The Edge Singapore Fri, Jun 03, 2022
City Developments
Price target:
UOB Kay Hian ‘buy’ $9.20
‘Resilient’ 1QFY2022
UOB Kay Hian analyst Adrian Loh has kept a “buy” rating on City Developments (CDL) with a target price of $9.20.
On May 24, CDL reported a “resilient” operating performance in 1QFY2022 ended March supported by healthy hospitality occupancy rates, with strong room rate and revenue per available room (RevPAR) metrics in most of its geographies except New Zealand.
London and Europe were notably robust, with RevPAR spiking 10x and 7x respectively, as expected by Loh. “We expect 1HFY2022 and even 3QFY2022 numbers to be similarly strong as the summer holiday season kicks in from June onwards, and especially looking at recent outlook statements from various airlines regarding the summer high season,” writes the analyst.
As movement restrictions in Singapore eased in 1QFY2022, offices in general saw a gradual increase with workers exiting the “work from home” mode.
In 1QFY2022, CDL reported that its Singapore office portfolio had a healthy occupancy rate of 93% and higher-than-market average of 88%. A positive effect of this has been retail sales, which has reached close to pre-Covid-19 levels, resulting in CDL’s retail occupancy of 95% as compared to the market average of 92%.
However, CDL’s Singapore residential segment saw a 41% y-o-y fall in units sold due to uncertainty after the December 2021 property cooling measures.
“We do not view this, however, as a major cause for concern given that CDL’s launches in 2022 are backend-loaded,” says Loh. “In addition, our channel checks with the construction industry point to a recovery, and the risk of delays has materially reduced.”
For China, Loh sees a likely drag in 1HFY2022 due to the strict pandemic control measures in place. “Although office occupancy in Shanghai remains relatively stable, retail in Suzhou has been significantly impacted and residential sales and construction work in these two cities as well as in Shenzhen have been negatively affected,” Loh observes.
On the whole, Loh believes that CDL’s outlook remains reasonably strong for the rest of 2022, given its back-end loaded residential launches in Singapore as well as continued recovery in its hospitality segment.
In his report, Loh has upped his earnings estimates after factoring in the sales of Piccadilly Grand, as well as the slightly higher average selling prices for Canninghill Piers.
Looking ahead, the analyst adds that there will be further earnings upgrades during the group’s 1HFY2022 results, in line with the capital gains that will come from the divestment of Tanglin Shopping Centre and the collective sale of Golden Mile Complex.
The completion of the divestment of the Millennium Hilton Seoul will also see a disposal gain of $526.2 million for the group. “The market will be looking for guidance as to whether CDL intends to distribute some of these proceeds in the form of a special dividend,” Loh writes. — Chloe Lim
BRC Asia
Price target:
SAC Capital ‘hold’ $1.92
Construction rebound but prices easing
A rebound in construction activities helped BRC Asia Holdings beat expectations in 1HFY2022, says SAC Capital analyst Peggy Mak.
Revenue grew 61.0% y-o-y to $793.3 million, and net profit grew 108% to $39.8 million, buoyed by higher steel prices (up about 35%) and volume (up about 25%).
In a May 25 note, Mak is maintaining her “hold” call on BRC Asia Holdings with a target price of $1.92.
“Sales in the Singapore market accounted for 85.5% of revenue, as BRC remains a major supplier of rebars for the construction sector. As at end-March, it has an order backlog of $1 billion,” says Mak.
Gross margin rose from 8.1% in 1HFY2021 to 8.7% in 1HFY2022, with a $1.8 million reversal of provision for onerous contracts, versus $28.9 million provision in the previous year.
BRC set aside $42.5 million to cover undelivered orders that quoted steel price at below current market price. Excluding these provisions, gross margin fell from 15.7% in 1HFY2021 to 9.6% in 1HFY2022, as cost of raw materials rose in tandem with average selling price (ASP).
Meanwhile, steel rebar futures are heading lower from May, says Mak.
Rebar prices surged by about 30% from late-February when the war in Ukraine erupted, as steel exports from Russia and Ukraine were cut.
Since early May, prices have eased by 17% to US$790/tonne. The decline in steel prices could bring about an earlier reversion of the $42.5 million in provisions for onerous contracts, says Mak, an upside risk to earnings projections.
“We are, however, more concerned about the impact of a price decline. The Building and Construction Association [BCA] stipulates a monthly material price index for implementation of fluctuation clauses in supply contracts for rebars for public sector projects,” says Mak.
She adds: “While this index has so far tracked the market price closely, there is a risk, albeit small, if rebar market prices fall sharply and come in below the prices that BRC has contracted to buy. Net gearing has improved to 0.8x (from 1.17x at September 2021) with lower net debt to ebitda of 2.6x (September 2021: 4.3x).”
Mak believes debt will rise as working capital requirements grow with higher revenue. “The company generates strong 1HFY2022 annualised return on invested capital of 27.4%, which cushions the risk of rising interest rates.”
To reflect higher order deliveries, Mak has raised her FY2022E and FY2023E revenue by 5.6% and 2.7%, and net profit by 10.9% and 6.2%, respectively. — Jovi Ho
ST Engineering
Price target:
Maybank Securities ‘buy’ $4.75
Multiple positives ahead
Maybank Securities’ Kelvin Tan has initiated coverage on Singapore Technologies Engineering (ST Engineering) with a “buy” call and $4.75 target price, given how resumption of air travel is likely to translate into more demand for the company’s aerospace engineering business.
Its spate of acquisitions over the past year — including traffic management system provider Transcore, its largest to date — will help drive a higher volume of business in new and fast-growing areas.
There is also a growing addressable market of defence contracts that ST Engineering can bid for — given heightened geopolitical volatility. Along with a recent reorganisation of the company that breaks down silos between its major subsidiaries, thereby extracting synergies, Tan sees ST Engineering well poised to deliver better earnings, stable dividends, on the back of its record (and growing) order book of $19.3 billion.
“The recent restructuring, which focuses on pushing greater integration across what have historically been silo-like divisions, could be a material positive,” writes Tan, who is projecting the company’s pretax profit margin to increase from 9% in FY2021 to 10.2% by FY2024, mainly on efficiencies in smart cities initiatives coupled with strong order book growth.
He sees “potential surprise to the upside” from higher revenue from cross-selling, as well better cost efficiencies from central procurement in the coming two to three years.
ST Engineering is now trading at around 22.6x FY2021 earnings, which is a premium to Singapore large-cap industrials’ average of 12.4x. However, Tan points out that it “correspondingly (and consistently)” generates a much higher return on equity than all peers in this category.
While ST Engineering has recently taken on more debt to fund its acquisitions, Tan believes that its capacity to pay dividends “could hold steady” because of its resilient earnings and cash flow.
“Its diversified business carries high exposure to defence, public security and critical infrastructure projects, which may buttress the company against uncertain commercial aerospace demand,” notes Tan.
In a sign of better earnings visibility, the company has recently changed its policy of paying dividends every half a year to every quarter. — The Edge Singapore
