• Reiterate BUY and SGD0.06 TP, 27% upside. We remain positive on Marco Polo Marine, even though the stock has surged by >20% from SGD0.043 since our last update. MPM remains in a sweet spot to deploy and operate its first commissioning service operation vessel (CSOV) by Dec 2023 or 1Q24 in an environment where such vessels (used to build offshore windfarms) are in short supply. We forecast FY22-24 (Sep) earnings growth at 18% CAGR, led by the new vessel’s deployment at attractive charter rates. The stock remains attractive at 0.6x PEG.

• Well-poised for higher charter rates. Our investment thesis for MPM remains intact, with earnings growth led by stronger demand and higher charter rates. This is being driven by elevated demand for offshore vessels in both the oil & gas (O&G) and offshore windfarm sectors vis-à-vis limited vessel supplies in the market. Vessel demand remains robust, as regional O&G exploration is increasing while North Asian nations build up their offshore windfarms to meet green or renewable energy environmental targets. Meanwhile, there is tight supply for vessels, as bank financing for new ones remains tight while older vessels are being scrapped. There are now c.800 vessels – down from c.1,000 previously – serving both the offshore windfarms and O&G sectors. Additionally, the former market is currently facing a shortage of tier-1 CSOVs with only c.10 now operating – mainly deployed in Europe – while another 30 or so are on order.

• Momentum building up for chartering and shipbuilding businesses. In 1HFY23, MPM’s revenue rose 102% YoY to SGD56m, driven by the ship chartering and shipyard segments. Its average charter rates in 2QFY23 have more than doubled from 1QFY20’s numbers, driven by strong vessel demand from the O&G and offshore windfarm sectors. Average vessel utilisation rates for 1HFY23 were decent at 66% vs 58% in 1HFY22. Shipyard utilisation for 1QFY23 and 2QFY23 were healthy at 74% and 84% on strong ship repair momentum, with new shipbuilding contracts for barges tied up till 1HFY24. Our earnings and TP remain unchanged.

• Key risks. Our forecasts and TP are premised on improved charter rates, stronger utilisation rates, and the successful deployment of MPM’s CSOV – all over the next two years. We believe any underperformance in these aspects will represent downside risks to our earnings estimates and TP. 

• ESG. As MPM’S ESG score is 3 out of 4 – on par with our country median – we apply a 0% discount/premium to its intrinsic value to derive our new TP. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 29 May 2023

• Keep BUY, with new SOP-based SGD3.40 TP from SGD3.30, 34% upside and 4% FY24F (Mar) yield. FY23 results missed on AUD weakness, albeit. with the highest DPS payout since FY19. With FY23 return on invested capital (ROIC) rising to 8.3% (FY22: 7.3%), management has set a new low double-digit target in the medium term. We cut FY24F- 25F core earnings by 2-5% post results call, with FY26F introduced. Our TP (inclusive of a 6% ESG premium) is lifted slightly after updating the valuations of associates. Singtel remains our sector preferred pick.

• A miss on FX, albeit, good operational showing with ROIC at 8.3%. 4QFY23 core earnings of SGD489m (-12.5% QoQ, +4.4% YoY) brought FY23 core earnings to SGD2.05bn (+7% YoY), at 90% of our forecast (consensus: 93%) with the key deviation coming from the weaker AUD (-6% YTD). Group revenue and EBITDA fell a marginal 5% and 2.2% YTD with stronger EBITDA margin of 25.2% notched (FY22: 24.6%), largely on account of tight cost controls. The positive offsets were from associate contributions (+6.1% YTD) on Airtel’s outperformance and lower depreciation expense. A final DPS of 5.3 SG cents (FY22: 4.8 SG cents) puts full-year DPS at 14.9 SG cents (including special DPS of 5 SG cents), the highest since FY19 with ordinary DPS of 9.9 SG cents at the top-end of its 60-80% payout, ahead of our and market expectations.

• Roaming roars back. Singapore consumer revenue grew 5% YoY in 2HFY23 (+ 11.2% YTD) while EBITDA gained 15%. Mobile services revenue (MSR) jumped 12%, supported by a further recovery in roaming revenue (postpaid roaming revenue trebled YoY and is at 60% of pre-pandemic levels), higher migrant traffic which bolstered prepaid sales and stronger 5G adoption. Optus’ mobile revenue ticked up 3% on market price repair with EBITDA up 1% (+4% ex-NBN migration revenue). Meanwhile, NCS, Singtel’s digital ICT arm, saw 16% revenue growth in FY23 although EBIT fell 35% on higher staff cost and investments to boost its capabilities. It has nonetheless registered two consecutive quarters of EBIT growth on cost containment efforts, supported by a strong sales pipeline of SGD3.2bn.

• More asset monetisation to come. Singtel’s asset recycling has thus far netted >SGD6bn. We see scope for more cash to be returned (management targets for additional SGD6bn from further asset divestments (eg sale of Comcenter HQ and disposal of infrastructure assets such as data centres and satellites). Key risks are competition, FX weakness and weaker-than- expected earnings.

• ESG framework update. As there is greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 26 May 2023

• Maintain NEUTRAL and SGD35.70 TP, 14% upside with c.6% FY23F yield. At DBS Investor Day 2023 – Digital Transformation 2.0 held earlier this week, management quantified key achievements made since 2017 (when it first shared details on the bank’s digital transformation) and showcased how DBS has deepened its technology capabilities, become data-driven, and is achieving scale and effectiveness. Management sees medium-term ROE at 15-17% and its CET-1 ratio at 12.5-13.5%.

• Medium-term ROE. DBS’ ROE has risen from 11.2% in 2015, when it first embarked on its digital transformation, to 15% in 2022. Of the total 3.8-ppt improvement, 2.5ppts were underpinned by structural drivers while another 2.2-ppt increase was from external drivers (Figure 1). Over the next three years, ROE is expected to range between 15% and 17%, down from the high of 18.6% in 1Q23 – with the drags being NIM (Federal Funds Rate falling below 3%) and credit cost (through the cycle 18bps vs 10-15bps for FY23F). Offsets are expected to come from: i) Faster growth in capital-light high-ROE businesses such as wealth management, global transaction services (GTS), and treasury market sales (TMS); ii) improved profitability in growth markets in India, Taiwan and Indonesia, and iii) capital management (Figure 2).

• Capital management. Management has a CET-1 target range of 12.5-13.5%. This assumes risk-weighted asset growth of 5% pa and dividend payout ratios of 60%. With CET-1 at 14% currently, the bank has the capacity to sustain a SGD0.24 pa increase in DPS, which suggests DPS of SGD1.92 in FY24F. A further SGD3.0bn could be distributed via a further dividend step-up, special dividends or share buybacks.

• Tech capabilities a key differentiator. Management attributes much of DBS’ structural advantage over peers to its technology capabilities. Its application programming interface or API-driven architecture increases connectivity with ecosystem partners, as well as improves internal workflows for greater productivity. The successful consolidation of the bank’s data platform has transformed its data into a competitive differentiator, enabling growth in new markets and segments and effective portfolio risk management. DBS has seen significant ROE uplift in its consumer & SME segments, as well as fee businesses.

• Will comfortably weather a recession. Despite the sharp rise in interest rates, DBS is not seeing stress in any part of its loan book. Internal stress tests indicate that asset quality should remain resilient. The bank has substantial allowances, with a SGD3.8bn general provision buffer (including SGD2.0bn of overlays) and non-performing asset coverage at a comfortable 127%. Capital is robust, with CET-1 at 14% while liquidity is ample.

• Valuations and TP. Our TP of SGD35.70 is based on an intrinsic value of SGD35.00 with a 2% ESG premium applied, based on our in-house ESG methodology. The GGM-derived P/BV of 1.52x is at +2SD from its historical mean, against a multi-year high ROE of c.17%.

Source: RHB Research - 25 May 2023

• Maintain NEUTRAL, new SGD0.80 TP from SGD1.14, 4% downside with c.4% FY23F yield. We maintain our NEUTRAL call, as Frencken’s 1Q23 update indicated weak demand and higher operating costs amid on- going excess inventory in the chip sector. We see low utilisation rates from expanded capacities straining near-term margins, as the semiconductor market waits for inventory levels undergo a correction. We slash earnings estimates by 31%, in view of weaker-than-expected sales and a dimmer margin outlook. Our TP is pegged to 10x FY23-24F P/E.

• 1Q23 net profit was below our estimate, at SGD5.2m (-60% YoY). This was booked on a lower revenue of SGD173m, marking a 13% YoY decline from 1Q22’s SGD198m. Revenue from the mechatronics division shrank 14% YoY (SGD149m), led by industrial automation (-40% YoY, to SGD19m) and Asia’s semiconductor (-24% YoY, to SGD58m) segments. Turnover from the medical and analytical & life sciences units grew 31% and 3% YoY to SGD30m and SGD40m, due to an increase in orders from Europe and Asia. Meanwhile, revenue for the integrated manufacturing services division dropped by 10% YoY, as sales at both the automotive & consumer and industrial electronics segments declined. FRKN’s GPM narrowed to 12.3% (-3.1ppts YoY). Net profit plunged by 60% YoY to SGD5.2m as a result of lower margins and higher costs.

• Excess chip inventory continues to dominate sector trends. Taiwan Semiconductor Manufacturing Co (TSMC) (2330 TT, NR) – FRKN’s major client ASML’s (ASML NA, NR) key customer – remains impacted by customers’ excess inventory levels, and is awaiting adjustments. For now, TSMC’s 2023 revenue outlook points to a decline by at least a low single- digit percentage YoY.

• Margin drag at play – due to higher installed capacity, low utilisation. FRKN now anticipates a drag in its margins, with the current sales decline expected to pull down its utilisation rate on a higher installed base. Note that its production capacity had been expanded ahead of an anticipated ramp-up in the utilisation rate. But, with the decline in semiconductor outlook and sales to customers, the higher depreciation costs and costs for the new capacities will drag on profitability. As 1Q23 net profit missed estimates, we cut FY23-25F earnings by 31% each year, to SGD33m, SGD35m, and SGD37m to reflect a weak 1Q23 and soft margins.

• Key downside risks to our forecasts include a later-than-expected recovery in semiconductor demand.

• ESG. As FRKN’S ESG score is 3 out of 4 – on par with our country median – we apply a 0% discount/premium to its intrinsic value to derive our new TP. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 24 May 2023

• Stay NEUTRAL and SGD9.80 TP, 5% upside. Singapore Exchange’s April market statistics came in below estimates. Both securities daily average value (SDAV) and derivatives daily average volume (DDAV) registered declines. Implied FY23F (Jun) SDAV and DDAV (based on data till April) are tracking 2% and 5% below our forecasts. We reiterate our view of a weak outlook for its cash equities business in the near term and maintain our below-Street estimates. SGX’s 21x forward P/E is close to its historical average, which is a fair valuation level.

• Securities volumes decline for four straight months. The STI climbed 0.4% MoM in April, ending the month with a 1.3% total return and bringing total returns for 2023’s first four months to 2.1%. SDAV did fall 23% YoY (-19% MoM) to SGD979m. For each month in 2023, the SDAV has now registered a YoY decline. The YTD securities market turnover value and SDAV for FY23 are tracking 14% and 13% below the numbers for the same period in FY22 (Figure 1). The implied FY23F SADV, based on data through February, is 2.3% below our estimate. We believe SGX could continue to see weakness in its cash equities business. We maintain our FY23F SDAV estimate of SGD1,119m, which remains below consensus.

• Total derivatives traded volumes in April was 17.7m contracts (-15% YoY, -25% MoM) with DDAV amounting to 0.93m (-10% YoY, -9% MoM). SGX said the reduced trade in equities and FX could not be offset by strong gains in commodities activities. Commodity derivatives traded volumes rose 55% YoY, led by a 63% YoY increase in benchmark iron ore volumes, but total futures traded volumes on FX slid 13% YoY – the equities index futures traded volumes was 24% lower YoY while the SGX FTSE China A50 futures volumes fell 27% YoY. YTD derivatives traded volumes and DDAV for FY23 are tracking 3% and 5% above the numbers for the same period in FY22 (Figure 2). The implied FY23F DADV, based on data through April, is 4.7% below our estimate.

• Lacks near-term catalysts, unexciting yields. While we still see fixed income, FX, and commodities businesses as key long-term growth drivers, the near-term outlook for the cash equities business stays weak, especially amidst moderating expectations local banks’ earnings. SGX’s stock offers a dismal 3.4% forward dividend yield, ie well below the STI’s 5%. Our FY23F-24F earnings are 6-7% below Street (Figure 8). We continue to value SGX by applying 21x P/E to its FY24F EPS. Our TP includes an 8% ESG premium to its SGD9.10 FV.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for details.

Source: RHB Research - 22 May 2023

• BUY, new SGD8.80 TP from SGD9.75, 27% upside. City Development’s share price has corrected 16% YTD, weighed down by cooling measures. Despite a moderated residential outlook, we believe the impact to CDL’s bottomline is manageable, as its inventory is substantially sold and the remaining landbank is mostly in mass/mid-tier segments. The global hospitality portfolio (c.one-third of RNAV) should continue to see a good recovery. Key catalysts: i) The unlocking of portfolio value via an asset spin- off into funds or REITs, ii) divestments, and iii) possible M&A.

• Cooling measures impact manageable on residential portfolio. CDL has sold the bulk (c.88%) of its launched inventory in Singapore as of April. We estimate c.SGD5bn of unbilled residential sales that can be recognised over the next three years. It currently has four projects with c.1,500 units (c.SGD2bn GDV) in the launch pipeline (Figure 2) with an estimated c.80% unsold units in md-tier and mass market segments that are less impacted by the latest government cooling measures aimed mainly at foreigners and investors. While we expect a slight moderation in new launch prices post measures, margins are unlikely to see significant compressions and remain in an 8-20% range. In light of the recent measures CDL said it will defer its upcoming new launch – Newport Residences (its only high-end project in its pipeline) – while the remaining projects are likely to go ahead as per schedule. Overall, we revise our FY23F-24F earnings lower by 9% and 8%, mainly by deferring launch recognition and slightly slower sales.

• Hospitality segment set to stay buoyant. CDL’s listed REIT subsidiary CDL Hospitality Trusts (CDREIT SP, NEUTRAL, TP: SGD1.25) posted a strong set of 1Q numbers with net property income up 35% YoY, boosted by strong revenue/available room or RevPAR recovery in Singapore, Australia, and Europe. We expect a similar trading performance for its Millennium & Copthorne operations and are positive on 2023’s outlook.

• Slowly progressing on its fund management ambitions. Post the recent acquisitions of St Katherine Docks (UK) and Sofitel Brisbane, the fund management’s asset under management stands at c.USD4bn – CDL has an end-2023 target of USD5bn. The fund management’s business growth has been one of its key strategies to improve its weak core ROE.

• ESG score by a notch to 3.3 (out of 4.0). As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note Envisioning a Better Future. As CDL’s score is three notches above the country median, we apply a 6% ESG premium to reach our new SGD8.80 TP. Keep BUY.

Source: RHB Research - 19 May 2023