Author:simonsg | Publish date: Tue, 13 Dec 2022, 10:52 AM
Singapore Exchange (SGX)’s implied FY23F (Jun) securities daily average value (SDAV) and the derivatives daily average volume (DDAV), based on the first five months of data, are tracking our forecast. While SDAV improved m-o-m, the y-o-y weakness has persisted. If this weakness continues, there could be downside risks to our FY23 estimate.
The recent rebound of SGX's share price has brought its forward P/E in line with the historical mean – which is fair, in view of an earnings decline in FY23F and its unexciting 3.5% dividend yield.
SGX's Nov Securities Volume Up M-o-m But Still Down Y-o-y
In November, the total securities market turnover value of SGX was S$27.2bn (-3% y-o-y, +18% m-o-m), while the SDAV stood at S$1.24bn (-8% y-o-y, +7% m-o-m). The STI gained by 6.4%, and registered its strongest price performance since Mar 2021.
During the month, SGX also saw the listing of NoonTalk Media on the Catalist board. NoonTalk Media is a Singapore-based media entertainment company that specialises in artist & talent management, multimedia production and event conceptualisation.
The implied FY23F SADV for SGX, based on the first five months of data for FY23, is 1.3% above our estimate..
Strong FX Volume Growth Supports Higher Derivatives Volume Y-o-y
In November, the total derivatives traded volume of SGX rose to 23.7m contracts (+30% y-o-y, +8% m-o-m), the highest reported by SGX since March. The DDAV was 1.08m (+24% y-o-y, -2% m-o-m). The expectations of China’s gradual reopening and expanded government support for the country’s property sector fanned the risk-on sentiment in Asian equities, currencies and commodities.
Amongst SGX’s derivative offerings, the volume of SGX FTSE A50 Index Futures increased 24% y-o-y to 9.3m contracts, while benchmark iron ore derivatives gained 69% y-o-y to 3.2m contracts.
Hedging activity on SGX’s FX OTC and futures marketplace accelerated amid US$ weakness. Total FX futures traded volume surged 104% y-o-y 4m contracts, which is an all-time high. We have provided our earnings and target price sensitivity to changes in SDAV and DDAV, see details in report attached below.
SGX's Historical Mean P/E Seems Fair
SGX’s current one year forward P/E of 22x is in line with its historical average P/E. As we foresee downside risks to our and consensus estimates from the ongoing weakness in SDAV, we recommend that investors wait for a better entry point. In addition, SGX’s dividend yield is well below the STI’s forward yield of 4.9%.
Our target price is based on a target P/E of 21x on 12 months’ forward EPS.
Our target price includes an ESG premium of 8% over its fair value of S$8.60, as per our in-house proprietary methodology. Maintain NEUTRAL on SGX with S$9.30 target price, 2% upside.
Author:simonsg | Publish date: Thu, 8 Dec 2022, 10:51 AM
We make small adjustments to Singapore Exchange (SGX)'s securities daily average value (SDAV), derivatives daily average volume (DDAV), and treasury income estimates for FY23 (Jul 2022 to Jun 2023). We also roll forward our valuation basis from FY23F EPS to 12 months' forward EPS.
Despite mild upward earnings adjustments, we believe SGX's SDAV could surprise us on the downside.
We assess SGX to be fairly priced, amidst expected earnings declines for FY23F and an underwhelming yield.
SGX's SDAV Has Been on a Declining Trend
Based on our earlier estimates, the implied FY23F SDAV, calculated on the first four months of data for FY23, was 7% below our estimate. We lowered our FY23F SGX's SDAV forecast by 5% and still believe that there could be further downside risks to our estimates.
SGX's DDAV Growth Continues to Track Expectations
SGX’s DDAV (derivatives daily average volume) has seen 9 consecutive months of either flat or y-o-y positive growth as of Oct 2022. Despite the rise in competition, SGX has managed to retain a large market share on its China A50 index futures product.
We remain confident in SGX’s derivatives business, with strong growth expected from its equity, FX, and commodity derivatives volumes. So far, the reported operating statistics for FY23 have tracked our growth expectations.
We have provided our earnings and target price sensitivity to changes in SGX's SDAV and DDAV in the report attached below.
We Raise Our Treasury Income Estimates
On the back of an ongoing rise in interest rates, we have increased our treasury income estimates for FY23–FY25. We expect the rise in SGX's treasury income to commence in 2HFY23 and move higher at a gradual pace during the forecast period.
SGX Is Trading at Its Historical Mean P/E Ratio; Our Target Price Includes An ESG Premium
SGX’s forward P/E of 22x is in line with its historical 1-year forward P/E, which we believe is a fair valuation.
We suggest investors to wait for a better entry point as the expectation of a muted SDAV outlook going forward could pose a downside risk to our and the consensus estimates. In addition, SGX offers a below-market dividend yield of 3.5%.
Our target price for SGX is based on a target P/E of 21x on 12 months’ forward EPS. Our target price includes an ESG premium of 8% over its fair value of S$8.60.
Stay NEUTRAL on SGX with a new S$9.30 target price from S$9.00, 2% upside and a ~4% yield.
Author:simonsg | Publish date: Wed, 7 Dec 2022, 10:50 AM
As per SingStat, the restaurant industry in Singapore has continued to register strong (+61.1%) y-o-y sales growth in October. While we expect the rate of growth to moderate, we still expect the industry to deliver positive growth in 2023.
Japan Foods’ strong balance sheet, which has helped it to survive the pandemic, its ability to sustain strong gross margins, and its recent expansion into halal restaurant brands should continue to support strong profit growth during FY23-25.
Expecting Positive Retail Sales Growth in 2023
As per the Singapore department of statistics (SingStat), sales of F&B services grew 36.9% y-o-y in October, extending the 29.6% y-o-y increase in September. The large growth in F&B sales in October was mainly attributed to the low base in Oct 2021, when there were stricter restrictions on dining-in at F&B establishments.
The turnover of restaurants increased by 61.1% y-o-y during this period. On a seasonally adjusted basis, sales of F&B services increased 1.0% m-o-m, while the turnover of restaurants fell 0.9% m-o-m in October.
While we expect sales momentum to slow in 1H23 due to the economic headwinds and higher GST rates effective 1 Jan 2023, we still expect F&B sales to register positive growth in 2023.
Margins Have Held Up Well Despite High Inflation
We believe Japan Foods (SGX:5OI)’ standardised food inputs across all its operations, an efficient central kitchen operations, and improved labour productivity should enable it to maintain its margins. Its gross margin widened to 84.7% in 1HFY23 from 83.8% in 1HFY22 (FY22: 84.6%), despite the inflationary environment.
To offset some rise in input costs, Japan Foods is gradually passing on higher costs to customers by raising its prices as the demand remains strong.
Halal Franchise Offers Strong Growth Prospects
Japan Foods has expanded its halal restaurant offering and grown the number of its halal restaurants from six in 1HFY22 to 12 in 1HFY23. It also expanded its portfolio of halal brands to five as of Oct 2022.
Halal restaurants contributed a net revenue y-o-y increase of S$6.4m in 1HFY23 to S$9.6m and accounted for 25.2% of Japan Foods' total revenue in 1HFY23. We see this segment as an untapped market that offers strong growth potential.
Above Market Dividend Yield and Compelling Valuation
Japan Foods paid 100% of its net profit as dividends in FY22, which we expect it to maintain in FY23-25. This implies a dividend yield of more than 5%, which is higher than what the Singapore market offers.
We view its ex-cash FY23F P/E of 12x as compelling, given its robust growth potential. Our target price for Japan Foods includes a 0% ESG premium/discount to its fair value.
Reiterate BUY on Japan Foods with S$0.60 target price offering 41% upside and ~5% FY23F (Mar) yield.
Author:simonsg | Publish date: Mon, 5 Dec 2022, 10:50 AM
Frasers Centrepoint Trust (SGX:J69U)’s suburban mall portfolio is expected to stay resilient in the face of a slowing economic growth but it is not immune to inflationary pressures and rising interest rates.
Frasers Centrepoint Trust has also seemed to have dropped out of race to acquire Mercatus malls, which we believe is not a bad news in the current challenging market conditions.
Overall, we expect upside from occupancy increase and rental uptick to be offset by higher financing costs and lower margins.
Not a Leading Contender for Mercatus’ Portfolio Anymore
Reuters reported that Hong Kong listed Link REIT (823 HK) has emerged as the frontrunner in the race to buy the trimmed retail portfolio assets from Mercatus Co-operative Ltd. estimated at S$2.5bn. Frasers Centrepoint Trust was tipped to be among potential candidates but the latest news does not come as a surprise as challenging equity funding environment and higher debt costs have largely dimmed any accretion potential for such a portfolio.
In our view, Frasers Centrepoint Trust could focus instead on increasing its stake in Waterway Point (50% owned) or acquiring North Point City South Wing at the right opportunity as these assets offer greater familiarity, synergy, and value extraction potential for Frasers Centrepoint Trust.
With gearing at 33%, Frasers Centrepoint Trust has > S$0.5bn in debt headroom before it crosses the 40% level.
Occupancy and Rents to Remain Firm, But Expect Pressure on Margins
Frasers Centrepoint Trust's portfolio occupancy rose 0.4ppt q-o-q to 97.5% (i.e. near full occupancy), with its three large dominant malls (Causeway Point, North Point City North Wing, and Waterway Point) registering.
Rent reversion saw a turnaround with +1.5% in FY22 (FY21: -0.6%) on incoming vs outgoing basis as underlying tenant sales across its malls rose 10% above pre-COVID-19 levels.
Occupancy cost fell to 16.2% vs 19.2% the peak in FY20. NPI margin is expected to see a ~2% compression as most of the utility rate hedges across its malls will be rolled over to high spot market rates by May 2023.
Frasers Centrepoint Trust currently hedged 71% of its borrowings and every 50bps increase in interest rates is expected to have a ~2% impact on its DPU.
In addition, Frasers Centrepoint Trust has a high ~48% of debt due for refinancing in the next two years which we expect should result in ~100bps increase in overall interest cost.
Frasers Centrepoint Trust – Valuation and Recommendation
We have revised down FY23-24F DPU forecast for Frasers Centrepoint Trust by 3% due to higher financing costs, lower margins, and tweaking up the rents. Our COE assumption is lifted up by 70bps to factor in rising rates resulting in a lower target price.
We raise Frasers Centrepoint Trust’s ESG score by a notch to 3.2 (out of 4.0) by raising environmental score on the back of its efforts and carbon emission reduction targets. As this score is two notches above the country median we applied a 4% premium to our intrinsic value to derive target price.
Keep NEUTRAL rating on Frasers Centrepoint Trust with a lower target price of S$2.09 from S$2.45, 4% upside.
Author:simonsg | Publish date: Fri, 2 Dec 2022, 5:53 PM
City Developments (SGX:C09)'s 3Q business updates were in line and showed continued pickup across all three market segments.
City Developments’s strategy of deleveraging its non-core assets over last two years has placed it in a relatively better balance sheet position amid rising interest rates. Key earnings drivers continue to be its healthy unbilled sales from Singapore residential projects and hospitality segment recovery.
Despite year-to-date share price outperformance (+22%), the stock remains undervalued at ~50% discount to RNAV.
Development Portfolio Well Positioned Despite Rising Rates and Cooling Measures
Residential sales in Singapore projects remained strong with Copen Grand executive condominium (EC) (50% stake) fully sold out since its launch in October, adding an estimated ~S$0.5bn in presales revenue. With this, we estimate City Developments has unbilled residential sales revenue of ~S$5bn that can be recognised over the next three years.
City Developments has also recently won another EC project at Bukit Batok West Avenue 5 in September, which should see similar strong demand considering the EC segment is relatively less impacted by cooling measures and interest rates (deferred payment options). It also has four residential projects (>1,000 units), which are expected to be gradually rolled out in 2023-2024.
Sharp Recovery in the Hospitality Segment to Continue in 4Q
3Q revenue per available room (RevPAR) for its hospitality portfolio jumped 89% y-o-y and was up 43% vs 1H, boosted by occupancy and room rate increase across all markets.
The Singapore, UK, and US markets, which account for the majority of City Developments's hospitality portfolio, were the best performers with RevPAR (3Q) rising 167%, 165% and 60% y-o-y. Overall gross margins also rose 14ppts to 36.2% indicating that revenue growth well exceeded inflation pressures.
Near-term outlook remains positive despite an anticipated slowdown in 2H23.
Fund Management’s Assets Under Management (AUM) Less Likely to Hit US$5bn Target by 2023
City Developments's management noted that it has paused plans for a UK commercial REIT IPO in Singapore. With the sharp rise in interest rates, we see less chance of it being listed as a REIT by 2023.
Fund management’s AUM as of 1H stood at US$2.9bn, and we believe it is challenging to achieve the US$5bn target by end-2023.
On the balance sheet front, City Developments’s gearing has been lowered to 0.52x (including investment properties at a fair value) providing S$1-2bn debt headroom to tap into market opportunities arising from current market uncertainties.
No changes to our earnings estimates for City Developments. City Developments is given ESG score of 3.3 out of 4.0 – based on our proprietary in-house methodology. As this ESG score is three notches above our country median, we apply a 6% premium to derive our target price.
Stay BUY on City Developments with S$9.75 target price, 18% upside and ~2% FY23F yield.
Author:simonsg | Publish date: Thu, 1 Dec 2022, 5:54 PM
ComfortDelGro (SGX:C52) and Gojek are collaborating to address the driver shortage issue afflicting Singapore's point-to-point (P2P) transportation industry. As part of the collaboration, Gojek users will be able to access ComfortDelGro's taxis via the Gojek app.
We view this positively as it should reduce the competitive intensity in Singapore's taxi industry even further. We reiterate that ComfortDelGro should see y-o-y earnings growth in 2023, owing to an improving taxi segment and increased rail ridership.
After the recent correction in ComfortDelGro's share price, its valuation looks compelling.
Teaming Up With Gojek to Address Driver Shortage
According to news reports, ComfortDelGro and Gojek have formed a two-year partnership to provide Gojek users in Singapore with greater access to ComfortDelGro's 10,000-strong taxi fleet via its ride-hailing app. This should address the broader issue of driver shortages, which has recently resulted in lower fulfilment rates.
Both companies anticipate that the collaboration will encourage vocational license holders to reconsider returning to the P2P industry, resulting in better service for commuters due to a larger pool of drivers and shorter wait times. The collaboration also aims to improve driver welfare, resulting in higher earnings for drivers.
More Collaboration Opportunities Will be Explored
ComfortDelGro and Gojek will also look into other areas of collaboration and resource sharing, such as the transition to EV and new revenue streams, as well as insurance, driver training, and vehicle maintenance assistance for driver partners.
According to a news report, both companies will reveal more details about the deal in the coming months. We leave our earnings estimates unchanged as we await further details from ComfortDelGro management.
Recently Released Quarterly Results Showed the Taxi Business Continuing to Improve
The taxi business made a strong y-o-y recovery in 3Q22 thanks to higher revenue from lower COVID-19-related rental discounts, higher call volumes, and newly introduced commissions. ComfortDelGro will extend the rental discount for the rest of 2022 and increased commission rate for call bookings to 5% from 4%, which will help to partially offset the rental discounts.
The Investment Thesis Remains Unchanged and the Valuation Is Compelling
We maintain that ComfortDelGro's leadership position in Singapore taxis and recovery in public transport ridership should enable it to report a gradual earnings recovery. ComfortDelGro's share price has dropped 13% in the last three months, and the stock's forward P/E is now well below its 10-year average, making the valuation quite compelling.
Our target price for ComfortDelGro includes a 12% the DCF-derived S$1.60 fair value.
Maintain BUY rating on ComfortDelGro with S$1.80 target price, 46% upside with a ~4% FY23F yield.
