In its latest quarterly 10-stock portfolio, Phillip Securities has shifted towards a preference for larger cap counters. Three mid-cap names have been dropped: HRnetGroup, Prime US REIT and Del Monte Pacific. In their place, the brokerage has added CapitaLand Investment (CLI), Frasers Centrepoint Trust and PropNex.
Speaking at an investment seminar on April 1, Paul Chew, head of research at Phillip Securities, calls CLI an entity that can capture the “cradle” to “grave” to “afterlife” of a real estate asset. He elaborates that CLI has the muscle and management structure to acquire an empty piece of land, build a mall or an office; fill it up with tenants and turn the property into an income-generating asset; and then resell the same piece of asset to either its own REITs, or to one of the various private funds it manages.
Along the way, CLI can make either management fees, or book the capital gains, which would all add to its overall bottomline. The income to be earned extends to also after the assets have been sold to the REITs — the “afterlife” — which are controlled by CLI anyway. “Basically, they don’t give chance,” says Chew, referring to the strong grip CLI exerts over the income value chain of real estate assets. “This is a very good model, and is very hard to replicate. This is a very sticky, very high-quality fee that they earn,” says Chew, who has an “accumulate” call and $4.12 target price.
CLI is also set to enjoy a ride from China’s reopening. Pre-pandemic, earnings from China contributed around one third of its total. That proportion dropped to 10%. With China bouncing back, CLI is set to enjoy a big jump in earnings as well, says Chew.
Another new addition to the 10 stocks was PropNex, the largest real estate agency here. Chew’s target price for the stock is $2.40, given its visible earnings growth and attractive yield of 7%.
With around 11,000 real estate salespersons, PropNex is almost always asked by developers to help market their new launches. It is even able to hold market share throughout cycles — a sign of its firm grip over the market. “The industry has a low barrier to entry, but the barrier to scale is more difficult — how can you hit 11,000 agents?” reasons Chew.
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Last year, there were just around 4,000 units launched, which resulted in PropNex reporting largely steady overall earnings, instead of enjoying growth as it did in the preceding years. With more than 10,000 units slated for launch this year, Chew expects a corresponding jump in earnings.
He likes the company’s capital structure too. Unlike manufacturers or typical real estate firms, PropNex, because of the nature of its business, is virtually unencumbered by any fixed assets, leading to relatively high ROE of around 30% or more.
The third new addition to the 10 stocks is Frasers Centrepoint Trust, which owns a portfolio of suburban malls worth $6.7 billion, many of which are located right next to MRT stations, thus enjoying heavy commuter traffic on weekdays and families out for meals and leisure on weekends.
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Most recently, FCT, together with its sponsor Frasers Property, acquired half of another such mall, Nex, at Serangoon. Analyst Darren Chan, who has a target price of $2.31 on this stock, is neutral on this deal for now, but he sees a possible upside elsewhere.
Specifically, FCT’s tenant sales have already recovered to above pre-pandemic levels. Yet, the occupancy cost, which is a measure of tenants’ revenue over rental paid, is at 16.2%. In contrast, the same measure was 19% during the pandemic, and 17% pre-pandemic. This suggests some room for FCT to charge higher rents when the leases are up for renewal, says Chan. FCT now gives a yield of 5.5%.
‘Buying opportunity’
Chew has maintained his bullishness on the local banking sector, even as a growing list of other research houses have started trimming their earnings expectations, given the easing off of the rate hike cycle. “Yes, this is a buying opportunity,” says Chew. He believes that with the healthy deposit base, the three banks will continue to enjoy cheap funding while enjoying margins from the lofty rates.
Chew has kept two of the banks, DBS Group Holdings, and Oversea-Chinese Banking Corp (OCBC) in the 10 picks this quarter.
For DBS, besides the healthy margins from interest income, Chew expects the bank’s fee income to recover too, as its customers trade more, compared to the cautiousness seen across the board last year.
From a y-o-y growth of more than 15% in FY2021 for the year ended Dec 31, 2021, DBS’s fee income dropped by more than 10% in the subsequent FY2022. Chew expects fee income to recover by more than 5% this current FY2023 and grow by a further 10% or so in FY2024. Overall, Chew is projecting mid-teens earnings growth for DBS, which he believes is worth $41.60.
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Chew likes OCBC too, which has a relatively sizeable exposure to the Greater Bay Area, which, presumably, will see better business prospects with China’s lifting of pandemic-related restrictions. Chew expects OCBC to generate earnings growth in the mid-teens. “Now, everybody wants China exposure and reopening and recovery,” he says.
Chew also notes that the local banks, including OCBC, have the potential to give out more dividends. DBS, for example, has declared a special dividend for FY2022, although OCBC has not, preferring to stay conservative and stick closely to the policy of paying out half its earnings as ordinary dividends. “They like to play a soccer match with three goalkeepers,” quips Chew. Even so, that is a yield of nearly 6%, which Chew says is a record.
‘High margin’
The team at Phillip Securities continue to like City Developments (CDL). The real estate and hospitality company is rated “accumulate” and has been given a price target of $8.86. Via its Millennium & Copthorne subsidiary, CDL operates more than 130 hotels with 38,000 rooms across the world, giving CDL a strong leg up in the post-pandemic recovery story. Within Singapore, revenue per average room night (RevPar) for FY2022 has already recovered by 91% y-o-y. With travellers from China not yet back in pre-pandemic numbers, it suggests a good chance for RevPar to exceed pre-pandemic levels, says Chew.
In addition, there is a constant stream of residential development projects, with more than 2,000 units in total, that will help lift earnings. One notable project is the redevelopment of FujiXerox Tower from an office tower into a mixed development. Given how CDL has held this piece of asset for years, this is a potentially high margin-yielding project, says Chew.
In a somewhat related post-pandemic recovery story, Phillip Securities has also kept CapitaLand Ascott Trust (CLA) within the 10 picks. CLA, previously known as Ascott Residence Trust, has used the pandemic to adjust its portfolio of some $8 billion, to include a bigger proportion of longer-stay properties, such as co-living and student dormitories. They complement the traditional base of hospitality assets chiefly consisting of serviced residences. By doing so, CLA enjoys a mix of both stable income from these longer-stay properties, plus potential growth-oriented income from the shorter-term stay assets.
There is potential upside from capital management as well. Chan, who has a “buy” call and $1.26 target price, says that CLA has a track record of steadily divesting its assets at above valuation. Proceeds from the gains from the divestment were then added to the distribution. With the pandemic, the divestment — part of an overall capital recycling strategy — has paused. Even so, distribution has continued, tapping just operation revenue and giving a yield of 5.7%. Chan estimates there are some $300 million in such “hidden” value from potential divestments not fully reflected.
Treasury upside
Similar to the local banks, several other research houses have turned negative on SGX Group over the last few months, citing the unfavourable market sentiment that will presumably hurt trading volume. Chew maintains the exchange operator as one of his 10 picks, with a “buy” call and $11.71 target price. Of course, his optimism is not premised on a flood of new listings the exchange will see — for there isn’t, he says.
Rather, Chew has zoomed in on the interest income-generating potential of the exchange from its treasury operations, which he believes will be a “surprise”.
For FY2022 ended June 30, 2022, SGX’s treasury income was $49 million. In line with higher rates, this amount has increased to $47 million in 1HFY2023 ended December 2022, suggesting that the full year FY2023 level will be significantly higher.
Chew acknowledges that trading volume, which is the core income generator of the exchange, is volatile, which no one can predict accurately. Nonetheless, he believes that SGX, as the monopoly exchange here, is well positioned with its multi-asset strategy to capture fund flows in bonds, foreign exchange, and commodities with its wide range of derivative products. “That’s why we still like SGX,” says Chew.
Keppel Corp is another stock that has remained within the 10. The brokerage now has a “buy” call and $6.41 price target, premised on the company’s ongoing asset recycling strategy as it sharpens its focus on renewable energy and assets management. Keppel recently finally completed the sale of its offshore and marine business to Sembcorp Marine. “Admittedly, the story ended then, exciting as it was,” quips Chew.
However, he points out that aside from the well-narrated themes, Keppel, which used to have its separately-listed property arm, has potential upside from the sale of some 40,000 residential units across its various markets of Singapore, China, Vietnam, India and Indonesia. Proceeds from property sales are believed to be earmarked for reinvestment in the utilities business, further boosting the company’s stakes in this business segment, says Chew.
Last but not least, Chew’s pick for the 10 is ComfortDelGro Corp, which operates buses, trains and taxis in China, the UK and Australia, besides its home ground Singapore. On March 31, the company’s soon-to-retire chairman Lim Jit Poh said there are plans to invest some $6 billion to switch its fleet of buses and taxis running on traditional fuel to electric vehicles.
In addition, the company is investing in autonomous vehicles and is “seriously considering” the business of vehicle distribution — which it used to have. Further down the road, ComfortDelGro is looking at diversifying into logistics and even expansion into sea and air transport. Meanwhile, in the near term, Chew, who has a $1.63 target price on the stock, points out that the company is not just riding on an earnings recovery from the pandemic, but its balance sheet is also well buttressed with some $600 million in cash
