Suntec REIT
Price targets:
DBS Group Research ‘hold’ $1.10
Maybank Securities ‘hold’ $1.15
PhillipCapital ‘buy’ $1.47
Citi Research ‘sell’ $1.13
Higher funding costs
Analysts are mostly negative on Suntec REIT after the REIT reported a 14% y-o-y drop in its distribution per unit (DPU) for the 3QFY2023 ended Sept 30.
DBS Group Research and Maybank Securities kept their “hold” calls with lowered target prices while Citi Research kept its “sell” call. Its target price also remained unchanged at $1.13.
PhillipCapital was the only brokerage to keep its “buy” call and target price of $1.47, the highest among the four brokerages featured here.
To PhillipCapital’s Liu Miaomiao, Suntec REIT’s 3QFY2023 results came in within her expectations.
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The REIT’s 3QFY2023 gross revenue grew by 15% y-o-y to $123.4 million, at 79.7% of her FY2023 forecast while its net property income (NPI), which rose by 9.7% y-o-y to $84.6 million, stood at 77.9% of her full-year estimates.
The REIT’s DPU for the 9MFY2023 also stood at 76.3% of Liu’s full-year forecast.
In her report dated Oct 24, Liu noted the REIT’s positive rental reversions. She also liked that the REIT’s current divestment plan is on track so far.
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“Suntec is committed to its current divestment plan, aiming to sell strata units at Suntec Office Tower 1–3 worth $100 million by the end of FY2023. Selling prices are supported by strong demand from end-users and limited supply due to the Urban Redevelopment Authority’s (URA) restrictions on new developments. By 3QFY2023, approximately 40% of the divestment plan was completed, with prices 20% above book value. This is likely to reduce gearing by 100 basis points (bps), providing a buffer against potential year-end valuation declines,” Liu writes.
“The management expresses confidence in the Singapore market and foresees no change in cap rates. While gearing improvement from divestment may be offset by overseas asset devaluation, it is expected to remain below the 45% threshold,” she adds.
However, the REIT’s cost of debt, which increased by 37 percentage points y-o-y and 0.14% percentage points q-o-q to 3.78% as at Sept 30, remains a concern.
“[Suntec REIT’s] adjusted interest coverage ratio (ICR) deteriorated to 2x [from 2.1x in 2QFY2023], capping the regulatory gearing limit at 45%,” she points out.
On this, the analyst expects Suntec REIT’s all-in interest cost in FY2024 to reach 4.25%.
“There is no commitment to top-up the distributional income using excess cash yet in FY2024,” she notes.
The REIT’s overseas markets have also displayed weaker metrics. In the UK, the REIT’s overall occupancy rate fell by 6.5 percentage points q-o-q to 93.5% while its Australian portfolio occupancy rate fell by 1.2 percentage points q-o-q to 95.54%.
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“Leasing movement in UK and Australia markets were crippled by the cautious economic outlook with hampered expansionary drivers. 55 Currie Street is expected to have a reduction in occupancy rate of 40%. Management has allocated 12 months to backfill the space and anticipates rental reversion to be flattish but in line with the market rate,” says Liu.
Looking ahead, the analyst expects Suntec REIT’s Singapore market to be its key revenue driver double-digit rental reversion for the retail side to continue and high single-digit for the office sector in FY2024.
“We have also observed a decreasing trend in occupancy costs, which supports the potential for higher rental reversion,” she notes.
“In the UK office market, it seems to have reached its bottom, and we do not foresee any further drops in occupancy rates in FY2023. However, the transaction market in Australia remains subdued, characterized by a widened price gap between buyers and sellers, which is currently hindering the divestment of 177 Pacific Highway in the near term,” she adds.
Based on Suntec REIT’s last-closed price of $1.10 as at Oct 23, the REIT implies DPU yields of 6.08% or 7.16% for the FY2023 and FY2024 respectively, based on Liu’s estimates.
“We believe much of the downside risk including larger-than-expected expansion in cap rate and slower-than-expected divestment have been factored into the current share price. As such, our dividend discount model (DDM)-based target price remains at $1.47 with FY2023–FY2024 DPUs of 6.68 cents to 7.87 cents,” she says.
DBS Group Research’s Rachel Tan and Derek Tan have lowered their target price to $1.10 from $1.48 previously, which is the lowest among the brokerages within this article.
They have lowered their FY2024 DPU estimates by 2% to factor in higher vacancies from the REIT’s UK and Australia portfolios and higher financing costs.
Nonetheless, they acknowledge positive aspects such as its strong double-digit reversions at Suntec City and in Australia and the divestment of its strata units to maintain its gearing.
However, the REIT’s higher interest costs remain a concern.
“Despite Suntec’s underlying portfolio, especially its Singapore assets, seeing improved performance, higher interest costs have been eroding its income as its debt was only [around] 50% hedged previously. Despite the payout of its remaining capital distributions in FY2023, we estimate that its two-year DPU CAGR will decline by 15%,” say the DBS analysts.
Other key data to watch are the REIT’s vacancies in Australia and the UK, higher refinancing costs in FY2024 and valuation risks.
“Suntec REIT will be the key beneficiary should interest rates decline at an accelerated rate,” the analysts add.
Similarly, Maybank Securities’ Krishna Guha has also lowered his target price to $1.15 from $1.30 due to a continued risk of lower asset values and higher funding costs. “Top-line growth was anchored by accelerated recovery of the convention business. However, higher interest costs and lower margins moderated distribution,” says Guha.
“While Suntec’s valuation (6.9% FY2023 dividend yield, 0.5x P/B) is attractive in a historical context, downside risk remains from elevated gearing, potentially lower asset values and continued repricing of interest costs,” he continues.
Citi’s Brandon Lee has kept his target price unchanged as he sees “no respite” for the REIT on its high gearing. Despite the REIT’s efforts in divesting $100 million of Suntec City Office strata units, the move, which should reduce Suntec REIT’s gearing by 100 bps, will be offset by softening y-o-y valuations in Australia and the UK. The softening valuations in Australia and UK would bring the REIT’s gearing up by 100 bps, which would mean that its FY2023 gearing should be relatively unchanged at 42.7%, note Lee.
Furthermore, the Singapore office sector is also softer. “While Suntec REIT is facing some resistance during rent increases, it will likely notch positive rent reversions (albeit not double-digit) and high occupancy of 98%,” says Lee of its Singapore office portfolio. — Felicia Tan
Tiong Woon Corp
Price target:
Lim & Tan ‘buy’ 88 cents
Sector’s cheapest and biggest laggard
Lim & Tan’s Nicholas Yon and Chan EN Jie have maintained their “buy” call on Tiong Woon Corp, citing how the crane operator stands out as a rare listed entity here that has a positive outlook on its business and the industry.
In their Oct 25 note, Yon and Chan figure that the company, as a regional heavyweight in the heavy lift industry, is trading at a significantly undervalued level.
“There exists a notable perception gap between the market’s
perception and reality regarding TWC’s capabilities, which are on par with international industry giants, yet remain relatively unknown. This presents a strong potential for a re-rating,” the analysts note.
Yon and Chan figure that having gone through the pandemic, Tiong Woon is starting to win more business both within Singapore and in overseas markets and is on track to surpass its previous record earnings of $22 million recorded in FY2014.
As a sign of its confidence, the analysts point out that Tiong Woon investing in more heavy-powered cranes that will help it capture more business in the current upcycle of the construction and petrochemical industries.
“With Ting Woon’s operating leverage, we are confident project visibility will pave the way for margin expansion, increased profitability and dividends,” the analysts say.
Meanwhile, despite profits at a record high since its last downturn in FY2017, Tiong Woon is far from the cycle peak and trading at distressed valuations of 0.4x PB, 6.2x FY24F PE and 2.7x FY24F EV/Ebitda.
Their target price of 88 cents is at a 40% discount to peers’ EV/Ebitda, which Yon and Chan explain is so because of the company’s small market cap and low trading liquidity.
“We believe the time for a sector rerating is imminent and Tiong Woon remains the cheapest and the biggest laggard in the construction industry, which should translate into supernormal gains for investors in time to come,” state the Lim & Tan analysts. — The Edge Singapore
Mapletree Logistics Trust
Price targets:
DBS Group Research ‘buy’ $1.88
OCBC Investment Research ‘buy’ $1.72
Buy on resilient 2Q results
DBS Group Research has maintained its “buy” call and $1.88 on Mapletree Logistics Trust M44U , following its set of “resilient” 2QFY2024 earnings that came in within expectations, despite the tough operating environment.
For the three months to Sept 30, MLT, which runs a $12.8 billion portfolio of logistics assets, reported a distribution per unit of 2.268, up 0.9% y-o-y, partly helped by divestment gains. This brings 1HFY2024 DPU to 4.539 cents.
If the divestment gain is excluded, MLT’s core DPU would be down 5% y-o-y, no thanks to higher financing costs and unfavourable forex.
Nonetheless, DBS continues to like MLT, calling it a “citadel of stability”, with weak operating performance in China, a key market, already priced in.
DBS notes that MLT has been “fairly resilient” year to date, with its unit price down 5.7% in 2023 versus an FSTREI index dip of 14%.
At current levels, valuations are attractive at 1.03x P/B and an FY24–FY25 yield of 5.8%, which is close to its historical mean and close to its peers Mapletree Industrial Trust ME8U and CapitaLand Ascendas REIT A17U .
“Given the overall market slowdown, we expect increased positioning into sectors that can weather through economic downshifts and MLT remains well placed to deliver attractive total returns at current levels,” says DBS.
Separately, OCBC Investment Research has kept its “buy” call on this counter, but with a lowered target price of $1.72 from $1.85 previously.
The 2QFY2024 earnings met OCBC’s expectations but with a potentially “higher for longer” interest environment, it has raised its cost of equity assumption to 6.6% and lowered the terminal growth rate to 1.5%. — The Edge Singapore
Keppel DC REIT
Price target:
PhillipCapital ‘buy’ $2.26
Upgrade on lower share price
PhillipCapital analyst Darren Chan has upgraded his call on Keppel DC REIT (KDCREIT) from “neutral” to “buy”, following the REIT’s recent share price performance after its 3QFY2023 results ended Sept 30. Chan’s target price remains unchanged at $2.26.
Despite the REIT reporting a lower distribution per unit (DPU) of 2.492 cents, this is in line with the analyst’s expectations, forming 25.1% of their FY2023 forecasts.
Chan says that the REIT’s 3QFY2023 revenue and net property income (NPI) growth of 0.5% and 0.8% y-o-y respectively were driven by contributions from acquisitions and positive income reversions and escalations. However, this was “more than offset” by higher finance costs (+56.9% y-o-y) and less favourable forex hedges.
Chan highlights two positives from the performance of the REIT for this quarter. Firstly, Keppel DC REIT maintained a high portfolio occupancy of 98.3% with a portfolio weighted average lease expiry (WALE) of 7.8 years.
He notes that 27.7% of leases by rental income will expire in 2024, with only 1% expiring for the rest of 2023. The leases signed in 3QFY2023 were in Singapore, Australia, Ireland and the Netherlands, and were at positive rental reversions.
“Additionally, some of the leases signed were restructured into power pass-through leases, which should improve NPI margins,” Chan says.
He notes that the average cost of debt increased 0.2 percentage points (ppts) q-o-q to 3.5% in 3QFY2023, and an interest coverage ratio (ICR) remains healthy at 5.4x. The REIT has 4.2% of debt up for refinancing in 2024 and the majority of debt expiring from 2026 and beyond. However,
Chan notes that gearing increased 90 basis points (bps) q-o-q to 37.2%.
“A 100 bps increase in interest rates would lower DPU by about 2.4%. Forecast foreign-sourced income is also substantially hedged till June 2024,” he adds.
While the analyst maintains that there are no negatives for the REIT, he notes that there is a final payment of about $142 million upon the completion of Guangdong Data Centre 3, originally scheduled for 3QFY2023, but has been delayed due to Covid-related supply chain disruptions. — Nicole Lim
ComfortDelGro
Price target:
DBS Group Research ‘buy’ $1.65
Driver commissions remain
DBS Group Research analysts have maintained a “buy” on ComfortDelGro C52 (CDG) following Gojek’s newly announced move to cut commissions. The Indonesian ride-hailing player recently announced that it plans to lower driver commissions in Singapore from 15% to 10%, effective Nov 1 to at least the end of 2024. This is likely an attempt to attract drivers to its platform amid supply crunch in the point-to-point transport sector, the analysts note.
GoTo’s Gojek had previously raised its driver commission in Singapore to 15% in February. Pre-pandemic, the driver commission was 20% before it was cut to 10% in June 2021.
The planned 10% commission is on par with the CDG’s commission for private hire drivers with their own vehicles via the company’s ride-hailing platform, Zig. It is also higher than Zig’s platform commission for private hire drivers who leased vehicles from CDG (8%) and CDG taxi drivers (5%). The ride-hailing leader Grab, on the other hand, charges its drivers a commission of up to 20.18%.
CDG’s driver commission continues to remain competitive, DBS analysts highlight. “Nonetheless, we believe this lower commission from Gojek could potentially push back plans to increase commission rates to remain competitive.
“While the ride-hailing environment will be more competitive in the short term, we are positive in the medium to long term with a view of Gojek exiting the market,” the analysts add. The analysts are keeping their target price for CDG at $1.65. — Khairani Afifi Noordin
Hyphens Pharma International
Price targets:
SAC Capital ‘buy’ 33 cents
CGS-CIMB Research ‘add’ 34 cents
Ardence Pharma deal favourable
Analysts at CGS-CIMB Research and SAC Capital are keeping their “add” and “buy” calls on Hyphens Pharma as they view the company’s acquisition of the remaining 58% stake in Ardence Pharma as favourable.
In his Oct 20 report, CGS-CIMB analyst Tay Wee Kwang describes Ardence as a strategic asset in growing Hyphens Pharma’s medical aesthetics business.
In FY2022, Ardence generated sales of $2.8 million and a net profit of $817,000 as per Hyphens Pharma’s announcement. The acquisition of the remaining stake in Ardence is to take place across three tranches, with the last tranche expected to be completed by FY2027.
The first tranche will see Hyphen Pharma’s stake increase from 42% to 65% for a consideration of about $1.9 million — valuing Ardence at $8.1 million or an implied FY2022 P/E of 9.9x. This is expected to be completed by the end of FY2023.
Tay thinks that the valuations are attractive, given Ardence’s superior net profit margin of 29.4% to Hyphen Pharma’s 7% in FY2022. Additionally, Ardence has stronger growth potential, in which its revenue and net profit doubled y-o-y from FY2021 to FY2022, as mentioned during an analyst briefing.
Ardence was founded in 2018 as a boutique pharmaceutical company serving more than 250 medical aesthetics clinics in Malaysia. It is the exclusive distributor of anti-ageing injectables Plinest and Newest within Southeast Asia. This, coupled with a licensing model that removes the need for further drug testing presents opportunities for rapid geographical expansion, highlights SAC analyst Nicole Lim Qiuni.
Although the incremental net profit contribution from the additional 23% stake in Ardence is likely negligible in the near term, Tay is positive on the deal due to the cross-selling opportunities.
Lim concurs, adding that the acquisition would provide access to new distribution lists and diversify product lines within a market poised for exponential growth, cementing its position as a major player. As Hyphens Pharma has ventured into aesthetic medicine with brands TDF and Nabota, acquiring Ardence allows for horizontal integration which often leads to economies of scale.
Tay and Lim have maintained their target prices at 34 cents and 33 cents respectively. — Khairani Afifi Noordin
Frencken Group
Price target:
CGS-CIMB Research ‘add’ $1.37
Improving outlook
CGS-CIMB Research analyst William Tng has kept his “add” call on Frencken Group E28 with a higher target price of $1.37 from $1.10 previously.
“We reiterate our ‘add’ call on Frencken as it seems to be seeing the early stages of recovery among its semiconductor customers, in our view, leading to a potential resumption in double-digit core earnings per share (EPS) growth in FY2024 to FY2025,” Tng writes in his Oct 19 report.
His higher target price is due to a rollover to FY2025 based on an unchanged FY2025 P/E of 12.2x based on its five-year FY2019 to FY2023 average.
Going into FY2024 to FY2025, the analyst is expecting the company to see firmer orders from its customers, whose inventories have now been depleted.
“In our view, compared to 1HFY2023 when customers were not willing to accept components from Frencken due to their excess inventory situation, Frencken is now able to ship the components it is producing to customers,” says Tng.
“The Netherlands accounted for 27.2% of Frencken’s FY2022 revenue. In our view, given the higher production costs in Europe and the difficulty in hiring workers, Frencken could benefit from production outsourcing opportunities from Europe into Malaysia,” he adds.
For the 3QFY2023, Frencken is likely to report revenue of $176.8 million, 9.5% down y-o-y. Its net profit is estimated to drop by 45.1% y-o-y to $6 million.
In addition, the group had guided in its 1HFY2023 results that it was “cautious” on its FY2023 outlook. The group previously stated that it expected revenue to be stable on a h-o-h basis.
“For 2HFY2023, Frencken has provided the following guidance for its segmental revenue: semiconductor segment to see higher revenue h-o-h; medical segment to register stable revenue h-o-h; analytical & life sciences segment revenue to increase h-o-h; industrial automation segment revenue to decrease h-o-h; and its automotive segment revenue to stay stable h-o-h,” says Tng. Frencken is expected to release its 3QFY2023 update by Nov 27. — Felicia Tan
