The Edge Singapore Thu, Jul 07, 2022
Oversea-Chinese Banking Corporation
Price target:
CGS-CIMB Research ‘add’ $14.20
Net interest margins expected to expand
CGS-CIMB Research has maintained its “add” recommendation on Oversea-Chinese Banking Corporation (OCBC) with no changes to the target price of $14.20.
Despite the macroeconomic instability driving market volatility, CGS-CIMB expects quicker net interest margin (NIM) expansion and benign credit cost to be bright spots in 2QFY2022 ended June for the bank amid a modest market-related wealth management and treasury. OCBC is expected to release its 2QFY2022 results on Aug 3.
“We expect Singapore banks’ 2QFY2022 earnings to still be weighed down by market volatility amid macroeconomic headwinds of unabating inflation, uncertainties on interest rates and recession risk,” writes analyst Andrea Choong.
“Nonetheless, NIM expansion and border reopenings across the region, such as the shorter quarantine period upon arrival in China, are bright spots for the sector,” she adds.
The analyst expects OCBC to post a $1.3 billion net profit for 2QFY2022, a 2% decrease q-o-q but 15% gain y-o-y, as benchmark rates have accelerated following the Fed Fund Rate (FFR) hike of 50 and 75 basis points (bps) in May and June respectively.
“As such, we expect a quicker pace of NIM expansion notwithstanding the three to six month lag time for the repricing of loan portfolios and stronger outflow of current account and savings account (CASA) deposits into fixed deposits,” says Choong, who expects NIM to rise by about 9 bps q-o-q to 1.64% in 2QFY2022.
Not spotting particular weaknesses in any of OCBC’s portfolios, CGS-CIMB also expects the asset quality of OCBC’s loan portfolio to be contained.
Choong says that CGS-CIMB remains watchful on elevated mortgage rates, energy prices and commodities trading. It is also cognisant of the impact on borrowers’ repayment capabilities amid the FFR hikes, hence she expects the results briefing for the overall banking sector in Singapore to be centered on the implication on asset quality and credit growth.
Choong also believes that loan growth for OCBC could be relatively muted in the second quarter, as she predicts a 1% q-o-q growth, amid customers remaining cautious. Hence, she anticipates loan-related non-interest income lines to be softer q-o-q as well.
“We think credit costs could remain benign at 12 bps in 2QFY2022. Risks to this call is if OCBC shores up on its management overlays as a precautionary step. A significant pick-up of Asean-China trade flows as China reopens is a key catalyst,” Choong writes, while noting that the recession continues to be a key downside risk. — Bryan Wu
ESR-LOGOS REIT
Price target:
DBS Group Research ‘buy’ 50 cents
Joining the big league
DBS Group Research has kept a “buy” rating on ESR-LOGOS REIT with a target price of 50 cents. This follows the REIT’s successful merger with ARA LOGOS Logistics Trust (ALOG) in April, making it the fifth largest industrial Singapore REIT with a total asset base of $5.5 billion.
“With large cap industrial Singapore REITs trading at around 20 basis points (bps) premium over its mid cap peers, we believe that the market has yet to rerate ESR-LOGOS REIT, despite its ability to access a significant pipeline of assets and support from an enlarged sponsor group,” say analysts Dale Lai and Derek Tan. “In the medium term, as ESR-LOGOS REIT executes on its value-accretive plans, we expect its P/NAV to trade closer to its large cap peers, implying an approximate 18% upside to its share price from current levels.”
At a yield of around 7.4%–7.5%, ESR-LOGOS REIT’s yield is more than 200 bps higher than the larger cap industrial S-REITs and is attractive, they note. They are also upbeat on the REIT as the manager is executing on an asset repositioning strategy post-merger, which should be value accretive and drive a re-rating in share price. ESR-LOGOS REIT also has an undemanding P/NAV of 1.1x.
Soon, ESR-LOGOS REIT will embark on the repositioning of its portfolio with close to $200 million of divestments carried out since FY2021 ended December 2021. It will continue to divest non-core assets and recycle proceeds into higher yielding opportunities. The rejuvenation of its portfolio entails redevelopment projects and asset enhancement initiatives that will drive organic growth in earnings and upside to net asset value (NAV).
While its peers find it increasingly challenging to make accretive acquisitions given the negative cap rate spreads in most major markets, Lai and Tan believe that ESRLOGOS REIT can look to its sponsor’s pipeline of US$2 billion ($2.81 billion) in the medium term.
“With a substantial pipeline of assets available in Japan and Singapore where cap rate spreads are still conducive, ESR-LOGOS REIT could be one of the few industrial REITs to experience exponential portfolio growth,” Tan and Lai say. — Chloe Lim
Japan Foods Holding
Price target:
RHB Group Research ‘buy’ 55 cents
Back to pre-pandemic levels
RHB Group Research has kept its “buy” call on Japan Foods Holding with a target price of 55 cents as Singapore is “fully open” and discretionary consumer spending is in revival.
The monthly revenue at Japan Foods’ restaurants have returned to pre-Covid-19 levels. The group also has plans to capitalise on the economic revival and weak competition by looking to aggressively grow its number of outlets in the coming months.
“We expect strong growth over FY2023 (ending March 2023) to FY2025, with profit quickly reverting to pre-Covid-19 levels despite rising cost inflation,” says analyst Shekhar Jaiswal.
The analyst estimates Japan Foods to have 60 restaurants by end-March 2023 from 56 currently. “This rise in the number of outlets would mean y-o-y higher operating costs, especially from increased labour,” writes Jaiswal, while being aware that rising cost inflation would imply higher input expenses across its entire operations. However, the way Jaiswal sees it, the group’s standardised food inputs across all its operations, efficient central kitchen operations, and improved labour productivity should enable it to maintain its margins. Furthermore, the group is focusing on diversifying its raw materials sourcing to manage the rise in input costs.
“We note that it was able to keep its gross margins above 84% throughout the pandemic,” the analyst notes, estimating FY2023 gross margins to be at 84.4%.
As at March, Japan Foods had no borrowings and a cash balance of $23 million, representing 43% of its market cap.
“While it believes this large cash balance gives it a buffer to survive any unexpected decline in economic activity, we assess that, once we get past the near-term economic weakness, this large cash balance will provide it with sufficient firepower to aggressively expand the number of outlets in Singapore or regionally, if needed,” the analyst writes.
During FY2018–FY2020, its dividend payout ratio stood at 68%-214%. Japan Foods announced 100% of net profit to be paid as dividends in FY2022, which it expects to sustain in the future. “We estimate the group’s dividend yield at above 5% for FY2022–FY2023,” says the analyst.
“We believe Japan Foods’ FY2024 P/E of 17x does not do justice to our expectations of its strong return to pre-Covid-19 profitability,” says Jaiswal. “On an ex-cash basis, the stock is trading at 12x FY2023 P/E, which we believe is quite compelling.” — Chloe Lim
Photo: Bloomberg