Pacific excluding China continues to be robust with the logistics markets remaining in a landlord’s market.
Citi’s Lee, who is calling a “buy” and $1.85 target price, concurs. He notes that at the existing valuations of 1.17 times P/B — which is the cheapest among the top three industrial S-REITs — and FY2024/FY2025 yield of 5.3%/5.4% respectively, the majority of the negatives have likely been priced in, with the management’s proactive portfolio rejuvenation strategy likely to result in upside risk to DPU.
Meanwhile, Maybank analyst Krishna Guha has downgraded MLT to “hold” from “buy”. “While logistics continues to be an attractive sector, sluggish recovery in China, competition from oncoming new supply and rising vacancy make us pause,” he explains. While he lowered his earnings estimates, he has indicated a slightly higher target price of $1.70 to factor in a lower discount rate. — Khairani Afifi Noordin
Singapore Telecommunications
Price target:
DBS Group Research ‘buy’ $3.39
A rally ‘finally’?
DBS Group Research’s Sachin Mittal expects Singtel to post annual earnings growth of 10% when it reports its results for the financial year ending March 31, as he keeps his “buy” call and $3.39 target price, citing, in his Jan 26 report, two reasons to expect a rally, “finally”.
First, the telco enjoys the benefits of geographical diversification. Currently, Singtel is the number one integrated player in Singapore, owns the number two mobile player in Australia, and holds significant stakes in its telecom associates in India, Indonesia, Philippines, and Thailand, contributing to over 67% of its operating profit in FY2023.
Mittal observes that Singtel’s holding company discount has expanded to a record 51% as its share price has not kept pace with its associates’ market value. Bharti Airtel’s share price, for one, gained around 50% in the past year. Singtel owns an effective stake of around 30% in the Indian telco which makes its stake worth $33 billion. In contrast, Singtel’s market cap is at around $40 billion.
“The holding company discount has expanded from less than 15% in FY2018 to 51% as the share does not reflect the rise in the market value of its associates, especially Bharti. This can be explained by Singtel’s return on investment capital (ROIC) falling below its weighted average cost of capital (WACC) since FY2020 due to a sharp decline in core operating profit excluding associates over the last five years,” he explains.
The analyst expects the holding company discount to narrow to 20%, with a recovery in Singtel’s core operating profit led by annual cost-savings of $200 million over FY2023 to FY2026 and growth in the businesses of its IT-serving arm, NCS, and its data centres.
Mittal adds that a divestment target of $6 billion at over 36 cents a share over FY2023 to FY2026 including associates “should uplift” ROIC and support a 90% payout ratio over the next three years.
On this he expands: “We project its ROIC to reach 7.2% in FY2024, exceeding a WACC of 7%. Singtel could also benefit from potential divestments and a higher payout ratio of 90% in 2H2024F versus a 77% payout ratio in 1HFY2024.”
At present, the analyst’s fair value for Singtel’s core businesses in Singapore and Australia is at 84 cents per share, at 5x FY2023 EV/Ebitda as he adjusts the net debt position.
After a 20% holding company discount, regional associates are worth $2.56 per share mainly due to a sharp rise in the market value of Bharti.
Key risks noted by Mittal include the Australian dollar’s further decline adversely impacting Singtel’s business in the country via Optus and any irrational competition. He writes: “Our base case assumes a gradual recovery in Optus’s operating profit.” — Douglas Toh
Riverstone Holdings
Price target:
UOB Kay Hian ‘buy’ 82 cents
Semiconductor cycle to help lift demand
UOB Kay Hian analysts Llelleythan Tan and John Cheong have upgraded their call on Riverstone Holdings AP4 to “buy” as the semiconductor industry recovery will benefit the cleanroom glove segment.
“As Riverstone’s customers are major manufacturers in the semiconductor and hard disk drive industries, the slowdown in the electronics and semiconductor sectors have led to softer cleanroom glove demand from 2022,” note Tan and Cheong in their Jan 26 report. However, the semiconductor sales market is expected to recover with a 20% growth rate in 2024, up from 11 in 2023.
As such, Riverstone’s management expects demand for cleanroom gloves to recover in 2024.
Cleanroom gloves contribute about 80% to Riverstone’s total earnings. The segment is also likely to grow, thanks to new clients from the preceding year.
“While management has shared that average selling prices (ASPs) will be lowered to pass on cost savings from raw materials, they have also announced successful client acquisitions from the pharmaceutical sector,” say the analysts.
“The impact of lower ASPs will likely be offset by higher volumes from Riverstone’s semiconductor customers and new clients, pointing to top-line growth for the cleanroom glove segment in 2024,” they add.
On Nov 3, 2023, Riverstone reported a net profit of RM59.3 million ($16.7 million) for the 3QFY2023 ended Sept 30, 2023, 26.5% higher q-o-q although it was still down by 6.6% y-o-y. Riverstone’s 9MFY2023 net profit fell by 43.9% y-o-y to RM152.9 million.
“While the glove industry faced a slowdown from pandemic-induced oversupply and less-than-optimal utilisation in 2023, we note that 3QFY2023 gross profit margin improved 6 percentage points q-o-q and 1.1 percentage points y-o-y,” write Tan and Cheong in their Jan 26 report.
“This significant expansion was driven by a stronger product mix, with more customised healthcare gloves delivered, and lower raw material costs during the period,” they add.
Riverstone also declared an interim dividend of 5 sen, bringing its total dividend for the 9MFY2023 to 10 sen, implying a payout ratio of 97%, which is a “strong vote of confidence”.
“Given that Riverstone has a strong balance sheet with a net cash balance of RM951 million as of 9MFY2023, which is equivalent to 18 cents per share (around 30% of market cap), a payout ratio above 100% is highly likely,” say the analysts.
Riverstone is also likely to benefit from higher-margin customised healthcare gloves. The company offers products beyond gloves, such as finger cots, cleanroom packaging bags and face masks. Its own “RS” brand of cleanroom gloves also has a “unique competitive advantage”.
Riverstone, which also sells healthcare gloves, is in the middle of closing its 10-year production lines to build newer lines for customised products. The new production lines are expected to be completed by 2Q2024. The move will allow the company to expand its gross margin substantially as customised gloves fetch a gross profit margin of around 30%, around six times that of generic gloves, say the analysts.
“Increased demand for customised healthcare gloves will drive higher margins for Riverstone,” they add.
For FY2023 to FY2025, the analysts estimate Riverstone’s revenue to be RM964 million, RM1.04 billion and RM1.11 billion, respectively, while patmi estimates are RM212 million, RM246.3 million and RM267.4 million, respectively. The forecasts were updated after accounting for lower cleanroom glove ASPs and sales volume estimates.
“ASPs for cleanroom gloves were around US$123.30 per 1,000 pieces, and we expect it to decline in 2023–2025 to US$91 per 1,000 pieces, US$90 per 1,000 pieces and US$90 per 1,000 pieces respectively,” they write.
Following the upgrade, the analysts have raised their target price estimate to 82 cents from 67 cents. The new target price is pegged to 17.3 times FY2024 P/E or 1 standard deviation (s.d.) above the five-year historical mean.
“While glove companies continue to face underutilisation, we believe that Riverstone may outperform its peers with its higher-margin customised glove offerings,” they write. — Felicia Tan
HRnetGroup
Price target:
RHB Bank Singapore ‘buy’ 91 cents
Economic recovery to lift business
RHB Bank Singapore is keeping its “buy” call on HRnetGroup with an unchanged target price of 91 cents as analyst Alfie Yeo expects the group to see growth led by economic recovery.
“We continue to be positive on HRnetGroup, ahead of anticipated economic recovery in Singapore and China,” says Yeo, adding that the research house’s economist has forecasted Singapore’s 2024 GDP growth to accelerate (1.5% growth in 2023, before accelerating to 3% in 2024) while maintaining strong GDP growth of 5% for China.
Apart from being a beneficiary of the economic recoveries in Singapore and China, Yeo likes the stock for its cash-generative ability, strong net cash balance sheet, attractive dividend yield of about 5%, undemanding valuation of around 11 times forward P/E (at –1 standard deviation (s.d.) of its historical mean forward P/E) and continued share buyback in support of EPS.
Meanwhile, the unemployment rate has remained stable in November 2023 from 3Q2023 at 2%. “We like the stock due for its compelling valuation vis-à-vis growth as a beneficiary of economic recovery this year,” says Yeo.
On the outlook, with the growing GDP driven by improving the external environment, Yeo expects more robust global demand to drive domestic industries’ recovery and, eventually, the demand for labour, which will lend support to his earnings outlook.
“Our two-year FY2023–FY2025 earnings growth CAGR remains at 5%, as we are positive on a hiring recovery from next year onwards — this is on the back of accelerating economic growth,” says Yeo. The group’s financial year ends on Dec 31.
Outside of Singapore, China seems also to be recovering economically, with RHB economists forecasting a 5% GDP growth for 2024. China’s 3Q2023 GDP has already surprised market estimates with a 4.9% y-o-y growth.
Furthermore, the country’s growth momentum has accelerated sequentially to 1.3% q-o-q (seasonally adjusted) from a 0.5% q-o-q (seasonally adjusted) growth in 2Q2023, supporting a recovery. “This should translate into higher job demand in 2024 as well. HRnetGroup’s North Asia segment contributed to 40% of 1HFY2023’s gross earnings, of which China is a key contributor,” says Yeo. — Samantha Chiew
Genting Singapore
Price target:
Citi Research ‘buy’ $1.20
Stronger gaming revenue seen
Ahead of Genting Singapore G13 ’s (GENS) full-year results on Feb 22, Citi Research analysts George Choi and Ryan Cheung are maintaining their “buy” call, as they see Resorts World Sentosa (RWS) as one of the biggest beneficiaries from Singapore’s reopening. Their target price remains unchanged at $1.20.
Choi and Cheung make their forecasts based on rival Marina Bay Sands’ (MBS) “decent” ebitda growth in 4QFY2024, which saw its net revenue increase by 5% q-o-q to US$1.06 billion ($1.42 billion), mainly driven by the strong growth in the gaming segment.
The analysts note that the VIP gross gaming revenue (GGR) grew 5% q-o-q, mainly driven by the higher VIP hold of 4.57% (vs. 3.85% in 3QFY2023) but partially offset by the 11% q-o-q decline in volumes. Mass volume exceeded the 4QFY2019 levels by about 53%, while slot volumes exceeded 4QFY2019’s by about 80%. Meanwhile, total mass GGR grew 3% q-o-q and exceeded the 4QFY2019 level by 34%.
MBS’s property ebitda improved 11% q-o-q to a quarterly record high of US$544 million ($729 million), and its luck-adjusted ebitda of US$473 million beat Citi’s forecast of US$432 million by 9%.
The analysts note that the luck-adjusted ebitda margin came in at 48.8%, higher than their forecast of 46%. Although hotel room rates fell about 5% q-o-q to US$647, it was about 44% higher than 4QFY2019, while occupancy fell about 2 percentage points to 94.4%. They note that MBS introduced about 1,250 redesigned rooms as of the end of 2023, including about 350 suites.
They add that management targets the additional 550 redesigned rooms at MBS to be in service by Chinese New Year 2025, while other enhancements to non-gaming amenities are to be completed in phases from 2024 to 2025.
With about 770 suites in total after the completion of the refurbishment programme, management expects MBS to achieve annualised ebitda of more than US$2 billion and then grow 10-20% over the next three or four years, they say.
For 4QFY2023, Choi and Cheung forecast RWS’s revenue to reach $697 million on a luck-adjusted basis, exceeding 4QFY2019 levels by 15%.
They forecast ebitda will exceed 4QFY2019 by 11% to reach $319 million and note that their conservative 4QFY2023 ebitda forecast represents about a 2% q-o-q decline as compared to a luck-adjusted 3QFY2023 ebitda.
Meanwhile, they add that a likely increase in dividends, from 3 cents per share in FY2022 to 4 cents per share in FY2023, is another reason for investors to buy this stock. Their target price remains unchanged at $1.20. — Nicole Lim
