Sembcorp Industries
Price targets:
CGS International ‘add’ $7.32
Citi Research ‘buy’ $6.88
DBS Group Research ‘buy’ $7.35
Core net profit beats expectations
Analysts are optimistic about Sembcorp Industries U96 , as the group recorded earnings of $540 million in 1HFY2024 ended June, 2% higher y-o-y.
Following the results, analysts at CGS International and DBS Group Research have kept their respective “add” and “buy” calls on the group, with higher target prices of $7.32 from $7.01 and $7.35 from $7.15.
Citi Research analyst Luis Hilado has similarly maintained his “buy” call but with an unchanged target price of $6.88.
Sembcorp’s core net profit of $532 million surpassed the expectations of CGSI analysts Lim Siew Khee and Meghana Kande at 57% of their FY2024 estimates. The group’s core net profit stood at 58% of Bloomberg’s consensus estimates. This is due to better-than-expected contribution from the gas segment and a drop in corporate costs due to lower interest expenses.
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“However, this was somewhat offset by weakness in renewable energy (RE) segment profit driven by increased curtailment of its China RE portfolio and lower average battery storage earnings in the UK,” write Lim and Kande in their Aug 6 report.
Sembcorp is also facing a higher curtailment of 200 basis points (bps) due to lower power demand, which management expects to persist in the near term, along with regular RE seasonality in 2HFY2024.
The analysts add: “New RE capacity of 2.3 gigawatts by end-FY2024 may cushion some of the curtailment risks, in our view.”
See also: With 300MW wind-solar project win in India, Sembcorp at 64% of 2028 renewable energy goal: CGSI
Meanwhile, the group’s 1HFY2024 net profit of $339 million for the gas and related services segment also beat Lim and Kande’s estimate of $314 million while the planned maintenance of its Singapore cogen plant was also completed slightly ahead of schedule at a bottom line impact of around $55 million, beating the analysts’ estimate of $60 million.
Sembcorp also unveiled its long-term strategy for the integrated urban solutions (IUS) business, which made up around 10% of its FY2022 net profit. Around 85% of the business will stem from land sales, which the analysts note to be “lumpy”.
DBS’s Ho Pei Hwa’s higher target price on the group comes after the analyst raised her FY2024/FY2025 net profit forecasts by 6%–11%, factoring in higher profitability for its gas and related service segment and partially offset by slower renewable earnings.
Ho writes: “While its gearing level is relatively high, Sembcorp has strong operating cash flow, good access to project financing for renewable projects, as well as the flexibility to recycle capital through the securitisation of assets/partnerships. These allow it to continue self-funding its five-year growth plan without the need for equity fundraising (EFR).”
Her projections see the renewable segment’s profit rising at a CAGR of 25% from FY2022 to FY2028, driving a 7.5% group profit CAGR from FY2024 to FY2028.
She adds: “Renewable and urban solutions could contribute 55% to 60% to group profit.”
The analyst notes that Sembcorp’s growing renewable energy portfolio with accretive acquisitions remains its key share price driver while continuous earnings delivery from the portfolio is also critical to strengthening investor confidence.
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“Efficient capital recycling to free up cash would also cheer the market,” writes Ho.
Lastly, Citi’s Hilado derives his target price using a sum-of-the-parts valuation methodology based on Semcorp’s different operating segments.
He writes: “The energy business (conventional and renewables) is valued at 9 times FY2025 earnings before interest, depreciation and amortisation (ebitda), roughly in-line with peers to reflect solid execution of its green transition strategy and more stable earnings base from its conventional energy segment. Its Integrated urban solutions business is valued at 0.7 times price-to-book value ratio (P/B), benchmarked against large-cap Singapore developers.” — Douglas Toh
Venture Corp
Price targets:
CGSI International ‘add’ $15.95
DBS Group Research ‘buy’ $16.40
Analysts remain positive despite slight earnings miss
Analysts at CGS International (CGSI) and DBS Group Research are maintaining their “add” and “buy” calls on Venture Corp although the company’s 1HFY2024 ended June results missed their expectations.
In 1HFY2024, Venture Corp posted revenue and net profit of $1.38 billion and $123.9 million respectively. This forms 42% of DBS’s estimates and 43%/44% of CGSI’s forecasts.
Despite this, DBS analyst Ling Lee Keng highlights Venture Corp’s strong net cash position at $1.19 billion as at June 30 as well as its zero debt. As such, the company is in a good position to capture new opportunities for its next phase of growth, says Ling.
Ling also notes that Venture Corp has a healthy pipeline of new product introduction at different stages across its various tech domains, which should help to drive growth in 2HFY2024 and beyond.
“Additionally, with the majority of its manufacturing facilities in Malaysia (Johor and Penang), the group is well-positioned to support customers seeking to diversify their operations outside of China to mitigate the geopolitical risks,” she adds.
Given the revenue miss, CGSI has reduced its FY2024 revenue forecast by 3.22%, leading to a 4.95% reduction in its FY2024 EPS forecast. Analyst William Tng expects to see a resumption in EPS growth in FY2024–FY2026 as customers’ orders pick up as well as share price support from its 5.21% dividend yield.
Tng’s target price has been raised slightly to $15.95 from $15.93 as the share base was reduced by 0.11% based on share buybacks and the cancellation of some shares repurchased.
DBS, however, has trimmed its target price to $16.40 from $16.90 previously based on about 16 times P/E on blended FY2024/FY2025 earnings. — Khairani Afifi Noordin
NetLink NBN Trust
Price targets:
CGS International ‘add’ 95 cents
DBS Group Research ‘buy’ 98 cents
Maybank Securities ‘buy’ 97 cents
‘Buy’ for ‘resilient performance’ amid connection services repricing
Analysts from CGS International (CGSI), Maybank Securities and DBS Group Research are positive about NetLink NBN Trust despite the company reporting a lower y-o-y profit after tax of $25.7 million in 1QFY2025 ended June 30.
CGSI’s Ong Khang Chuen reiterates his “add” call with an unchanged target price of 95 cents, while Maybank’s Hussaini Saifee keeps his “buy” with an unchanged target price of 97 cents. The team at DBS has also kept its “buy” call with an unchanged target price of 98 cents.
Ong from CGSI likes NetLink for its resilient performance amid the revised interconnection offer (ICO) pricing from April 1 and its commitment to a stable distribution per unit (DPU) for FY2024–FY2026 despite the repricing.
The analyst notes that NetLink’s regulated revenues remained stable y-o-y in 1QFY2025, with strong residential connection growth offsetting the lower pricing.
Instead, Ong says that revenue decline was mainly driven by lower ancillary project revenue, a normalisation after two years of higher activity level, which is of a lower margin profile.
Excluding the impact from one-off items, the analyst says that NetLink’s core ebitda margin expanded by about 1.4 percentage points y-o-y to 72.7% in the quarter.
He highlights that NetLink’s 10 Gigabytes per second (Gbps) broadband plans are spurring transient growth in connections. The company added 17,000 residential fibre connections, forming about 80% of its FY2024 total net addition in residential connections.
NetLink says that this is due to end-users switching to faster broadband plans but who have yet to terminate their existing connections for slower plans, likely due to contract obligations.
The analyst notes that NetLink believes residential connection numbers continued to grow at a steady clip, in line with past quarters. Meanwhile, the group views the slight dip in non-building address points (–1.2% q-o-q) as a blip and continues to expect this segment to return to growth in the coming quarters.
Ong highlights that as of the end of June, NetLink’s net gearing remained healthy at 26.5%, and fixed-rate borrowings accounted for 75.9% of outstanding loans. Its effective average interest rate stood at 2.69% in 1QFY2025 and management expects it to remain below 3%, he adds.
On that point, NetLink’s management has reiterated its commitment to stable distributions as long as its cash generation and debt position remain healthy. The analyst therefore forecasts a 6.3% dividend yield for FY2025.
Likewise, Maybank’s Saifee says that NetLink’s 1QFY2025 review is “stable on the surface”.
Besides the group’s stable Regulated Asset Base (RAB) revenue and increase in residential connections by over 17,000 due to 10Gbps fibre offering, the analyst notes that the non-building address point (NBAP) connections “surprisingly fell” 1% q-o-q.
“Management expects the rise in residential connections to reverse and expects growth momentum in NBAP connections to resume,” he adds.
The analyst trimmed his FY2025-FY2026 earnings forecasts by 1%–3% to factor in FY2024 results, mainly from his higher depreciation and amortisation assumption by inputting higher FY2024 capex. His ebitda forecasts remain relatively unchanged.
Saifee sees NetLink as a bigger beneficiary when the interest rate cycle turns as the stock has a 71% negative correlation to the 10-year US bond yield while its 6% dividend yield remains highly visible and stable.
Finally, DBS’s analysts say that NetLink’s yield spread of 340 basis points (bps) is attractive compared to its last four-year average of 335 bps.
The Singapore government’s 10-year bond yield of 2.85% implies a yield spread of 340 bps.
They expect NetLink’s DPU to rise 1%-2% annually over the next few years and the yield spread to narrow towards 250 bps, reflecting the resilient nature of its distributions.
NetLink’s 6.3% yield and the resilient nature of its business are also a plus to the DBS team. — Nicole Lim
AIMS APAC REIT
Price target:
Maybank Securities ‘buy’ $1.39
REIT’s AEIs keep analyst’s ‘buy’ call
Maybank Securities is keeping its “buy” call on AIMS APAC REIT after its 1QFY2025 results which saw a decrease in distribution per unit (DPU) of 1.7% y-o-y. Analyst Li Jialin says that the REIT has two asset enhancement initiatives (AEIs) with pre-commitment and has kept her target price unchanged at $1.39.
On the REIT’s result, Li says operations are stable. The transient dip of 50 basis points (bps) in occupancy was from the Singapore portfolio, while double-digit rental reversion is sustained, he adds.
The analyst notes that the REIT’s management does not see a longer lead time by tenants to reach a leasing decision and full-year guidance for rental reversion remains high single-digit to low teens.
Despite sector headwinds, occupancy at 1A International Business Park remains stable at above 60% and is expected to hold, benefitting from nearby Tuas mega port, Li notes.
On the two AEI initiatives, Li says that the total cost outlay for 7 Clementi Loop and 15 Tai Seng is less than $32 million, with a projected net property income (NPI) yield of above 7%.
In FY2024, the asset at 7 Clementi Loop contributed $1.1 million of revenue. As AEI work begins, this asset will enter a nine-month leasing downtime, but Li notes that management does not expect a material impact.
The impact could be offset by higher rental reversions, contributions from 15 Tai Seng commencing in 3QFY2025, non-rental income from solar panels and potential capital top-up, the analyst adds.
The proposed food factory redevelopment remains in the pipeline until the existing lease expires next year, she continues.
AIMS APAC REIT’s total gross debt is 1.7% higher q-o-q, resulting in a gearing of 33.1%. “As the $100 million multicurrency medium-term note programme expires in 3QFY2025, we expect to see minor movements in balance sheet metrics until end-FY2025,” says Li.
“We adjusted our topline forecasts and borrowing costs in light of upcoming debt maturity in 3QFY2025, hence trimming our DPU forecasts by about 1%–2% for FY2025–FY2026. Our dividend discount model-based target price remains unchanged,” she ends. — Nicole Lim
Hongkong Land
Price targets:
CGS International ‘hold’ US$3.21
DBS Group Research ‘buy’ US$3.88
Morningstar ‘4 stars’ US$3.86
Lower target prices due to Hong Kong and China projects
Analysts at DBS Group Research, CGS International (CGSI) and Morningstar have trimmed their target prices and fair value estimates on Hongkong Land to US$3.88 ($5.13), US$3.21 and US$3.86 respectively following the company’s 1HFY2024 ended June results release.
While the negative trends within Hongkong Land’s first-half results were in line with Morningstar’s expectations, the performance of the Mainland China business is weaker than expected, analyst Xavier Lee notes.
“Rental income declined 3% y-o-y as the Hong Kong office portfolio continues to see pressure from market oversupply, while the Hong Kong Landmark retail portfolio suffers from outbound tourism in Hong Kong. For the Mainland China business, the development properties segment suffers from low margins as buyers’ sentiment remains lacklustre,” he adds.
Morningstar expects continued pricing pressure for Hongkong Land’s Mainland China development properties as the company prioritises clearing inventory.
Consequently, the analyst has lowered its development properties’ average selling price and margin assumptions, apart from adjusting his model to factor in the temporary disruption from the renovation works in Landmark.
Meanwhile, DBS analysts Jeff Yau, Percy Leung and Cherie Wong are keeping “buy” on Hongkong Land, noting that the company is currently reviewing its overall business strategies as well as commercial priorities, which is expected to be completed before end-2024.
They note that in the past three months, Hongkong Land’s share price has been largely stable, outperforming other Hong Kong landlords. Meanwhile, the stock is trading at a 70% discount to DBS’s appraised current net asset value, about 1.5 standard deviations below its 10-year average discount of 50%.
“Estimated dividend yield for FY2024 stands at 6.8%. Current stock valuation is cheap even allowing for lingering headwinds in the Hong Kong office sector,” the analysts add.
All eyes are currently on the strategic review as any new initiative that could unlock the asset value for shareholders should be positive for share price, DBS highlights.
CGSI analysts Raymond Cheng, Will Chu and Steven Mak think the strategic review may include major capital expenditure for the company’s investment properties. It also may include restricted appetite for China development properties projects as well as an expansion of project investment in Asean.
The company could also reveal a revision of dividend policy that may be tied to its profit from investment properties and hotels in the future. The CGSI analysts are keeping “hold” on Hongkong Land.
Meanwhile, Morningstar believes that weakness across offices and luxury retail in Hong Kong and Mainland China could continue to weigh on Hongkong Land’s share price in the near to medium term. That said, the analysts think the current price at a 17% discount to its valuation is attractive for investors willing to look beyond the industry downturn. — Khairani Afifi Noordin
