RHB Investment Research Reports

Author: rhbinvest   |   Latest post: Fri, 3 Feb 2023, 11:31 AM


Raffles Medical - Awaiting Updates on Margin and China Outlook

Author: rhbinvest   |  Publish date: Fri, 3 Feb 2023, 11:31 AM

  • Maintain BUY and SGD1.65 TP, 10% upside with 2% FY23F yield. In anticipation of strong 2H22 earnings and a likely positive outlook for its China segment, Raffles Medical's share price has risen by 7% YTD. We expect greater clarity on the sustainability of its margins and updates on the outlook for its China businesses when it announces FY22 results on 27 Feb. While cost pressures may weigh on the group’s near-term earnings outlook, we remain positive on its long-term growth – which we believe remains dependent on the ramp-up of its China operations.
  • Near-term cost headwinds could persist despite recent strong margins. RFMD reported better-than-expected margins for 9M22, as the drop in costs from COVID-19-related business was faster and higher than the decline in revenue. However, we maintain that labour constraints and higher costs (wages and energy) may negatively impact its current elevated margin. Other healthcare players in Singapore are reporting a similar trend on the cost front as well. RFMD is trying to pass on some costs to patients, but we believe it may not be sufficient. This, along with EBITDA losses from its China operations, is why we expect it to report lower YoY earnings in 2023, despite registering revenue growth.
  • China’s reopening could boost medical tourism in Singapore... Historically, foreign patients used to account for close to one-third of Raffles Medical’s overall patient load in Singapore. The group recently stated that since the Singapore borders reopened on Apr 2022, it has seen a return of foreign patients – especially from Indonesia and Indochina. Medical tourism in Singapore will gain further momentum with China reopening its borders. We believe this should translate to higher foreign patient loads at its Singapore hospital operations.
  • ...and could also speed up the growth of its China operations. We currently expect the group’s China business – especially its Shanghai hospital – to ramp up gradually this year. Management has maintained that the EBITDA breakeven period for its China operations remains at 2-3 years, implying that the Shanghai hospital could record negative EBITDA in 2023-2025. However, a faster-than-expected recovery in demand for healthcare in China, amidst the country’s reopening, could potentially bring forward this breakeven period.
  • We see further upside to its share price. Our TP for RFMD, which continues to be based on the average value derived from using the P/E, P/BV, EV/EBITDA, and DCF valuations, offers a 10% upside. As RFMD has an ESG score of 3.11 out of 4 (ie slightly above the country median), our TP includes a 2% ESG premium over its intrinsic value, in line with our in-house proprietary methodology.

Source: RHB Research - 3 Feb 2023

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CapitaLand Integrated Commercial Trust - Fairly Valued; Cut to NEUTRAL

Author: rhbinvest   |  Publish date: Thu, 2 Feb 2023, 10:09 AM

  • Downgrade to NEUTRAL from Buy, TP remains at SGD2.00, 5% downside. CapitaLand Integrated Commercial Trust’s 2H22 and FY22 results were slightly below our expectations. Portfolio operating metrics improved in 4Q22 and FY22, but growth was comparatively lower vs that of peers. The positive momentum is expected to be maintained in 1H23 before slowing down in 2H23 – but operational gains will be offset by higher interest and inflationary pressures. Valuations are fair – CICT is trading at its BV and offers 5% dividend yields.
  • 2H22 distributable income and DPU rose 5% YoY and 3% YoY aided by rental growth and acquisitions. This was partly offset by higher interest expenses. FY22 DPU was at 97% of our forecast, being dragged down by higher-than-expected financing costs. CICT’s overall portfolio (on a same- store basis) was stable, as the gains on Singapore assets were offset by losses at the German segment due to higher discount rates, terminal yield as well as FX impact. Service charges have been raised across assets, which should partially offset utility and operating cost pressures ahead.
  • About 81% of the REIT’s borrowings are hedged but this could fall to 70% if CICT decides to roll over its debt expiring this year to floating interest rates. Overall interest cost for FY23 is expected to be in the mid 3% levels (from 2.7%). Every 1% increase in rates will have a c.3% impact on DPU.
  • Rent growth expected to slow down but remain positive. Retail and office rent reversions both turned positive in FY22, at 1.2% and 7.6% respectively, with stronger rent growth recorded in 4Q22. Looking ahead, the momentum is expected to carry on in 1H23. Although market demand has softened slightly, the supply remains tight for both segments, with low- single digit positive rent reversions expected. On the retail front, tenant sales (FY22) rose 23% YoY, with a sharper recovery seen in downtown malls. Potential upside could come from Raffles City Singapore hospitality portfolio for FY23. Overall committed occupancy rose 0.7ppt QoQ to 95.8%, and is expected to remain firm at c.95% levels this year.
  • Acquisitions are challenging as CICT’s net gearing is on the high side at 40.4% but there is a possibility of the REIT paring down its stake in some office assets, or selling smaller malls and increasing its stake in some newer assets, ie CapitaSpring and CapitaSky. Ongoing asset enhancements at CQ @ Clarke Quay is expected to be completed by 3Q23, and committed occupancy (including leases in advanced negotiations) stands at 80%.
  • We trim FY23-24F DPU by 2-3% by mainly adjusting interest cost assumptions. CICT has one among the highest ESG scores among the S- REITs under our coverage, at 3.3 (out of 4.0). This is three notches above the country median, so we applied a 6% ESG premium to its intrinsic value to derive our TP.

Source: RHB Research - 2 Feb 2023

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Keppel Pacific Oak US REIT - Calm Amidst the Storm; Keep BUY

Author: rhbinvest   |  Publish date: Thu, 2 Feb 2023, 10:08 AM

  • Stay BUY with revised DDM-derived USD0.69 TP from USD0.74, 27% upside. Keppel Pacific Oak US REIT’s results were slightly below (96% of forecast), while valuations surprised on the upside. Operational numbers remained strong despite very challenging office market conditions – we attribute this to assets in right markets and a strong leasing team. Gearing remains comfortable at below 40%. YTD, KORE’s share price has bounced back c.19%, but remains cheap at 30% below book and offers 10% yield.
  • 4Q adjusted NPI down 6% QoQ due to lower income from assets divested during the quarter and higher repair and maintenance expenses. Adjusted DPU (2H) was 2.8% lower YoY as higher revenue was offset by an increase in interest and property expenses. Overall portfolio value surprised on the upside, coming in relatively flat (+0.2% YoY) on an absolute basis, but declined 2.7% when including capex and tenant improvements. In comparison, its peer Manulife US REIT (MUST SP, BUY, TP: USD0.43) earlier announced a 11% valuation decline. This again differentiates a relatively positive outlook on KORE’s submarket and its limited tenant concentration risks.
  • Outlook moderated but still positive. Rent reversions are expected to remain in positive low single digits (FY22: 3.8%, 4Q: 8.1%) with asking rents still c.6% below average in place rents. Despite uncertainty and negative news flows from the tech sector, its overall portfolio occupancy remained flat QoQ at 92.6%. For FY23, while some fluctuations in occupancy are anticipated from known tenant exits, it remains in active discussion with various prospects and confident of maintaining its high occupancy levels with demand staying relatively firm for smaller leases. The impact from big tech layoffs and cutbacks is not expected to be significant in its Seattle and Sacramento submarkets and overall portfolio as such. Physical occupancy in its assets have instead seen an improvement from market cool-off and is currently at c.60%, which it sees as positive.
  • Strong balance sheet with 77% of its debt hedged and no debt maturing until 4Q24. Every 50bps rate increase should have a c.1.2% DPU impact.
  • Acquisitions not the focus, as it sees limited opportunities in the market currently and its high cost of capital limits any accretion potential. Overall gearing is comfortable at 37.5%. It has earmarked two assets in its portfolio which it could potentially divest at the right price.
  • We have lowered FY23-24F DPU by 5-6% by tweaking our occupancy assumptions, with higher interest costs. ESG score of 3.0 (out of 4.0) is in line with country median, and we applied a 0% premium/discount to our DDM-derived TP.

Source: RHB Research - 2 Feb 2023

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ESR-LOGOS REIT - Portfolio Transformation on Track; BUY

Author: rhbinvest   |  Publish date: Wed, 1 Feb 2023, 10:09 AM

  • BUY, new TP of SGD0.45 from SGD 0.46, 18% upside with c.7% FY23F yield. ESR-LOGOS REIT’s 2H22 and FY22 results were broadly in line. Its operational performance should continue improving in FY23, on resilient industrial demand, but offset by interest cost and inflation pressures. Key catalyst: The successful execution of its ongoing portfolio rejuvenation, with the likely divestment of assets and capital recycled into asset enhancements and selective acquisitions. The strong sponsor backing and visible growth pipeline presents strong medium-term growth.
  • 2H22 DPU grew 7.5%YoY, aided by merger contributions and past gains distribution top-ups of SGD14.5m – to offset divestment losses, as well as interest and inflation cost pressures. With the ongoing portfolio revamp and rising cost pressures, management plans to continue leaning on capital top- ups, for up to c.10% of DPU. Overall portfolio value declined marginally as gains from Singapore assets (+1.2%) were offset by a decline in Australia (-5.7%), which in turn was due to a c.50bps cap rate expansion. c.72% of its debt is on fixed interest rates as of 4Q22 (3Q22: 67%), with every 50bps increase expected to impact DPU by about 3%. The REIT also indicated that it will likely redeem its SGD100m perpetual securities, which is due for a rate reset in Feb 2023.
  • Divestment of SGD450m in non-core assets on the cards. EREIT is currently marketing a SGD450m portfolio of non-core Singapore assets. The move comes closely on the heels of its SGD150m worth of divestments announced last year, at a c.15% blended premium to valuations. We are positive on management’s strategy of rebalancing its portfolio towards modern and longer lease assets and divesting shorter-lease assets. While there is a visible pipeline of SGD2bn worth of sponsor assets, it remains cautious on acquisitions ahead amid the rising cost of capital. Management is also currently evaluating the potential redevelopment of an existing logistics asset into a cold storage ramp-up logistic facility, for which there is high demand. Asset enhancement exercises are also ongoing at three of its assets, at an estimated yield-on-cost of 6-7%.
  • Positive mid-single digit reversions for FY23F following a strong 2022, in which its portfolio saw a healthy c.12% rental reversion –driven mainly by logistics and high-specification buildings. Passing rental rates for its overseas assets are also 20-40% below spot rental rates, indicating good room for rental growth. Overall portfolio occupancy improved 0.3ppt QoQ to 92.7%, and should stay around these levels for FY23.
  • We trim FY23-24F DPU by 1% and 2%, factoring in higher operating and interest costs. EREIT has an ESG score of 3.1 out of 4.0. As this is one notch above the country median, we applied a 2% ESG premium to its intrinsic value to derive our TP.

Source: RHB Research - 1 Feb 2023

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CDL Hospitality Trusts - Recovery More Than Priced in

Author: rhbinvest   |  Publish date: Tue, 31 Jan 2023, 10:35 AM

  • NEUTRAL, new SGD1.25 TP from SGD1.15, 9% downside, 5% FY23F yield. CDL Hospitality Trusts’ strong 2H22 results were in line with expectations. Its outlook is moderated by a mix of slowing economic growth and inflationary pressures, but positive surprise could come from a strong rebound in Chinese tourist arrivals. This, however, is mostly priced in (share price has risen 25% in the last three months), and the stock is trading at levels close to its BV. It is also most exposed to rising interest rates, due to low hedges and half its debts expiring in 2023-2024.
  • 2H22 operational DPU grew 75% YoY, on a 48% YoY growth in NPI, with six of its eight operating markets recording healthy improvements. 13 of its 17 hotels outperformed pre-pandemic RevPAR in 4Q22 (vs 4Q19). Portfolio value (on a same-store basis) rose 4.8%YoY, driven by a 9% valuation jump in Singapore assets. While cap rates rose marginally (0-50bps) across markets, the effect was offset by the stronger performance and growth outlook. No capital top-ups were made for FY22 (vs SGD12.5m in FY21) and the guidance is for no additional capital top-ups this year.
  • Positive outlook with Singapore expected to lead the recovery…driven by a healthy pipeline of meetings, incentives, conferences and exhibitions (MICE) events and an anticipated sharp recovery in Chinese tourists later this year. Other markets in its portfolio that could benefit from the recovery in China tourist arrivals include the Maldives, Japan, and New Zealand. Headwinds, on the other hand, include labour shortages and cost pressures – which management expects will ease, as the year progresses.
  • …but interest cost pressures may limit gains. Only 56% of CDLHT’s debt is on fixed interest rates, and this is among the lowest among the S- REITs. Every 100bps increase in its interest cost could shave DPU by SGD0.0086 (18% of FY22). In addition, it has 22% and 28% of debt expiring in FY23 and FY24, which we expect to be rolled over at interest rates of slightly above 4%. Overall interest costs, as a result, should come in at high 3% levels, vs 3.5% as of end Dec 2022.
  • Acquisitions likely in overseas markets. CDLHT’s gearing fell to 36.6% (FY21: 39.1%) on the back of the valuation increase. It could also tap-in equity on the back of the recent share price run-up. Management noted that potential acquisition opportunities are mostly overseas (the UK, Japan etc) with over-leveraged buyers likely to offload. An asset enhancement exercise is currently underway at Grand Copthorne Waterfront, with extensive rejuvenation works on all rooms and meeting facilities.
  • We fine-tune FY23-24F DPU by 1% and -3% after factoring in rising interest cost expenses. Its ESG score of 3.1 is a notch above the country median, so we applied a 2% premium to intrinsic value to derive our TP.

Source: RHB Research - 31 Jan 2023

Labels: CDL HTrust
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Keppel REIT - Laggard Proxy to Resilient Office Sector; BUY

Author: rhbinvest   |  Publish date: Mon, 30 Jan 2023, 10:04 AM

  • Keep BUY, TP drops to SGD1.10 from SGD1.14, 13% upside. Keppel REIT’s results were slightly below estimates, with earnings meeting 96% of our full-year forecast. Despite the ongoing technology sector and economic slowdown, Singapore’s office market is expected to stay resilient on low supply and flight-to-quality trends. We believe the REIT could also look at asset divestments to lower gearing and recycle capital. Valuations are reasonably attractive, at 0.7x book value with a FY23F yield of 6.2%.
  • 2H22/FY22 DPU rose 2.4%/1.4% YoY, aided by the first tranche of the anniversary dividend distribution of SGD10m. Operational DPU (2H) was lower by 4% YoY on higher interest expenses, lower JV & associates income, and a weaker AUD. KREIT remains committed to a SGD20m annual capital top-up for the next four years, which will offset interest cost hikes. Portfolio value rose 1.7% HoH, with Singapore assets (+2.3% HoH) more than offsetting the weakness from assets abroad. About 76% of debt is hedged, with every 50bps rise in interest rates affecting DPU by 2%.
  • Blue & William’s first anchor tenant, Equifax, will consolidate its office space to occupy one-third of the building (c.4,350sqm). Management noted signing rental rates were in line with development assumptions of c.900- 1,100psm pa. The building is on track to be completed by mid-2023. The developer, Lendlease, has been providing 4.5% annual coupon payments during the current development phase, and has also committed to a 3-year rental guarantee on any unlet space after practical completion.
  • Slightly disappointing Japan entry. In Oct 2022, KREIT announced its entry into the Japan market by acquiring Ginza 2-chome, a freehold office building in central Tokyo, for JPY8.8bn (SGD84m). While we welcome its move to diversify into Japan, we believe management overpaid for the asset. The building is only c.36% occupied currently, and has an estimated NPI yield of 1.2% (3.1% when fully occupied), which we regard as very low. Debt cost is expected to be around c.1.5%, which means the acquisition is not expected to be immediately yield-accretive. When the building is fully occupied, however, the deal will be mildly accretive with full debt funding.
  • Mid- to high-single digit reversions expected in FY23F. KREIT posted strong portfolio rental reversions of +19.4% in 4Q22 (FY22: +10%) which we believe was mainly driven by mark-to-market of rent for space surrendered by Standard Chartered (c.80% of 184k sqf backfilled). Despite the economic and technology sector slowdown, it expects office leasing demand to remain firm in 1H, then cool down in 2H. The overall portfolio occupancy rate is expected to remain resilient, at c.96% for 2024.
  • We lower FY23-24F DPU by 4-5% on higher interest costs, and after tweaking occupancy, rental and recent acquisition assumptions. As KREIT’s ESG score of 3.2 is two notches above the country median, we applied a 4% premium to our intrinsic DDM value to derive our TP.

Source: RHB Research - 30 Jan 2023

Labels: Keppel Reit
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