• 1Q23 results were below expectations. Revenue and PATMI were 19%/10% of our forecasts. Revenue suffered from the cessation of Biosensors and delay shipments in Vietnam.
• Specialty pharma revenue declined by 27%. The loss of Biosensor distribution in Dec 22 was well flagged. The surprise was supply disruption from three specialty pharma manufacturers.
• We cut our FY23e earnings by 31% to S$9.1mn and the DCF target price is lowered to S$0.39 (prev. S$0.445). Our BUY recommendation is maintained. We expect the supply constraints to spill over into 2Q23. Proprietary brands have performed well with 16% growth. It will be a multi-year journey for proprietary brands to reach scale and compete even more effectively in the region. Investments into DocMed, another $5.4mn over the next 2-3 years could drag earnings but can be deemed as one-off upfront cost to develop the platform.

The Positive

+ Healthy growth in proprietary brands. Proprietary brands revenue increased by 16% in 1Q23 supported by higher demand for Ceradan® dermatological products. Ceradan® and Ocean Health® have a pipeline of new products to be launched this year. The Group launched Ceradan® Advanced Emollient Wash in Singapore and Malaysia during 1Q2023.

The Negatives

– Supply disruption in specialty products. Specialty revenue fell 27% due to the cessation of the distributorship of Biosensors products in Dec 22 and the delay in the shipment of key products in Vietnam. Of the three suppliers facing production disruption, two resumed production in 2Q23.

– Weaker operating margins. Net profit margin suffered from higher R&D and travelling expenses. Margins will be weighed down further from DocMed investments into the platform.

Source: Phillip Capital Research - 18 May 2023

• 1H23 net profit was below our expectations, at 31% of our FY23e forecasts. Net profit fell 34.1% YoY, due to 1) 15% decline in ASP; and 2) slow construction progress with safety measures implemented at worksites, which caused deliveries to be deferred. Lower order delivery was mitigated by trading volume, which reduced gross margin by 1.3% pt to 7.4%.
• Construction activities have picked up since April. Demand remains strong, underpinned by pent-up demand in residential and infrastructure development. BCA has projected 2023 construction demand at S$27bn-32bn (2022: S$29.8bn) and progress payment to grow by 9-20%. BRC’s orderbook has further grown to S$1.42bn. Rebar prices have stabilized from Feb 2023.
• Maintain BUY with a lower DCF-derived target price of $1.99 (prev. $2.14). We cut our forecasts by 23.2% and 27.7% for FY23e and FY24e to reflect the lower 1H23 earnings. We expect steel prices to stabilize for the rest of the year, though this implies a 20.4% YoY decline in 2H23. Order deliveries should rise as construction activities are ramped up.

The Negative

– 1H23 earnings came in at only 31% of our FY23e estimates. The shortfall was due to lower order deliveries, which was impeded by low construction progress at work sites to meet heightened safety measures. The measures are mandated to last till end-May, but activities are picking up with improved safety conditions.  BRC booked more lower-margined trading businesses during the period, and gross margin fell 1.3% pt to 7.4%. Interest costs rose 170% YoY to S$6.3mn, resulting in 34.1% YoY decline in 1H23 net profit.

The Positives

+ Net gearing improved to 0.38x (Sep 22: 0.76x). With easing of steel prices and freight costs, inventory holdings were brought down. Credit terms from suppliers become more favourable, leading to strong operating cash inflow of about S$0.608/share.

+ Orderbook edged higher to S$1.42bn (Sep 22: $1.4bn), as demand remains robust. BCA estimates that progress payments, which represent work done and revenue booked, to grow by 9-20% in 2023. We estimate about 60% of the orderbook are for jobs in the public sector which are less volatile and payments are more certain. While the delay in construction work had affected cash flow and credit conditions of some contractors, we do not see any risk of default that could impact building material suppliers.

Source: Phillip Capital Research - 18 May 2023

• 3QFY23 earnings of RM34.2mn were below our estimates. 9MFY23 earnings were at 64% of our FY23e. The 15% YoY dip in earnings came from higher-than-expected OPEX due to the current inflationary environment and a need to increase staff costs.
• Project-related revenue comprising software licensing and software project services fell 27% YoY. Silverlake recently signed their first multi-million 10-year core and channels digital banking MOBIUS deal with a client in Malaysia, total size of more than RM100mn of which RM30-40mn will be booked in the first year.
• We maintain BUY with an unchanged target price of S$0.49. We lower FY23e earnings by 7% as we increase operating expenses estimates for FY23e. Our target price is pegged to 21x P/E FY23e. We expect MOBIUS and the recovery in bank IT spending after two cautious pandemic years to be the key growth drivers for the company.

The Positives

+ Recurring revenue rose 8% YoY. Recurring revenue comprises maintenance and enhancement services, insurance ecosystem transactions and services, and retail transactions processing revenue. Maintenance and enhancement services increased 7% YoY to RM124mn as the dip in enhancement services revenue was more than offset by the increase in maintenance revenue. The decline in enhancement services revenue was mainly due to the timing and progress of contracts fulfilment and delivery, and Silverlake anticipates this will be recognised and booked in the following quarter. Insurance ecosystem transactions and services revenue increased 18% YoY as there was broad-based growth

across all segments, from vehicle claims processing, insurance policies processing, productivity and analytics solutions, and integration services. Revenue from retail transactions processing surged 102% YoY mainly due to higher subscriptions for Silverlake’s cloud-based retail solution, AgoraCloud, from both retail and pharmaceutical customers in Malaysia and Singapore.

+ Order backlog healthy. Silverlake has a long track record and a proven client base in Southeast Asia. Three of the 5 largest Southeast Asia-based financial institutions use its core banking platform, and it has largely retained all its clients since bringing them on board its platform. Silverlake’s project pipeline is healthy, at RM1.8bn (2QFY23: RM1.8bn), with a record contract wins of RM259mn in 3QFY23 and an order backlog of RM261mn on the verge of closing in 4QFY23. Furthermore, Silverlake has recently secured their first multi-million 10-year core and channels digital banking MOBIUS deal with a client in Malaysia. Silverlake is beginning to close more deals and is witnessing an uptick in inquiries about its financial services market solutions and capabilities.

The Negatives

– OPEX rose 14% YoY. Operating expenses were 14% higher YoY mainly due to the current inflationary environment and a need to support long-term growth and sustainability. The increase was across all segments, with increases in staff costs due to additional headcount, increase in finance costs due to a revolving credit facility drawdown, increase in foreign currency exchange losses due to the fluctuation of foreign currencies, and higher costs for internal and external branding activities as markets opened up. Nonetheless, the expense over revenue ratio was kept at 30%.

– Project-related revenue fell 27% YoY. Software licensing revenue fell 65% YoY to RM7mn. This was mainly due to the progression of actual project delivery varying from quarter to quarter, resulting in a lag in revenue contribution. However, this was offset by software project services revenue increasing 6% YoY to RM26mn as there was additional revenue recognised from recently closed contracts from countries such as Thailand, UAE, and Malaysia. In addition, progressive project revenue recognised from on-going secured projects remained at a stable level.

Source: Phillip Capital Research - 18 May 2023

• 1Q23 revenue was within expectations but PATMI disappointed. 1Q23 revenue/PATMI was 22% and 18% of our FY23e forecast.
• The cost recovery from higher indexation of bus fees is underway in UK but the full benefit will be more evident in 2H23. Taxi earnings were hampered by incentives in China to attract taxi drivers, especially in Beijing. Balance sheet continues to strengthen with net cash of S$718mn
• The recovery in Singapore disappointed. Improvement in rail passenger volumes and prices could not offset the higher electricity and lower bus contracting fee. We are lowering our FY23e PATMI by 8% to S$167.4mn. Recovery in FY23e will stem from increased passenger volumes for both taxis and trains, a reduction in taxi rental rebates in Singapore by 5% points, indexation of UK bus contracts and lower taxi rebates in China. We maintain BUY with a reduced DCF target price of S$1.57 (prev. S$1.63).

The Positives

+ Taxi revenue improvement is still underway. Recovery of taxi revenue was due to booking commissions introduced last year (May 22: 4%, Oct 22: 5%) and a more stable taxi fleet. The improvement in taxi revenue would have been stronger but for incentives in China to attract drivers. Utilisation rate of taxis remains sluggish, especially in Beijing. Operating profit in China declined 46% to S$3.4mn.

+ With stable capex, cash piles up. Comfort generated free cash flow of around S$76.8mn in 1Q23 (1Q22: S$92.5mn). Net cash continues to pile up on the balance sheet. 1Q23 net cash is S$718mn, similar to last years S$754mn. Net cash is at record levels. Annualised capex is now S$200mn p.a., compared to the S$350mn-400mn p.a. pre-pandemic. We expect the large cash hoard will also boost earnings through higher interest income.

The Negative

– Poor margins in public transport. Public transport operating margins are a paltry 3% vs pre-pandemic 8%. Margin pressure comes from low bus contracting fees in Singapore, higher electricity and increased bus driver fees in Australia and UK. Despite the jump in rail fees (via subsidies) and volumes in Singapore, margins were under pressure. UK suffered an operating loss of S$3.5mn in 1Q23, compared to S$1.6mn profit a year ago.

Source: Phillip Capital Research - 17 May 2023

• Earnings were within expectations. 1H23 revenue and PATMI at 49%/52% of our FY23e forecasts. 2Q23 PATMI growth of 3.4% was driven by growth in spirits but dragged down by a major decline in beer earnings.
• 2Q23 beer volumes were down 10% YoY. Sabeco volume declined by double-digits due to distributors de-stocking and slowdown in economic growth. Consumer sentiment in Vietnam is weak, especially for the industrial sector.
• We maintain our FY23e forecast. We expect improvement in beer sales to gradually recover in Vietnam as tourist arrivals support consumption and economic activity. The activities around the general election in Thailand is another trigger for beer demand in the near-term. Our recommendation is upgraded from ACCUMULATE to BUY due to recent share price weakness. The target price of S$0.80 is unchanged. We peg 18x FY23e earnings for the core operations, its 5-year average. And listed associates are valued at market valuations.

The Positive

+ Better product mix and selling price for spirits. Spirits volume in 2Q23 rose 7.8% YoY to THB31.4bn (S$1.2bn). Revenue growth was from a larger mix of the higher priced brown compared to white spirits. The price increase also supported sales growth. The mix of brown and white spirits have not been disclosed except for double-digit revenue growth for brown and marginal decline in white spirits. There remain ample production capacity in spirits and capital expenditure is minimal. Raw material cost from molasses is expected to rise this year based on the recent Dec22-Apr23 annual harvest.

The Negative

– Beer volumes first decline in six quarters. Volume in 2Q23 declined 10.1% YoY, pulling down revenue by 7.3%. Operating margins fell as marketing expenses remain elevated.  Gross margins were stable at 22.4%. Volumes decline was led by Sabeco, with revenues declining by 15% YoY in 1Q23. Vietnam, especially the industrial export sector, is suffering from weak economic conditions, job losses and poor consumer sentiment. Distributors are not willing to carry much inventory due to the weak demand and high interest rates. Thailand volumes were also impacted by higher prices but there has been market share gains.

Source: Phillip Capital Research - 15 May 2023

• Revenue and EBITDA were in line with expectations at 22%/25% of our FY22e estimates. 1Q23 revenue growth of almost 9% YoY was broad-based, especially mobile roaming revenue and higher ARPUs in entertainment.
• The extra investment into the DARE+ transformation was around S$25mn of the expected S$155mn to be spent this year. The bulk of this spend will be in opex. We estimate S$90mn.
• FY23e will be a transition year as StarHub undergoes huge expenditure namely in IT. In general, these investments will lower operating cost as networks and infrastructure are replaced and move to the cloud. Revenue opportunities are expected to come from the launch of a All-in-One app platform, more self-serve consumer features, faster speed and agility to launch products and providing Greentech and hybrid multi cloud capabilities to the enterprise segment. We maintain our FY23e forecast and NEUTRAL recommendation. The target price of S$1.08 is unchanged, pegged at 6.5x FY22e EV/EBITDA, in line with other mobile peers.

The Positive

+ Roaming revenue lifted mobile. Mobile revenue rose 13.4% YoY to S$152mn, supported by both ARPU and subscriber growth. Roaming is the largest driver of ARPU recovery despite ongoing migration to SIM only. Prepaid remains challenged with sluggish net adds and lower prices.

The Negative

– Weakness in broadband. Excluding the MyRepublic acquisition, broadband revenue declined an estimated 5% YoY to S$49mn. Broadband is facing higher price contribution. ARPU and subscribers were basically flat QoQ. The acquisition of MyRepublic has only lifted StarHub broadband ARPU by S$1 to S$34. The launch of SIMBA (formerly TPG) broadband plans will further pressure prices.

Source: Phillip Capital Research - 15 May 2023