Asian Insights SparX Singapore downstream F&B
Refer to important disclosures at the end of this report
DBS Group Research . Equity 9 Sep 2019
Mass-market F&B set to sizzle STI : 3,144.48 • Lifestyle, affluence, and eating habits have lifted mass-market F&B to the sector’s sweet spot which Analyst offers the hottest growth opportunities Alfie YEO +65 6682 3717 • Mass-market segment (
Our top picks are Jumbo, Koufu, MCT, FCT, CMT. The F&B foodservice sector trades at 19x forward PE, lower than our Singapore consumer universe average of 22x PE. Our picks for the sector are Jumbo and Koufu, as both have strong exposure to the mass-market segment, with clear growth drivers for both local and overseas expansion. Earnings growth will be led by store and margin expansion and better efficiencies. Both are trading at less than 20x forward PE. Our retail mall picks are Mapletree Commercial Trust (MCT),
Ca pitaLand Mall Trust (CMT) and Frasers Centrepoint Trust (FCT).
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The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination. Table of Contents
Executive Summary 3
Mass-market F&B is the fastest-growing segment in Singapore 5 • CAGR of over 2% projected for Singapore F&B in the next five years • Hottest growth opportunities can be found in the mass-market F&B segment
Recent consumption trends support sustainable long-term growth of mass-market F&B segment 8 • Millennials’ consumption trend fueling growth in the mass-market segment • More targeted and personal advertising strategies can further benefit F&B mass-market segments • Fine-dining segment the biggest casualty of outlet closures in Singapore • Meanwhile, limited service restaurants and kiosks continue to thrive • Acquisitions reflect robust investment demand for mass-market F&B • Diners favour casual, quick-turn concepts • Reconfiguration of tenancies by landlords signal more opportunities for F&B players • Opportunity for further mass-market concepts remain, particularly in the suburbs
F&B companies continue to deliver earnings growth, overcoming cost pressure 14 • Singapore F&B companies’ earnings have historically grown at a rate of 3.3% • Slight net margin decline as lower food cost mitigates higher operating costs • Mall rental rates picking up but larger players with better bargaining power will be less affected • Companies continue to grow with margin enhancement/productivity strategies • Conclusion
Valuations and stock picks 19
Stock profiles 22 • Koufu • Jumbo Group • BreadTalk Group • Old Chang Kee • Japan Foods Holdings • Capital Mall Trust • Frasers Commercial Trust • Mapletree Commercial Trust
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Executive Summary
Hottest growth opportunities can be found in the mass- Mass market continues to grow with new dining options. The market F&B segment F&B foodservice scene remains robust, with recently opened Jewel Changi Airport contributing more mass-market dining Singapore’s foodservice sector is led by cafés/bars, limited choices with new brands and new concepts such as A&W and service restaurants, and street stalls/kiosks. According to Shake Shack. Online orders are also becoming more common Euromonitor, Singapore’s F&B foodservice market is worth as society goes cashless and driving up deliveries for more about S$8.3bn and is expected to grow by 2.1% CAGR by casual food options. 2023 led by cafés/bars, limited service restaurants, and street stalls/kiosks. From 2008-2018, the F&B food service sector Mass-market concepts can better navigate and overcome cost grew by 2.4% CAGR driven by the abovementioned formats, challenges than high-end F&B. We believe the mid-range whereas the full-service restaurants expanded by a much mass-market segment will continue to be viable compared to slower 0.8% CAGR over the same period and is projected to niche high-end low-turnover dining concepts. With cost grow at an even slower 0.4% over the next five years. challenges, the mass-market segment will be able to extract higher productivity by implementing more self-service Mass-market F&B leads Singapore’s F&B growth, driven by initiatives more easily than high-end full-service formats, as more transactions. The F&B foodservice sector is expected to foreign worker dependency ratio is being tightened. We be driven by higher F&B spend per transaction, and growth in believe companies will need to continuously find ways to number of transactions, accounting for 1.2ppts of innovate processes to improve productivity and profitability. Euromonitor’s 5-year 2.1% growth projection. This We favour retail landlords, and F&B operators that are underscores our belief that the mass-market segment targeting the more economically priced mass-market segment (defined by per head spend of S$20 or less) remains a highly and allocating more retail space and starting brands to cater viable segment with an estimated total market size of for this segment. S$6.2bn (75% of Singapore’s F&B market). Thus, operators in the slowing higher-end full-service restaurants segment might Malls are also trending toward higher proportion of mass need to operate with caution. market F&B. The composition of malls has gradually shifted in favour of more non-discretionary (particularly mass-market High-end restaurants have closed. Costs remain a challenge in F&B) and activity-based concepts that are harder to replicate Singapore, as seen by some higher-end restaurants. Even online. This will likely remain a key strategy for landlords three- and two-Michelin-starred restaurants such as going forward, who are starting to see value in incorporating Robuchon Restaurant and Restaurant Andre had to relinquish more mass-market F&B tenants into the mix. their stars due to low profitability. The recent slow GDP growth rate projections for Singapore could also fuel more Stock beneficiaries are F&B/REIT players with mass switching from high-end to mass-market segment as market exposure and clear regional growth strategies compared to previous years. Favour stocks exposed to mass market with overseas Lifestyle, affluence, eating habits lift mass-market F&B exposure and cost management strategies. We believe F&B to the sector’s sweet spot and REIT players with clear growth and cost management strategies in the mass market are in a sweet spot for growth. Current lifestyle trends support mass-market F&B, lifting it to Those with strong local presence and regional exposure to the sweet spot. Companies in the mass-market segment rising middle-class markets are key stock beneficiaries. These continue to grow through acquisitions such as NTUC companies are capable of morphing into multi-format, multi- Foodfare’s acquisition of Kopitiam and BreadTalk’s planned cuisine, and multi-brand F&B companies. Their scale would acquisition of Food Junction. Consumer behaviour and busy enable them to 1) introduce foreign brands, while exporting lifestyles are driving a trend towards frequent eating-out, their own brands overseas for regional growth; and 2) utilise convenience, quick-service formats, and faster technology to deliver operational efficiencies. payment/checkout modes including cashless and online transactions. Higher-productivity initiatives are propelling companies towards adopting more self-service features with less reliance on manpower at mass-market outlets.
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With rising operating costs, we select stocks that have good Our top F&B picks are Jumbo and Koufu. Our picks are Jumbo cost management/margin enhancement strategies. While and Koufu in Singapore for growth. Jumbo’s growth will be average gross margins have improved over the last three years led by new stores and higher margins from closure of from favourable food costs, operating margins of SGX-listed underperforming stores, opening of higher-end and higher- F&B companies have declined largely due to higher staff costs. footfall restaurant outlets, bigger franchise income and better Hence, net margins are now a tad lower from three years ago. operating efficiency. Koufu’s margins are expected to Our stock picks comprise companies with cost management improve as well, driven by turnaround of its kiosk business, and margin enhancement strategies which would allow them better foodcourt sales efficiency and lower depreciation. We to navigate cost challenges well. are neutral on BreadTalk as the company’s earnings growth is affected by its China bakery business and the acquisition of Top picks are Jumbo, Koufu for F&B; MCT, CMT and FCT Food Junction. for retail REITs Top retail mall REITs are CapitaLand Mall Trust, Frasers Favour stocks exposed to mass-market segment. Our top Centrepoint Trust and Mapletree Commercial Trust. We like picks are all exposed to the mass-market segment. We favour REIT-owned malls as they continue to post tenant sales and Jumbo and Koufu for F&B, and MCT, CMT and FCT for rental income growth despite the tough retail cycle, exposure to mass-market and suburban retail malls. outperforming individually owned spaces. Those with well- located portfolios with access to immediate catchment Positive on the sector. The food retail sector is generally populations, especially with exposure to necessity shopping defensive, with an attractive ROE from 10% to over 20%. and REIT managers’ holistic approach towards tenant remixing, Most companies in our coverage universe are projected to have shown resilience thus far. We believe that landlords with remain on a growth trajectory, driven by store openings in the ability to establish lasting differentiation amid rising Singapore and overseas, with earnings growth outpacing competition from e-commerce will outperform. Our stock picks revenue growth. Our F&B stock universe is projected to are CapitaLand Mall Trust as a key proxy to Singapore retail, generate an earnings CAGR of 4.4%. Frasers Centrepoint Trust for its suburban exposure and firm pipeline, and Mapletree Commercial Trust for exposure to one Our F&B foodservice universe is trading at 19x PE. Our of the best-in-class retail asset in Vivocity. Singapore F&B foodservice universe is trading at an average 19x forward PE, lower than our Singapore consumer universe average of 22x PE. Selected F&B companies offer investors more stable earnings, net cash balance, cash generation capabilities, and earnings growth.
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Mass-market F&B is the fastest-growing segment in Singapore
CAGR of over 2% projected for Singapore F&B in the Singapore foodservice to grow at 2.1% CAGR till 2023 next five years
Singapore consumes more than S$8bn of food annually. Singapore consumes approximately S$8.4bn of food annually. Based on data from Singstat and Ministry of Trade and Industry hosted on data.gov.sg, the estimated value of Singapore’s F&B sales is approximately S$8.4bn each year, or about S$700m per month, growing from over S$7.4bn in 2012 or about S$600m per month. In 2017, Singapore consumed more than 1.3bn tonnes of meat, fruit, eggs and vegetables according to the Agri-Food & Veterinary Authority of Singapore (AVA). Separately, data from Singstat for Singapore Retail Sales point to S$800-900m of F&B foodservice sales per month, amounting to S$9.2bn in 2018. Source: Euromonitor, DBS Bank
Annual value of F&B sales in Singapore is over S$8bn Retail sales data shows resilience in mass market while restaurant segment is susceptible to economic slowdown
F&B retail sales has high correlation to GDP at 0.8. F&B retail sales growth has generally hovered between -2.8% and 6.6% y-o-y since 2010 based on Singstats’ F&B Services index. Since 2009, F&B sales growth based on Euromonitor and Singstat has been at a similar rate of 1.9% and 2% CAGR respectively. We observe strong correlation between GDP growth and F&B Services index of 0.8 since 2009 with private consumption contributing 35.4% of 2018 GDP.
Strong correlation between F&B Services and GDP at 0.8 Source: data.gov.sg, DBS Bank
Singapore’s F&B market is driven by higher ticket size and more transactions. According to Euromonitor, Singapore’s F&B foodservice market is worth about S$8.3bn and is expected to grow by a 2.1% CAGR up to 2023. Growth will be driven by higher ticket size and an increase in foodservice transactions which are forecast to grow at 1.3% and 0.8% CAGR respectively for the next five years. These in turn will drive per outlet sales by 1.9% CAGR, with outlet count remaining flattish at 0.2% CAGR over the next five years.
Source: ThomsonReuters Datastream, DBS Bank
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Restaurants most susceptible in an economic slowdown. The Hottest growth opportunities in mass-market F&B F&B Services index pointed to a decline in 2015 due to a segment slowdown in GDP growth with restaurants posting the largest drag, declining by close to 5% y-o-y. Restaurants’ Mass-market F&B segments have been growing the fastest. performance recovered in 2018 along with GDP, but is still Based on Euromonitor’s F&B growth for the past five years lagging fast food restaurants, which are currently growing from 2013-2018, mass-market segment formats (which we the fastest. define by per head spend of S$20 or less) have thrived, each growing at >2% CAGR in terms of sales value. Conversely, Strong correlation between GDP and foodservice the revenue of full-service restaurants has remained relatively flat while the number of transactions has fallen by 0.3% CAGR over the same period. We believe the slower GDP performance over the past few years has led to the downtrading of F&B demand from higher-end full-service restaurants to more economical formats such as fast food, kiosks, street stalls, and cafés/bars.
Mass-market F&B segment sales have thrived between 2013 and 2018
Source: ThomsonReuters Datastream, DBS Bank
Fast food has been resilient in the past few years. The number of fast food outlets has been growing since 2005. Even when GDP slowed in 2015 with a decline in the number of restaurants, fast food outlets continued to grow albeit at a slower pace. The outlook for fast food is robust given that limited service restaurants are forecast to outgrow the overall foodservice sector at 2.8% CAGR vs 2.1% in the next five years, according to Euromonitor. We believe this signals a shift in the market towards convenience as lifestyles become more hectic. It is also notable that fast food outlets outgrew Source: Euromonitor, DBS Bank other formats during the 2009 financial crisis. An estimated market size of S$6.2bn. Based on Share of food service value in Singapore totaling S$8.3bn Euromonitor’s categorisation of formats and market size in 2018 excluding full-service restaurants, we estimate the mass market segment (comprising self-service cafeterias, cafés/bars, street stalls/kiosks, and limited service restaurants) to be worth S$6.2bn. This makes up about c.75% of Singapore’s foodservice market.
Source: Euromonitor, DBS Bank
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Mass-market F&B segment to outgrow higher-end Up to 75% of Singapore’s F&B segment is mass market restaurants from 2018-2023
Source: Euromonitor, DBS Bank estimates Source: Euromonitor, DBS Bank We estimate mass-market segment to be worth c.S$6.2bn
Source: Euromonitor, DBS Bank estimates
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Recent consumption trends support growth of mass-market F&B segment
Millennials’ consumption trend can fuel mass-market Cost of living calculator: Price range of daily meals in segment Singapore*
There are c.880,000 millennials or 22% of population in Singapore. According to Pew Research Center, the Millennial Budget (food centres) Generation is in the 23-38 age group today and is defined as those born between 1981 and 1996. According to Singstat, Singapore’s Millennial Generation population is approximately Homecooked Meals 0.9m. Based on our observation, the eating preferences of (for meat and vegetables) millennials tend to evolve around healthy eating, freshness, convenience, and nutrition; with value, environment, lifestyle and aesthetics occasionally playing a part. Mid-priced (family restaurants)
Millennial Generation as classified by Pew Research 0 10 20 30 40 50 Center *Fine-dining category ranges between S$100 and S$400 daily Source: Economic Development Board of Singapore, DBS Bank
More targeted and personal advertising strategies are benefitting mass-market segment
Social media and blogs are changing the way F&B operators advertise. The rise of social media and influencers has changed the way F&B companies advertise and promote their businesses. Social media can improve brand awareness, lower marketing costs, and is able to target specific audiences. Source: Pew Research Centre, DBS Bank Social media and blogs are now part of how operators advertise and promote their food. The use of social Convenience, health, value and lifestyle generally dominate influencers therefore allows food products and dining millennials’ eating habits. Healthy eating is centred on the experiences to be reviewed and profiled independently via availability of information on health risks and nutritional value, word of mouth. which is pushing the market towards more health-conscious eating habits. Busy lifestyles have also helped to raise demand F&B players already using alternative advertising channels for convenience. With the rise of social media, novelty factors, which mass market can also benefit. Jumbo, in opening its ambience and aesthetics have also become key consumption recent outlets at Tsui Wah, Jumbo Seafood ION, and Zui Yu considerations, tying in with the Millennial Generation’s higher Xuan Teochew Restaurant, engaged social influencers to help propensity to leverage on social media platforms to showcase promote their new restaurants as part of their marketing their lifestyle choices. Millennials are also savvier in hunting for campaign. Operators would also need to keep up their level value, and would normally take advantage of discounts, deals of food quality, aesthetics and service as well, since customers and promotions when making their food purchases. These these days tend to feature their dining experience on social food preferences tend to fall under the mass-market segment media. Accounting for 75% of the F&B foodservice market, where per head spend is S$20 or below – an achievable level we see the mass-market segment as a key beneficiary of such by the average Singaporean household’s income and dining promotional channels. standards, in our opinion.
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Fine dining segment has been the biggest casualty of Diners favour casual, quick-turn concepts outlet closures in Singapore Casual, quick-serve concepts growing fast in malls. While the Fine dining challenged by other F&B sub-segments. High-end frequency of eating out has increased, trends have leaned Michelin-starred restaurants are also affected by high toward more casual dining and quick-serve concepts, with operating costs including rent and manpower expenses. convenience, novelty and health factors often at the top of Singapore’s only three-Michelin-starred establishment Joel consumers’ minds. In 2018, 64% of respondents highlighted Robuchon Restaurant and two-Michelin-starred Restaurant their preference for dining out at a café - a sharp rise from Andre owned by Chef Andre Chiang closed their doors in 18% in 2015. Unsurprisingly, cafés, coffee houses, and food 2018. Stars are awarded for each kitchen and not for the kiosks were among the fastest-growing F&B categories, Chef or an entire chain of restaurants. However, nothing increasing 21.6% over a two-year period to reach a total of stops those associated to the kitchen from marketing the c.3,750 establishments as at end-2017. accolade. These owners’ willingness to lose their Michelin stars by closing their kitchens is evident that the F&B They have been evident in retail malls, as landlords’ strategies foodservices sector is challenging and faces keen competition evolved alongside changing consumer lifestyles – more multi- from other F&B sub-segments, formats and concepts. concept food halls and kiosks have sprung up across the island, featuring a greater diversity of tenants and cuisines Limited service restaurants and kiosks are thriving within smaller spaces which in turn, support more mass- market, lower-priced F&B offerings. These casual and quick- Street kiosks and limited service restaurants projected to serve outlets typically charge under S$20 per head – a sweet outperform full-service restaurants. Both limited service spot given Singaporeans’ demographic profile, which we restaurants and street stalls/kiosks have been projected by believe is set to remain a strong growth proponent for the Euromonitor to grow at a 5-year CAGR of 2.8% and 2.7% y- mass-market segment ahead. o-y respectively from 2018-2023, the fastest across all F&B formats. Players in this segment include chained casual and Kiosks one of the fastest-growing food retail formats fast food style restaurants. We further discuss the driving factors of this burgeoning phenomenon in the following sections.
Kiosks expected to outgrow other F&B formats
Source: Singstat, DBS Bank
Source: Euromonitor, DBS Bank Kiosks taking over? SPH REIT is one of the landlords that has reconfigured its space, enhancing approximately 3, 600 sqft at Multi-concept food halls, food kiosks supplementing lifestyle the basement of The Clementi Mall to create additional food of consumers. Increasingly, time-starved lifestyles have kiosks in late 2016. This resulted in a 50% jump in food contributed to shifts in consumer dining habits. Nearly a kiosks from 14 to 21, of which four were new-to-market and quarter of the 202 Singapore-based respondents profiled in 13 were new-to-mall brands. According to the Manager, this Nielsen’s August 2018 Out-of-Home Dining Survey indicated initiative alone allowed the m all to yield an additional that they ate out daily, up 5ppts from 19% in 2015. c.S$0.6m gross rental revenue per year. Approximately 55% also dined out at least once a week, compared to 51% in 2015.
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Back on the bubble tea bandwagon; prospective double-digit More bubble tea outlets opening up in recent years operating margins on offer for these lucrative kiosk concepts. Competitor Year Number of Singapore outlets More bubble tea kiosks have burst into the scene recently. At established around S$5 a cup, this is definitely for the mass market Koi 2007 53 segment. We believe the attraction of bubble tea kiosks lies in Gong Cha 2009 25 the market’s high acceptance for bubble tea beverages, low Liho 2017 66 floor area required to operate these outlets (about 150-200 R&B Tea 2018 16 sqft), low capex of S$100,000-250,000 relative to Tiger Sugar 2018 5 restaurants, and lower depreciation and breakeven. TP-Tea 2018 2 Nayuki 2018 2 Operating margins can be in the double digits, which makes Heytea 2018 2 such businesses attractive. New brands in the market include Bobii Frutii 2018 2 R&B Tea, Tiger Sugar, and Nayuki. TenRen Tea 2018 1 The Clementi Mall: Pre and Post Reconfiguration @ B1 TaiGai 2018 1 Supertea 2018 1 Pre AEI Bober Tea 2018 1 The Alley 2019 2 Jenjudan 2019 1 Xing Fu Tang 2019 1 Total 186 Source: Companies’ store locator, DBS Bank
Source: The Clementi Mall, Spunk Studio
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More opportunities for F&B leases as malls reconfigure GRI contributions FCT’s portfolio malls* tenant mix
Shift in configuration of retail malls to leverage on these positive trends. The threat of e-commerce and changing consumer habits have significantly transformed the role of shopping malls over the past decade, from retail-centric hubs to lifestyle centres catering to shoppers’ physiological, social and entertainment needs. As shopping malls evolve, they are giving rise to more integrated spaces - featuring adjoining residential and/or office blocks, and more community spaces. The configuration of malls has also changed with the times in favour of more F&B and activity-based tenants, which has helped to anchor the resilience of the retail sector amid a challenging retail backdrop. *FYE Sep, excludes Changi City Point and Bedok Point Source: FCT, DBS Bank Proportion of F&B leases trending higher across leading retail S-REITs CMT and FCT’s portfolios. CapitaLand Mall Trust F&B anchors help augment portfolio stability. A demand (CMT) is the largest retail REIT in Singapore with generator, the higher proportion of F&B tenants is a key approximately half of its malls located downtown. Its footfall driver and anchors portfolio occupancy across the suburban malls, which constitute the remaining 50% of its majority of retail S-REITs (some of which are profiled below), portfolio, often enjoy direct connectivity to key transportation which have climbed near multi-year highs in recent quarters. nodes. We observe that CMT’s F&B leases generally represented between 15% and 45% of Gross Rental Income Portfolio Occupancy for CMT and FCT Trending Higher (GRI) across the malls within CMT’s portfolio in FY18, up from S-REIT Actual Occupancy (%) 12-38% in FY13. CY4Q15 CY4Q16 CY4Q17 CY4Q18 CY2Q19 CMT 97.6% 98.5% 99.2% 99.2% 98.3% GRI contributions across CMT’s portfolio malls* FCT 94.5% 91.3% 92.6% 96.2% 96.8% MCT 99.9% 99.6% 98.2% 99.9% 99.1% SPH- 99.8% 100% 100% 99.2% 99.0% REIT* *FYE Aug Source: Respective REITs, DBS Bank
Acquisitions reflect robust investment demand for mass- market F&B
Recent acquisitions. Recent acquisitions include consolidation in the foodcourt/coffeshop scene with BreadTalk’s S$80m takeover of Food Junction. Earlier, NTUC Enterprise announced *FYE Dec, excludes Jcube, Bukit Panjang Plaza and Clarke Quay on 21 September 2018 its acquisition of Kopitiam Investment Source: CMT, DBS Bank and its subsidiaries for an undisclosed fee. NTUC Foodfare and Kopitiam continue to operate independently, maintaining their Meanwhile, Frasers Centrepoint Trust (FCT) is the largest own respective management and employees. The acquisition listed pure-suburban retail landlord in Singapore. Excluding brings the number of food outlets under the NTUC Enterprise Changi City Point, which caters to a different audience due to umbrella to more than 100. Broadway had also in 2018 its location in the vicinity of Changi Business Park, we note bought over 23 S-11 coffee shops. that FCT’s exposure to F&B tenants has been generally higher. As such, increases have thus been modest over the last five years, with the higher end of the range inching up just 3.1 ppts to 45.3% in FY18.
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In May 2018, Philippine fast-food chain, Jollibee Foods Natural captive market for footfall in the heartlands. Owing Corporation (JFC), announced its S$45m (US$33.5m) to their larger population catchments and often favourable investment into Titan Dining LP, a S$100m private equity fund, locations alongside key transportation nodes, suburban malls to acquire the master franchise of Tim Ho Wan restaurant are generally less susceptible to e-commerce threats, which chain in the Asia Pacific, with the option to acquire have contributed to their rising popularity among tenants “substantial ownership” of the master franchise after seven over time. Prominent global brands which have ventured years. The deal adds to Jollibee’s portfolio of Chinese beyond the Orchard belt in recent years include Sephora, restaurants - Chowking in the Philippines, Yonghe King and H&M and soon, Japanese discount store Don Don Donki. Hong Zhuang Yuan in China, boosting Jollibee’s international profile. More brands are moving to the heartlands. New-to-market concepts favouring suburban over downtown (Orchard or More recently, JFC announced a 100% acquisition of The fringe) locations also appear to be on an increasing trend. Coffee Bean & Tea LLC for US$350m, further expanding its Famous Taiwan bubble tea store, Xing Fu Tang, is one such global presence. example. After gaining much fanfare at its temporary pop-up at Orchard, the bubble tea chain announced the opening of Opportunity for mass-market concepts in the suburbs its first standalone franchised store in Singapore at Century Square mall, which sits in Tampines (Outer East region). Supply of retail spaces in the suburbs to remain strong, but Similarly, A&W, which has returned to Singapore after a 16- demand is also on the rise. The government’s ongoing push year hiatus, set up an outlet in Jewel in April 2019 and also for decentralisation of live, work and play elements has been announced plans to open its second outlet at Ang Mo Kio – a a key driving force in the development and growth of prominent submarket in the North-Eastern part of Singapore. suburban malls in Singapore. Suburban retail supply across the private and public sectors has grown steadily at a 1.4% New Retail Supply Skewed to the Suburbs CAGR (or +32.4%) over the last two decades – outperforming all regions but Orchard, where supply has expanded at a 1.6% CAGR, remains limited. While recent mall completions in Singapore have been mainly skewed to the suburbs, it is poised to remain the prevalent trend going forward as mall floorspace per capita - which ranged from 2.72-4.33 sqft NLA in the outer regions - was considerably lower than the average for Singapore and global peers.
Suburban Retail Supply Fastest Growing Over Last Two Decades Source: URA, DBS Bank
Despite higher supply, retail rents in suburban areas are growing fast. As at the end of 2Q19, total supply of retail space in the pipeline in Singapore (in terms of GFA) stood at 320,000 sqm - 44% of which is projected to be from the suburbs. This includes LendLease’s PLQ Mall in the Central East region, which makes up c.30%. It is no surprise that submarkets with lower per capita mall floorspace have delivered some of the best reversions YTD, as implied by median rent growth over 2016 to June 2019.
Source: CEIC, DBS Bank
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Rents are on an upward trend in suburban areas Rental gap between suburban and central has narrowed Median Rents (S$ psf pm) CAGR (S$ psf) Planning Area 2016 2017 2018 1H 2019 (%) Woodlands 20.2 23.2 21.4 27.0 10.2% Bukit Merah 13.0 12.9 15.9 15.9 6.9%
Museum 15.6 16.0 17.0 18.9 6.7%
Pasir Ris 14.0 15.4 17.7 16.6 5.8%
Clementi 10.1 8.9 8.9 11.5 4.6% Punggol 23.5 21.9 26.8 26.9 4.6% Yishun 16.7 22.5 16.4 18.9 4.2% Kallang 5.5 5.4 5.8 6.0 2.9% Sembawang 12.5 16.1 13.7 12.7 0.5% Source: URA, DBS Bank
Narrowing gap between downtown and suburban rents a Source: URA, DBS Bank reflection of firm underlying demand. Despite new mall completions and expansions skewed to the suburbs, they have not inflicted any adverse impact on rents. In fact, the rent gap between median rents at prime (ex-Orchard) vs suburban locations has narrowed substantially from c.11.3% in 1Q15 to c.1.9% in 2Q19, which reflects the resilient (and growing) nature of demand in these densely populated and higher-growth submarkets.
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F&B companies continue to grow, overcoming cost pressure
Earnings of Singapore F&B companies have historically Food supplies in Singapore procured globally. Singapore grown at a rate of 3.3% sources its food supplies from various parts of the world which reduce supply shocks from specific markets. Past four years’ earnings and revenue grew by 3.3% and Restaurants such as Jumbo procure crabs from all over the 4.1% CAGR respectively. Singapore-listed F&B companies world, from ASEAN countries to Sri Lanka and as far as over the past four years collectively grew their earnings by a Alaska. Importers including supermarkets procure fresh food 3.3% CAGR, with revenue growing at a 4.1% CAGR. and vegetables from all over the world as well, catering to Growth was largely driven by a mixture of new outlets, new demand of various consumer sub-segments and diversifying concepts, same-store sales and in some cases, acquisitions. its sources to reduce concentration and reliance of supplies The operating cost pressure among SGX-listed F&B from specific markets. The Ministry of Trade and Industry companies remains evident, with revenue growth (MTI) even has a Rice Stockpile Scheme to ensure adequate outstripping earnings growth. supply of rice in the market. These measures collectively help to ensure that import prices and inflation for food supplies Growth rate of SGX-listed F&B companies are generally mild. FY15-18 CAGR Note Average operating and net margin at c.8% and c.5.5% Revenue 4.1% Sum of 15 foodservice companies respectively. Average operating margins of foodservice peers Net profit 3.3% Sum of 15 foodservice companies range from 8-9%, with larger players such as Jumbo and Source: Bloomberg Finance L.P., DBS Bank Koufu registering up to 12-15%. Net margins average around 5-6%, with larger players capable of generating up to 8-12% Slight margin decline as food margins remain attractive net margins. For profitable companies, ROE can be above and operational costs inch up 10% and in excess of 20% at the top end.
Food inflation has remained modest, gross profit margins Average cost/margins of SGX-listed F&B companies remain attractive. Inflation for food services hovered at 1-4% Average Note in recent years and averaged 2.2% over the past 10 years. 2018 2015 Gross margins for food remain attractively high and stable, Sales 100% 100% (1) averaging 62-63% for Singapore-listed F&B companies over COGS/sales 25.2% 27.0% (2) the past four years. Singapore’s food inputs are largely Gross profit margin 74.8% 73.0% (3)=(1)-(2) imported from various markets, which help to keep inflation Staff costs/sales 29.2% 27.0% (4) down. Gross margins can typically be preserved since higher Rents/sales 23.0% 22.7% (5) food prices can easily be passed on to customers. Other Opex/sales 15.3% 14.8% (6) Operating profit margin 7.3% 8.5% (7)=(3)-(4)-(5)-(6) Singapore food services inflation has remained mild Interest JV & Tax/sales 2.0% 3.0% (8) Net profit 5.3% 5.5% (9)=(7)-(8) Source: DBS estimates
Source: ThomsonReuters Datastream, DBS Bank
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Singapore Downstream F&B
Mall rental rates picking up but larger players with Healthier Supply-Demand Dynamics to Drive Occupancy better bargaining power will be less affected Higher
Retail rents have fallen since 2015 due to supply-demand dynamics. While median rents for retail spaces have undoubtedly fallen compared to 2011-2015, this appears to have bottomed across the board earlier - dispelling concerns over a bumper supply of retail space coming through in 2019. We attribute this to improved supply-demand dynamics, as evidenced by high pre-leasing commitments for new completions such as Jewel Changi and Funan.
Bottoming Out of Median Rents (S$ psf)
Source: URA, CEIC, DBS Bank
Rents will likely continue to trend higher despite larger supply of suburban retail spaces available. We see rents trending higher due to limited new supply of retail spaces going forward. Supply is also trending towards suburban areas where the captive market for F&B services are, although we see rental reversions rising faster in suburban areas. There is Source: URA, DBS Bank more room for retail space supply to grow in suburban areas as mall floorspace per capita is below Singapore and global But we expect rental rates to trend up on limited supply of peer average of key developed markets. retail space going forward. According to URA, occupancy for retail space in Singapore was approximately 92.3% as at Larger F&B groups will have more bargaining power over rent 2Q19, up 1ppt from 91.3% in the previous quarter. While reversions. We believe higher rents are more manageable for historical absorption rates typically averaged 75-76% in years bigger F&B operators as we expect them to have better where there were major new completions, this is projected to bargaining power towards rent increase as some of these rise to 90% on the back of strong take-up rates for new established players have 1) multi-brand strategy and scale in offerings. On the back of limited new supply beyond 2019, terms of floor area in malls; 2) the ability to attract footfall positive leasing momentum should continue to filter through into malls, e.g. as anchor tenants; 3) concepts that are to subsequent years as well, which bodes well for rents. desired by malls and hence could enjoy lower rentals at the landlords’ invitation; 4) the flexibility and option to locate their outlets outside of malls including shophouses.
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Lower Mall Floorspace per Capita Signals Further Opportunities for Landlords and Mall Tenants in Singapore
(sq ft NLA) Japan (2016) 4.4
Hong Kong (2015) 10.1 Singapore (2018) 5.9 United States (2017) 23.6
Source: FCT, Cistri, DBS Bank
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Companies with cost-enhancement strategies continue to grow
Store expansion and cost pressure seen in most companies’ Margin-enhancement initiatives to help supplement growth. recent results. Recent results from F&B foodservice companies We like companies that continue to seek growth through have largely pointed to revenue growth from store count store network expansion, with clear strategies to enhance expansion, and lower margins from higher operating costs. operational efficiencies to mitigate high staff and rental costs, Companies with earnings growth and margin expansion are including product mix, pricing, seasonal menu, store those with clear plans in place for operational leverage and rationalisation and labour productivity enhancement efficiencies. strategies.
Recent quarter results were mixed Revenue Revenue drivers Earnings Earnings drivers growth Growth (y-o-y) (y-o-y) Katrina FY18 +11.7% 7 new outlets -72.9% Higher staff costs, asset write-offs and acquisition-related expenses ABR Holdings FY19 +5.9% Same-store sales -50.3% Margin compression, higher COGS and opex Old Chang Kee FY19 +5% Same-store sales +14.6% Margin expansion, operational leverage No Signboard 9m19 -10.6% Temp outlet closures n/m Margin compression, operating cost increase RE&S 9m19 +0.4% Quick-service segment +29.7% Margin expansion operational leverage Jumbo 9m19 -0.4% Store closures +6.2% Margin leverage on closure of non-performing outlets Koufu 1H19 +6.1% More outlets +14.2% Operational and margin leverage from sales increase Japan Foods FY19 +0.3% n/a -42.3% Higher opex for staff, rental, utilities and online delivery charges Breadtalk 2Q19 +9.8% Restaurant segment -57.9% Operating losses at bakery division, wider startup losses Kimly 9m19 +4.4% Acquired new brands -9.2% Gross margin pressure, higher opex particularly staff costs Neo Group FY19 +1.6% Food catering segment +48.7% Gross margin expansion, and operational efficiencies
Source: Bloomberg Finance L.P., DBS Bank
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Conclusion
Mass market, convenience and online are trending up. We Rental reversions for retail landlords still positive. Rental believe demand in F&B continues to be in the mass-market reversions at both malls remained positive at c.1.4% in 2Q19. segment with the market moving towards accommodating a During the quarter, FCT’s Bedok Point saw an uptick in more convenient, and self-service lifestyle due to: 1) increase shopper traffic as the neighbourhood mall welcomed new in operating costs especially labour and rents; and 2) F&B tenants. Meanwhile, Mapletree Commercial Trust’s integration of technology and online platforms into F&B (MCT) VivoCity delivered positive rental reversions of over businesses. While food remains a staple for consumers, the 7%, driven mainly by the renewal of a mini anchor tenant. preference for convenience and online purchases is starting to When taken together, these datapoints continue to reflect kick in. Reaching out to consumers now entails more online firm underlying demand for space across submarkets and channels (discount codes/coupons, payment systems, reviews, tenants’ confidence in the medium-term sales outlook. With etc.). By the same token, the internet facilitates a convenient structural factors little changed, we believe that shopper lifestyle which complements mass-market to-go value food. travel patterns should return to normality in the medium term as the novelty effect runs out, which typically lasts 9-12 F&B players are still expanding despite challenges; expect months on average. more technology to be implemented. The market has seen niche players such as higher-end Michelin Star restaurants Cost challenges can be managed. For larger F&B groups, giving up their status due to high operating costs. Going higher manpower costs can be mitigated by technology and forward, we expect to see outlets adopting more technology productivity initiatives, while rising rents can be managed with reduced manpower, while requiring more self-service with strong bargaining power using multi-outlet strategy in from consumers to counteract labour cost challenges. Despite malls, taking up a larger floor area, locating outside of malls, these cost challenges, the players in the market are still or only entering malls at the landlord’s invitation at a seeking expansion via acquisitions, bringing in new brands or favourable rate. new players coming in with new brands, products and concepts. F&B firms in Singapore are still keen on growing Prefer retail landlords with suburban exposure and regional market share. Seeking growth from overseas markets F&B players exposed to the mass market, with cost/margin continues to be a trend. A few listed companies on the SGX enhancement strategies. Riding on these trends, we advocate have sought funding to grow overseas. Firms can remain sticking with retail S-REITs with a larger suburban retail profitable and growth can be sustained if companies get their footprint and higher mass-market F&B component, which products, food quality value and brands, and cost structure provides downside protection and growth. FCT, MCT and CMT right. should thus fare better in this regard. For F&B picks, we prefer regional players with mass-market exposure, and cost Shopper traffic to malls to remain resilient. Integrated management/margin enhancement strategies. developments such as VivoCity are expected to remain resilient as near-term novelty effect of new malls continues to normalise. While we are starting to see diversions in shopper traffic and spending to Jewel, we are not overly concerned as these disruptions are unlikely to be structural in nature. Whenever a new mega attraction is launched, novelty factors will undoubtedly dominate. Jewel is no exception – during its opening weekend, CMT’s Tampines Mall and Bedok Mall experienced high- and mid-single-digit declines in tenants’ sales on average, which have since normalised to mid- and low-single-digit levels respectively.
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Singapore Downstream F&B
Valuations and stock picks
Potential winners are those which can benefit from BreadTalk, Koufu and Jumbo all set to benefit from mass- mass-market segment and overseas growth market segment and overseas growth over the long term. The outlook for our F&B coverage universe remains robust F&B stocks with mass-market element and overseas growth are with larger players continuing to seek overseas growth while in the sweet spot. We believe larger companies with exposure maintaining scale in Singapore and defending their domestic to the mass-market segment and overseas growth will be well market share. Among them, Koufu, BreadTalk and Jumbo all positioned for long-term growth. These companies have have exposure to the mass-market segment, both economies of scale in Singapore, a portfolio of retail brands domestically and overseas. A strong local business ensures and overseas exposure to grow over time. Being in the mass critical mass and base income and earnings, while overseas market ensures higher transaction volumes for cashflow churn exposure provides impetus to growth. Koufu is already while overseas presence provides room for future earnings operating mass-market foodcourts and tea kiosks. Jumbo has upside. Ng Ah Sio Bak Kut Teh while BreadTalk’s bakery, Toastbox and restaurant brands in the 4orth division cater to the mass- market segment. All three have exposure to North Asia markets, especially China and Macau.
Singapore foodservice peers trade at 19x forward PE Market Operating Net Dividend Net Cap EV/EBITDA EV/EBITDA P/BV P/Sales ROE Margin Margin Yield Gearing Company (S$m) Px Las t PE (Act) PE (Yr1) PE (Yr2) (x) (x) (x) (x) (%) (%) (%) (%) (x) Singapore listed foodservice players Koufu Group Ltd 408 0.74 15.9x 14.5x 14.2x 7.4x 3.0x 3.9x 1.7x 28% 15.0% 11.3% 3.4% cash BreadTalk Group Ltd 364 0.65 22.1x 27.2x 27.4x 5.4x 2.6x 2.6x 0.6x 10% 6.5% 2.0% 2.3% 0.77 Kimly Ltd 260 0.23 12.6x NaN NaN 6.7x NULL 3.0x 1.3x 26% 12.5% 10.8% 5.5% cash JUMBO Group Ltd 237 0.37 21.8x 20.2x 18.1x 10.7x 10.6x 3.4x 1.6x 17% 8.2% 7.6% 3.4% cash ABR Holdings Ltd 138 0.69 57.5x NaN NaN 24.9x NULL 1.4x 1.1x 3% 3.4% 2.1% 2.9% 0.85 Old Chang Kee Ltd 89 0.73 19.7x 19.5x 19.2x 8.1x 7.4x 3.1x 1.0x 15% 7.1% 4.8% 4.1% cash Japan Foods Holding Ltd 76 0.44 13.0x 22.7x 21.3x 4.8x 6.5x 2.2x 1.1x 10% 4.9% 4.9% 4.8% cash No Signboard Holdings Ltd 26 0.06 NULL NaN NaN 1.1x NULL 1.2x 0.9x -10% -6.9% -8.7% na cash RE&S Holdings Ltd 60 0.17 13.9x NaN NaN 3.8x NULL 1.6x 0.4x 10% 4.0% 2.5% 2.4% cash Tung Lok Restaurants (2000) Ltd 44 0.16 NULL NaN NaN 13.1x NULL 2.9x 0.5x -5% 1.3% -0.9% na cash Soup Restaurant Group Ltd 48 0.16 26.0x NaN NaN 10.1x NULL 4.6x 1.1x 20% 4.9% 5.0% 4.0% cash Katrina Group Ltd 38 0.16 NULL NaN NaN 8.7x 14.1x 3.2x 0.5x 3% 0.9% 0.7% na cash Sakae Holdings Ltd 10 0.07 2.9x NaN NaN NULL NULL 0.2x 0.2x 12% 9.5% 5.3% na 1.20 Pavillon Holdings Ltd 5 0.01 NULL NaN NaN NULL NULL 0.2x 0.3x -35% nm nm na cash Neo Group Ltd 59 0.40 10.9x NaN NaN 6.9x NULL 1.5x 0.3x 14% 4.8% 3.0% 1.3% 1.75 Singapore average 19.7x 20.8x 20.0x 8.6x 7.4x 2.3x 0.8x 8% 5.4% 3.6% 3.4% 1.1x Ex-BreadTalk 19.4x 19.2x 18.2x 8.9x 8.3x 2.3x 0.9x 8% 5.4% 3.7% 3.5% 1.3x Source: ThomsonReuters, DBS Bank
Stock pick strategy – Bottom up selection for F&B stocks Our Singapore foodservice universe trades at a forward PE of 19x
Our F&B foodservice universe is trading at 19x PE. Our (x) Singapore F&B foodservice stock universe is trading at 19x PE 35.0 on average, lower than our Singapore consumer universe 30.0 average of 22x PE. F&B companies offer investors a more +2sd: 28.7x 25.0 stable earnings outlook, and most are in net cash positions. +1sd: 23.7x There is scope for upside as sector PE valuations are at 20.0 historical mean, and catalysts could emerge if these Avg: 18.6x 15.0 companies exceed their earnings growth expectations via -1sd: 13.6x store network expansion and achieve better operating 10.0 efficiencies and operating margins. -2sd: 8.6x 5.0 Stock universe’s earnings CAGR at 4.4% for the next three Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 years. We project a three-year earnings CAGR of 4.4% for our stock universe, mainly driven by revenue growth from Source: ThomsonReuters, DBS Bank store expansion, and margin enhancement or productivity initiatives to a smaller extent.
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Singapore Downstream F&B
Positive on the sector. We prefer to focus on each company’s Stock-picking strategy – Bottom-up approach for Retail growth development. Our preferred picks for the F&B REITs segment are Koufu and Jumbo, while taking a neutral stance on BreadTalk. While all three are growing nicely in Singapore, We expect malls owned by REITs to shine brighter amid patchy challenges in their respective growth markets have led us to recovery. Over the last few years, retailers have been hit by take a slightly different stance for each stock. several factors: 1) declining sales efficiency on sales leakages from the proliferation of overseas travel; 2) labour challenges Top F&B picks: Jumbo and Koufu. Both stocks have positive arising from restrictions on foreign labour and minimum wage earnings growth outlook. We see growth for Jumbo coming policies; and 3) flattish consumption trends. However, REIT- from new stores and higher margins from closure of lower- owned malls continued to post tenant sales and rental income margin stores, opening of higher-end and higher footfall growth despite the tough retail cycle, outperforming restaurant outlets, higher franchise income, and better individually owned spaces. Those with well-located portfolios operating efficiency. Koufu’s margins are expected to improve with access to immediate catchment populations, especially as well, driven by turnaround of its kiosk business, better with exposure to necessity shopping and REIT managers’ foodcourt sales efficiency and lower depreciation. holistic approach towards tenant remixing, have shown resilience thus far. We believe that landlords with the ability to Jumbo (BUY, TP S$0.47). We remain positive on Jumbo as we establish lasting differentiation amid rising competition from e- see its Singapore operations continuing to do well from the commerce will outperform. closure of lower-margin stores and opening of higher-end and higher-footfall restaurant outlets. We also anticipate that CapitaLand Mall Trust (BUY, S$2.95). Share price has done well performance of new stores would be strongly led by Jumbo as attention has turned to CMT as one of the faster-growing Seafood ION, and Jumbo Seafood Jewel, with Zui Yu Xuan large-cap S-REITs with a 2-year DPU CAGR of over 3.0%. Given Teochew Cuisine’s performance expected to improve. The improved property fundamentals and expectations that interest stock’s valuation is attractive, trading at 17-19x (pre- rates will remain lower for longer, these factors could continue exceptional items) forward PE (equivalent to -1SD of its mean to boost valuations over the medium term. Even as the street PE) and offers a decent dividend yield of 3.8% for FY20F. remains divided on the stock given uncertainties over the impact of the surge in new retail supply in 2019 (particularly Koufu (BUY, TP S$0.88). We remain positive on Koufu as it is megamall Jewel), our deep dive into CMT’s key micro-markets on track to deliver earnings growth via turnaround of its kiosk gives us confidence that the REIT can surprise on the upside. business and improving foodcourt performance. We also like its strong balance sheet, cashflows, ROAE, and decent Frasers Centrepoint Trust (BUY, S$2.95). We like FCT for the dividend yield of 3.5-3.6%. Valuation is attractive at 13.8x defensive attributes of its suburban exposure and firm growth FY20F PE, below peer average of 19x. pipeline post its recent moves to acquire stakes in PGIM’s AsiaRetail fund (which owns five suburban retail malls in F&B picks are Jumbo and Koufu Singapore) and Waterway Point, which have sparked a Recommendation TP Net profit CAGR transformation in the group’s growth outlook. DPU is now 12-mth FY18-21F projected to grow at a 2.8% CAGR over FY18-21F vs c.1% per Jumbo BUY 0.47 7.9% annum previously – which places FCT favourably among the BreadTalk HOLD 0.61 0.0% fastest-growing REITs. In addition, the successful inclusion in Koufu BUY 0.88 5.4% the FTSE EPRA/Nareit index in the medium term could drive a Total 4.4% further share price re-rating. Source: DBS Bank Mapletree Commercial Trust (BUY, S$2.40). We remain bullish BreadTalk (HOLD, TP S$0.61). We are neutral on BreadTalk as on MCT given it owns two of the best-in-class retail and its China bakery business and recent acquisition of Food office/business park assets. Iconic mall and key asset, VivoCity Junction is a drag on earnings. We will remain neutral on the is valued at a cap rate of only 4.6%, higher than recent stock until there is more visibility for earnings recovery in its transactions at 2.6-4.2% for arguably less-dominant malls. China bakery business. Hence, we believe MCT can maintain its premium P/Bk multiple. Furthermore, as MCT continues to deliver consistent DPU growth, and the market prices in the scarcity premium of being one of only two 100% Singapore-focused large-cap REITs, we believe MCT will continue to outperform.
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F&B scorecard of selected SGX-listed companies Jumbo Koufu BreadTalk Japan Foods OCK
Mass-market revenue exposure 26% >90% 75% c.95% 100% Key mass-market brands Ng Ah Sio R&B BreadTalk, Ajisen Old Chang Kee Supertea Toastbox, Menya Muasashi Koufu Food Republic, Osaka Oshio So Key mass-market formats Casual Kiosks, Bakery, Casual Kiosks Foodcourts Foodcourts, Quick-service, Casual Key overseas market China Macau China, HK Nil Australia, Malaysia Overseas exposure by revenue 20% 9% 42% 0% <3% Financial metrics Operating margins (FY19) 8.2% 15.0% 6.5% 4.9% 5.4% Net margins (FY19) 7.6% 11.3% 2.0% 4.9% 4.8% ROE (FY19) 17% 28% 10% 10% 15% Earnings CAGR FY18-21F 7.9% 5.4% 3.8% n/a n/a * We define mass-market F&B segment by per head spend of S$20 or less. Source: DBS Bank estimates
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Stock Profiles
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Page 22 Sin gapore Company Guide Koufu Group Ltd
Version 5 | Bloomberg: KOUFU SP | Reuters: KOUF.SI Refer to important disclosures at the end of this report
DBS Group Research . Equity 8 Aug 2019
BUY Foodcourts driving growth Last Traded Price ( 7 Aug 2019): S$0.715 (STI : 3,184.69) Price Target 12-mth: S$0.88 (24% upside) (Prev S$0.85) Maintain BUY, TP raised to S$0.88. We remain positive on Koufu and maintain our BUY recommendation with a higher TP Analyst of S$0.88 after rolling over FY19F PE to FY20F. Koufu is on Alfie YEO +65 6682 3717 [email protected] Andy SIM, CFA +65 6682 3718 [email protected] track to deliver earnings growth via turnaround of its kiosk businesses and improving foodcourt performance. We continue What’s New to like the stock for its sound fundamentals including stable • 2Q19 earnings within expectations, growth driven by earnings, strong balance sheet, cashflows, ROAE, and decent foodcourts and margin expansion dividend yield of 3.5-3.6%. Valuation is attractive at 13.8x FY20F PE, below peer average of 17x. • Interim DPS of 1 Sct declared • Growth to be driven by stronger foodcourt Where we differ. Our forecasts are below consensus as we are performance and turnaround in kiosk businesses more conservative than the street on 1) breakeven period of Koufu’s kiosk business; 2) overseas earnings growth potential; • Maintain BUY, with higher S$0.88 TP and 3) foodcourt performance in Singapore. Nonetheless, we are still positive on the above drivers albeit less aggressive.
Price Relative Potential catalyst. This will stem from economies of scale over the long term and special dividends from sale of its existing central kitchen property before moving into the new integrated facility. Longer-term drivers include the setting up of an integrated facility aimed at delivering economies of scale, and overseas growth from Macau.
Valuation: Forecasts and Valuation The stock currently trades at 13.8x FY20F PE. Our TP of S$0.88 FY Dec (S$m) 2018A 2019F 2020F 2021F Revenue 224 246 268 277 is based on 17x FY20F PE, pegged to peers’ average (ex- EBITDA 42.8 110 114 117 BreadTalk) multiple. Pre-tax Profit 29.5 33.6 34.5 34.4 Net Profit 24.4 27.9 28.6 28.6 Key Risks to Our View: Net Pft (Pre Ex.) 25.7 28.1 28.6 28.6 Net Pft Gth (Pre-ex) (%) (4.2) 9.1 2.0 (0.2) Key earnings risks include failure to renew leases, inability to EPS (S cts) 4.40 5.02 5.16 5.15 secure new outlets, departure of key tenants and food stalls, EPS Pre Ex. (S cts) 4.64 5.06 5.16 5.15 customers downtrading to hawker centres and coffee shops, EPS Gth Pre Ex (%) (4) 9 2 0 Diluted EPS (S cts) 4.40 5.02 5.16 5.15 competition from foodcourts that offer more attractive Net DPS (S cts) 2.20 2.51 2.58 2.57 propositions (environment, pricing, food quality, etc.) to BV Per Share (S cts) 16.5 19.0 21.6 24.1 customers. PE (X) 16.1 14.1 13.8 13.8 PE Pre Ex. (X) 15.3 14.0 13.8 13.8 At A Glance P/Cash Flow (X) 10.1 9.6 8.7 8.4 Issued Capital (m shrs) 555 EV/EBITDA (X) 7.1 2.9 2.8 2.6 Net Div Yield (%) 3.1 3.5 3.6 3.6 Mkt. Cap (S$m/US$m) 394 / 285 P/Book Value (X) 4.3 3.7 3.3 2.9 Major Shareholders (%) Net Debt/Equity (X) CASH CASH CASH CASH Jun Yuan Holdings 77.2 ROAE (%) 36.4 28.3 25.5 22.5 Free Float (%) 22.8 Earnings Rev (%): - - - 3m Avg. Daily Val (US$m) 0.64 Consensus EPS (S cts): 5.20 5.40 6.10 ICB Industry : Consumer Services / General Retailers Other Broker Recs: B: 2 S: 0 H: 0 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P
ed: TH / sa: YM, PY, CS Page 23 Company Guide
Koufu Group Ltd
WHAT’S NEW Foodcourts driving growth
1Q19 earnings in line, growth driven by foodcourts: Revenue Growth and investment thesis remains intact: We continue to of S$58.1m (+7.3% y-o-y) and core earnings of S$7.13m be positive on Koufu as growth remains on track to meet our (+17.3% y-o-y) were in line with our estimates. Revenue was estimates. Uplift from full 12-month contribution of MBS driven by Outlet and Mall Management segment which grew outlet is coming through and turnaround of kiosk operations 11% y-o-y to S$29.5m while F&B retail segment grew 3.6% remains on track. New outlets continue to open, with the y-o-y to S$28.6m. Margin expansion was largely from uplift number of tea kiosks targeted to reach 25 by end-FY19F from from foodcourts. An interim DPS of 1 Sct has been declared, 22 currently. Two new Elemen restaurants at Paya Lebar and against our 2.5-Sct DPS expectation for the full year. Great World City will contribute from 3Q19 onwards. Four new foodcourts are also due to open going forward. The tea Foodcourts firing on all cylinders: Revenue growth in kiosk business is also growing overseas with plans to open foodcourts was driven by new outlets from University of more outlets in Macau, Indonesia, Malaysia, Philippines and Macau, Marina Bay Sands outlet (which was closed for four Australia. months for renovation last year), and overall improvement in all other foodcourts. Profit before tax improved to S$8.59m Maintain BUY, TP adjusted higher to S$0.88 after rolling over (+19.1% y-o-y) as both cost of sales and operating expenses earnings base to FY20F: Our earnings estimates are grew at a slower pace (+2.9% y-o-y to S$9.1m and +4.4% y- unchanged since results are in line. Our 17x PE-based TP o-y to S$39.8m). The uplift in margins was largely contributed however is raised from S$0.85 to S$0.88, after rolling over by foodcourts as the business has high operating leverage, our earnings from FY19F to FY20F. We continue to like the with excess revenue beyond fixed costs capable of flowing stock for its sound fundamentals including stable earnings, straight into profits. strong balance sheet, cashflows, ROAE, and decent dividend yield of 3.5-3.6%. Maintain BUY.
Quarterly / Interim Income Statement (S$m) FY Dec 2Q2018 1Q2019 2Q2019 % chg yoy % chg qoq
Revenue 54.1 57.8 58.1 7.3 0.5 Cost of Goods Sold (8.8) (8.8) (9.1) 2.9 3.3 Gross Profit 45.3 49.0 49.0 8.1 0.0 Other Oper. (Exp)/Inc (38.1) (39.3) (39.8) 4.4 1.3 Operating Profit 7.17 9.67 9.19 28.2 (4.9) Other Non Opg (Exp)/Inc 0.0 0.0 0.0 - - Associates & JV Inc 0.05 0.09 0.11 122.4 16.0 Net Interest (Exp)/Inc 0.0 (0.8) (0.7) nm 10.5 Exceptional Gain/(Loss) 0.0 (0.5) 0.02 nm nm Pre-tax Profit 7.21 8.45 8.59 19.1 1.7 Tax (1.1) (1.5) (1.4) 28.4 (5.4) Minority Interest 0.0 0.00 0.0 nm nm Net Profit 6.08 6.96 7.15 17.6 2.7 Net profit bef Except. 6.08 7.47 7.13 17.3 (4.5) EBITDA 10.3 28.1 28.1 174.2 0.1 Margins (%) Gross Margins 83.7 84.8 84.4 Opg Profit Margins 13.2 16.7 15.8 Net Profit Margins 11.2 12.0 12.3
Source of all data: Company, DBS Bank
Page 24 Company Guide
Koufu Group Ltd
Outlet count CRITICAL DATA POINTS TO WATCH
Critical Factors Store count growth largely from foodcourts and self-operated F&B stalls. We have assumed 2-3 new outlets per year for foodcourts going forward and coffee shops to remain stable at c.15 outlets as Koufu’s focus is currently on opening more foodcourts. Likewise, we expect Koufu to continue managing Punggol Plaza and Jurong West Hawker Centre without further additions. The increase in number of self-operated F&B stalls is a function of the number of new foodcourts. We do not expect Revenue per outlet (S$m) an aggressive increase in F&B kiosks, QSR and full-service restaurants, as we believe some of these formats need to show consistent profitability before they are scaled up.
More new outlets in Singapore. Growth continues to hinge on more outlets opening in strategic locations with a focus on hospitals, commercial malls, educational institutions and new housing estates. As Singapore’s population increases, the development of more adequate infrastructure to accommodate population increase will fuel the demand for more foodcourt outlets going forward. We believe new hospitals such as FY18 cost breakdown Woodlands Healthcare Campus and housing estates including Bidadari will carve opportunities for Koufu to penetrate with more outlets.
Expands presence in Macau. Koufu entered Macau in 2011 to operate a Koufu foodcourt format at Sands Cotai Central, Macau. It has also opened its first Supertea F&B kiosk at Sands Cotai Central in Macau and is negotiating with landlords and developers for new F&B outlets.
Longer-term growth in other markets outside of Singapore and Revenue by country FY18 Macau. In the longer term, Koufu intends to expand in markets around Singapore and Macau, namely China, Malaysia and Indonesia, at an opportune time.
Building traction on full-service restaurants. Koufu has three Elemen full-service restaurants serving natural meatless cuisine, with another two more opening at Paya Lebar Quarter and Great World City. Plans for Elemen include strengthening the brand name and building a store network in Singapore before expanding overseas into China, Malaysia, Indonesia, and Australia. Revenue breakdown by segment
Building a larger facility to support future growth. There are plans to establish an integrated facility to expand centralised procurement, preparation and processing capabilities of the existing central kitchens. The existing central kitchens have limited production capacities with some of the food preparation processes partially done onsite at its F&B outlets and self- operated F&B stalls. With a larger central kitchen, Koufu can derive economies of scale.
Source: Company, DBS Bank
Page 25 Company Guide
Koufu Group Ltd
Balance Sheet: Leverage & Asset Turnover (x) Cash-generative business, balance sheet in net cash. Koufu’s business is generally cash generative with S$30-51m of operating cashflow generated in the past three years. Capex has been comparatively low at less than S$15m per year over the same period. The business had net cash of S$88.6m in 2Q19. Working capital is generally positive with average trade payable days of 39-41 days and inventory of 11-14 days, outstripping receivable days at 27-29.
Share Price Drivers: Sale of existing Woodlands central kitchen. Koufu is due to Capital Expenditure move into its new integrated facility in FY20F and intends to sell its existing central kitchen at Woodlands. If sold, we estimate a gain of S$11m, worth about 2 Scts per share, which could be paid as special dividends.
Integrated facility to drive economies of scale. With the new integrated facility coming up in FY20, Koufu can consolidate, enhance productivity and improve operational efficiencies by rolling out larger quantities at the new facility, while maintaining quality and consistency. Excess capacity can also be used to derive an additional revenue stream by supplying ROE (%) food input to stall holders at its foodcourts in the future.
Key Risks: Food safety and licences. As a foodservice operator, it is important to maintain food safety. Lapses would lead to reputational risks and in extreme cases, food operation licences could be revoked. Other risks include food contamination and tampering risks, outbreak of diseases or viruses in livestock inducing food scares, exposure to negative publicity, customer complaints and potential litigation. Forward PE Band (x) Vulnerability to disease outbreaks and poor weather. Business could slow during a health crisis or poor weather such as haze. During Singapore’s haze in October 2015, businesses were disrupted as consumers hid indoors. The Singapore government estimated that the haze had resulted in economic losses of about S$700m.
Environment, Social, Governance: Koufu is committed to improving community welfare and supporting the less fortunate and elderly through fundraising PB Band (x) and charity, including a partnership with Singapore artist Tan Kay Nguan to raise funds and adopting a charity called Sun Love Home.
Company Background Koufu is a leading foodcourt and coffee shop operator in Singapore with a presence in Macau. It also has other foodservice formats including tea kiosks, full-service and quick- service restaurants.
Source: Company, DBS Bank
Page 26 Company Guide
Koufu Group Ltd
Key Assumptions FY Dec 2017A 2018A 2019F 2020F 2021F Outlet count 157 156 183 201 210 Revenue per outlet (S$m) 0.61 0.60 0.60 0.60 0.59
Segmental Breakdown FY Dec 2017A 2018A 2019F 2020F 2021F Revenues (S$m) Outlet and mall 105 112 115 120 118 management F&B retail business 111 112 131 148 159 Total 217 224 246 268 277 Operating profit (S$m) Outlet and mall 13.5 15.7 14.7 15.4 15.2 managemen F&B retail businesst 24.6 22.5 29.0 32.7 35.2 Others (7.4) (7.8) (6.9) (10.7) (13.2) Total 30.7 30.4 36.9 37.4 37.2 Operating profit Margins (%) Outlet and mall 12.8 14.0 12.8 12.8 12.8 management F&B retail business 22.1 20.2 22.1 22.1 22.1 Others N/A N/A N/A N/A N/A Total 14.2 13.6 15.0 14.0 13.4
Income Statement (S$m) FY Dec 2017A 2018A 2019F 2020F 2021F Revenue 217 224 246 268 277 Cost of Goods Sold (35.4) (35.1) (39.3) (42.9) (44.4) Gross Profit 181 189 207 225 233 Other Opng (Exp)/Inc (151) (158) (170) (188) (196) Operating Profit 30.7 30.3 36.9 37.4 37.2 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.29 0.30 0.30 0.40 0.40 Net Interest (Exp)/Inc 1.12 0.14 (3.4) (3.3) (3.2) Exceptional Gain/(Loss) 0.0 (1.3) (0.2) 0.0 0.0 Pre-tax Profit 32.1 29.5 33.6 34.5 34.4 Tax (5.3) (5.0) (5.7) (5.9) (5.9) Minority Interest 0.05 (0.1) 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 26.9 24.4 27.9 28.6 28.6 Net Profit before Except. 26.9 25.7 28.1 28.6 28.6 EBITDA 40.1 42.8 110 114 117 Growth Revenue Gth (%) 0.7 3.3 9.8 9.0 3.5 EBITDA Gth (%) (0.4) 6.7 156.9 3.8 2.2 Opg Profit Gth (%) 3.6 (1.2) 21.5 1.4 (0.5) Net Profit Gth (Pre-ex) (%) 3.8 (4.2) 9.1 2.0 (0.2) Margins & Ratio Gross Margins (%) 83.7 84.3 84.0 84.0 84.0 Opg Profit Margin (%) 14.2 13.6 15.0 14.0 13.4 Net Profit Margin (%) 12.4 10.9 11.3 10.7 10.3 ROAE (%) 36.8 36.4 28.3 25.5 22.5 ROA (%) 18.3 18.3 11.7 8.4 7.6 ROCE (%) 30.5 32.3 13.5 9.0 8.1 Div Payout Ratio (%) 315.7 50.0 50.0 50.0 50.0 Net Interest Cover (x) NM NM 11.0 11.4 11.8 Source: Company, DBS Bank
Page 5
Page 27 Company Guide
Koufu Group Ltd
Quarterly / Interim Income Statement (S$m) FY Dec 2Q2018 3Q2018 4Q2018 1Q2019 2Q2019
Revenue 54.1 57.6 57.0 57.8 58.1 Cost of Goods Sold (8.8) (9.0) (8.6) (8.8) (9.1) Gross Profit 45.3 48.6 48.5 49.0 49.0 Other Oper. (Exp)/Inc (38.1) (41.8) (39.5) (39.3) (39.8) Operating Profit 7.17 6.81 9.00 9.67 9.19 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.05 0.10 0.0 0.09 0.11 Net Interest (Exp)/Inc 0.0 0.03 0.14 (0.8) (0.7) Exceptional Gain/(Loss) 0.0 (1.3) 0.0 (0.5) 0.02 Pre-tax Profit 7.21 5.64 9.14 8.45 8.59 Tax (1.1) (1.0) (1.6) (1.5) (1.4) Minority Interest 0.0 0.0 0.0 0.00 0.0 Net Profit 6.08 4.64 7.51 6.96 7.15 Net profit bef Except. 6.08 5.94 7.51 7.47 7.13 EBITDA 10.3 10.1 11.8 28.1 28.1
Growth Revenue Gth (%) (1.7) 6.3 (0.9) 1.3 0.5 EBITDA Gth (%) (1.0) (1.9) 17.5 137.8 0.1 Opg Profit Gth (%) (2.8) (5.0) 32.2 7.5 (4.9) Net Profit Gth (Pre-ex) (%) (1.1) (2.3) 26.3 (0.6) (4.5) Margins Gross Margins (%) 83.7 84.4 85.0 84.8 84.4 Opg Profit Margins (%) 13.2 11.8 15.8 16.7 15.8 Net Profit Margins (%) 11.2 8.1 13.2 12.0 12.3
Balance Sheet (S$m) FY Dec 2017A 2018A 2019F 2020F 2021F
Net Fixed Assets 18.9 21.4 189 233 241 Invts in Associates & JVs 0.40 0.26 0.56 0.96 1.36 Other LT Assets 22.9 30.5 32.6 33.9 34.5 Cash & ST Invts 53.0 96.0 83.2 84.0 98.5 Inventory 1.30 1.29 1.29 1.88 1.95 Debtors 10.7 10.2 11.4 12.5 12.9 Other Current Assets 0.0 0.13 0.13 0.13 0.13 Total Assets 107 160 318 367 390
ST Debt 0.18 0.41 0.41 0.41 0.41 Creditor 45.2 46.0 51.2 55.8 57.7 Other Current Liab 8.08 7.34 7.34 7.34 7.34 LT Debt 1.57 4.36 4.36 4.36 4.36 Other LT Liabilities 9.06 10.0 149 179 186 Shareholder’s Equity 43.0 91.4 105 120 134 Minority Interests 0.15 0.12 0.12 0.12 0.12 Total Cap. & Liab. 107 160 318 367 390
Non-Cash Wkg. Capital (41.3) (41.8) (45.6) (48.6) (50.1) Net Cash/(Debt) 51.3 91.2 78.5 79.3 93.7 Debtors Turn (avg days) 9.2 17.0 16.0 16.3 16.7 Creditors Turn (avg days) 252.1 474.8 450.9 455.3 466.7 Inventory Turn (avg days) 14.2 13.4 12.0 13.5 15.7 Asset Turnover (x) 1.5 1.7 1.0 0.8 0.7 Current Ratio (x) 1.2 2.0 1.6 1.6 1.7 Quick Ratio (x) 1.2 2.0 1.6 1.5 1.7 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 660.9 299.3 837.7 628.3 381.2 Z-Score (X) 2.6 2.6 2.6 2.6 2.6
Source: Company, DBS Bank
Page 28 Company Guide
Koufu Group Ltd
Cash Flow Statement (S$m) FY Dec 2017A 2018A 2019F 2020F 2021F
Pre-Tax Profit 32.1 29.5 33.6 34.5 34.4 Dep. & Amort. 9.08 12.1 72.7 76.2 78.9 Tax Paid (4.0) (5.6) (5.7) (5.9) (5.9) Assoc. & JV Inc/(loss) (0.3) (0.3) (0.3) (0.4) (0.4) Chg in Wkg.Cap. 11.6 (0.2) 1.90 1.67 0.81 Other Operating CF 2.47 3.62 (61.0) (61.0) (61.0) Net Operating CF 51.0 39.1 41.2 45.1 46.9 Capital Exp.(net) (11.6) (14.3) (40.0) (30.0) (18.2) Other Invts.(net) 20.1 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 56.8 (42.0) 0.0 0.0 0.0 Net Investing CF 65.2 (56.3) (40.0) (30.0) (18.2) Div Paid (86.5) (18.1) (13.9) (14.3) (14.3) Chg in Gross Debt (24.9) 3.02 0.0 0.0 0.0 Capital Issues 0.0 45.5 0.0 0.0 0.0 Other Financing CF (0.2) (5.4) 0.0 0.0 0.0 Net Financing CF (112) 25.1 (13.9) (14.3) (14.3) Currency Adjustments (0.6) 0.06 0.0 0.0 0.0 Chg in Cash 4.00 7.94 (12.7) 0.81 14.4 Opg CFPS (S cts) 7.09 7.08 7.08 7.83 8.30 Free CFPS (S cts) 7.09 4.47 0.21 2.72 5.17 Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank Analyst: Alfie YEO Andy SIM, CFA
Page 29 Company Guide
Koufu Group Ltd
DBS Bank recommendations are based on an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return, i.e., > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable share price catalysts within this time frame) *Share price appreciation + dividends
Completed Date: 8 Aug 2019 08:25:34 (SGT) Dissemination Date: 8 Aug 2019 08:34:29 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
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The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Page 30 Company Guide
Koufu Group Ltd
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COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS'') or their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 30 Jun 2019
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Disclosure of previous investment recommendation produced: 6. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
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Page 31 Singapore Company Guide Jumbo Group
Version 14 | Bloomberg: JUMBO SP | Reuters: JUMB.SI Refer to important disclosures at the end of this report
DBS Group Research . Equity 7 Aug 2019
BUY One-off drag from Riverwalk Last Traded Price ( 6 Aug 2019): S$0.375 (STI : 3,170.47) renovations Price Target 12-mth: S$0.47 (24% upside) (Prev S$0.51) Maintain BUY, TP revised to S$0.47. We remain positive on Analyst Jumbo but with a lower TP of S$0.47 as we lower our FY19-21F Alfie YEO +65 6682 3717 [email protected] earnings by 11-14% to account for one-off drag on revenue and Andy SIM, CFA +65 6682 3718 [email protected] gross profit from a 4-week long renovation at the Jumbo Seafood outlet at Riverwalk, and as we tweak our sales assumptions What’s New generally. Excluding the impact of the renovations, we estimate that 3Q19 earnings was in line. Our investment view for the stock • 3QFY19 earnings below from loss of contribution from remains intact albeit our earnings forecasts are recalibrated lower. Riverwalk outlet due to renovations We see that Singapore operations will continue to do well from • Most Singapore outlets doing well the closure of lower-margin stores and opening of higher-end and higher footfall restaurant outlets. We also anticipate that • Cut FY19-21F earnings by 11-14% performance of new stores would be strongly led by Jumbo Seafood ION, and Jumbo Seafood Jewel, with Zui Yu Xuan • Maintain BUY with lower TP of S$0.47 Teochew Cuisine’s performance expected to improve. The stock’s valuation is attractive, trading at 17-19x (pre-exceptional) forward PE (equivalent to -1 SD of its mean PE) and offers a decent Price Relative dividend yield of 3.8% for FY20F.
Where we differ. Our FY19F earnings is below consensus as we factor in loss of revenue and gross profit from the renovations at Riverwalk outlet.
Potential catalyst. Faster–than-expected outlet expansion, especially in China, and regional franchises are potential stock
catalysts provided its cost structure does not deteriorate considerably. More franchise outlets should also deliver better Forecasts and Valuation FY Sep (S$m) 2018A 2019F 2020F 2021F growth once the number of outlets attains critical mass. The Revenue 153 152 163 174 better performance of China outlets could also lift earnings. EBITDA 18.2 18.1 21.8 23.0 Pre-tax Profit 13.5 12.7 16.1 16.9 Valuation: Net Profit 11.0 11.5 13.1 13.8 TP pegged to peer average of 23x FY19F PE. We derive our TP of Net Pft (Pre Ex.) 10.9 11.7 13.1 13.8 S$0.47 based on 23x FY20F PE, pegged to peer average. Net Pft Gth (Pre-ex) (%) (24.2) 7.7 11.8 5.4 EPS (S cts) 1.72 1.80 2.05 2.16 Key Risks to Our View: EPS Pre Ex. (S cts) 1.70 1.83 2.05 2.16 Apart from operational risks, we see the failure to deliver growth EPS Gth Pre Ex (%) (24) 8 12 5 in China as a key risk to our earnings growth projection. Diluted EPS (S cts) 1.72 1.80 2.05 2.16 Net DPS (S cts) 1.20 1.26 1.43 1.51 Singapore’s business is stable while the bulk of the growth is BV Per Share (S cts) 10.2 10.8 11.6 12.3 driven by China. PE (X) 22.1 21.1 18.5 17.6 PE Pre Ex. (X) 22.4 20.7 18.5 17.6 At A Glance P/Cash Flow (X) 15.1 16.4 12.2 13.1 Issued Capital (m shrs) 641 EV/EBITDA (X) 11.1 11.0 8.8 8.2 Mkt. Cap (S$m/US$m) 243 / 176 Net Div Yield (%) 3.2 3.3 3.8 4.0 Major Shareholders (%) P/Book Value (X) 3.7 3.5 3.3 3.1 JBO Holdings Pte Ltd 45.6 Net Debt/Equity (X) CASH CASH CASH CASH Sim Chye Hock 10.0 ROAE (%) 16.9 17.1 18.3 18.1 Tan Gee Jian 6.6 Earnings Rev (%): (14) (11) (11) Free Float (%) 37.8 Consensus EPS (S cts): 2.10 2.30 2.40 Other Broker Recs: B: 3 S: 0 H: 1 3m Avg. Daily Val (US$m) 0.12 ICB Industry : Consumer Services / Food & Drug Retailers Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P
ed: JS/ sa: DT, PY, CS Page 32 Company Guide
Jumbo Group
WHAT’S NEW One-off drag from Riverwalk outlet renovations
3Q19 earnings and margins below as Riverwalk outlet is Singapore operations offset weaker performance of overseas undergoing renovations for four weeks: Core 3Q19 earnings outlets: Singapore outlets continue to do well especially the of S$1.52m (-32.8% y-o-y) was below our forecast as new outlets in Jewel and ION Orchard, while Zui Yu Xuan is margins missed our expectations. This is largely due to the 4- still making a small loss. China operations meanwhile week closure of Jumbo Seafood Riverwalk for renovation. continue to be challenging. JV income registered losses of Revenue was higher at S$36.4m (+1.5% y-o-y) led by new S$0.3m from slower performance of Jumbo Seafood Taiwan. stores – Jumbo Seafood Jewel and Zui Yu Xuan Teochew We now anticipate overall impact to be a slight net profit Cuisine/Chao Ting Teochew Pao Fan. The absence of growth for FY19F. contribution from the Riverwalk outlet led to lower than expected margins. Excluding the impact of the renovations, Cut FY19-21F earnings by 11-15%: The Riverwalk earnings would have been largely in line. renovations has impacted our numbers and we estimate loss of S$1.5m in sales and c.S$1.2m in gross profit. The impact Gross margins below expectations but in line after adding would have flowed straight to operating profit since back Riverwalk’s potential contribution: Gross margin was operating expenses continued to be incurred during the higher at 62.3% (+0.3 ppt y-o-y) from slightly better renovations. The lower operating profit for 3QFY19 is one- contribution of franchise income. But this was lower than our off, and the Riverwalk outlet has resumed operations with a expectations as we were anticipating more franchise income stronger table turn. Factoring the renovation, we are lowering contribution. The absence of Jumbo Seafood Riverwalk’s our FY19F earnings by 14%. We also lower our FY20F contribution also played a part in the lower margins, since earnings by a smaller 11%, with revenue growth rate Jumbo Seafood’s gross margins tend to be higher than maintained at 8% but growing from a smaller FY19F revenue average. Both gross margins and gross profit would have base. Our FY21F earnings is also reduced by 11% with been in line with our estimates if we add back our estimate of revenue and earnings growth rates maintained at around 5- Riverwalk’s 4-week revenue and margin contribution. 6%.
Operating margins below, impacted by loss of gross profit, as Maintain BUY and S$0.47 TP. Our TP is lowered from S$0.51 opex remained intact: Operating profit was S$1.73m (-8.8% to S$0.47 based on 23x FY20F PE, rolling over from 23x on y-o-y), within expectations. Operating margin was below our FY19-20F blended earnings base. We continue to be positive forecast at 4.8% (-0.5ppt) on lower gross profit. The on the stock underpinned by improving Singapore Riverwalk outlet continued to incur operating expenses performance in the coming quarters. While Singapore throughout the renovation, leading to lower overall operating operations is on an earnings recovery path, an earlier than margins. The increase in operating cost was largely due to expected earnings turnaround in China would be another higher staff and rent expenses on opening of new outlets. driver for the stock. The stock’s valuation is attractive, trading at 17-19x (pre-exceptional) forward PE (equivalent to -1 SD of its mean PE) and offers a decent dividend yield of 3.8% for FY20F.
Page 33 Company Guide
Jumbo Group
Quarterly / Interim Income Statement (S$m) FY Sep 3Q2018 2Q2019 3Q2019 % chg yoy % chg qoq
Revenue 35.8 41.3 36.4 1.5 (11.8) Cost of Goods Sold (13.6) (14.6) (13.7) 0.6 (6.2) Gross Profit 22.2 26.6 22.7 2.1 (14.9) Other Oper. (Exp)/Inc (20.3) (21.5) (20.9) 3.1 (2.6) Operating Profit 1.90 5.15 1.73 (8.8) (66.3) Other Non Opg (Exp)/Inc 0.35 0.66 0.00 nm nm Associates & JV Inc 0.07 0.05 (0.3) nm nm Net Interest (Exp)/Inc 0.02 0.14 0.08 333.3 (43.9) Exceptional Gain/(Loss) (0.1) (0.1) 0.14 nm nm Pre-tax Profit 2.27 5.89 1.65 (27.1) (71.9) Tax (0.3) (1.0) (0.3) 3.0 (66.6) Minority Interest 0.27 0.14 0.35 30.2 148.2 Net Profit 2.21 5.02 1.66 (24.8) (66.9) Net profit bef Except. 2.26 5.12 1.52 (32.8) (70.3) EBITDA 3.49 7.18 2.86 (18.1) (60.3) Margins (%) Gross Margins 62.0 64.6 62.3 Opg Profit Margins 5.3 12.5 4.8 Net Profit Margins 6.2 12.2 4.6 Source of all data: Company, DBS Bank
Page 34 Company Guide
Jumbo Group
No of outlets Singapore CRITICAL DATA POINTS TO WATCH
Critical Factors Jumbo Seafood a key revenue contributor. The Jumbo Seafood brand, which comprises five outlets in Singapore and six in China, was a key revenue contributor in FY18. Jumbo Seafood in China accounted for c.20% of revenue, while its five Jumbo Seafood outlets in Singapore contributed majority of the Group’s total revenue. This works out to an average annual revenue of S$10m per outlet in Singapore. Jumbo serves more than 6,800 diners (across all restaurant brands) and more than No of outlets PRC 1.6 tonnes of crabs each day.
Revenue driven by customer traffic. The bulk of Jumbo’s sales stem from dine-ins. Revenue is therefore driven by customer traffic. Jumbo Seafood Singapore tends to enjoy higher traffic during seasonal and festive periods including Chinese New Year, and occasions such as Mother’s Day and Father’s Day. It also enjoys good traffic in July and August from higher tourist arrivals. The crowd for dinner in Singapore typically runs close to full capacity while there is still room for the lunch crowd to grow. Reservations must be made for specific periods during Sales per outlet S$m dinner and are conditional upon customers occupying the tables for only a limited time. This allows Jumbo to turn over its tables to accommodate a new cycle of customers.
Food, staff and rental costs make up c.75% of sales. Operating margin was 8.3% in FY18, with COGS comprising 37% of sales, staff costs 31%, rental 9.3%, utilities 2.4%, and other opex 10.2%. It leased more than 125,000 square feet of restaurant space as of FY18. Key items for COGS are mainly food ingredients including seafood, meat, poultry, vegetables and fruits. Revenue split by brand FY18
Table turns expected to be stable. Jumbo currently does an average of 1-2 table turns per night in Shanghai and 1-3 turns per night in Singapore. Turns are largely stable and not expected to increase significantly. Table turns for lunch are currently below 1x, private rooms at a maximum of 2x and tables located at open spaces are turning at 3-4x.
Average ticket size. The average bill is S$50-80 per head in Shanghai while Singapore’s average spend is S$63-70. We believe Shanghai’s average spend should trend higher because its latest IFC mall outlet is catering to higher-end customers. The Revenue split by geography FY18 pricing premium compared to Singapore is the higher cost of importing crabs and ingredients (herbs, etc.) into China. The average spend per head for Jumbo Seafood Singapore is between S$65 and S$70, JPOT at S$30-33, Ng Ah Sio Bak Kut Teh at S$18-23, and JCafe at S$10-11.
Source: Company, DBS Bank
Page 35 Company Guide
Jumbo Group
Leverage & Asset Turnover (x) Balance Sheet: Cash business, balance sheet in net cash. Jumbo has the ability to generate positive free cashflows. Operating cashflows generated in FY18 was strong at S$16m, while capex per store is relatively low at S$1-2m. Jumbo had a net cash position of c.S$41m at end-Jun 2019, approximately S$0.06 per share. Working capital is generally positive since payable days are close to three months, while inventory and collection days collectively range from 29-35 days.
Share Price Drivers: Capital Expenditure Faster-than-expected earnings growth. Jumbo is a growth stock led by rapid outlet growth in Singapore and Shanghai. Better- than-expected earnings traction could cause the stock to re-rate and trade at higher valuations.
Tourist arrivals. Jumbo’s business volumes peak during holiday seasons and special occasions (rise in tourist arrivals, Chinese New Year, Mother’s Day and Father’s Day). Conversely, bad weather such as haze and decline in tourist arrivals would lead to lower sales volumes on reduced footfall and weak sentiment ROE (%) on the stock.
Chinese Yuan depreciation decreases margins. Depreciation of the Chinese Yuan would increase crab import costs and earnings translated into SGD would be lower. This will be more important when China contributes more to the group (from 20% of revenue in FY18) going forward.
Key Risks: China business imperative to growth. While we view its Singapore business as stable, expansion in China will support Forward PE Band (x) growth over the mid to long term. Slower-than-expected pace of expansion would impede growth.
Food safety and licences. As a restaurant operator, it is important to maintain food safety. Lapses would lead to reputational risks and in extreme cases, food operation licences could be revoked.
Environment, Social, Governance: Jumbo is committed to make a positive impact in the community, with support programmes and goodwill projects in PB Band (x) education and community welfare. Recent projects include donations to charities/societies, and student sponsorships.
Company Background Jumbo is an operator of F&B outlets in Singapore and China. Its anchor brand Jumbo Seafood is widely recognised for its signature Chilli Crab dish. Other brands include JPOT, Ng Ah Sio Bak Kut Teh, Chui Huay Lim Teochew Cuisine, and Singapore Seafood.
Source: Company, DBS Bank
Page 36 Company Guide
Jumbo Group
Key Assumptions FY Sep 2017A 2018A 2019F 2020F 2021F No of outlets Singapore 15.0 14.0 14.0 14.0 13.0 No of outlets PRC 4.00 6.00 6.00 7.00 8.00 Sales per outlet S$m 7.64 7.65 7.58 7.78 8.27
Segmental Breakdown FY Sep 2017A 2018A 2019F 2020F 2021F Revenues (S$m) Singapore 120 122 120 123 133 PRC 25.4 31.3 31.4 40.7 41.2 Total 145 153 152 163 174
Income Statement (S$m) FY Sep 2017A 2018A 2019F 2020F 2021F Revenue 145 153 152 163 174 Cost of Goods Sold (53.2) (57.1) (55.7) (60.3) (63.9) Gross Profit 91.9 96.0 96.0 103 110 Other Opng (Exp)/Inc (75.3) (83.2) (83.6) (89.0) (94.7) Operating Profit 16.6 12.7 12.5 14.2 15.0 Other Non Opg (Exp)/Inc 0.79 0.70 0.76 0.76 0.76 Associates & JV Inc 0.13 (0.1) (0.6) 1.00 1.00 Net Interest (Exp)/Inc 0.17 0.04 0.31 0.15 0.15 Exceptional Gain/(Loss) 0.09 0.12 (0.2) 0.0 0.0 Pre-tax Profit 17.8 13.5 12.7 16.1 16.9 Tax (2.8) (2.9) (2.3) (3.4) (3.6) Minority Interest (0.6) 0.41 1.10 0.48 0.51 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 14.5 11.0 11.5 13.1 13.8 Net Profit before Except. 14.4 10.9 11.7 13.1 13.8 Growth to accelerate as EBITDA 22.1 18.2 18.1 21.8 23.0 Riverwalk outlet to resume full Growth year of operation in FY20F after Revenue Gth (%) 6.1 5.5 (0.9) 7.7 6.3 undergoing 4-week renovation EBITDA Gth (%) (9.4) (17.9) (0.5) 20.7 5.7 period in 3Q19. Opg Profit Gth (%) (13.8) (23.4) (2.3) 13.8 6.1 Net Profit Gth (Pre-ex) (%) (20.0) (24.2) 7.7 11.8 5.4 Margins & Ratio Gross Margins (%) 63.4 62.7 63.3 63.1 63.2 Opg Profit Margin (%) 11.5 8.3 8.2 8.7 8.7 Net Profit Margin (%) 10.0 7.2 7.6 8.0 8.0 ROAE (%) 22.3 16.9 17.1 18.3 18.1 ROA (%) 17.1 12.9 13.1 14.3 14.1 ROCE (%) 21.4 15.8 16.9 17.7 17.7 Div Payout Ratio (%) 75.4 69.9 70.0 70.0 70.0 Net Interest Cover (x) NM NM NM NM NM Source: Company, DBS Bank
Page 37 Company Guide
Jumbo Group
Quarterly / Interim Income Statement (S$m) FY Sep 3Q2018 4Q2018 1Q2019 2Q2019 3Q2019
Revenue 35.8 39.5 35.5 41.3 36.4 Cost of Goods Sold (13.6) (14.8) (12.9) (14.6) (13.7) Gross Profit 22.2 24.7 22.6 26.6 22.7 Other Oper. (Exp)/Inc (20.3) (21.3) (19.8) (21.5) (20.9) Operating Profit 1.90 3.32 2.75 5.15 1.73 Other Non Opg (Exp)/Inc 0.35 0.15 0.10 0.66 0.00 Associates & JV Inc 0.07 0.0 0.0 0.05 (0.3) Net Interest (Exp)/Inc 0.02 0.01 0.01 0.14 0.08 Exceptional Gain/(Loss) (0.1) 0.18 (0.3) (0.1) 0.14 Pre-tax Profit 2.27 3.66 2.56 5.89 1.65 Tax (0.3) (1.4) (0.4) (1.0) (0.3) Minority Interest 0.27 0.14 0.27 0.14 0.35 Net Profit 2.21 2.45 2.43 5.02 1.66 Net profit bef Except. 2.26 2.27 2.68 5.12 1.52 EBITDA 3.49 4.89 4.10 7.18 2.86
Growth Revenue Gth (%) (14.2) 10.2 (10.2) 16.3 (11.8) EBITDA Gth (%) (43.3) 40.3 (16.1) 75.1 (60.3) Opg Profit Gth (%) (60.5) 74.9 (17.2) 87.2 (66.3) Net Profit Gth (Pre-ex) (%) (46.9) 0.2 18.2 90.9 (70.3) Margins slumped on absence Margins of gross profit at Riverwalk Gross Margins (%) 62.0 62.5 63.7 64.6 62.3 for 4 weeks. Opg Profit Margins (%) 5.3 8.4 7.8 12.5 4.8 Net Profit Margins (%) 6.2 6.2 6.9 12.2 4.6
Balance Sheet (S$m) FY Sep 2017A 2018A 2019F 2020F 2021F
Net Fixed Assets 19.4 20.8 21.4 21.5 21.2 Invts in Associates & JVs 0.55 2.07 1.48 2.48 3.48 Other LT Assets 1.10 4.80 4.80 4.80 4.80 Cash & ST Invts 51.7 47.0 48.2 54.1 57.5 Inventory 1.48 1.54 1.47 1.60 1.69 Debtors 9.04 11.7 10.3 11.1 11.8 Other Current Assets 0.0 0.0 0.0 0.0 0.0 Total Assets 83.2 88.0 87.6 95.5 101
ST Debt 0.0 0.0 0.0 0.0 0.0 Creditor 10.1 13.8 10.7 14.0 14.9 Other Current Liab 4.36 4.37 4.37 4.37 4.37 LT Debt 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 0.30 0.30 0.30 0.30 0.30 Shareholder’s Equity 65.3 65.4 69.2 74.3 78.9 Minority Interests 3.23 4.13 3.03 2.54 2.03 Total Cap. & Liab. 83.2 88.0 87.6 95.5 101
Non-Cash Wkg. Capital (3.9) (4.9) (3.3) (5.7) (5.8) Net Cash/(Debt) 51.7 47.0 48.2 54.1 57.5 Debtors Turn (avg days) 18.9 24.7 26.5 23.9 24.0 Creditors Turn (avg days) 92.4 83.4 88.9 82.9 91.5 Inventory Turn (avg days) 9.7 10.5 11.0 10.3 10.4 Asset Turnover (x) 1.7 1.8 1.7 1.8 1.8 Current Ratio (x) 4.3 3.3 4.0 3.6 3.7 Quick Ratio (x) 4.2 3.2 3.9 3.5 3.6 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) N/A N/A N/A N/A N/A Z-Score (X) 12.9 11.5 12.9 11.2 11.2
Source: Company, DBS Bank
Page 38 Company Guide
Jumbo Group
Cash Flow Statement (S$m) FY Sep 2017A 2018A 2019F 2020F 2021F
Pre-Tax Profit 17.8 13.5 12.7 16.1 16.9 Dep. & Amort. 4.58 4.83 5.46 5.88 6.25 Tax Paid (2.9) (2.9) (2.3) (3.4) (3.6) Assoc. & JV Inc/(loss) (0.1) 0.12 0.59 (1.0) (1.0) Chg in Wkg.Cap. (7.8) 0.96 (1.6) 2.45 0.05 Other Operating CF 0.10 (0.4) 0.0 0.0 0.0 Net Operating CF 11.6 16.1 14.9 20.0 18.6 Capital Exp.(net) (5.9) (6.1) (6.0) (6.0) (6.0) Other Invts.(net) 0.0 (4.0) 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 (1.1) 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.01 0.01 0.0 0.0 0.0 Net Investing CF (5.9) (11.2) (6.0) (6.0) (6.0) Div Paid (14.1) (10.9) (7.7) (8.1) (9.2) Chg in Gross Debt (0.6) 0.0 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 1.00 1.31 0.0 0.0 0.0 Net Financing CF (13.7) (9.6) (7.7) (8.1) (9.2) Currency Adjustments 0.0 0.03 0.0 0.0 0.0 Chg in Cash (8.0) (4.7) 1.16 5.91 3.44 Opg CFPS (S cts) 3.03 2.36 2.57 2.74 2.90 Free CFPS (S cts) 0.89 1.56 1.38 2.18 1.97 Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank Analyst: Alfie YEO Andy SIM, CFA
Page 39 Company Guide
Jumbo Group
DBS Bank recommendations are based on an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return, i.e., > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable share price catalysts within this time frame) *Share price appreciation + dividends
Completed Date: 7 Aug 2019 08:42:26 (SGT) Dissemination Date: 7 Aug 2019 08:47:52 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
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Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Page 40 Company Guide
Jumbo Group
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Page 41 Singapore Company Guide BreadTalk Group Ltd
Version 10 | Bloomberg: BREAD SP | Reuters: BRET.SI Refer to important disclosures at the end of this report
DBS Group Research . Equity 6 Sep 2019 HOLD Food Junction to weigh on earnings Last Traded Price ( 6 Sep 2019): S$0.645 (STI : 3,144.48) Price Target 12-mth: S$0.61 (-6% downside) (Prev S$0.77) Maintain HOLD, with a lower TP of S$0.61. We remain neutral on BreadTalk after it announced its acquisition of Food Junction Analyst for S$80m. Factoring in the effects of the acquisition, we Alfie YEO +65 6682 3717 [email protected] Andy SIM, CFA +65 6682 3718 [email protected] anticipate a drag on margins and earnings due to: 1) lower profitability of Food Junction vis-à-vis its own Food Atrium What’s New division; and 2) additional interest costs for financing the • Acquiring Food Junction for S$80m acquisition with additional debt of c.S$50m. Nonetheless, on a positive note, the acquisition will provide BreadTalk with a • Higher interest cost and lower Food Junction higher market share in the foodcourt segment in Singapore, as profitability to weigh on margins well as a larger earnings base. • Lowered FY20-21F earnings by 8-10% Where we differ. Our earnings forecasts are below consensus as • Maintain HOLD with lower S$0.61 TP we factor in a longer breakeven period for the new 4orth division. The division is in its infancy with scope to increase store count, but this will lengthen the division’s EBIT breakeven Price Relative period. This unit should be capable of delivering similar margins to the restaurant division in the long term. We anticipate margins to head lower following the recent Food Junction acquisition as well.
Potential catalyst. We see potential for a special dividend of up to 4.5Scts if Perennial sells AXA Tower.
Forecasts and Valuation Valuation: FY Dec (S$m) 2018A 2019F 2020F 2021F Our TP of S$0.61 is derived from sum-of-parts (SOTP) Revenue 610 660 740 782 EBITDA 79.7 199 221 240 valuation. We value the retail business at S$0.52 on 22x PE on Pre-tax Profit 31.1 21.7 21.8 25.0 blended FY19-20F earnings, investment properties at S$0.33 Net Profit 15.2 13.2 13.3 15.2 based on market value, and net debt at S$0.24. Net Pft (Pre Ex.) 16.4 13.4 13.3 15.2 Net Pft Gth (Pre-ex) (%) 22.1 (18.4) (0.8) 14.7 EPS (S cts) 2.70 2.35 2.36 2.70 Key Risks to Our View: EPS Pre Ex. (S cts) 2.91 2.38 2.36 2.70 Operational risks include food safety and licences as well as EPS Gth Pre Ex (%) 22 (18) (1) 15 negative publicity. In extreme cases, food operating licences Diluted EPS (S cts) 2.69 2.34 2.35 2.69 can be revoked for lapse in food safety procedures. Negative Net DPS (S cts) 1.50 1.50 1.50 1.50 BV Per Share (S cts) 23.7 24.6 25.4 26.6 publicity may lead to weaker demand and poorer marketability PE (X) 23.9 27.5 27.4 23.9 when selling its franchises as the public and franchisees would PE Pre Ex. (X) 22.1 27.2 27.4 23.9 shy away from their association with BreadTalk. P/Cash Flow (X) 5.5 8.3 6.4 5.3 EV/EBITDA (X) 5.4 2.6 2.3 2.1 At A Glance Net Div Yield (%) 2.3 2.3 2.3 2.3 P/Book Value (X) 2.7 2.6 2.5 2.4 Issued Capital (m shrs) 564 Net Debt/Equity (X) 0.2 0.8 0.7 0.6 Mkt. Cap (S$m/US$m) 364 / 263 ROAE (%) 11.5 9.7 9.4 10.4 Major Shareholders (%) Earnings Rev (%): - (8) (10) Meng Tong Quek 34.0 Consensus EPS (S cts): 2.2 2.8 3.3 Lih Leng Lee 18.6 Other Broker Recs: B: 0 S: 0 H: 3 Free Float (%) 47.4 Source of all data on this page: Company, DBS Bank, Bloomberg 3m Avg. Daily Val (US$m) 0.26 Finance L.P ICB Industry : Consumer Services / General Retailers
ed: JS/ sa: YM, PY, CS Page 42 Company Guide
BreadTalk Group Ltd
WHAT’S NEW Food Junction to weigh on earnings
Maintain HOLD, with lower TP of S$0.61. We maintain HOLD P/B valuation higher than Koufu’s trading multiple in the and lower our TP to S$0.61 post acquisition of Food Junction. market: There is no meaningful PE valuation due to losses and This is largely due to a drag on earnings as a result of interest low earnings of Food Junction. However, headline P/B cost from financing the acquisition. BreadTalk will borrow valuation is on the high side. The PE valuation is not additional debt of c.S$50m which will raise interest expense meaningful given that Food Junction incurred a loss in FY18 going forward. In addition, Food Junction currently has lower and 1H19’s earnings was small. NTA is S$12.3m implying P/B operating margins which we assume will lead to lower of 6.5x, higher relative to Koufu’s <4x P/B. BreadTalk will operating margins for Food Atrium in FY20F. Our lower TP is draw down an additional debt of c.S$50m for 5 years to in line with the reduction in our earnings forecast for FY20- finance this deal. 21F by 8-10%. Anticipate strengthening market share/operational network Earnings drag to stem from higher interest costs and lower and cost synergies in the longer term. With NTUC Foodfare foodcourt margins. Our assumptions for the Food Junction buying Kopitiam (2018), Broadway buying S-11 (2018), and acquisition are: 1) acquisition debt of S$50m along with our now BreadTalk buying Food Junction, the market for chained assumed interest cost of 2.5-3.5%; and 2) the fifteen Food foodcourts and coffeeshops is indeed consolidating. Larger Junction outlets will contribute to revenue but we impute F&B firms continue to seek market share and expansion in this lower operating margins at Food Atrium Division in FY20F space by taking out smaller players. With fewer leading due to Food Junctions’ lower profitability. Our FY20-21F foodcourt players in Singapore, their bargaining power may revenue projection is raised by 6% while operating profit strengthen in the future. We believe the acquisition will also margin assumption for FY20F is lowered to 8% (from 10% allow BreadTalk to better compete with the top two previously) before normalising to 10% by FY21F. foodcourt players with stronger market share and store network. Although we see some drag on EPS in the short S$80m acquisition consolidates BreadTalk’s position as third term, the acquisition could be positive over the long term as largest foodcourt player in Singapore: BreadTalk’s 100% foodcourt is a high fixed-cost business and once revenue purchase of Food Junction Management Pte Ltd (Food exceeds fixed costs, there is high-margin potential. Junction) for S$80m will consolidate BreadTalk’s position as the third largest foodcourt operator in Singapore, behind Prefer Koufu to BreadTalk at this “Junction”. We continue to NTUC Foodfare/Kopitiam (10+52) and Koufu (47). Food like Koufu which is a BUY on favourable valuations and better Junction owns 12 foodcourts in Singapore and 3 in Malaysia growth traction, while our call on BreadTalk remains a HOLD with one more opening next year in Mid Valley Southkey, as we believe earnings drag from the acquisition will limit Johor Bahru, while BreadTalk has 14 foodcourts in Singapore upside. and 2 in Malaysia.
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Page 43 Company Guide
BreadTalk Group Ltd
Bakery outlets CRITICAL DATA POINTS TO WATCH
Critical Factors Focus on driving higher operating efficiencies and margin improvement. The focus is to raise efficiency of its existing operations, lower operating costs, and expand margins. We see lower FY19F operating margins due to the recent Food Junction acquisition as profitability is currently low. However, once operating synergies are achieved, we anticipate operating margins to normalise by FY21F. Restaurant outlets Driving margin improvement through cost efficiencies. Initiatives such as better demand planning, more efficient human resource planning, and tighter cost controls have benefitted operating margins. These have led to lower food wastage, and reduction in unnecessary payroll expenses. Management has also been spending less on capex, leading to some moderation in depreciation expenses going forward.
Longer breakeven for 4orth division over the immediate term. We see the new 4orth division concept restaurants as a longer term driver of earnings. Concept brands include Sō Ramen, TaiGai, and Nayuki bakery outlets in Singapore, and Song Fa Bak Kut Teh and Food court outlets Wu Pao Chun Bakery outlets in China. Over time, we expect the division to yield higher margins, similar to the Restaurant division. But for now, the division is in a start-up phase and we see the operation taking a longer-than-expected time reach breakeven. This will be a slight drag on group operating profit and margins in the coming quarters.
Changes to management personnel, tenant mix and tenant quality have enabled Food Atrium to turn profitable. The Food Atrium division made a marked turnaround in FY17 after it closed non- performing outlets in tier 2 cities in China the year before. Food Total Atrium’s management team in China was replaced with new personnel who have made changes to tenant quality and tenant mix, leading to improvements in performance and occupancy at Food Atriums in China. It will now focus on its operations in Beijing, Shanghai, Shenzhen and Guangzhou where tables can turn more frequently. Earnings recovery is on track, driven by better profitability and cost leverage from Food Atrium division across outlets in Beijing, Xi’an, Thailand, and Singapore.
Din Tai Fung is in London. BreadTalk has opened a new outlet in Covent Garden last year via a JV (where BreadTalk is the major Annual sales per outlet S$m shareholder) with Fairy Rise Development (Din Tai Fung franchise owner), Din Tai Fung Taiwan, a UK partner and a Taiwanese individual. Another outlet is scheduled to open in 2H19 at Centre Point in Tottenham Court Road. We see scope for more outlets in Thailand as there are only eight Din Tai Fung restaurants there. As restaurant margins are attractive, a better sales mix from the restaurant business would improve overall profitability eventually.
Source: Company, DBS Bank
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Appendix 1: A look at Company's listed history – what drives its share price?
Share price has been driven by various factors including earnings, properties and strategic investors
(S$) Earnings decline 1.40 Sale and earnings Re-rated on new growth declined, BreadTalk IHQ higher interest 1.20 building and Minor costs, lower net margins International taking 1.00 a stake
0.80
0.60
0.40 Earnings Gain in Perennial turnaround, CHIJMES potential 0.20 investment, sale of AXA operating margin expansion Tower 0.00 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 Oct-19 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19
Source: DBS Bank
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Leverage & Asset Turnover (x) Balance Sheet: Cash business; balance sheet in net debt. As with all food service companies, BreadTalk is a cash business. The business generated S$65-90m of operating cashflows annually and S$18m-54m of positive free cashflows in the last four years. Net debt as of end-June 2019 was about c.S$94.2m, equivalent to approximately 16.7 Scts per share, representing a net debt ratio of 0.7x. BreadTalk was in net cash till FY12 when it built its BreadTalk IHQ. In FY13 when it opened its IHQ, net debt stood at S$89m. It has S$100m of medium-term notes issued in 1Q18 due on 17 January 2023 at 4% coupon for general corporate Capital Expenditure purposes, including refinancing of existing borrowings, and financing capital expenditure and general working capital.
Share Price Drivers: Changes to property holdings likely to drive share price. Valuations for BreadTalk re-rated to an all-time high when it moved into its IHQ in 2013. Similarly, when it sold 112 Katong last year and declared special dividends, its share price re-rated as well. In 4Q16, BreadTalk announced the sale of 111 Somerset, which also lifted its share price in anticipation of special dividends. We expect special dividends if and when AXA ROE (%) and/or CHIJMES is sold. The adoption of SFRS (I) 9 in 2Q19 which accounts for investment securities at fair value has led us to increase our SOTP-based TP for the investment properties component.
Key Risks: Food safety and licences. As a restaurant operator, it is important to maintain food safety. Lapses would lead to reputational risks and in extreme cases, food operation licences could be revoked.
Negative publicity affects consumer confidence and the Forward PE Band (x) marketability of its franchise. BreadTalk has had some negative publicity, especially in 2015 over food safety and food preparation procedures in Singapore and China. Incidents such as these can generate negative response from the public which could affect sales as well as the marketability of its franchise overseas.
Environment, Social, Governance: BreadTalk is focused in ensuring food safety and hygiene, improving customer satisfaction and imparting good values to its people. Sustainability areas include Food Safety and PB Band (x) Hygiene, Regulatory Compliance, Business Ethics, Economic Performance, Risk Management and Customer Satisfaction.
Company Background BreadTalk Group is a Singapore-based food and beverage (F&B) group engaged in the operations and franchising of bakery/confectionery outlets, food courts and restaurants across the region. BreadTalk’s portfolio currently has six brands – BreadTalk, ToastBox, Food Republic, Ramen Play, San Pou Tei and Din Tai Fung. It operates over 900 outlets across 17 countries. Source: Company, DBS Bank
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Key Assumptions FY Dec 2017A 2018A 2019F 2020F 2021F Bakery outlets 871 863 875 880 885 Restaurant outlets 25.0 28.0 32.0 34.0 36.0 Food court outlets 53.0 55.0 58.0 76.0 80.0 Total 949 946 965 990 1,001 Annual sales per outlet 0.63 0.63 0.67 0.73 0.76 S$m Segmental Breakdown FY Dec 2017A 2018A 2019F 2020F 2021F Revenues (S$m) Bakery operations 297 282 292 299 307 Restaurant sales 141 152 178 192 208 Food Atrium income 149 157 169 226 243 4orth 7.86 14.2 17.0 17.9 18.8 Higher revenue forecast Others 4.62 4.41 4.73 4.73 4.73 due to consolidating 16 Total 600 610 660 740 782 Food Junction foodcourts Operating profit (S$m) post acquisition ( S$Bakerym) operations 9.46 6.49 7.29 7.48 7.67 Restaurant sales 24.4 22.2 26.6 28.9 31.2 Anticipate some drop in Food Atrium income 8.90 16.6 16.9 18.0 24.3 margins dragged by 4orth (0.3) (3.7) (3.7) (3.7) (3.7) Food Junction Others (7.0) (1.4) (4.2) (4.2) (4.2) Total 35.5 40.2 42.9 46.5 55.3 Operating Margins (%) Bakery operations 3.2 2.3 2.5 2.5 2.5 Restaurant sales 17.4 14.6 15.0 15.0 15.0 Food Atrium income 6.0 10.6 10.0 8.0 10.0 4orth (4.2) (26.3) (21.9) (20.9) (19.9) Others (150.6) (31.5) (88.2) (88.2) (88.2) Total 5.9 6.6 6.5 6.3 7.1
Income Statement (S$m) FY Dec 2017A 2018A 2019F 2020F 2021F Revenue 600 610 660 740 782 Cost of Goods Sold (266) (267) (221) (248) (262) Gross Profit 333 343 439 492 520 Other Opng (Exp)/Inc (298) (303) (396) (445) (464) Operating Profit 35.5 40.2 42.9 46.5 55.3 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.21 (1.8) (0.4) (0.4) (0.4) Net Interest (Exp)/Inc (3.2) (6.0) (20.7) (24.3) (29.9) Exceptional Gain/(Loss) 8.27 (1.2) (0.2) 0.0 0.0 Pre-tax Profit 40.8 31.1 21.7 21.8 25.0 Tax (11.0) (11.4) (6.5) (6.5) (7.5) Minority Interest (8.1) (4.5) (2.0) (2.0) (2.3) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 21.7 15.2 13.2 13.3 15.2 Net Profit before Except. 13.4 16.4 13.4 13.3 15.2 Higher interest expense for c.S$50m acquisition EBITDA 76.2 79.7 199 221 240 financing based on our Growth borrowing cost Revenue Gth (%) (2.5) 1.7 8.2 12.1 5.7 assumption EBITDA Gth (%) (4.7) 4.5 150.0 11.2 8.4 Opg Profit Gth (%) 9.2 13.2 6.8 8.4 18.9 Net Profit Gth (Pre-ex) (%) 55.4 22.1 (18.4) (0.8) 14.7 Margins & Ratio Impact of FRS 116 Gross Margins (%) 55.6 56.3 66.5 66.5 66.5 Opg Profit Margin (%) 5.9 6.6 6.5 6.3 7.1 Net Profit Margin (%) 3.6 2.5 2.0 1.8 1.9 Impact of FRS 116 ROAE (%) 16.6 11.5 9.7 9.4 10.4 ROA (%) 4.0 2.6 1.6 1.3 1.5 ROCE (%) 7.4 6.7 5.3 4.5 5.3 Div Payout Ratio (%) 90.9 55.6 63.9 63.7 55.5 Net Interest Cover (x) 11.1 6.6 2.1 1.9 1.8 Source: Company, DBS Bank
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Quarterly / Interim Income Statement (S$m) FY Dec 2Q2018 3Q2018 4Q2018 1Q2019 2Q2019
Revenue 149 158 155 158 163 Cost of Goods Sold (65.6) (68.5) (67.1) (51.1) (54.3) Gross Profit 83.2 89.1 87.6 106 109 Other Oper. (Exp)/Inc (71.8) (79.7) (77.0) (97.2) (98.8) Operating Profit 11.4 9.45 10.6 9.22 10.2 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (0.5) (0.3) (1.0) 0.0 (0.1) Net Interest (Exp)/Inc (1.2) (1.9) (0.6) (5.4) (5.1) Exceptional Gain/(Loss) (2.6) (0.2) 1.95 (0.2) 0.0 Pre-tax Profit 7.03 7.07 11.1 3.65 5.01 Tax (2.6) (3.2) (3.2) (2.5) (2.9) Minority Interest (2.0) (1.2) 1.07 0.12 (1.1) Net Profit 2.44 2.70 8.88 1.32 1.02 Net profit bef Except. 5.02 2.86 6.93 1.48 1.02 EBITDA 20.1 20.0 22.1 47.4 49.6
Growth Revenue Gth (%) 0.2 5.9 (1.8) 1.8 3.6 EBITDA Gth (%) 15.3 (0.5) 10.5 114.6 4.5 Opg Profit Gth (%) 30.5 (17.1) 12.3 (13.1) 10.8 Net Profit Gth (Pre-ex) (%) 217.1 (43.0) 142.2 (78.7) (30.6) Margins Impact of FRS 116 Gross Margins (%) 55.9 56.5 56.6 67.5 66.7 Opg Profit Margins (%) 7.7 6.0 6.9 5.8 6.3 Net Profit Margins (%) 1.6 1.7 5.7 0.8 0.6
Balance Sheet (S$m) FY Dec 2017A 2018A 2019F 2020F 2021F
Net Fixed Assets 169 173 263 256 247 Invts in Associates & JVs 36.7 34.9 34.6 34.2 33.8 Other LT Assets 121 133 514 514 514 Cash & ST Invts 154 190 142 150 170 Inventory 9.72 11.3 3.01 3.38 3.57 Debtors 52.0 56.5 58.7 65.8 69.5 Other Current Assets 8.70 9.92 9.92 9.92 9.92 Total Assets 552 608 1,024 1,033 1,048
ST Debt 57.1 97.8 53.7 53.7 53.7 Creditor 90.3 97.0 97.1 99.3 105 Impact of FRS 116 Other Current Liab 109 109 202 202 202 Includes right of use assets LT Debt 126 128 219 219 219 Other LT Liabilities 14.5 13.2 283 283 283 Shareholder’s Equity 129 134 138 143 150 Minority Interests 25.5 29.1 31.1 33.0 35.3 Total Cap. & Liab. 552 608 1,024 1,033 1,048
Non-Cash Wkg. Capital (129) (129) (228) (222) (224) Net Cash/(Debt) (28.5) (36.2) (131) (122) (102) Debtors Turn (avg days) 33.3 32.5 31.9 30.7 31.6 Creditors Turn (avg days) 143.1 151.7 549.9 494.4 486.6 Inventory Turn (avg days) 15.8 17.0 40.5 16.1 16.6 Asset Turnover (x) 1.1 1.1 0.8 0.7 0.8 Raise debt by c.S$50m Current Ratio (x) 0.9 0.9 0.6 0.6 0.7 for the acquisition Quick Ratio (x) 0.8 0.8 0.6 0.6 0.7 Net Debt/Equity (X) 0.2 0.2 0.8 0.7 0.6 Net Debt/Equity ex MI (X) 0.2 0.3 0.9 0.9 0.7 Impact of FRS 116 Capex to Debt (%) 20.0 21.2 47.7 14.7 14.7 Includes lease liabilities Z-Score (X) 1.2 1.9 1.2 1.2 1.3
Source: Company, DBS Bank
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Cash Flow Statement (S$m) FY Dec 2017A 2018A 2019F 2020F 2021F
Pre-Tax Profit 40.8 31.1 21.7 21.8 25.0 Dep. & Amort. 40.5 41.3 40.5 46.6 49.2 Tax Paid (10.1) (9.6) (6.5) (6.5) (7.5) Assoc. & JV Inc/(loss) (0.2) 1.80 0.35 0.37 0.39 Chg in Wkg.Cap. 15.0 (6.9) 98.8 (5.3) 1.70 Other Operating CF (1.5) 7.85 (111) 0.0 0.0 Net Operating CF 84.4 65.6 43.8 57.0 68.8 Capital Exp.(net) (36.5) (47.8) (130) (40.0) (40.0) Includes impact of FRS Other Invts.(net) 14.6 (3.6) 0.0 0.0 0.0 116 non-cash Invts in Assoc. & JV (3.3) (0.5) 0.0 0.0 0.0 adjustment Div from Assoc & JV 0.06 0.0 0.0 0.0 0.0 Other Investing CF (12.7) 0.40 0.0 0.0 0.0 Net Investing CF (37.9) (51.5) (130) (40.0) (40.0) Includes S$80m Food Div Paid (16.9) (11.3) (8.4) (8.4) (8.4) Junction acquisition Chg in Gross Debt 1.34 43.8 46.4 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (8.9) (2.5) 0.0 0.0 0.0 Net Financing CF (24.4) 30.0 38.0 (8.4) (8.4) Additional c.S$50m Currency Adjustments (1.5) (0.4) 0.0 0.0 0.0 debt raised Chg in Cash 20.7 43.7 (48.2) 8.52 20.4 Opg CFPS (S cts) 12.3 12.9 (9.8) 11.0 11.9 Free CFPS (S cts) 8.52 3.17 (15.3) 3.01 5.12 Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank Analyst: Alfie YEO Andy SIM, CFA
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DBS Bank recommendations are based on an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return, i.e., > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable share price catalysts within this time frame) *Share price appreciation + dividends
Completed Date: 6 Sep 2019 18:00:45 (SGT) Dissemination Date: 6 Sep 2019 18:28:20 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
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Page 51 SMC Research Singapore Equity Explorer Old Chang Kee
Bloomberg: OCK SP | Reuters: OCKL.SI Refer to important disclosures at the end of this report
DBS Group Research . Equity 9 Sep 2019
NOT RATED S$0.73 STI : 3,144.48 Puffing up Stable Growth Closing price as of 4 Sep 2019 • Strong brand name and well-established snack chain in Return *: 2 Singapore with 86 outlets island-wide Risk: Moderate Potential Target 12-mth*: 12-Month S$0.76 (4% • Potential growth driven by network expansion and upside) diversification into the B2B sector
Analyst • Decent FY20F dividend yield of c.4.1% Alfie YEO +65 6682 3717 [email protected] • Stock return rating of 2 with fair value of S$0.76 based on 20x PE The Business Price Relative Established snack and F&B chain in Singapore since 1956. Old Chang Kee (OCK) is known for its signature curry puffs and to- go snacks sold at its high foot traffic kiosk locations.
Growth driven by network expansion and B2B model. The company believes that it has a headroom of ~20 more stores to grow in Singapore. Branching into a B2B model, supplying snacks to institutions such as hotels and in-flight catering service providers, etc. could fuel growth. Forecasts and Valuation The Stock FY Mar (S$m) 2018A 2019A 2020F 2021F Revenue 85.5 89.8 92.7 98.0 Fairly value of S$0.76. The stock currently trades at 18.1x FY20F EBITDA 10.8 11.2 11.7 12.4 Pre-tax Profit 4.74 5.41 5.77 6.13 earnings, above Singapore-listed food service players at 19x. Our Net Profit 3.78 4.34 4.61 4.90 fair value based on historical mean at 20x FY20F PE is S$0.76. Net Pft (Pre Ex.) 4.50 4.54 4.61 4.90 Dividend yield is expected to be at 4.1% for FY20F. EPS (S cts) 3.12 3.57 3.80 4.04 EPS Pre Ex. (S cts) 3.71 3.74 3.80 4.04 Potential stock price catalysts. OCK’s growth hinges on whether EPS Gth (%) 117 15 6 6 it can scale up its B2B business model. In addition, the company EPS Gth Pre Ex (%) (9) 1 2 6 Diluted EPS (S cts) 3.12 3.57 3.80 4.04 is expanding its margins through new brands and higher-margin Net DPS (S cts) 3.00 3.00 3.00 3.00 products and other operational efficiencies by leveraging on BV Per Share (S cts) 23.4 23.4 24.2 25.3 technology to reduce manpower. PE (X) 23.4 20.4 19.2 18.1 PE Pre Ex. (X) 19.7 19.5 19.2 18.1 What could go wrong with this stock? We believe inability to P/Cash Flow (X) 9.2 8.5 8.1 7.7 scale up its B2B business and enhance margins could stifle EV/EBITDA (X) 8.1 7.4 7.1 6.5 Net Div Yield (%) 4.1 4.1 4.1 4.1 earnings growth. Failure to deliver could result in little or no P/Book Value (X) 3.1 3.1 3.0 2.9 earnings growth. Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 13.6 15.3 15.9 16.3 At A Glance Issued Capital (m shrs) 121 Consensus EPS (S cts): Other Broker Recs: B: 0 S: 0 H: 0 Mkt. Cap (S$m/US$m) 88.6 / 64.1 Major Shareholders (%) ICB Industry: Consumer Services Han Keen Juan 58.6 ICB Sector: Food & Drug Retailers Goodview Properties Pte Ltd 11.7 Principal Business: An established snack and F&B chain in Singapore Lim Tao-E William 7.3 since 1956. It also operates in Malaysia, China, and Australia. Free Float (%) Source of all data on this page: Company, DBS Bank, Bloomberg 3m Avg. Daily Val (US$m) 0.01 Finance L.P.
*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report.
ed: TH/ sa: YM, PY, CS Page 52 Equity Explorer Old Chang Kee
REVENUE DRIVERS Chart 1: Old Chang Kee store count against revenue Network expansion in Singapore. OCK has increased its number of outlets from 76 kiosks back in FY13 to 86 kiosks in FY19. The management believes that it still has about 20 kiosks worth of headroom to grow and will continue to look for strategic locations to rent.
Expanding its retail presence overseas in the UK. The company opened its first flagship outlet in Covent Garden, London, UK in FY19 and received many positive reviews. Despite the high manpower and overhead costs, the company plans to further expand its retail presence in the UK. Chart 2: Profitability margins against revenue per outlet Ramping up its B2B efforts. OCK’s diversification into the B2B sector is helping to boost its top line. Instead of bringing its products only to consumers, it also serves business operators in sectors such as F&B, travel and hospitality. For example, the company is serving curry puffs to passengers onboard Singapore Airlines flights through SATS Ltd. It also provides catering services for corporate and private events. Further, its central kitchen is also producing more upstream products such as sauces and mixes for various retail channels. Outside Singapore, the company is also exporting upstream products such as sauces and mixes to Malaysia. Revenue contributed from other services increased from 1.5% in FY18 to 2.3% in FY19. Chart 3: Main cost components as a % of sales COST STRUCTURE
Selling and distribution expense is the main cost driver. Employee compensation and the purchase of inventories are the two main cost components for the business, followed by rental expense on the operating leases of the company’s kiosks located countrywide. Selling and distribution costs as a percentage of sales has been fairly stable at the 40% level since FY16 while COGS as a percentage of sales improved to 36% in FY19.
KEY OPERATING ASSETS
Central kitchen with sophisticated pastry-making machineries. The company owns sophisticated pastry-making machines from a Chart 4: Breakdown of expenses based on FY19A reputable Swiss manufacturer which helped the company to automate the cutting of dough and filling of curry puffs to ensure a consistent product sold countrywide. Automation efforts such as this has helped the company to reduce manpower requirements, improve productivity and increase the capacity of the factory. The company owns a food factory in Woodlands, Singapore and an industrial building in Johor, Malaysia. Both are for the purpose of manufacturing and distributing food products.
Source: Company, DBS Bank
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GROWTH PROSPECTS
Higher-margin product mix through continuous innovation in Chart 5: Key competitors turning locally-inspired flavours into snacks and finger food. This has helped to increase the price points for new flavours and the average selling price of its products, leading to increasing revenue at 5% CAGR from FY13-19. The company continues to refine the performance of its portfolio of kiosks and has since closed down low-performing outlets or temporarily closed some outlets for renovation works. As at FY19, the company has 86 outlets in Singapore with scope to increase this number at more locations in Singapore.
Improving profitability and margins. Despite rising rental, manpower and raw material costs in Singapore, the company managed to keep its costs under control through improved food Chart 6: Old Chang Kee’s brand portfolio cost management via bulk purchases for its central kitchen and improved manpower efficiencies. The current staff per store ranges between eight and 20, and the management believes that it can use technology such as mobile payment systems to further supplement growth and reduce manpower costs.
New brands and seasonal products capable of driving margins. The management takes pride in reinventing and in bringing the local flavours of Singapore to overseas markets or creating seasonal products. Aside from the Old Chang Kee brand, the company has also developed a range of distinctive brand names, including, O’ My Darling, O’ My Kampong (which is a vintage concept café to revive the olden days in Singapore), Bun Times (to Table 1: Key management team extend the company’s Hainanese heritage), Mushroom café, Dip ‘n’ Go, and Curry Times. New brand names have the capability to • Han Kee Juan, Executive Chairman command higher prices at their commencement, while seasonal • Lim Tao-E William, Executive Director and CEO products are capable of enhancing margins through better selling • Chow Hui Shien, Executive Director and Deputy CEO prices. • Audrey Yap Su Ming, Independent Director • Tan Han Beng, Lead Independent Director MANAGEMENT & STRATEGY
Led by an investor who took over and grew the business Source: Company, DBS Bank since 1986. The Executive Chairman, Han Kee Juan, bought over OCK from its founder in 1986. He is also the largest shareholder of OCK with 58.6% direct interest in the business. He comes with more than 30 years of sales experience and plays an instrumental role in the development and expansion of the group’s business. William Lim, the CEO of the company, is Mr Han’s nephew and is a cousin of Ms Chow Hui Shien, the Deputy CEO of the company. Lim holds a 7.3% direct interest in the company and brings with him more than 20 years of sales experience. He is responsible for the development of new products and in expanding the business in overseas markets.
Seeking growth through operational efficiencies and store expansion. OCK’s key strategy is to drive operational efficiencies, and to enhance its brand positioning, amidst the challenging retail conditions. It is continuously looking to grow its number of outlets, especially in Singapore and London. Other growth strategies include margin enhancement initiatives through product mix and technology.
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Segmental Breakdown Margins Trend FY Mar 2016A 2017A 2018A 2019A 2020F 2021F Revenues (S$m) Outlet sales 72.8 77.1 84.2 87.7 90.6 95.9 Others 1.06 1.24 1.31 2.10 2.10 2.10 Total 73.9 78.4 85.5 89.8 92.7 98.0
Income Statement (S$m) FY Mar 2016A 2017A 2018A 2019A 2020F 2021F
Revenue 73.9 78.4 85.5 89.8 92.7 98.0 Cost of Goods Sold (27.2) (28.7) (33.3) (32.3) (33.3) (35.2) Gross Profit 46.6 49.6 52.2 57.5 59.4 62.8 Other Opng (Exp)/Inc (40.3) (43.5) (46.7) (51.2) (52.9) (55.9) Operating Profit 6.32 6.09 5.55 6.36 6.51 6.89 Other Non Opg (Exp)/Inc 0.0 (0.4) 0.22 (0.2) (0.2) (0.2) Associates & JV Inc 0.0 0.0 (0.1) (0.3) (0.3) (0.3) Net Interest (Exp)/Inc (0.2) (0.1) (0.2) (0.3) (0.3) (0.3) Exceptional Gain/(Loss) 0.0 (3.2) (0.7) (0.2) 0.0 0.0 Pre-tax Profit 6.10 2.43 4.74 5.41 5.77 6.13 Tax (1.1) (0.7) (1.0) (1.1) (1.2) (1.2) Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 4.97 1.75 3.78 4.34 4.61 4.90 Net Profit before Except. 5.00 4.93 4.50 4.54 4.61 4.90 EBITDA 10.4 10.3 10.8 11.2 11.7 12.4 Growth Revenue Gth (%) 3.1 6.1 9.1 5.0 3.2 5.7 EBITDA Gth (%) (3.8) (1.5) 5.1 3.8 4.1 6.1 Opg Profit Gth (%) (12.4) (3.6) (8.8) 14.4 2.4 6.0 Net Profit Gth (Pre-ex) (%) (9.1) (1.5) (8.7) 0.8 1.6 6.3 Margins & Ratio Gross Margins (%) 63.1 63.3 61.1 64.1 64.1 64.1 Opg Profit Margin (%) 8.6 7.8 6.5 7.1 7.0 7.0 Net Profit Margin (%) 6.7 2.2 4.4 4.8 5.0 5.0 ROAE (%) 14.6 5.6 13.6 15.3 15.9 16.3 ROA (%) 9.3 3.3 7.3 8.4 8.9 9.2 ROCE (%) 11.1 11.6 10.6 10.6 10.9 11.2 Div Payout Ratio (%) 146.4 208.7 96.2 83.9 79.0 74.3 Net Interest Cover (x) 40.0 64.8 23.0 24.0 24.5 23.4
Source: Company, DBS Bank
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Equity Explorer Old Chang Kee
Balance Sheet (S$m) Asset Breakdown (2019) FY Mar 2016A 2017A 2018A 2019A 2020F 2021F
Net Fixed Assets 28.9 27.6 32.6 28.5 30.1 30.2 Invts in Associates & JVs 0.0 0.0 0.0 0.16 0.16 0.16 Other LT Assets 2.41 2.65 3.25 3.03 2.97 2.90 Cash & ST Invts 19.4 15.6 12.8 15.5 15.2 16.8 Inventory 0.72 0.71 1.19 1.10 1.18 1.25 Debtors 0.16 0.25 0.28 0.34 0.32 0.33 Other Current Assets 2.86 3.98 2.21 2.39 2.39 2.39 Total Assets 54.5 50.7 52.3 50.9 52.3 54.0
ST Debt 1.05 4.35 1.60 1.43 1.43 1.43 Creditor 7.13 8.25 7.89 7.49 7.93 8.39 Other Current Liab 2.76 3.58 3.27 4.03 4.03 4.03 LT Debt 7.26 6.19 9.69 7.75 7.75 7.75 Other LT Liabilities 1.66 0.96 1.46 1.76 1.76 1.76 Shareholder’s Equity 34.6 27.4 28.4 28.5 29.4 30.7 Minority Interests 0.0 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 54.5 50.7 52.3 50.9 52.3 54.0
Non-Cash Wkg. Capital (6.2) (6.9) (7.5) (7.7) (8.1) (8.5) Net Cash/(Debt) 11.1 5.02 1.51 6.27 6.04 7.61 Debtors Turn (avg days) 0.7 1.0 1.1 1.2 1.3 1.2 Creditors Turn (avg days) 99.1 116.2 104.6 104.3 101.8 101.9 Inventory Turn (avg days) 9.8 10.7 12.3 15.5 15.0 15.2 Asset Turnover (x) 1.4 1.5 1.7 1.7 1.8 1.8 Current Ratio (x) 2.1 1.3 1.3 1.5 1.4 1.5 Quick Ratio (x) 1.8 1.0 1.0 1.2 1.2 1.2 Net Debt/Equity (X) CASH CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH CASH Capex to Debt (%) 81.0 78.5 75.6 23.4 78.4 65.4
Source: Company, DBS Bank
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Cash Flow Statement (S$m) Capital Expenditure FY Mar 2016A 2017A 2018A 2019A 2020F 2021F
Pre-Tax Profit 6.10 2.43 4.74 5.41 5.77 6.13 Dep. & Amort. 4.15 4.56 5.09 5.33 5.62 5.94 Tax Paid (1.4) (0.5) (1.0) (0.5) (1.2) (1.2) Assoc. & JV Inc/(loss) 0.0 0.0 0.08 0.30 0.29 0.29 Chg in Wkg.Cap. 1.38 (0.5) 0.17 (0.5) 0.38 0.37 Other Operating CF 0.35 3.52 0.59 0.49 0.0 0.0 Net Operating CF 10.6 9.57 9.65 10.5 10.9 11.5 Capital Exp.(net) (6.7) (8.3) (8.5) (2.1) (7.2) (6.0) Invts in Assoc. & JV 0.0 0.0 (0.5) 0.0 (0.3) (0.3) Other Investing CF (0.4) 0.07 0.48 0.25 0.0 0.0 Net Investing CF (7.1) (8.2) (8.6) (1.9) (7.5) (6.3) Div Paid (3.6) (7.3) (3.6) (3.6) (3.6) (3.6) Chg in Gross Debt 0.33 2.34 0.35 (1.4) 0.0 0.0 Other Financing CF (1.0) (0.3) (0.5) (0.8) 0.0 0.0 Net Financing CF (4.3) (5.2) (3.8) (5.9) (3.6) (3.6) Chg in Cash (0.7) (3.9) (2.8) 2.66 (0.2) 1.57 Opg CFPS (S cts) 7.61 8.28 7.81 9.06 8.67 9.17 Free CFPS (S cts) 3.20 1.07 0.93 6.86 3.05 4.53
Source: Company, DBS Bank
VALUATIONS
The company currently trades at 18.1x FY20F earnings. We believe Low free float, key stakeholders control more than half of the stock is fairly valued at current valuations with Singapore-listed the company. Shares in OCK remain tightly held, with a free float food service players trading at 19x forward PE. Our fair value based of 14.92%. The key management and founder collectively own on 20x FY20F PE is S$0.79, pegged to historical average PE 73.3% through direct and deemed interest in the company. valuations. Dividend yield is 4.1% for FY20F. Chart 2: Historical 12-month forward PE ratio (x) Risk Assessment: Moderate Category Risk Rating Wgt Wgtd Score 1 (Low) - 3 (High) Earnings 2 40% 0.8 Financials 1 20% 0.2 Shareholdings 2 40% 0.8 Overall 2 1.8
Expect steady earnings growth and strong balance sheet. Sales volatility is low given the defensive nature of food products. We believe OCK’s earnings can grow at a steady pace if costs are well managed. The business generates operating cashflows of c.S$10m annually. The company’s balance sheet is in a net cash position of S$8.5m (as of June 2019). Dividend paid out to Source: DBS Bank, Bloomberg Finance L.P. shareholders for the past two years have exceeded 80% of earnings.
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Page 57 Equity Explorer Old Chang Kee
DBS Bank Equity Explorer return ratings reflect return expectations based on an assumed earnings profile and valuation parameters: 1 (>20% potential returns over the next 12 months) 2 (0 - 20% potential returns over the next 12 months) 3 (negative potential return over the next 12 months) The risk assessment is qualitative in nature and is rated as either high, low or moderate risk. (see section on risk assessment) Note that these assessments are based on a preliminary review of factors deemed salient at the time of publication. DBSV does not commit to ongoing coverage and updated assessments of stocks covered under the Equity Explorer product suite. Such updates will only be made upon official initiation of regular coverage of the stock.
Completed Date: 9 Sep 2019 17:37:51 (SGT) Dissemination Date: 9 Sep 2019 17:42:44 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
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Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
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Page 59 SMC Research Singapore Equity Explorer Japan Foods Holdings
Bloomberg: JFOOD SP | Reuters: JPFD.SI Refer to important disclosures at the end of this report
DBS Group Research . Equity 9 Sep 2019
NOT RATED S$0.435 STI : 3,144.48 Specialist franchisee of Japan Closing price as of 6 Sep 2019 Return *: 2 brands Risk: Moderate • Leading Japanese restaurant player in Singapore with Potential Target 12-mth*: 12-Month S$ 0.41 more than 70 stores regionally (-6% downside) • Growth driven by regional expansion in Japan, Thailand Analyst and China Alfie YEO +65 6682 3717 • Attractive dividend yield of 4.8% [email protected] • Stock return rating of 2 with fair value of S$0.41 based on 20x PE
Price Relative The Business A leading franchisee of Japanese restaurants in Singapore. Japan Foods Holdings (JFH) has 57 outlets in Singapore and interest in 21 restaurants across Malaysia, Indonesia, China and Hong Kong with 16 franchised and self-developed brands.
Holds a strong portfolio of 15 Japanese franchised and self-developed brands. These include Ajisen Ramen, Menya Musashi, and Osaka Ohsho. Some of its brands like Fruit Paradise and Aji-Tei are self-developed.
Forecasts and Valuation Growth driven by regional expansion. We see growth driven organically FY Mar (S$m) 2018A 2019A 2020F 2021F in Singapore and via recent partnerships with Minor Food Group Revenue 67.9 68.1 73.6 78.9 (Singapore) and Ajisen China to grow overseas in Thailand, Japan, China EBITDA 11.3 8.17 8.34 8.60 and Hong Kong. Pre-tax Profit 7.00 4.12 4.46 4.72 Net Profit 5.78 3.34 3.57 3.78 The Stock Net Pft (Pre Ex.) 5.79 3.33 3.57 3.78 EPS (S cts) 3.33 1.92 2.05 2.16 Fair value of S$0.41. JFH currently trades at 20.1x FY20F earnings, above EPS Pre Ex. (S cts) 3.33 1.91 2.05 2.16 Singapore-listed food service players’ 19x. Our fair value based on 20x EPS Gth (%) 24 (42) 7 6 FY20F PE is S$0.41. FY20F dividend yield is attractive at 4.8%. EPS Gth Pre Ex (%) 24 (43) 7 6 Diluted EPS (S cts) 3.33 1.92 2.05 2.16 Potential stock price catalysts. JFH is focused on improving operating Net DPS (S cts) 2.10 2.10 2.10 2.10 BV Per Share (S cts) 19.6 19.4 19.3 19.4 efficiencies via controlling raw material costs, streamlining of work PE (X) 13.1 22.7 21.3 20.1 processes using technology, and outlet portfolio management to drive PE Pre Ex. (X) 13.0 22.7 21.3 20.1 earnings growth. Better-than-expected cost control outcomes and P/Cash Flow (X) 8.1 8.9 10.3 8.7 success of overseas outlets could drive higher earnings and share price. EV/EBITDA (X) 4.8 6.5 6.5 6.3 Net Div Yield (%) 4.8 4.8 4.8 4.8 What could go wrong with this stock? The company faces typical risks P/Book Value (X) 2.2 2.2 2.3 2.2 Net Debt/Equity (X) CASH CASH CASH CASH of a restaurant operator. Margin and cost dampeners include higher ROAE (%) 17.6 9.8 10.6 11.2 rents, short supply of food, and higher labour costs. At A Glance Consensus EPS (S cts): 2.2 2.4 Other Broker Recs: B: 0 S: 0 H: 2 Issued Capital (m shrs) 174 Mkt. Cap (S$m/US$m) 75.5 / 54.7 ICB Industry: Consumer Services Major Shareholders (%) ICB Sector: Food & Drug Retailers Kenichi Takahashi 66.0 Principal Business: Leading F&B group in Singapore specialising in Wong Hin Sun 5.5 Japanese cuisine with more than 40 restaurants serving authentic Chan Chau Mui 4.7 Japanese food under various franchise and self-developed brands. Free Float (%) 23.8 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P. 3m Avg. Daily Val (US$m) 0.01
*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report.
ed: TH/ sa: YM, PY, CS Page 60 Equity Explorer Japan Foods Holdings
REVENUE DRIVERS Chart 1: JFH regional store count against revenue Network expansion and introducing niche Japanese brands as franchisee into Singapore. JFH has been growing its restaurant network over the years through new franchised or self-developed brands. Revenue growth was driven by store count increase, reaching an all-time high S$68m in FY19, largely from a store count of over 50 outlets in Singapore. Current store count stands at 57 directly operated own and franchised stores in Singapore, 18 Menya Musashi outlets (comprising 11 in China, six in Hong Kong and one in Malaysia) owned through associated companies, and one Ajisen Ramen sub-franchised to an operator in Malaysia.
A diversified portfolio of brands. JFH’s key brands are Ajisen Ramen, Menya Musashi and Osaka Ohsho, which collectively Chart 2: Revenue breakdown by brands across time contribute c.68% of FY19’s revenue. Ajisen Ramen was first introduced to the Singapore market in 1997 and has been JFH’s main franchised brand ever since. However, revenue contribution from Ajisen Ramen outlets declined from 44% in FY15 to 34% in FY19, as JFH divested from Ajisen into other Japanese brands. The company continues to introduce new franchise and self-developed brands. New brands introduced during FY19 include Kagurazaka Saryo, Konjiki Hototogisu, and Kara-men. Menya Musashi’s revenue contribution increased from 20% in FY15 to 23% in FY19 as the group continues to expand its store count under this brand in Hong Kong and China. Revenue contribution under all other brands increased from 8% in FY15 to 24% in FY19 from brands such as Menzo Butao, Kagurazaka Saryo, Japanese Gourmet Town, Konjiki Hototogisu, and Shitamachi Tendon Akimitsu. Chart 3: Profitability margins against revenue per self- COST STRUCTURE operated store in S$’m
Selling and distribution expense is the main cost driver. While the group’s ongoing efforts to consolidate its procurement of food ingredients have led to economies of scale and increasing gross margins, rising cost pressures from wages and rents have led to higher opex and declining operating margins. JFH’s key cost components are cost of sales (16% of sales), staff and rental costs (30% of sales each) and other opex (5% of sales).
High operational leverage business. We have found a strong correlation between revenue per store and operating margins. Over Chart 4: Main cost components as a % of sales the past 5-7 years, correlation between revenue per store and operating margins has been strong at 0.91. This is evidence that the business has strong fixed cost and operating leverage such that excess revenue per store generated would lead to higher operating margins. Revenue per store has been falling due to store expansion and dilution of revenue across a higher outlet base. We believe this is because its brand portfolio largely comprises Japanese cuisine where there is less contrasting differentiation to win new customers.
Source: Company, DBS Bank
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GROWTH PROSPECTS
Earnings growth driven by four-pronged strategy. JFH’s four- Chart 5: Breakdown of expenses based on FY19 pronged strategy consists of the following: 1) Developing new concepts through the launch of new franchised and self-developed brands. It aims to continue bringing in niche Japanese restaurant brand names to Singapore mainly as a franchisee; 2) Actively managing its restaurant outlets and brand portfolio; opening, rebranding and closing outlets regularly to achieve profitability; 3) Overseas expansion through strategic investments such as recent JVs with Minor Food Group (Singapore) and Ajisen China to grow in Hong Kong, China, Japan and Thailand; and 4) Cost and quality control through a central kitchen, bulk purchase of raw materials and consolidating the processes to achieve economies of scale and better margins.
Recent JV partnerships to add another leg of overseas growth. The group has recently partnered with Minor Food Group Source: Company, DBS Bank (Singapore), which operates brands like Thai Express, Xin Wang Hong Kong Café, Poulet and Kiseki Japanese Buffet Restaurant. This Chart 6: Key competitors collaboration is intended to expand the geographical reach in each of their respective brands via a JV that will franchise and operate restaurants in Japan, Thailand and China. Another recent partnership with Ajisen China will see its JV launch One-Michelin star “Konjiki Hototogisu” ramen brand in Hong Kong going forward. MANAGEMENT & STRATEGY
Managed by the founder and supported by a professional management team. The Executive Chairman and CEO, Takahashi Kenichi, founded the group in 1997 and is also the largest shareholder of JFH with a 66% stake. Mr Kenichi brings with him 21 Source: Individual companies’ website years of F&B experience and a strong business network. Assisting Mr Kenichi closely is Chan Chau Mui, the Chief Operating Officer, who Table 1: Key management team oversees the group’s daily operations. Ms Chan joined the company • Takahashi Kenichi, Executive Chairman and CEO in April 1999 and has been responsible for the group’s operations, • Liew Kian Er, CFO & Financial Controller helping to expand its business. Revenue and earnings had grown • Chan Chau Mui, Chief Operating Officer from S$44m/S$2m in FY10 to S$68m/S$6m in FY18. This represents • Chan Fuang Chiang, Chief Chef an 8-year CAGR of 6%/11% in revenue and earnings from FY10-18. • Wong Hin Sun, Non-Executive Vice Chairman Management’s interest aligned with shareholders. Most key • Lee Sok Koon, Lead Independent Director executives in JFH are compensated below S$250,000 annually with the exception of Takahashi Kenichi and Kenneth Liew Kian Er (Chief Source: Company, DBS Bank Financial Officer). As of 10 June 2019, key management and founders collectively owned a substantial 70.8% directly. Including Eugene Wong’s (Non-executive Vice Chairman of the company, a member of the Audit and Risk Committee, a member of the Nominating Committee, and a member of the Remuneration Committee of the company) deemed interest in the company, the key management and founders collectively own 76.3% of the group. As such, we believe the management’s interest is aligned with the company’s shareholders.
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Page 62 Equity Explorer Japan Foods Holdings
Segmental Breakdown FY Mar 2016A 2017A 2018A 2019A 2020F 2021F Revenues (S$m) Restaurant sales 62.7 65.4 67.8 68.0 73.5 78.8 Franchised operations 0.11 0.10 0.07 0.05 0.05 0.05 Total 62.8 65.5 67.9 68.1 73.6 78.9 Operating profit (S$m) Restaurant sales 4.22 3.73 4.86 6.06 3.69 3.41 Franchised operations 0.30 0.26 0.15 0.36 0.18 0.18 Total 4.52 3.98 5.01 6.42 3.87 3.59
Income Statement (S$m) FY Mar 2016A 2017A 2018A 2019A 2020F 2021F
Revenue 62.8 65.5 67.9 68.1 73.6 78.9 Cost of Goods Sold (9.9) (9.9) (10.2) (10.6) (11.4) (12.2) Gross Profit 52.9 55.6 57.7 57.5 62.2 66.7 Other Opng (Exp)/Inc (50.1) (51.5) (52.1) (54.2) (58.6) (62.8) Operating Profit 2.79 4.11 5.56 3.32 3.59 3.85 Other Non Opg (Exp)/Inc 1.24 0.91 0.87 0.54 0.50 0.50 Associates & JV Inc 0.59 0.61 0.47 0.13 0.13 0.13 Net Interest (Exp)/Inc 0.09 0.09 0.10 0.12 0.24 0.24 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.01 0.0 0.0 Pre-tax Profit 4.66 5.70 7.00 4.12 4.46 4.72 Tax (0.9) (1.1) (1.2) (0.8) (0.9) (1.0) Minority Interest 0.0 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 3.78 4.66 5.78 3.34 3.57 3.78 Decreased due to lower profit Net Profit before Except. 3.82 4.67 5.79 3.33 3.57 3.78 from CN and HK operating EBITDA 9.92 10.8 11.3 8.17 8.34 8.60 restaurants and high initial set-up Growth costs of new restaurants. Revenue Gth (%) 0.2 4.2 3.6 0.3 8.1 7.2 EBITDA Gth (%) (0.6) 8.8 4.4 (27.5) 2.0 3.1 Opg Profit Gth (%) (20.5) 47.5 35.4 (40.3) 8.1 7.2 Net Profit Gth (Pre-ex) (%) (18.8) 22.3 24.0 (42.5) 7.2 5.8 Net profit fell in FY19 mainly due Margins & Ratio to higher manpower costs and Gross Margins (%) 84.2 84.9 85.0 84.5 84.5 84.5 rents alongside expanded Opg Profit Margin (%) 4.4 6.3 8.2 4.9 4.9 4.9 restaurant network. Net Profit Margin (%) 6.0 7.1 8.5 4.9 4.9 4.8 ROAE (%) 12.3 14.9 17.6 9.8 10.6 11.2 ROA (%) 9.8 11.7 13.7 7.7 8.2 8.6 ROCE (%) 10.7 12.7 16.2 10.0 11.2 11.8 Div Payout Ratio (%) 92.3 74.6 63.2 109.8 102.7 97.0 Net Interest Cover (x) NM NM NM NM NM NM
Source: Company, DBS Bank
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Page 63 Equity Explorer Japan Foods Holdings
Balance Sheet (S$m) Asset Breakdown (2019) FY Mar 2016A 2017A 2018A 2019A 2020F 2021F
Net Fixed Assets 11.8 9.86 9.28 9.31 9.69 10.1 Invts in Associates & JVs 1.29 1.89 2.37 2.42 2.56 2.69 Other LT Assets 4.59 5.25 6.00 5.20 5.20 5.20 Cash & ST Invts 16.9 20.2 21.9 22.1 21.3 21.8 Inventory 0.64 0.60 0.66 0.68 0.72 0.72 Debtors 0.66 0.71 1.02 1.01 1.10 0.18 Other Current Assets 3.02 2.25 2.06 3.07 3.07 3.07 Total Assets 38.9 40.8 43.3 43.8 43.6 43.7
ST Debt 4.96 5.91 0.0 0.0 0.0 0.0 Creditor 1.27 1.13 7.27 8.59 8.57 8.57 Other Current Liab 0.91 1.23 1.53 1.01 1.01 1.01 LT Debt 0.0 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 0.86 0.86 0.43 0.32 0.32 0.32 Shareholder’s Equity 30.9 31.7 34.0 33.8 33.7 33.8 Minority Interests 0.0 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 38.9 40.8 43.3 43.8 43.6 43.7
Non-Cash Wkg. Capital 2.14 1.20 (5.1) (4.9) (4.7) (5.6) Net Cash/(Debt) 11.9 14.3 21.9 22.1 21.3 21.8 Debtors Turn (avg days) 3.6 3.8 4.7 5.4 5.2 3.0 Creditors Turn (avg days) 113.6 92.9 264.6 453.9 429.8 385.6 Inventory Turn (avg days) 50.6 48.0 39.4 38.3 35.2 32.5 Asset Turnover (x) 1.6 1.6 1.6 1.6 1.7 1.8 Current Ratio (x) 3.0 2.9 2.9 2.8 2.7 2.7 Quick Ratio (x) 2.5 2.5 2.6 2.4 2.3 2.3 Net Debt/Equity (X) CASH CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH CASH Capex to Debt (%) 96.7 59.4 N/A N/A N/A N/A
Source: Company, DBS Bank
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Page 64 Equity Explorer Japan Foods Holdings
Cash Flow Statement (S$m) Capital Expenditure FY Mar 2016A 2017A 2018A 2019A 2020F 2021F
Pre-Tax Profit 4.66 5.70 7.00 4.12 4.46 4.72 Dep. & Amort. 5.31 5.17 4.36 4.18 4.12 4.12 Tax Paid (0.3) (0.7) (1.4) (1.4) (0.9) (1.0) Assoc. & JV Inc/(loss) (0.6) (0.6) (0.5) (0.1) (0.1) (0.1) Chg in Wkg.Cap. (0.5) 0.62 5.96 0.30 (0.2) 0.92 Other Operating CF 1.05 1.09 (6.2) 1.45 0.0 0.0 Net Operating CF 9.61 11.3 9.27 8.51 7.40 8.67 Capital Exp.(net) (4.8) (3.5) (3.9) (4.4) (4.5) (4.5) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 (0.2) 0.0 0.0 Div from Assoc & JV 0.0 0.17 0.0 0.22 0.0 0.0 Other Investing CF (0.2) (0.5) (0.1) (0.1) 0.0 0.0 Net Investing CF (5.0) (3.8) (4.0) (4.5) (4.5) (4.5) Div Paid (3.5) (3.5) (3.7) (3.7) (3.7) (3.7) Chg in Gross Debt (0.1) (0.3) 0.0 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 (0.2) 0.0 0.0 Other Financing CF (0.2) (0.6) 0.02 (0.4) 0.0 0.0 Net Financing CF (3.8) (4.3) (3.7) (4.3) (3.7) (3.7) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 0.0 Chg in Cash 0.88 3.07 1.64 (0.3) (0.8) 0.51 Opg CFPS (S cts) 5.81 6.14 1.91 4.72 4.33 4.45 Free CFPS (S cts) 2.76 4.48 3.11 2.38 1.66 2.39
Source: Company, DBS Bank
VALUATIONS
The company currently trades at 20.1x FY20F earnings. We believe Low free float; key stakeholders control more than half of the stock is fairly valued at current valuations with Singapore-listed the company. Shares in JFH remain tightly held, with a free float food service players trading at 19x forward PE. Our fair value based of 23.73%. The key management and founder collectively own on 20x FY20F PE is S$0.41, pegged to historical average PE 70.8% (or 76.3% including deemed interest). valuations. Dividend yield is 4.8% for FY20F. Chart 5: Historical 12-month forward PE ratio (x) Risk Assessment: Moderate Category Risk Rating Wgt Wgtd Score 1 (Low) - 3 (High) Earnings 2 40% 0.8 Financials 1 20% 0.2 Shareholdings 2 40% 0.8 Overall 2 1.8
Expect steady earnings growth and strong balance sheet. The company remains profitable despite a cycle of earnings improvement and decline every two years since FY13 largely due to volatility of operating expenses. The business generates S$8-12m of operating cash annually and its balance sheet is sound, with net Source: DBS Bank, Bloomberg Finance L.P. cash of S$24m as of June 2019, or c.42% of its market cap.
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Page 65 Equity Explorer Japan Foods Holdings
DBS Bank Equity Explorer return ratings reflect return expectations based on an assumed earnings profile and valuation parameters: 1 (>20% potential returns over the next 12 months) 2 (0 - 20% potential returns over the next 12 months) 3 (negative potential return over the next 12 months) The risk assessment is qualitative in nature and is rated as either high, low or moderate risk. (see section on risk assessment) Note that these assessments are based on a preliminary review of factors deemed salient at the time of publication. DBSV does not commit to ongoing coverage and updated assessments of stocks covered under the Equity Explorer product suite. Such updates will only be made upon official initiation of regular coverage of the stock.
Completed Date: 9 Sep 2019 17:47:39 (SGT) Dissemination Date: 9 Sep 2019 17:50:29 (SGT) Sources for all charts and tables are DBS Bank unless otherwise specified.
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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
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Equity Explorer Japan Foods Holdings
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
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ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
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Compensation for investment banking services: 3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced: 4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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Page 67 Singapore Company Guide CapitaLand Mall Trust
Version 13 | Bloomberg: CT SP | Reuters: CMLT.SI Refer to important disclosures at the end of this report
DBS Group Research . Equity 25 Apr 2019
Marvelous growth BUY Last Traded Price ( 24 Apr 2019): S$2.36 (STI : 3,362.43) Staying above the competition. We remain convinced that Price Target 12-mth: S$2.55 (8% upside) (Prev S$2.44) attention will turn to CapitaLand Mall Trust (CMT) as one of the faster growing large-cap S-REITs with a CAGR of 3.0% over Analyst Carmen Tay +65 6682 3719 [email protected] FY18-20F. As the retail sector bottoms out and new Derek TAN +65 6682 3716 [email protected] contributions from Funan and Westgate flow in, we believe that investors will accord higher valuations CMT. Our TP is raised to What’s New S$2.55 after we roll forward valuations. Maintain BUY! • 1Q19 DPU came in within expectations Where we differ: Deep dive into micro-markets gives us • Optimism in operational numbers despite confidence that CMT can surprise on the upside. While the management’s cautious tone street remains divided on the stock given the uncertainties over • Funan mall to drive earnings from 2H19 onwards the impact of the surge in new retail supply in 2019, especially • Upside from a low gearing Jewel in 2Q19. While we expect some volatility in the east-side
malls, we believe that higher contributions from Westgate and Funan will more than compensate for the expected near-term Price Relative hurdles that Tampines Mall and Bedok Mall, located in the East, may face now but should normalise in the medium term.
Potential catalyst: Improving rental reversions or acquisitions. We believe CMT delivered operationally and the past tenant remixing efforts are bearing fruit as portfolio rental reversions came in +1.2%, which is an improvement across most of its
malls. The utilisation of its balance sheet to fund further Forecasts and Valuation acquisitions also offers an upside surprise to our estimates. FY Dec (S$m) 2017A 2018A 2019F 2020F Gross Revenue 682 698 777 816 Valuation: Net Property Inc 478 494 541 566 Reiterate BUY; TP adjusted to S$2.55. At current price, the Total Return 658 677 447 467 stock offers FY19F DPU yield of 5.0% and total potential Distribution Inc 413 429 451 471 return in excess of 10%. EPU (S cts) 11.4 13.2 12.1 12.6 EPU Gth (%) 1 16 (8) 4 DPU (S cts) 11.2 11.5 11.7 12.2 Key Risks to Our View: DPU Gth (%) 0 3 2 4 More aggressive rate hikes than consensus expectations may NAV per shr (S cts) 195 202 202 202 cause ripples in the market. Being a proxy for interest-rate PE (X) 20.7 17.9 19.5 18.7 Distribution Yield (%) 4.7 4.9 5.0 5.2 investment, CMT may then suffer from selling pressure.
P/NAV (x) 1.2 1.2 1.2 1.2 At A Glance Aggregate Leverage (%)* 31.2 32.6 32.1 32.0 Issued Capital (m shrs) 3,688 ROAE (%) 5.9 6.7 6.0 6.3 Mkt. Cap (S$m/US$m) 8,704 / 6,391 Major Shareholders (%) Distn. Inc Chng (%): - - Capitaland Limited 28.2 Consensus DPU (S cts): 12.0 12.4 Blackrock Inc 7.1 Other Broker Recs: B: 6 S: 2 H: 16 National Trades Union 5.0 *after accounting for debt on associate level, gearing in FY19-20F to be Free Float (%) 59.7 closer to c.34%. 3m Avg. Daily Val (US$m) 17.7 ICB Industry : Financials / Real Estate Investment Trust Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P Bloomberg ESG disclosure score (2017)^ 39.3 - Environmental / Social / Governance 30.2 / 47.4 / 51.8 ^ refer to back page for more information
ed: TH/ sa: YM, PY, CS Page 68 Company Guide
CapitaLand Mall Trust
WHAT’S NEW Positive start in 1Q19
(+) 1Q19 DPU of 2.88 Scts in line with expectation • Occupancy rate dipped slight from 99.2% to 98.8% but is likely to be more transitional in nature. • Capitand Mall Trust (CMT) delivered a positive start to • We remain excited on the improved stability and basing 2019, with a 3.6% y-o-y growth in DPU to 2.88 Scts, out of rental reversions, which is tad better than the coming in within 25% of our full-year forecast. Revenues +0.7% reported in FY18. We believe that this is a positive and net property income grew by 10.0% and 11.5% y-o- signal that things are improving and that pressures in the y to S$192.7m and S$140.1m respectively. Amount retail space are bottoming out available for distribution to unitholders rose 11.3% y-o-y • Tenant sales on a psf basis dipped 0.4% y-o-y on the to S$121.4m. After accounting for income retained of back of 2.0% increase in traffic. Management believes S$15.1m, income to be distributed amounted to this does not represent a trend and could be due to the S$106.3m. The income retained comprises S$9.2m of early Lunar New Year holidays in 2019 which might have taxable income which will be likely be paid out in the resulted in some “consumer fatique”. subsequent quarters and S$5.9m from CRCT which will • While tenant sales by trade categories was generally be kept for general working capital purposes. negative in 1Q19, we note that categories in which CMT • The growth in distributions was driven by a combination has more exposure (c.60% of revenues) are growing – of steady portfolio operational performance (steady Sporting Goods, Jewellery, F&B and Fashion, reported occupancy rates and positive rental reversion of 1.2% in higher sales y-o-y. 1Q19) coupled with the purchase of 70% stake in • In terms of competition from recently opened Jewel, the Westgate Mall in 4Q18. This more than compensates for manager is seeing some impact in terms of shopper the income vacuum for Sembawang Shopping Centre traffic over first opening weekend of Jewel but cautions which was divested in June 2018. that there could be further volatility in the near term. However, they expect normalcy to return in the medium (-/+) Gearing levels stable at 34.4% with financial metrics term after the novelty effect wears off. remaining strong • Following the Westgate acquisition, which was 65% (+) Funan is tracking in line with estimates debt-funded, gearing rose sequentially from 31.7% (3Q) • The mall is expected to open towards the end of 2Q19 to 34.2% (4Q) and remained stable at current levels. and is now close to 90% leased with the office portion • While average cost of debt was stable at c.3.2%, the achieving commitment rates in excess of 92%+ while average term to maturity was 4.2 years. retail is slightly behind at c.87%+. As it approaches the • Post quarter end, the manager has also taken advantage soft opening date, the manager is mindful about the of the flattish yield curve to further term out its weighted curation of the tenant mix and will be selective in the average debt expiry further with the issuance of 10-year names that they introduce to the mall. US$300m fixed rate notes at S$3.609%. The longer duration debt is positive for the REIT as it minimises Raising TP to S$2.55. interest rate volatility for the longer term. • We roll forward our valuations which resulted in a higher TP of S$2.55. We continue to like CMT for its defensive (+/-) Sense of optimism in the operational numbers despite portfolio and with the retail sector’s recovery underway, we management’s cautious tone expect valuations to remain buoyant in the medium term. • Across CMT’s portfolio, the NPI uplift was relatively Maintain BUY. broad-based with positive rental reversion of 1.2% on 336,000 sqft of leases renewed in the quarter. We note that most of the malls in the portfolio (ex Raffles City) turned positive in a range of 0.1-4.2%. Raffles City saw negative rental reversions largely due negative renewal of a fashion tenant.
Page 69 Company Guide
CapitaLand Mall Trust
Quarterly / Interim Income Statement (S$m) FY Dec 4Q2017 3Q2018 4Q2018 % chg yoy % chg qoq
Gross revenue 172 171 180 4.7 5.8 Property expenses (53.1) (47.9) (56.0) 5.4 17.1 Net Property Income 119 123 124 4.3 1.4 Other Operating expenses (12.3) (12.0) (12.8) 3.9 6.8 Other Non Opg (Exp)/Inc (0.5) (0.3) (8.9) nm nm Net Interest (Exp)/Inc (22.9) (20.3) (23.2) (1.3) (14.3) Exceptional Gain/(Loss) 0.0 0.0 0.0 - - Net Income 102 148 98.6 (3.2) (33.3) Tax (0.2) 0.0 0.39 nm nm Minority Interest 0.0 0.0 0.0 - - Net Income after Tax 102 148 98.9 (2.7) (33.0) Total Return 127 148 123 (3.5) (17.0) Non-tax deductible Items (5.7) (6.5) (5.9) 3.7 (9.6) Net Inc available for Dist. 100 106 109 9.3 3.1 Ratio (%) Net Prop Inc Margin 69.2 71.9 68.9 Dist. Payout Ratio 102.8 97.5 98.8
Source of all data: Company, DBS Bank
Page 70 Company Guide
CapitaLand Mall Trust
CRITICAL DATA POINTS TO WATCH Net Property Income and Margins (%)
Critical Factors
A bellwether for REITs. CMT, being the first and longest- running REIT in Singapore which has gone through different growth phases at a market cap of close to S$7.0bn and an asset base of over S$10bn, remains a bellwether for the REIT industry. While CMT had seen better growth days back in 2003-2009 and saw increased challenges disrupting the retail sector over the past few years, we believe that the worst could be over, given the REIT’s improving rental reversionary Net Property Income and Margins (%) prospects in recent times. Most importantly, we believe that given the REIT’s track record and having positioned its exposure towards more non-discretionary spending, we remain confident on the REIT’s ability to continue paying steady distributions across market cycles.
Supply risk dissipating, rental reversions a key driver for further outperformance. While supply in retail remains high in 2018- 2019, we note that pre-commitment rates for upcoming malls have been strong (Paya Lebar Quarter has pre-leased c.90% of its retail mall) with strong anchors. Apart from Paya Lebar Quarter Mall, we believe most of the other major retail assets Distribution Paid / Net Operating CF coming on stream do not pose a direct competition to the catchment areas of CMT’s malls. We expect consensus to gradually converge to our view over time.
As such, with supply risk dissipating and ongoing tenant remixing, we believe that CMT’s mall will continue to achieve stable rental reversions with the possibility of seeing a sustained improvement from 2019 onwards.
Re-introducing inorganic growth; Westgate stake from sponsor could be an opportunity. In the medium term, we believe CMT Interest Cover (x) will look to re-introduce growth engines to stimulate its portfolio earnings growth in order to drive share price performance. The proposed acquisition of the remaining 70% stake in Westgate mall from the sponsor and redevelopment of Funan are prime examples, which are projected to start contributing from 1H19 and 2H19 onwards respectively.
Supported by a low gearing of <35% (assuming the Westgate acquisition is 20% debt funded), the manager remains on the lookout for inorganic opportunities across the region.
Source: Compamy, DBS Bank
Page 71 Company Guide
CapitaLand Mall Trust
Appendix 1: A look at Company's listed history – what drives its share price?
Share price and rental reversions
(%) Rental Reversion vs Share Price S$/share
20.0% Strong organic 4 growth driving re- rating in share Share price weakness due to the fall in reversions due to Should pick up after 3.5 2008-2009 crisis. expected recovery in 15.0% the retail market 3 Share price traded in a tight range largely due to expectations of weakening rents and oversupply 2.5 10.0%
2
5.0% 1.5
1 0.0% Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 0.5 Rental Reversion (%) (RHS) CMT Share Price (RHS) -5.0% 0 Source: Company, DBS Bank
Page 72 Company Guide
CapitaLand Mall Trust
Aggregate Leverage (%)
Balance Sheet: Gearing to remain stable. Post the sale of Sembawang Shopping Centre, CMT’s gearing ratio is forecast to remain fairly stable at <35% over FY19-20F. This is after assuming 100% and 20% debt financing for the redevelopment of Funan and acquisition of Westgate respectively. Gearing level is within management's comfortable level of between 35% and 40%.
Cost of debt to remain stable. The average debt cost is 3.2%, ROE (%) which should remain stable in the immediate term. With interest rates on the rise, we have priced in a 20-bp increase in average interest cost once hedges are rolled over in the coming two years.
Share Price Drivers: Acquisitions to drive earnings. CMT has the right of first refusal to acquire its sponsor’s retail assets in Singapore. Beyond Westgate, we note that CapitaLand has several other retail assets in its portfolio which could be injected into the REIT, Distribution Yield (%) including Star Vista.
Better-than-expected operational results. We believe that CMT’s portfolio will remain resilient despite headwinds. The trust's ability to maintain a steady growth in top line while holding occupancies will be a strong testament to the manager's capability to stand out among its peers.
Key Risks: Downside risk to rental reversions. A worse-than-expected slowdown in consumer sentiment and consumption outlook PB Band (x) may result in lower reversionary potential (vs our 1.5% estimate) for leases expiring in FY19/20.
Environment, Social, Governance: CMT has good disclosure with clarity and transparency in ESG and financial reports. CMT has more than 90% of operating properties achieving at least Green Mark Gold certification and aims to continue reducing energy and water intensity and carbon emissions going forward. CMT also aims to maintain Environment, Social, Governance high business ethics and compliance of laws in its business Bloomberg ESG Disclosure Score dealings and aim to provide its staff, customers’ safety and 50 health in their properties. 40
Company Background 30
CapitaLand Mall Trust (CMT) is a real estate investment trust 20 which owns and invests in retail properties in the suburban 10 areas and downtown core of Singapore. 0 Y2015 Y2016 Y2017
CT SP Equity Peers
Source: Company, DBS Bank
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Income Statement (S$m) FY Dec 2016A 2017A 2018A 2019F 2020F Gross revenue 690 682 698 777 816 Property expenses (210) (204) (204) (236) (249) Net Property Income 480 478 494 541 566 Other Operating expenses (49.0) (48.9) (48.6) (55.3) (56.4) Driven by contribution Other Non Opg (Exp)/Inc 0.0 0.0 (9.0) 0.0 0.0 from Funan Mall Net Interest (Exp)/Inc (95.0) (94.0) (87.5) (105) (111) Exceptional Gain/(Loss) (0.6) (0.6) 0.14 0.0 0.0 Net Income 402 405 478 447 467 Tax (1.0) (0.2) 0.39 0.0 0.0 Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Income After Tax 401 405 478 447 467 Total Return 469 658 677 447 467 Non-tax deductible Items 23.5 8.05 (48.6) 3.91 3.94 Net Inc available for Dist. 424 413 429 451 471 Growth & Ratio Revenue Gth (%) 3.1 (1.1) 2.2 11.4 5.0 N Property Inc Gth (%) 2.9 (0.3) 3.2 9.6 4.8 Net Inc Gth (%) (15.2) 1.0 18.0 (6.5) 4.4 Dist. Payout Ratio (%) 92.9 95.8 95.6 96.0 96.0 Net Prop Inc Margins (%) 69.5 70.1 70.8 69.6 69.5 Net Income Margins (%) 58.1 59.3 68.5 57.5 57.2 Dist to revenue (%) 61.5 60.5 61.6 58.0 57.7 Managers & Trustee’s fees 7.1 7.2 7.0 7.1 6.9 ROto salesAE (%) %) 6.0 5.9 6.7 6.0 6.3 ROA (%) 3.9 3.9 4.3 3.8 4.0 ROCE (%) 4.2 4.2 4.1 4.3 4.5 Int. Cover (x) 4.5 4.6 5.1 4.6 4.6 Source: Company, DBS Bank
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Quarterly / Interim Income Statement (S$m) FY Dec 4Q2017 1Q2018 2Q2018 3Q2018 4Q2018
Gross revenue 172 175 171 171 180 Property expenses (53.1) (49.5) (50.6) (47.9) (56.0) Net Property Income 119 126 121 123 124 Other Operating expenses (12.3) (12.0) (11.9) (12.0) (12.8) Other Non Opg (Exp)/Inc (0.5) 0.36 120 (0.3) (8.9) Net Interest (Exp)/Inc (22.9) (22.3) (21.8) (20.3) (23.2) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Net Income 102 110 240 148 98.6 Tax (0.2) 0.0 0.0 0.0 0.39 Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax 102 110 240 148 98.9 Total Return 127 110 296 148 123 Non-tax deductible Items (5.7) 1.96 3.00 (6.5) (5.9) Net Inc available for Dist. 100 109 105 106 109 Growth & Ratio Revenue Gth (%) 2 2 (2) 0 6 N Property Inc Gth (%) (2) 5 (4) 2 1 Net Inc Gth (%) (3) 9 118 (39) (33) Net Prop Inc Margin (%) 69.2 71.7 70.5 71.9 68.9 Dist. Payout Ratio (%) 102.8 90.7 95.6 97.5 98.8
Balance Sheet (S$m) FY Dec 2016A 2017A 2018A 2019F 2020F
Investment Properties 8,509 8,770 9,411 9,421 9,431 Other LT Assets 1,301 1,149 1,715 1,715 1,715 Cash & ST Invts 483 523 349 543 577 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 33.7 32.4 27.5 36.7 38.5 Other Current Assets 0.0 29.4 0.0 0.0 0.0 Total Assets 10,327 10,504 11,502 11,715 11,761
ST Debt 250 535 529 529 529 Creditor 160 156 199 388 408 Other Current Liab 55.9 57.9 99.9 98.1 98.1 LT Debt 3,038 2,648 3,099 3,109 3,119 Other LT Liabilities 130 180 145 145 145 Unit holders’ funds 6,692 6,928 7,429 7,445 7,462 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Funds & Liabilities 10,327 10,504 11,502 11,715 11,761
Non-Cash Wkg. Capital (183) (152) (272) (450) (467) Net Cash/(Debt) (2,805) (2,660) (3,279) (3,095) (3,071) Gearing to remain stable; Ratio 34% on a see through basis. Current Ratio (x) 1.1 0.8 0.5 0.6 0.6 Quick Ratio (x) 1.1 0.7 0.5 0.6 0.6 Aggregate Leverage (%) 32.8 31.2 32.6 32.1 32.0 Z-Score (X) 5.3 5.2 5.1 5.1 5.1 Source: Company, DBS Bank
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Cash Flow Statement (S$m) FY Dec 2016A 2017A 2018A 2019F 2020F
Pre-Tax Income 402 405 478 447 467 Dep. & Amort. 1.11 0.70 0.0 0.0 0.0 Tax Paid (3.6) 0.0 0.0 (1.8) 0.0 Associates &JV Inc/(Loss) (66.9) (70.4) (129) (66.3) (67.8) Chg in Wkg.Cap. 1.01 (2.3) 19.4 180 17.6 Other Operating CF 99.2 94.6 87.9 0.0 0.0 Net Operating CF 433 428 456 559 416 Net Invt in Properties (76.0) (99.0) (316) (10.0) (10.0) Other Invts (net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 98.5 0.0 0.0 0.0 Div from Assoc. & JVs 92.1 80.9 81.0 66.3 67.8 Other Investing CF 11.3 8.77 0.26 0.0 0.0 Net Investing CF 27.3 89.2 (235) 56.3 57.8 Distribution Paid (394) (395) (456) (433) (452) Chg in Gross Debt (85.6) 21.6 (114) 10.0 10.0 New units issued 3.88 6.50 272 1.86 1.88 Other Financing CF (105) (111) (97.1) 0.0 0.0 Net Financing CF (581) (478) (395) (421) (440) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (121) 39.3 (174) 194 34.3
Operating CFPS (S cts) 12.2 12.1 12.1 10.3 10.8 Free CFPS (S cts) 10.1 9.27 3.86 14.9 11.0
Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank Analyst: Carmen Tay Derek TAN
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^ Bloomberg ESG Disclosure Scores rate companies annually based on their disclosure of quantitative and policy-related ESG data. It is based on a scoring scale of 0-100, and calculated using a subset of more than 100 raw data points it collects on ESG. It is designed to measure the robustness of companies' disclosure of ESG information in their reporting/the public domain. Based on Bloomberg disclosures, as of 25 Jan 2019, the global ESG disclosure average score is 24.92 and 22.14, 28.26, 49.97 for Environmental, Social and Governance, respectively.
DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame) Share price appreciation + dividends
Completed Date: 25 Apr 2019 08:31:38 (SGT) Dissemination Date: 25 Apr 2019 09:51:17 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
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(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS'') or their subsidiaries and/or other affiliates have a proprietary position in CapitaLand Mall Trust recommended in this report as of 31 Mar 2019
2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
Compensation for investment banking services: 3. DBS Bank Ltd, DBS HK, DBSVS their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from CapitaLand Mall Trust as of 31 Mar 2019
4. DBS Bank Ltd, DBS HK, DBSVS their subsidiaries and/or other affiliates of DBSVUSA, within the next 3 months, will receive or intend to seek compensation for investment banking services from CapitaLand Mall Trust as of 31 Mar 2019
5. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for CapitaLand Mall Trust in the past 12 months, as of 31 Mar 2019
6. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively. Disclosure of previous investment recommendation produced: 7. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Page 78 Singapore Company Guide Frasers Commercial Trust
Version 17 | Bloomberg: FCOT SP | Reuters: FRCR.SI Refer to important disclosures at the end of this report
DBS Group Research . Equity 11 Jul 2019
HOLD (Downgrade from BUY) Re-rating catalyst has played out Last Traded Price ( 10 Jul 2019): S$1.66 (STI : 3,340.42) Price Target 12-mth: S$1.70 (2% upside) Downgrade to HOLD. We downgrade our call on Frasers Commercial Trust (FCOT) from BUY to HOLD with an Analyst unchanged TP of S$1.70. Our previous bullish call was premised Mervin SONG, CFA +65 6682 3715 [email protected] Derek TAN +65 6682 3716 [email protected] on FCOT backfilling the space vacated by HP at Alexandra Technopark (ATP). With the signing of Google which has What’s New increased committed occupancy to 93.7%, this re-rating • Boost from Google largely priced in catalyst has largely played out.
• Uncertainty over timing of Brexit will likely delay Where we differ – Close to average spread to large-cap office acquisition of UK business parks REITs. FCOT on average has historically traded at 1.2% higher • Downgrade to HOLD with unchanged TP of S$1.70 yield than its large-cap office peers given its Grade B, business park and overseas exposure. FCOT’s earnings are expected to recover in FY21 when full year contribution from Google kicks Price Relative in and FCOT no longer needs to rely on capital distributions to support its DPU. Then, its estimated forward yield of c.6% would be close to its average historical spread. Thus, compared to more bullish investors, we believe there is limited valuation support to drive FCOT’s share price higher in the near term.
Catalysts for turning more bullish. While we believe FCOT’s share price is likely to be range-bound near term, we would Forecasts and Valuation turn more bullish should FCOT acquire UK assets at a faster FY Sep (S$m) 2018A 2019F 2020F 2021F pace or at a higher yield. In our numbers, we have priced a Gross Revenue 133 133 160 178 S$250m UK acquisition at an initial NPI yield of 6% in 3QFY20. Net Property Inc 89.3 90.8 110 132 Total Return 142 52.8 57.8 80.4 Valuation: Distribution Inc 82.7 87.4 89.1 94.8 We maintain our DCF-based TP of S$1.70. With limited upside EPU (S cts) 13.6 5.80 6.22 8.52 to our TP we downgrade from BUY to HOLD. EPU Gth (%) 113 (58) 7 37 DPU (S cts) 9.60 9.60 9.60 10.1 DPU Gth (%) (2) 0 0 5 Key Risks to Our View: NAV per shr (S cts) 160 156 153 151 A key risk to our view is slower-than-expected recovery in PE (X) 12.2 28.6 26.7 19.5 office rents and improvement in occupancy at ATP. Distribution Yield (%) 5.8 5.8 5.8 6.1 P/NAV (x) 1.0 1.1 1.1 1.1 Aggregate Leverage (%) 28.2 29.7 37.0 36.9 At A Glance ROAE (%) 8.9 3.7 4.0 5.6 Issued Capital (m shrs) 906 Mkt. Cap (S$m/US$m) 1,504 / 1,107 Major Shareholders (%) Distn. Inc Chng (%): 0 (2) 2 Frasers Property Ltd 24.9 Consensus DPU (S cts): 9.70 9.70 9.70 Free Float (%) 75.1 Other Broker Recs: B: 2 S: 0 H: 4 3m Avg. Daily Val (US$m) 2.7 Source of all data on this page: Company, DBS Bank, Bloomberg ICB Industry : Financials / Real Estate Investment Trust Finance L.P
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WHAT’S NEW
Large proportion of positives priced in
Bullish thesis has largely played out by a lower assumed risk-free rate (2.5% versus 3.0% • Our bullish thesis for FCOT over the past year was previously) and cost of debt (3.25% versus 3.75% premised on FCOT backfilling the space vacated by previously). HP at Alexandra Technopark (ATP) which in our view has largely played out. FCOT’s yield spread to large-cap office REITs on a stablished • After the announcement that HP (HP Enterprise and basis near historical average HP Singapore) would vacate ATP in 2017, FCOT had • Based on FY19F yield, FCOT’s yield spread to its large to rely on paying out capital distributions and paying cap office REITs (CCT and KREIT) stands at c.1.6% 100% of its management fee in units to maintain a versus average historical yield spread of c.1.2%. stable DPU. HP used to occupy a total of 496,766 While this looks attractive, we believe a more relevant sqft or c.44% of ATP. comparison would be once FCOT has a “clean yield” • Due to uncertainty over FCOT’s ability to find a in FY21 when it no longer needs to rely on capital replacement tenant, its share price had been distributions to support its DPU. In addition, while not depressed. a like for like measure given current earnings are • The recent signing of Google as a major tenant at depressed, stripping out the capital distributions, ATP has increased committed occupancy to 93.7% FY19-20F core DPU is below the 1.2% average from 59.2% at end-March 2019, and removed the spread. overhang on FCOT. This resulted in FCOT’s share • Based on our estimates, FCOT is trading on a FY21 price rallying close to our TP of S$1.70. forward yield c.6%. This compares to the FY21F yield for large-cap office REITs (CCT and KREIT) of c.4.6%. Delaying UK business park acquisition • Thus, the yield differential between FCOT and its • With the sale of 55 Market Street and gearing falling large-cap office peers of c.1.3% based on FY21 DPU to c.29%, we had assumed a S$250m acquisition of is close to the historical yield spread of 1.2% and a UK business park on a 6% initial NPI yield in FY19. FCOT does not looks as attractive now as at first • This was premised on Brexit occurring in March this glance. year and FCOT’s previous guidance that it would expand its UK portfolio after Brexit. Downgrade to HOLD • Given the delay in Brexit, we now assume FCOT will • We downgrade our recommendation on FCOT from 100% debt fund its S$250m UK acquisition in BUY to HOLD, given limited upside to our TP of 3QFY20. S$1.70. • Contribution from Google will only kick in from • The re-rating catalyst from FCOT backfilling the space 2QFY20 versus initial expectations of FCOT finding a vacated by HP has occurred. Moreover, FCOT is now large tenant that starts contributing in FY19. trading close to its historical yield spread to its large- Moreover, we have lowered our GBP/SGD FX cap office peers on a normalised basis. Hence, we assumption to 1.72 from 1.80 previously, and these believe FCOT’s share price will be range-bound near have reduced our core FY19-20F DPU (excluding term. capital distributions) by 10-18%. • Factors which would cause us to review our cautious • Nevertheless, we expect FCOT to maintain a DPU of stance are faster-than-expected expansion into the c.9.60 Scts over the next two years before FY21 UK, acquisition on a higher initial NPI yield and/or when it should deliver a “clean” DPU (no support higher-than-expected signing rents. from capital distributions) of c.10 Scts in FY21. • In addition, we have maintained our DCF-based TP of S$1.70 as the expected dip in core earnings is offset
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CRITICAL DATA POINTS TO WATCH Net Property Income and Margins (%)
Critical Factors Recovery in the Singapore office market. With supply pressures easing in Singapore and GDP growth expected to hit 3% in 2018 according to our DBS economists, we expect Grade-A office rents to be on an upturn over the next 3-4 years. While FCOT’s exposure in Singapore is predominantly Grade-B offices and business parks, whose rents are likely to lag, FCOT should also benefit from an upturn in office rents.
Earnings anchored by inbuilt rental escalations. FCOT’s earnings Net Property Income and Margins (%) are anchored by c.47% of its portfolio (mainly related to its Australian properties) having built-in annual rental escalations (weighted average of 2.6%). Thus, a significant portion of FCOT’s DPU is supported by a visible and stable income stream.
Medium-term upside from AEI at Alexandra Technopark. With HP Inc and HP Enterprise vacating Alexandra Technopark (ATP), FCOT has taken the opportunity to undertake a S$45m asset enhancement initiative (AEI) which we believe should enable FCOT to raise rents by 10% at the property over the medium term. Distribution Paid / Net Operating CF AEI at China Square Central. Following the sale of land at China Square Central (CSC) to FCOT’s Sponsor for the development of a hotel, FCOT will undertake an AEI at CSC closer to the completion of the hotel in mid-2019. We believe the AEI, as well as the improved vibrancy of the area and foot traffic once the hotel is open, will help drive rents higher in the medium term.
Positive exposure to Melbourne office market. Through the acquisition of 357 Collins Street in Melbourne, Australia, from its Sponsor in 2015, not only has FCOT gained exposure to a Interest Cover (x) property with decent cashflow visibility with a WALE of 3.2 years and inbuilt rental escalation clauses of 3.75-4% p.a., the REIT is now able to leverage on a healthy leasing market. According to Knight Frank, prime net face rents are forecast to grow by c.9% from mid-2018 until end-2019.
Expansion into UK. The acquisition of Farnborough Business Park (FBP) in the UK in our view provides FCOT with another growth avenue beyond its core markets of Australia and Singapore. With its sponsor holding another four business parks in the UK and has extended the first right of refusal to FCOT, we believe incremental acquisitions in the UK will feature for Source: Company, DBS Bank FCOT over the coming years. With over S$200m from the sale of 55 Market Street, FCOT is well positioned to further deepen its presence in the UK.
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Appendix 1: A look at Company's listed history – what drives its share price?
FCOT share price versus Singaporep ( ) office rents ( p ) Remarks 4.00 20.00 With significant exposure 3.50 18.00 to Singapore, FCOT’s share price is correlated to spot 3.00 16.00 office rents in Singapore. 14.00 2.50 12.00 2.00 With prospects of a multi- 10.00 year upturn in office rents 1.50 8.00 from 2018-2020, and expected improvement in 1.00 6.00 occupancy at ATP, we 0.50 4.00 expect FCOT’s share price 0.00 2.00 to be supported. Nevertheless, near term we believe a large proportion of the positives FCOT share price (S$) - LHS Grade A office rents (S$ psf/mth) - RHS have been priced in.
Source: Bloomberg Finance L.P., STB, DBS Bank
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Balance Sheet: Aggregate Leverage (%) Strong balance sheet. Following the sale of 55 Market Street and revaluation gains, FCOT’s gearing stood at c.29% at the end of March 2019. This strong balance sheet provides FCOT with significant financial flexibility to pursue acquisitions. On that front, we have assumed that FCOT spends S$250m to acquire properties in the UK in the middle of FY20, to result in gearing climbing back up to 36-37%.
No refinancing till FY20. Using the proceeds from the disposal of 55 Market Street to repay its near term debt, FCOT does not ROE (%) have significant refinancing until FY20, when c.S$161m is due to be refinanced.
Share Price Drivers: Range-bound for now. We believe the recent signing of Google as a major tenant at ATP has removed concerns over FCOT’s potential inability to backfill the vacant space at ATP. Nevertheless, with the recent share price rally, we believe a large proportion of the positives has been priced in. In addition, on a stabilised basis, FCOT’s yield spread to its large-cap peers based on FY21 DPU projections is already close to the historical Distribution Yield (%) average.
Key Risks: Rising interest rates. Any increase in interest rates will result in higher interest payments for FCOT. However, we note that c.87% of FCOT’s loans are on fixed rates.
Unfavourable forex movements. FCOT derives c.45% of its income from Singapore with the remainder from Australia and the UK. Thus the REIT’s DPU is subject to fluctuations in the PB Band (x) AUD and GBP. To manage this risk, FCOT hedges its AUD and GBP exposures on a 6- to 9-month rolling basis.
Company Background Frasers Commercial Trust (FCOT) is a real estate investment trust that invests in income-producing commercial office properties in Singapore, Australia and UK. Approximately 54% of FCOT’s portfolio worth an aggregate S$2.1bn is from its properties in Singapore while the remaining 39% and 7% are from Australia and UK respectively. Source: Company, DBS Bank
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Income Statement (S$m) FY Sep 2017A 2018A 2019F 2020F 2021F Gross revenue 157 133 133 160 178 Property expenses (42.7) (44.0) (42.1) (49.5) (45.7) Net Property Income 114 89.3 90.8 110 132 Other Operating expenses (15.5) (15.9) (15.9) (17.7) (19.0) Decline in FY18 income Other Non Opg (Exp)/Inc 0.59 73.0 0.0 0.0 0.0 due to loss of HP Net Interest (Exp)/Inc (23.9) (24.4) (26.5) (38.1) (33.6) Enterprise and HP Inc as Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 tenants at ATP, and sale Net Income 75.1 128 57.3 63.2 88.3 of 55 Market Street. Tax (23.7) (6.7) (4.5) (5.5) (8.0) Recovery from FY19F on Minority Interest 0.0 0.0 0.0 0.0 0.0 the back of improving Preference Dividend 0.0 0.0 0.0 0.0 0.0 occupancies at ATP and Net Income After Tax 51.4 121 52.8 57.8 80.4 assumed acquisition in Total Return 111 142 52.8 57.8 80.4 the UK. Non-tax deductible Items (32.8) (59.0) 34.6 31.4 14.4 Net Inc available for Dist. 78.6 82.7 87.4 89.1 94.8 Growth & Ratio Revenue Gth (%) 0.0 (14.8) (0.3) 20.2 11.4 N Property Inc Gth (%) (1.5) (21.6) 1.7 21.4 19.9 Net Inc Gth (%) (28.6) 135.2 (56.3) 9.4 39.2 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0 Net Prop Inc Margins (%) 72.7 67.0 68.3 69.0 74.3 Net Income Margins (%) 32.8 90.6 39.7 36.2 45.2 Dist to revenue (%) 50.2 62.1 65.7 55.8 53.3 Managers & Trustee’s fees 9.9 11.9 11.9 11.1 10.7 ROAE (%) 4.1 8.9 3.7 4.0 5.6 ROA (%) 2.4 5.6 2.4 2.5 3.3 ROCE (%) 3.2 3.3 3.2 3.7 4.3 Int. Cover (x) 4.1 3.0 2.8 2.4 3.4 Source: Company, DBS Bank
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Quarterly / Interim Income Statement (S$m) FY Sep 2Q2018 3Q2018 4Q2018 1Q2019 2Q2019
Gross revenue 33.0 32.5 32.5 31.6 30.4 Property expenses (10.6) (12.1) (10.9) (10.4) (10.3) Net Property Income 22.4 20.4 21.6 21.1 20.1 Other Operating expenses (3.8) (4.1) (4.1) (3.9) (4.1) Other Non Opg (Exp)/Inc (1.8) 0.36 75.0 (1.4) 0.69 Net Interest (Exp)/Inc (6.1) (6.4) (6.0) (4.7) (4.6) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Net Income 12.0 11.9 89.1 12.7 13.7 Tax (0.3) (1.4) (4.0) 0.74 (0.2) Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax 11.7 10.5 85.1 13.5 13.5 Total Return 11.3 10.5 107 14.1 13.6 Non-tax deductible Items 9.27 10.8 (85.3) 7.50 8.05 Net Inc available for Dist. 20.6 21.3 21.4 21.6 21.7 Growth & Ratio Revenue Gth (%) (7) (2) 0 (3) (4) N Property Inc Gth (%) (10) (9) 6 (2) (5) Net Inc Gth (%) (11) (11) 711 (84) 0 Net Prop Inc Margin (%) 67.9 62.7 66.5 67.0 66.1 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0
Balance Sheet (S$m) FY Sep 2017A 2018A 2019F 2020F 2021F
Investment Properties 2,071 1,977 2,023 2,276 2,280 Other LT Assets 0.42 159 159 159 159 Cash & ST Invts 74.6 31.6 30.4 24.3 30.2 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 13.1 5.10 5.10 5.10 5.10 Other Current Assets 0.0 0.0 0.0 0.0 0.0 Total Assets 2,159 2,173 2,218 2,465 2,474
ST Debt 183 17.0 17.0 17.0 17.0 Creditor 29.4 37.8 37.8 37.8 37.8 Other Current Liab 12.0 9.91 9.91 9.91 9.91 LT Debt 565 596 642 896 896 Other LT Liabilities 80.3 81.1 81.1 81.1 81.1 Unit holders’ funds 1,289 1,431 1,430 1,424 1,433 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Funds & Liabilities 2,159 2,173 2,218 2,465 2,474
Non-Cash Wkg. Capital (28.3) (42.6) (42.6) (42.6) (42.6) Net Cash/(Debt) (673) (582) (629) (888) (883) Decline in gearing in FY2018 Ratio due largely to the disposal of Current Ratio (x) 0.4 0.6 0.5 0.5 0.5 55 Market Street. Increase in Quick Ratio (x) 0.4 0.6 0.5 0.5 0.5 gearing in FY19F as we have Aggregate Leverage (%) 34.6 28.2 29.7 37.0 36.9 assumed a debt-funded Z-Score (X) 3.6 3.7 3.7 3.7 3.7 acquisition in the UK. Source: Company, DBS Bank
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Cash Flow Statement (S$m) FY Sep 2017A 2018A 2019F 2020F 2021F
Pre-Tax Income 75.1 128 57.3 63.2 88.3 Dep. & Amort. 0.0 0.0 0.0 0.0 0.0 Tax Paid (3.3) (1.4) (4.5) (5.5) (8.0) Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (2.6) (1.7) 0.0 0.0 0.0 Other Operating CF 27.7 (40.4) 15.9 16.3 14.4 Net Operating CF 96.8 84.0 68.7 74.1 94.8 Net Invt in Properties (4.3) 142 (46.0) (253) (3.6) Other Invts (net) 0.0 0.0 0.0 0.0 0.0 Includes acquisition of Invts in Assoc. & JV 0.0 (156) 0.0 0.0 0.0 S$250m worth of Div from Assoc. & JVs 0.0 0.0 0.0 0.0 0.0 properties in the UK. Other Investing CF (1.1) 2.03 0.0 0.0 0.0 Net Investing CF (5.4) (11.3) (46.0) (253) (3.6) Distribution Paid (64.5) (70.0) (69.9) (80.2) (85.3) Chg in Gross Debt 0.0 (120) 46.0 253 0.0 New units issued 0.0 98.4 0.0 0.0 0.0 Other Financing CF (23.8) (24.2) 0.0 0.0 0.0 Net Financing CF (88.4) (115) (23.9) 173 (85.3) Currency Adjustments 0.09 (0.3) 0.0 0.0 0.0 Chg in Cash 3.12 (43.0) (1.2) (6.1) 5.92
Operating CFPS (S cts) 12.4 9.68 7.55 7.98 10.1 Free CFPS (S cts) 11.5 25.6 2.49 (19.3) 9.68 Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank Analyst: Mervin SONG, CFA Derek TAN
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DBS Bank recommendations are based on an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return, i.e., > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable share price catalysts within this time frame) *Share price appreciation + dividends
Completed Date: 11 Jul 2019 16:36:48 (SGT) Dissemination Date: 11 Jul 2019 17:24:33 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
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Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS'') or their subsidiaries and/or other affiliates have a proprietary position in Frasers Commercial Trust recommended in this report as of 30 Jun 2019 2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. 3. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued share capital in Frasers Commercial Trust recommended in this report as of 30 Jun 2019 4. DBS Bank Ltd, DBS HK, DBSVS, DBSVUSA or their subsidiaries and/or other affiliates beneficially own a total of 1% of any class of common equity securities of Frasers Commercial Trust as of 30 Jun 2019
Compensation for investment banking services: 5. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced: 6. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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Page 88 Singapore Company Guide Mapletree Commercial Trust
Version 16 | Bloomberg: MCT SP | Reuters: MACT.SI Refer to important disclosures at the end of this report
DBS Group Research . Equity 9 Sep 2019
A new dawn BUY Last Traded Price ( 6 Sep 2019): S$2.24 (STI : 3,144.48) Best in class. We retain our BUY call on Mapletree Commercial Price Target 12-mth: S$2.40 (7% upside) (Prev S$2.25) Trust (MCT) with a street-high TP of S$2.40. The meteoric rise in MCT’s share price following its inclusion in the Straits Times Analyst Index (STI) heralds a new dawn of heighted investor interest and Derek TAN +65 6682 3716 [email protected] Rachel TAN +65 6682 3713 [email protected] liquidity for the REIT. As we realign our discount rates with the larger cap REITs (-10bps in WACC), our TP is raised to S$2.40. What’s New Furthermore, our TP reflects MCT’s ability to deliver consistent • Inclusion into the STI heralds a new dawn DPU growth of 3% CAGR over FY20-22F, and its scarcity premium of being one of only two 100% Singapore-focused • Upside catalyst will be acquisitions as investors await large-cap REITs. the injection of Mapletree Business City phase II • Longer term upside from progressive development of Where we differ: Transformative MBC II acquisition. Our street- Greater Southern Waterfront region high TP of S$2.40 prices in the acquisition of Mapletree Business City II (MBC II) in FY21 based on c.S$1.5bn at a cap • Maintain BUY, TP raised to S$2.40 rate of 5.1% with S$900m equity raising. As MCT has a low
cost of capital, while MBC II is within the first lease renewal cycle and has c.99% committed occupancy, there is a high Price Relative probability that the acquisition will take place in the coming year. Beyond the expected 2% DPU accretion, we believe the MBC II acquisition will elevate MCT to become the fourth largest S-REIT. More importantly, this would position MCT closer towards its office REIT peers which are trading at lower yields, leveraging on the optimism of the current office upcycle.
Benefiting from Greater Southern Waterfront (GSW) Forecasts and Valuation FY Mar (S$m) 2019A 2020F 2021F 2022F rejuvenation. The recent plans announced to add more Gross Revenue 444 458 560 576 residential, commercial components within the GSW region is Net Property Inc 348 359 443 455 music to investors’ ears as MCT’s assets sit at the core of the Total Return 582 255 311 317 planned rejuvenation. Distribution Inc 264 273 332 339 EPU (S cts) 8.50 8.78 9.16 9.32 EPU Gth (%) 1 3 4 2 Valuation: DPU (S cts) 9.14 9.43 9.79 9.99 After incorporating MBC II acquisition and S$900m equity- DPU Gth (%) 1 3 4 2 raising, we raised our DCF-based TP to S$2.40 from S$2.25. NAV per shr (S cts) 160 159 162 162 PE (X) 26.3 25.5 24.5 24.0 Distribution Yield (%) 4.1 4.2 4.4 4.5 Key Risks to Our View: P/NAV (x) 1.4 1.4 1.4 1.4 A key risk to our positive view is a slowdown in retail sales Aggregate Leverage (%) 33.1 33.2 34.5 34.6 affecting VivoCity’s ability to increase rents, and a slower-than- ROAE (%) 5.5 5.5 6.1 5.8 expected pick-up in office/business park rents.
At A Glance Distn. Inc Chng (%): - - - Consensus DPU (S cts): 9.2 9.7 9.8 Issued Capital (m shrs) 2,895 Other Broker Recs: B: 5 S: 2 H: 6 Mkt. Cap (S$m/US$m) 6,484 / 4,694 Major Shareholders (%) Source of all data on this page: Company, DBS Bank, Bloomberg Temasek Holdings Pte td 34.6 Finance L.P. Schroders Plc 8.0 Free Float (%) 57.4 3m Avg. Daily Val (US$m) 12.1 ICB Industry : Financial / Real Estate Investment Trust
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WHAT’S NEW
Stars are aligned
1. Government efforts to remake Greater Southern 3. Over 9,00 new homes at the current Keppel Club site; Waterfront offers significant opportunities for developers; more office developments in the GSW to sweeten VivoCity (owned by Mapletree Commercial Trust (MCT)) positioning of Mapletree Business City to prospective tenants. remains the bedrock of the rejuvenation of GSW in our • Themed as “Punggol by the Bay”, the GSW view. development will kick-start with the planned • Plans to redevelop the Greater Southern Waterfront development of over 9,000 housing units (both public (GSW) were first unveiled back in March-19 as part of and private homes) on the site of the current Keppel the plans to rejuvenate the area over the next 5-10 Golf Club, as part of the rethinking of land use of the years starting from the relocation of PSA City Terminal prime site over the longer term. in Tanjong Pagar to Tuas from 2027 onwards. • The golf club has two years of lease left to run, sits on • Stretching from Gardens by the Bay East area to Pasir a 44-ha plot, and is in between two MRT stations and Panjang, the GSW covers over 30km of Singapore’s near Labrador Park, which are ingredients to re-make Southern coastline and offers over 2,000 hectares of the area into a prime work-live-play precinct, in our land for potential redevelopment, equivalent to almost view. six times that of Marina Bay. • While the development will take time to take shape, • There are significant opportunities for developers as the government will also look to add more office the government looks to reshape GSW as a new “live, space within the GSW to supplement the growth of work and play” starting with up to potentially 9,000 the population and also bring more people to work new residential development homes (public and within GSW. private) at the current Keppel Club site which has 2 • This will inevitably be positive for MCT which has years of land lease left to run. office properties in the Alexandra precinct (Mapletree • VivoCity, the closest large retail mall located at the Business City Phase 1, PSA Building) and Harbourfront centre of the GSW masterplan, will be in our view the (Merrill Lynch Habour front building). Over time, there bedrock of the rejuvenation of the GSW. We believe are benefits from a wider pool of office occupiers the mall will benefit with the expected increase in looking to relocate there while the increased live-in residential apartments, working population, and new population within the GCW will fuel the attractiveness tourism elements added to the GSW over time. of properties to occupiers. • The two power stations at Pasir Panjang will also be 2. New “Play” elements at Pulau Brani. redeveloped for recreation purpose. • With the moving of Pulau Brani Ferry Terminal, plans are underway to turn it to an island of fun and 4. MCT – Another SREIT joining The High Table in the Straits recreation to complement the offerings at Sentosa, Times Index Singapore’s premier tourism island, which itself is undergoing a rejuvenation anchored by the expansion • MCT will be included in the STI effective 23 Sept 2019, of Resorts World @ Sentosa while plans to revitalise replacing Hutchison Port Holdings Trust. the beach area will expand its nature and heritage • MCT would maintain a weightage of 1.5% in the STI offerings. • This is in line with market expectations as seen by the • Plans for a Downtown South resort mirroring NTUC’s c.13% share price appreciation since the beginning of Downtown East resort will over time bring more Aug-19 holiday goers and families to the vicinity which we • While some investors might take some profit post the believe will drive visitations to both Sentosa and news, we believe MCT’s share price will remain VivoCity. elevated in anticipation of the potential injection of Mapletree Business City Phase 2. • While the timing is still uncertain, we believe Mapletree Business City Phase 2, anchored by key tenants like Google, will be widely seen as a positive addition to the REIT • In addition, MCT’s intention to stay as a “pure-play Singapore REIT” will remain as an attractive quality to investors.
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5. Raising our TP to S$2.40 • Our assumptions include the acquisition of Mapletree • We relooked at our cost of equity assumptions and Business Phase II for S$1.5bn @ 5.1% yield. We have now lower our WACC by 10bps to account for the assumed 60% of the purchase to be funded by new REIT’s larger liquidity status, similar to the larger cap equity. REITs. • Our TP is thus raised to S$2.40 from S$2.25.
Benefitting from the Greater Southern Waterfront development
Source of all data: Company, DBS Bank
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CRITICAL DATA POINTS TO WATCH Net Property Income and Margins (%)
Critical Factors VivoCity is one of the top performing malls in Singapore. VivoCity, which contributes 45-50% of MCT’s NPI, is one of the top performing malls in Singapore owing to its unique attribute of being the only major mall in the southern half of Singapore, a gateway to Sentosa Island, and having excellent connectivity via highways and the subway. With around 55m visitors each year and consistent delivery of tenants’ sales growth, VivoCity is one of the go-to malls for prospective retailers. Having just passed its 10-year anniversary, the mall has matured and is Net Property Income and Margins (%) therefore no longer delivering double-digit earnings growth. However, we believe MCT’s plans to “future and e-commerce proof” the mall via the addition of services and lifestyle options, and ongoing tenant remixing should enable VivoCity to deliver low single-digit rental reversions. Over the coming 12-24 months, the mall should also benefit from the opening of a library to drive foot traffic, and an addition of over 24,000 sqft of GFA and higher rents post the completion of various AEIs.
MBC I another crown jewel with inbuilt step-ups. Another key asset for MCT is MBC I, a best-in-class office/business park property which is only 10-15 minutes' drive from Singapore’s Distribution Paid / Net Operating CF CBD. MBC I contributes c.30% of MCT’s NPI. An attractive feature of the property is the fact that a majority of the leases have annual rental escalations of around 3%. This provides the REIT with an inbuilt organic earnings growth profile. Due to its choice location, nearby amenities and discounted rents with Grade A office specifications, we believe MBC I will remain a top choice for tenants seeking a decentralised location. This provides earnings resiliency to the REIT.
Recovery in spot office rents. Spot office rents have increased from the lows in 1H17 of S$8.95 psf/mth, reaching S$11.15 Interest Cover (x) psf/mth at the end of 1Q19, according to CBRE estimates. Going forward, we expect office rents to approach S$12-13 psf/mth by 2020/21. Given over 50% of MCT’s earnings are derived from its office/business park properties, we believe MCT is well placed to benefit from the upturn in office rents as new supply is expected to be muted over the coming 3-4 years.
Potential acquisitions from the Sponsor. In the medium term, there is potential for MCT to expand its portfolio by leveraging on its Sponsor Mapletree Group which has extended the right of first refusal over several properties including MBC II and HarbourFront. Should MCT acquire these properties, we believe Source: Company, DBS Bank its share price will re-rate given the enhancement to the quality of the REIT’s portfolio and improved trading liquidity as any acquisition will likely coincide with an equity-raising. To that end, we have priced in the acquisition of MBC II in FY21 on an initial 5.1% NPI yield.
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Aggregate Leverage (%) Balance Sheet: Gearing to rise to 35-36% post acquisition of MBC II. MCT’s gearing stood at c.33% as of Jun’19. After assuming the acquisition of MBC II, we expect gearing to stabilise at around the 35-36% level.
Share Price Drivers: Continued delivery of steady DPU growth. The market has been concerned about MCT delivering consistent and steady DPU ahead given the maturing of VivoCity and headwinds in the ROE (%) retail sector such as e-commerce and large retail supply growth. While acknowledging that VivoCity is unlikely to deliver double- digit increase in earnings, we believe MCT’s recent AEI and addition of a library and resultant bonus 24,000 sqft of GFA should not only build a moat around its current earnings but drive foot traffic/tenant sales resulting in higher rents ahead. With the acquisition of MBC II in FY21, we believe MCT’s best days are still ahead, and with steady DPU delivery, should result in a re-rating.
Distribution Yield (%) Pure-play Singapore REIT. With other S-REITs expanding outside Singapore, MCT is expected to remain focused solely in Singapore. This may attract investors who have preference for S-REITs with 100% exposure to Singapore.
Key Risks: Weaker operational performance from VivoCity. The mall is gradually phasing into a mature stage, with potential slowdown in growth ahead. The timely acquisition of MBC I, still a segment in high demand, plus management’s continuous efforts to revamp VivoCity’s offerings, should PB Band (x) mitigate the slowdown at the portfolio level.
Competition from other landlords. While office rents/business park rents are on an uptrend and MCT’s office and business/park portfolio being close to fully occupied, there remains competition from other buildings for MCT’s tenants.
Interest rate risk. Any increase in interest rates will result in higher interest payments that the REIT has to make annually to service its loans. Nevertheless, the risk is partially mitigated by Source: Company, DBS Bank the fact that c.85% of MCT’s debts are on fixed rates.
Company Background Mapletree Commercial Trust (MCT) is a real estate investment trust that invests in income-producing office, business park and retail properties in Singapore. The majority of its earnings are derived from VivoCity, one of the largest retail malls in Singapore. In addition, the REIT has four other office and business park properties including Mapletree Business City, a premier decentralised office/business park.
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Income Statement (S$m) FY Mar 2018A 2019A 2020F 2021F 2022F Gross revenue 434 444 458 560 576 Property expenses (94.7) (96.3) (98.7) (117) (121) Net Property Income 339 348 359 443 455 Other Operating expenses (31.6) (32.8) (35.3) (41.2) (43.9) Other Non Opg (Exp)/Inc 1.62 0.57 0.0 0.0 0.0 Assumed acquisition of Net Interest (Exp)/Inc (63.9) (69.4) (69.6) (90.9) (94.1) MBC Phase 2 Exceptional Gain/(Loss) (1.6) (0.4) 0.0 0.0 0.0 Net Income 243 246 255 311 317 Tax 0.0 0.0 0.0 0.0 0.0 Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Income After Tax 243 246 255 311 317 Total Return 568 582 255 311 317 Non-tax deductible Items (307) 18.3 18.6 21.3 22.5 Net Inc available for Dist. 260 264 273 332 339 Growth & Ratio Revenue Gth (%) 14.8 2.4 3.2 22.3 2.7 N Property Inc Gth (%) 15.9 2.6 3.4 23.2 2.8 Net Inc Gth (%) 15.6 1.0 3.6 22.1 2.1 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0 Net Prop Inc Margins (%) 78.2 78.3 78.5 79.0 79.1 Net Income Margins (%) 56.1 55.3 55.6 55.5 55.1 Dist to revenue (%) 60.1 59.5 59.6 59.2 59.0 Managers & Trustee’s fees 7.3 7.4 7.7 7.4 7.6 RO AE (%) 5.9 5.5 5.5 6.1 5.8 ROA (%) 3.7 3.5 3.6 3.9 3.7 ROCE (%) 4.7 4.6 4.6 5.2 4.8 Int. Cover (x) 4.8 4.5 4.7 4.4 4.4 Source: Company, DBS Bank
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Quarterly / Interim Income Statement (S$m) FY Mar 1Q2019 2Q2019 3Q2019 4Q2019 1Q2020
Gross revenue 109 110 113 113 112 Property expenses (22.6) (23.7) (24.7) (25.3) (23.8) Net Property Income 85.9 86.3 87.9 87.6 88.4 Other Operating expenses (8.2) (8.2) (8.3) (8.2) (8.5) Other Non Opg (Exp)/Inc 0.04 0.11 0.0 0.08 0.22 Net Interest (Exp)/Inc (16.9) (17.4) (17.6) (17.5) (17.6) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Net Income 60.9 60.8 62.0 62.0 62.5 Tax 0.0 0.0 0.0 0.0 0.0 Minority Interest 0.0 0.0 0.0 0.0 0.0 Net Income after Tax 60.9 60.8 62.0 62.0 62.5 Total Return 60.9 60.8 62.0 399 62.5 Non-tax deductible Items 3.68 4.81 5.00 (332) 4.72 Net Inc available for Dist. 64.6 65.6 67.0 66.9 67.3 Growth & Ratio Revenue Gth (%) 0 1 2 0 (1) N Property Inc Gth (%) 2 0 2 0 1 Net Inc Gth (%) 1 0 2 0 1 Net Prop Inc Margin (%) 79.2 78.5 78.1 77.6 78.8 Dist. Payout Ratio (%) 100.0 100.0 100.0 100.0 100.0
Balance Sheet (S$m) FY Mar 2018A 2019A 2020F 2021F 2022F
Investment Properties 6,682 7,039 7,053 8,563 8,580 Other LT Assets 10.2 7.44 7.44 7.44 7.44 Cash & ST Invts 45.1 49.1 51.0 47.9 50.3 Inventory 0.0 0.0 0.0 0.0 0.0 Debtors 2.95 4.00 4.13 5.05 5.19 Other Current Assets 0.42 1.08 1.08 1.08 1.08 Total Assets 6,741 7,101 7,117 8,624 8,644
ST Debt 144 50.0 50.0 50.0 50.0 Creditor 83.2 81.0 83.0 98.8 101 Other Current Liab 0.15 0.01 0.01 0.01 0.01 LT Debt 2,186 2,300 2,314 2,924 2,941 Other LT Liabilities 44.7 53.7 53.7 53.7 53.7 Unit holders’ funds 4,283 4,616 4,616 5,498 5,498 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Funds & Liabilities 6,741 7,101 7,117 8,624 8,644
Non-Cash Wkg. Capital (80.0) (75.9) (77.8) (92.7) (95.1) Net Cash/(Debt) (2,284) (2,301) (2,313) (2,926) (2,941) Ratio Current Ratio (x) 0.2 0.4 0.4 0.4 0.4 Quick Ratio (x) 0.2 0.4 0.4 0.4 0.4 Aggregate Leverage (%) 34.6 33.1 33.2 34.5 34.6 Z-Score (X) 1.6 1.6 1.6 1.5 1.5 Source: Company, DBS Bank
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Cash Flow Statement (S$m) FY Mar 2018A 2019A 2020F 2021F 2022F
Pre-Tax Income 243 246 255 311 317 Dep. & Amort. 0.0 0.0 0.0 0.0 0.0 Tax Paid 0.0 0.0 0.0 0.0 0.0 Associates &JV Inc/(Loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 10.0 6.65 1.90 14.9 2.45 Other Operating CF 78.9 84.7 88.3 112 117 Net Operating CF 332 337 345 438 436 Net Invt in Properties (18.5) (22.1) (13.7) (1,510) (17.3) Other Invts (net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc. & JVs 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.35 0.0 0.0 0.0 0.0 Net Investing CF (18.2) (22.1) (13.7) (1,510) (17.3) Distribution Paid (260) (263) (273) (332) (339) Chg in Gross Debt 0.0 21.4 13.7 610 17.3 New units issued 0.0 0.0 0.0 882 0.0 Other Financing CF (63.2) (70.4) (69.6) (90.9) (94.1) Net Financing CF (323) (312) (329) 1,069 (416) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (8.8) 3.39 1.90 (3.1) 2.45
Operating CFPS (S cts) 11.2 11.4 11.8 12.5 12.7 Free CFPS (S cts) 10.9 10.9 11.4 (31.6) 12.3 Source: Company, DBS Bank
Target Price & Ratings History
Source: DBS Bank Analyst: Derek TAN Rachel TAN
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DBS Bank recommendations are based on an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return, i.e., > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable share price catalysts within this time frame) *Share price appreciation + dividends
Completed Date: 9 Sep 2019 08:19:31 (SGT) Dissemination Date: 9 Sep 2019 08:45:58 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to ben take s n i ubstitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
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Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS'') or their subsidiaries and/or other affiliates have a proprietary position in Mapletree Commercial Trust recommended in this report as of 31 Jul 2019 2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report. 3. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued share capital in Mapletree Commercial Trust recommended in this report as of 31 Jul 2019
Compensation for investment banking services: 4. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced: 5. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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DBS Bank recommendations are based on an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return, i.e., > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable share price catalysts within this time frame) *Share price appreciation + dividends
Completed Date: 9 Sep 2019 18:08:45 (SGT) Dissemination Date: 9 Sep 2019 19:29:31 (SGT)
Sources for all charts and tables are DBS Bank unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.
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DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”) or their subsidiaries and/or other affiliates have proprietary positions in CapitaLand Mall Trust, Frasers Centrepoint Trust, Mapletree Commercial Trust, SPH REIT, recommended in this report as of 31 Jul 2019.
2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
3. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates have a net long position exceeding 0.5% of the total issued share capital in Mapletree Commercial Trust, SPH REIT, recommended in this report as of 31 Jul 2019.
Compensation for investment banking services: 4. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Koufu Group Ltd, CapitaLand Mall Trust, Frasers Centrepoint Trust, as of 31 Jul 2019.
5. DBS Bank Ltd, DBS HK, DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for CapitaLand Mall Trust, Frasers Centrepoint Trust, in the past 12 months, as of 31 Jul 2019.
6. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced: 7. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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RESTRICTIONS ON DISTRIBUTION General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
Australia This report is being distributed in Australia by DBS Bank Ltd, DBSVS or DBSV HK. DBS Bank Ltd holds Australian Financial Services Licence no. 475946.
DBSVS and DBSV HK are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS Bank Ltd and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSV HK is regulated by the Hong Kong Securities and Futures Commission under the laws of Hong Kong, which differ from Australian laws.
Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong This report has been prepared by a person(s) who is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities in Hong Kong pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Bank (Hong Kong) Limited, a registered institution registered with the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). For any query regarding the materials herein, please contact Carol Wu (Reg No. AH8283) at [email protected]
Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.
Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR
Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.
Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd.
United This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore. Kingdom This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom.
In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.
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Dubai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at units 608 - 610, 6th Floor, International Gate Precinct Building 5, PO Box 506538, DIFC, Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated Financial by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the Centre DFSA rulebook) and no other person may act upon it.
United Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as Emirates defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent.
United States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.
Other In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, jurisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
DBS Regional Research Offices
HONG KONG MALAYSIA SINGAPORE DBS (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd Contact: Carol Wu Contact: Wong Ming Tek (128540 U) Contact: Janice Chua 13th Floor One Island East, 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 18 Westlands Road, Capital Square, Marina Bay Financial Centre Tower 3 Quarry Bay, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 852 3668 4181 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 Fax: 852 2521 1812 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] e-mail: [email protected] Company Regn. No. 196800306E
THAILAND INDONESIA DBS Vickers Securities (Thailand) Co Ltd PT DBS Vickers Sekuritas (Indonesia) Contact: Chanpen Sirithanarattanakul Contact: Maynard Priajaya Arif 989 Siam Piwat Tower Building, DBS Bank Tower 9th, 14th-15th Floor Ciputra World 1, 32/F Rama 1 Road, Pathumwan, Jl. Prof. Dr. Satrio Kav. 3-5 Bangkok Thailand 10330 Jakarta 12940, Indonesia Tel. 66 2 857 7831 Tel: 62 21 3003 4900 Fax: 66 2 658 1269 Fax: 6221 3003 4943 e-mail: [email protected] e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand
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