Brokers' Digest: Prime US REIT, Hongkong Land, Yangzijiang Shipbuilding, SIA, CICT, ST Engineering, OUE REIT, Wilmar

A positive outcome is to be expected by the end of August, says the analyst in his July 16 note.

This, along with the REIT’s recent asset divestment and likelihood of interest rate cuts, puts it on a recovery path following the challenging market conditions of the last three years, in the analyst’s view. 

With Prime US REIT currently trading at 0.25 times FY2024 P/BV, Natarajan believes the REIT’s recent share price recovery has “further legs.” As of Natarajan’s report, the REIT was trading at 14 US cents per unit.

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The progress of the REIT’s final legal documentation stages of its refinancing is underway, with three of four lenders in the latter syndicated loan agreeing to close. The last lender has requested additional time to finalise internal documentation.

In facilitating this request, all four have agreed to amend the maturity date of the current facility to Aug 19 from July previously.

The analyst notes that the REIT’s loan refinancing has been a key share price overhang amid broad market concerns over bank lenders retreating from US office exposure. 

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“While we expect headline interest costs for refinanced loans to be much higher at 7.5%-8.5% on margin spread requirement increases for US office assets, Prime US REIT has in place interest rate swap hedges for US$330 million that extend until July 2026,” writes Natarajan.

In the analyst’s view, this will help mitigate the overall costs of newly refinanced loans to around 6%, assuming overall financing costs for FY2024 are 5%. An increase from 4% in FY2023, he believes overall financing costs will subsequently increase to around 5.5% for FY2025 - FY2026.

Additionally, Natarajan notes that the REIT’s divestment to Miles Capital was completed as of last week.

The asset was sold for US$82 million, a 3% discount to its valuation of US$84.8 million as at December 2023.

The move will lower pro-forma gearing to 45.8% from 48.4%.

“With increased market odds of two US federal funds rate cuts by end-2024, we believe further cap rate expansions (if any) are likely to be small and will depend on sub-markets,” adds the analyst.

As such, the REIT’s overall asset value is set to bottom out by end-FY2024 followed by a small recovery in FY2025, as per the analyst’s expectations.

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Natarajan believes the latest divestment, coupled with the likely retention of distributable income, should help bring gearing to a comfortable level below 45% by the end of the year.

He adds that the REIT is also experiencing active leading interest across various key assets, alongside the potential large lease signing at Park Tower, which could subsequently boost occupancy.

Meanwhile, ongoing asset enhancements at One Washingtonian Center, with an estimated capital expenditure of US$6 million, could significantly boost the REIT’s leasing prospects, given its superior location surrounded by amenities.

Natarajan’s unchanged target price of 23 US cents is pegged at 0.4 times FY2024 book value.

For FY2024, he expects Prime US REIT to distribute 10% of its income, similar to 2HFY2023. — Ashley Lo

Hongkong Land Holdings
Price target:
CGS International ‘hold’ US$3.30

Challenging near-term outlook

CGS International analysts Raymond Cheng, Will Chu and Steven Mak have kept their “hold” call on Hongkong Land while lowering their target price to US$3.30 ($4.02) from US$3.60 previously, following a challenging near-term outlook.

In their July 17 note, the analysts estimate a higher impairment provision for the group’s China development properties (DP) business in FY2024, resulting from softer average selling prices for property sales.

Currently, Hongkong Land expects impairment provisions of up to US$0.3 billion in 1HFY2024 for its China DP, which would “wipe out” almost all of its underlying net profit in the same period.

“With softer average selling price for DP sales compared with FY2023, we estimate its total provisions for China DP to be US$0.35 billion in FY2024 (US$0.9bn in FY2023),” write the analysts. 

That said, they also note that residential sales of the group’s West Bund project appear solid, with the first batch of 80 units sold out three hours after their launch.

In the analysts’ view, this could drive Hong Kong Land’s FY2024 DP contracted sales in China, which have since dropped by 36% year over year in 1QFY2024. 

As of last month, the group announced a three-year strategic investment to upgrade the retail portion of Landmark, its flagship commercial complex in Hong Kong

The investment has a US$1 billion budget, which the group and its anchor luxury brand tenants will share at 40% and 60%, respectively.

The latter has committed to 220,000 sq ft of retail space post-upgrade and will remain in operation during upgrade works.

To the analysts, this project is set to have a trivial impact on the group’s net gearing, which stood at 17% as at end-2023, due to Hongkong Land’s ability to commit to the capital for the upgrade with its operating cash flow from investment properties in Hong Kong. 

Despite this, the team of analysts remains cautious about the group’s Hong Kong retail and office rental plans for 2H2024.

This follows Hong Kong’s weaker luxury retail sales, with the sales of valuable items falling by 10.6% y-o-y in 5M2024, according to Hong Kong government statistics

Overall Central office vacancy also remains high at 12% as at the end of May, according to real estate agency JLL, leading to negative rental reversion at the group’s office portfolio.

As such, the analysts estimate a 2% y-o-y decline in Hongkong Land’s rental income from its Hong Kong investment properties portfolio in FY2024.

Overall, the analysts have cut their FY2024–FY2026 earnings per share by 6%–54%. 

Their reduced target price is based on a 70% discount to net asset value (NAV) of US$10.90, accounting for a more cautious view of the group’s exposure to Hong Kong office rental China DP, which the analysts believe could put its profitability “under pressure”. — Ashley Lo

Yangzijiang Shipbuilding
Price targets:
CGS International ‘add’ $2.50
Citi Research ‘buy’ $2.45
DBS Group Research ‘buy’ $2.75

Analysts positive after new yard

Analysts are positive about Yangzijiang Shipbuilding after it announced a new yard investment of about 866,671 sqm of land in Jiangsu Province on July 15.

The shipbuilding group plans to invest about RMB3 billion ($550 million) in capital expenditures over the next two years to complete this project, with long-term prospects of liquid natural gas and other clean energy vessels in mind.

Analysts from CGS International, Citi Research and DBS Group Research have kept their “add” and “buy” calls. CGSI and Citi’s analysts have kept their target price at $2.50 and $2.45 respectively while DBS’s analysts have raised their target price to $2.75.

CGSI’s Lim Siew Khee and Meghana Kande say the new yard could deliver five to six vessels each year or US$850 million ($1.14 billion) to US$1 billion in orders. They estimate that the new yard will be about 60% the size of the group’s existing Jiangsu Yangzi Xinfu yard, which focuses on the construction of mid-to-large-sized vessels.

“Recall that Yangzijiang had invested RMB650 million for the remaining 20% equity stake in Xinfu yard in 2021, implying a total value of RMB3.25 billion for the entire Xinfu yard,” they say.

Xinfu yard delivered 12 containerships in 2023, which Lim and Kande estimate to be about US$1.3 billion worth of contracts, and it is also scheduled to deliver 12 vessels in 2025.

They use Xinfu as a benchmark and expect the new yard to deliver five to six vessels of similar size yearly.

“Assuming US$170 million per vessel (based on year-to-date average prices for 13,000 TEU newbuild liquified natural gas (LNG) dual-fuel containerships), we estimate the new yard could add about US$850 million–US$1 billion in new order wins yearly. This represents about 15-18% of our 2024 order win target of US$5.5 billion,” they add. TEU stands for twenty-foot equivalent units.

Lim and Kande’s target price is still based on a 35% premium to regional yards’ average 2024 P/BV of 1.53 times, on better margin outlook.

Likewise, Citi analyst Luis Hilado says that Yangzijiang’s net cash position of RMB11 billion by FY2025 makes the funding of the project appear highly feasible.

While the breakdown of cost between land facilities has yet to be disclosed, he assumes a 30:70 ratio, respectively, and a 10-year average asset life. If so, the additional depreciation charges could amount to RMB210 million annually or about 3% of his current FY2026 profit forecasts.

“Albeit an initial profit pressure point, management is likely looking ahead to the long-term project and revenue upside from demand for clean energy ships,” he says.

Hilado values the company at $2.45, based on a target multiple of 10 times, or 1 standard deviation (s.d.) above its 10-year mean prior to the spin-off of its financial arm, applied to his FY2024 earnings per share (EPS) forecasts.

“We believe our target multiple is fair considering Yangzijiang’s strong medium-term earnings visibility/momentum given its record order book amid the current shipping industry upcycle, and as it now offers investors pure-play shipbuilding exposure as one of the leading shipyards in China,” he adds.

Finally, DBS analysts add that this new land acquisition will “lift growth prospects ahead”. They say that the land’s proximity to its existing Xinfu yard will enable Yangzijiang to seamlessly integrate the new facilities, thereby enhancing both productivity and operational efficiency.

They estimate it could boost capacity by about 20% and enable the delivery of an additional six ultra-large or high-value-add vessels. It could also raise Yangzijiang’s annual revenue run-rate from US$3.5 billion to US$4 billion or US$4.5 billion, lifting its growth prospects beyond 2026.

The capex could be fully funded by internal resources, supported by the group’s strong net cash position of over RMB10 billion net cash as at end-2023, they add.

DBS analysts say that Yangzijiang’s share price has done “spectacularly well” after its 1QFY2024 business update at end-May, surpassing their target price. “The share price pulled back from the high of almost $2.50 was due to normalisation following the impact of the Red Sea attack, in our view. We believe there are more legs to the rally in view of the robust order flow amid a multi-year shipbuilding upcycle, translating to double-digit earnings growth for the next few years boosted by potential capacity expansion,” they add.

As such, they raise their target price to $2.75, on a higher valuation multiple of 2.3 times P/B, in line with its historical 20% premium to the industry average, justifiable by Yangzijiang’s stronger return on equity and yield as well as financials. This translates to 12 times FY2024 P/E, which is undemanding, they add. — Nicole Lim

Singapore Airlines
Price targets:
CGS International ‘hold’ $6.78
Maybank Securities ‘hold’ $7.10

Robust 1QFY2025 but net profits for
FY2025–2027 to decline

In his July 12 note, Ong forecasts the carrier’s FY2025 to FY2027 net profits to progressively decline.

“The demand for air travel is likely to remain firm in 1QFY2025, buttressed by a strong pick-up in forward bookings to North Asia and Southeast Asia. But passenger yields may moderate further as other airlines increase capacity,” he adds.

For its low-cost subsidiary Scoot, operating margins may be relatively more resilient versus full-service carriers due to cost advantages, Ong notes.

For cargo, demand and load factor strengthened towards the end of FY2024, given healthy e-commerce flows and a shift to air freight by some shippers due to security concerns in the Red Sea region.

While cargo yield has held above pre-pandemic levels so far, it remains under downward pressure as industry bellyhold capacity increases with the resumption of more passenger flights.

On March 5, the proposed merger of Air India and Vistara. The deal is now pending foreign direct investment and other regulatory approvals. Upon completion, SIA will have a 25.1% stake in an enlarged entity with a significant presence in all key Indian airline market segments.

Maybank’s FY2025–FY2027 earnings per share (EPS) are 3%–23% higher than consensus as the analyst believes the ongoing supply chain issues will impede SIA’s competitors from quickly ramping up their flights in the next few years.

Meanwhile, CGSI analyst Raymond Yap has kept his target price unchanged at $6.78 ahead of SIA’s results for the 1QFY2025 ended June.

In his report dated July 16, Yap notes that SIA’s operating performance for both pax and cargo “looks good”. As such, he forecasts SIA to report an operating profit of about $520 million, representing a “small” dip of 7% q-o-q, as he pencils in higher unit costs q-o-q. This may be significantly offset by his expectations for higher unit revenues at both the pax and cargo businesses, he adds.

“We forecast 1QFY2025 patmi of about $490 million (–13% q-o-q), due to a possible normalisation of the effective tax rate from 4QFY2024’s low levels, when SIA probably utilised some of Scoot’s carry-forward losses,” he notes.

The analyst notes that passenger load performance for SIA was underpinned by strong demand for the airline and loads. The combined SIA and Scoot passenger loads saw 0.4% q-o-q higher revenue passenger kilometres (RPK) demand and 0.4% q-o-q higher passenger load factor (PLF) in 1QFY2025, likely due to the June school holidays.

Singapore Airlines’ operating performance improved q-o-q, with RPK up 2.3% q-o-q and PLF up 1.4% q-o-q to 86.4%, which Yap suspects likely helped keep its pax yields steady q-o-q at 11.9 cents.

Scoot saw a weaker result q-o-q with RPK down 5.5% and its PLF down 2.7% to 89% due to the flight disruptions in May and June caused by Pratt & Whitney engine issues faced by its A320neo fleet, which may have caused negative publicity. “We expect Scoot’s pax yields to have fallen 5.7% q-o-q to 6.6 cents,” he adds.

“Still, Scoot’s operations are much smaller than SQ’s, and if it kept its 1QFY2025 yields steady q-o-q, the pax business might still be higher q-o-q,” Yap says.

“We pencilled in a modest 7% q-o-q increase in cargo yields for SIA, given that SIA has a mixed portfolio of various cargo routes,” he says. — Khairani Afifi Noordin and Nicole Lim

CapitaLand Integrated Commercial Trust
Price target:
UOB KayHian ‘buy’ $2.29

Higher target price from continued enhancement of retail malls

In his July 16 report, the analyst notes CICT’s latest commencement of asset enhancement initiatives (AEI) at Level 1 of IMM Building.

The retail space, measuring 126,600 sq ft, is set to strengthen the mall’s outlet offerings, with its newest additions of a Fila Kids Outlet and Anta Kids Outlet in 1Q2024.

Additionally, the repositioning of IMM aims to right-size the supermarket’s footprint, refresh common areas and upgrade mall amenities.

“Committed occupancy for Phase 1 and 2 of the AEI, including leases under advanced negotiations, is high at 75%,” says Koh.

The initiative will be carried out over four phases and is set for completion in 2025.

The completion of the AEI will mark IMM as the largest outlet mall in Singapore with 110 outlet stores.

Koh adds that management targets to achieve a return on investment (ROI) of 8% for the capital expenditure valued at $48 million.

As of now, the office market remains “resilient” with vacancy for Grade-A core CBD tightening by 0.2 percentage points (ppt) y-o-y to 3.6% in 1Q2024.

In 2Q2024, IOI Central Boulevard, which came into the market in 1Q2024, received its temporary occupation permit and is currently 50% pre-committed.

The analyst also notes that shadow spaces have been significantly reduced from 0.7 million sq ft to 0.2 million sq ft, which eases the REIT’s competition with office landlords.

“CICT’s Grade A office properties are well located and continue to command premium rents,” writes Koh.

The analyst expects the REIT’s occupancy levels to remain stable at 95%, with the exception of minor fluctuations resulting from transitory vacancy.

Management expects positive rental reversion to be sustainable at high single-digits in 2H2024, which currently stands at 14.1% as of 1Q2024.

Following the higher average cost of debt by 0.1 ppt q-o-q to 3.5% in 1Q2024, Koh adds that the cost of debt is likely to peak at 3% in 4Q2024, according to management’s forecasts.

That said, 76% of the REIT’s borrowings are on fixed interest rates.

He adds: “We expect the positive impact of lower interest rates to be offset by the negative impact of refinancing, which will lead to a stable cost of debt in 2025.”

Aggregate leverage for the REIT remains stable at 40% as of March.

Overall, Koh has maintained his existing DPU estimates, although he has lowered his cost of equity estimate from 7.0% to 6.75% due to CICT’s ability to raise debt financing at a low cost. — Ashley Lo

Singapore Technologies Engineering
Price target:
UOB Kay Hian ‘buy’ $4.95

Staying invested

Despite ST Engineering’s recent share price strength, Chen recommends investors stay invested in the company because of its steady growth outlook, driven by upbeat performances across its three business segments.

Chen notes that in late 2021, ST Engineering set a 2026 revenue target of $11 billion. He believes the company can meet and even exceed this target in 2024, reaching $11.25 billion.

“The development of the digital business is also ahead of schedule, with digital business revenue on track to beat the 2026 target of $500 million this year. Smart city revenue has enough time to meet the $3.5 billion target by 2026.”

In his outlook, Chen forecasts ST Engineering’s revenue to grow by a three-year CAGR of 6.4% from 2024 to 2026, underpinned by its strong order book.

Among the three segments, commercial aerospace is expected to see the strongest growth at 19%, 5%, and 5% y-o-y in 2024, 2025, and 2026, respectively. This growth is backed by maintenance, repair and operations (MRO) capacity expansion, beating the global MRO industry’s average growth rate.

Revenue in its defence and public security segment is expected to grow by 8%, 3%, and 3% year-on-year in 2024, 2025, and 2026 respectively. Meanwhile, its urban solutions and satcom revenue is expected to grow by 3% y-o-y from 2024 to 2026. However, the analyst cautions that actual revenue recognition will be affected by the timing of project deliveries.

UOBKH forecasts ST Engineering’s core net profit to grow by a three-year CAGR of 10.8% from 2024 to 2026, faster than the revenue CAGR. This growth will be driven by improving blended operating margins thanks to the larger revenue scale and favourable operating leverage.

ST Engineering trades at 19.5 times its FY2025 P/E, 0.7 standard deviations (s.d.) below its historical average one-year forward P/E of 20.7 times. UOBKH’s target implies a 22 times FY2025 P/E, 0.7 s.d. above the historical mean. Chen adds that the target reflects ST Engineering’s upbeat growth outlook. — Khairani Afifi Noordin

OUE REIT
Price target:
Maybank Securities ‘buy’ 30 cents

Too undervalued to ignore

The REIT is one of the largest diversified Singapore REITs (S-REITs), with total assets under management (AUM) of $6.3 billion in FY2023 ended Dec 31, 2023. The REIT currently owns hotels and offices, a mall in Singapore, and another mall in Shanghai, comprising 1,655 hotel keys and 2.2 million sq ft of prime office and retail space.

In Guha’s view, OUE REIT is “too cheap to ignore”. At its last-traded unit price of 29 cents, OUE REIT is the “most inexpensive Singapore-centric commercial S-REIT,” says the analyst in his July 15 report.

Currently, the REIT trades at a yield of 7.5%, close to 1 standard deviation (s.d.) from its historical mean of 6.9%. On a price-to-book (P/B) metric, OUE REIT offers a 57% discount versus a historical discount of 35%.

Compared to its S-REIT peers, including commercial REITs, OUE REIT offers the highest yield, the steepest discount to book, and the highest implied cap rate of 6.2%, notes Guha. The peer averages for these metrics are a yield of 6.7%, a discount to book of 30%, and an implied cap rate of 4.6%.

According to Guha, the REIT’s Singapore-focused portfolio and central business district (CBD) Grade-A offices, master lease structure and blue-chip tenants offer resilience. At the same time, its hotels should see higher revenue from continued growth in revenue per available room (RevPAR).

Guha adds that occupancy for its Singapore CBD offices remains high despite the slowdown in spot rent growth, which should further provide stability.

Other positive factors in Guha’s assessment include the group’s increased proportion of unsecured borrowings, lowered financing spreads, and the REIT’s investment-grade credit rating of BBB– by S&P last year. OUE REIT also has sustainable financing, which makes up 90% of its total debt.

For FY2024, FY2025, and FY2026, the analyst has forecasted a distribution per unit (DPU) of 2 cents, 2.22 cents, and 2.3 cents, respectively. This estimate represents a compound annual growth rate (CAGR) of 2.7% from FY2023 to FY2026. — Felicia Tan

Wilmar International
Price target:
CGS International ‘add’ $3.94

Flat 2QFY2024 earnings expected

“Wheat, a key ingredient for Wilmar’s branded rice and noodles under its food products segment, saw prices increase 5.4% q-o-q in 2Q2024,” notes the analyst in his July 12 note.

Despite this, Tay believes that the continued consumption recovery in China and India will result in better sales volumes, which could offset cost pressures.

For Wilmar’s feed and industrial products, while soybean crush margins in China turned negative since the middle of June, the average margin of RMB139.8 ($25.83) per metric ton in 2Q2024 was an improvement from negative RMB287.4 per metric ton in 1Q2024, writes the analyst.

“Furthermore, the mend in pork prices could support better demand for soybean meal, a key ingredient for animal feed, going into 2HFY2024,” he adds.

In the case of Wilmar’s sugar milling operations, Tay notes that crude palm oil (CPO) prices have remained relatively stable while sugar prices have eased, decreasing 13.3% q-o-q, reflecting some weakness in the segment for 2QFY2024.

Wilmar’s share price will likely be weighed down soon due to the recent spate of negative news and the lack of catalysts. On July 10, several media outlets alleged that several major Chinese companies had compromised food safety standards by transporting cooking oil with fuel tankers without prior washing and disinfecting. Following the news, Wilmar’s 89.99%-owned Chinese subsidiary, Yihai Kerry Arawana, saw its share price dip by as much as 8.2% on July 10. Yihai Kerry Arawana owns Arawana, the largest cooking oil brand by sales volume in China.

Yihai Kerry Arawana has since asserted that it was not involved in the incident. The incident comes after an alleged fraud by one of Yihai Kerry Arawana’s China units in January. Wilmar also faced concerns over strikes in its Australian sugar mills in June.

Tay has kept his target price unchanged at $3.94, pegged to 11 times FY2025 P/E. The analyst sees a potential re-rating in Wilmar’s share price as he sees a better outlook in 2HFY2024.

“Wilmar is currently trading at 8.7 times FY2025 P/E after a 12.2% share price decline year-to-date, representing a 33% discount to peers. Its dividend payout of 17 cents for FY2024, based on our estimates, translates into an attractive yield of 5.5%,” says Tay.

Re-rating catalysts identified by Tay include inventory restocking in China to support sales of its food products, potential interest rate cuts in 2HFY2024 to translate into lower finance costs, and a spike in crude palm oil prices to support merchandising profitability.

However, adverse weather conditions affecting the harvest across its palm and sugar plantations in 2HFY2024 and down-trading of consumption in China and India resulting in margin compression are downside risks. — Ashley Lo