Digital Core REIT
Price target:
DBS Group Research ‘buy’ 72 US cents
How to react to an ‘over-reaction’
Now would be a good time to buy into Digital Core REIT, say DBS Group Research analysts Dale Lai and Derek Tan. The analysts believe that the REIT is now at an “attractive” re-entry point with its share price of 54 US cents (74 cents) as at Feb 3, representing around 0.9 times the REIT’s P/B and implying an FY2025–FY2026 yield of 6%.
FY2025–FY2026 yield is estimated to be higher than its peers on the Singapore Exchange (SGX) that are mainly trading at premiums of 1.2–1.4 times P/B.
From an EV/Ebitda basis, Digital Core REIT is also trading at a lower multiple of 23 times compared to its broader global peers’ multiples of 25 to 29 times.
“We believe that the discount is largely due to investors’ uncertainty surrounding the distribution growth outlook for the REIT, especially from the recent major non-renewal at [the] Linton Hall data centre,” Lai and Tan write in their Jan 28 report.
While noting that an extended property vacancy will have a “significant” impact on the REIT’s earnings and distributions, the analysts see that the market attention over the non-renewal could be an “over-reaction”.
Despite the potential downside of 19% to its distribution per unit (DPU), Lai and Tan believe Digital Core REIT is “well-positioned” to address the vacancy, as it can tap on the record-low market vacancy rates in Virginia to backfill the space quickly.
In addition, the REIT has the potential to achieve higher rental rates, given that market rents are now 20% to 30% higher than the expiring lease.
The analysts also believe that investors have largely ignored Digital Core REIT’s initiatives on financial management, leasing its existing assets and acquisitions, all of which were completed in recent months. The REIT recently acquired an additional 40% stake in its Frankfurt data centre and a 10% stake in its Osaka data centre, which will drive earnings.
These moves, say Lai and Tan, could contribute “positively” and limit the vacancy’s fall-off in distributions to just 4.0% less in FY2025.
The analysts’ estimates are based on the data centre being vacant for six months and better if Linton Hall is re-let ahead of time. Assuming that the space is tenanted by the end of FY2025, the analysts believe DPUs could jump by 11% y-o-y in FY2026, bringing it to a four-year high.
At present, the analysts’ estimates have not included the potential annexe block to be developed. However, once the annexe is built, it could add 20 megawatt (MW) to 30MW of IT load capacity. They write that it could then offer a potential estimated yield on cost of 10-12% with DPU accretion of between 13% and 19% in two to three years.
Lai and Tan have kept their “buy” call on Digital Core REIT as they see the REIT “playing the long game” with “more stability than [the] market is fearing”.
The REIT, which only has data centres in its portfolio, has structural tailwinds ahead of it with robust demand for data centres in key markets such as the US, Canada, Europe and Japan.
Moreover, the REIT enjoys income stability thanks to a long weighted average lease expiry (WALE). It should be able to quickly backfill spaces given the healthy demand dynamics in its markets.
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Other positives include the REIT’s pipeline assets from its sponsor, which is valued at over US$15 billion. Digital Core REIT has been granted a right of first refusal (ROFR) of these assets, which could allow the REIT to grow into the largest pure-play data centre S-REIT, Lai and Tan note.
Furthermore, the REIT has a “healthy” debt headroom, giving it enough flexibility to conduct further accretive acquisitions.
“We believe that once markets become more conducive for further acquisitions, Digital Core REIT will be able to grow further,” the analysts write. They have also lowered their target price to 72 US cents from 75 US cents to account for the non-renewal. The new target price implies a normalised target yield of 5% in the next three years. — Felicia Tan
Starhill Global REIT
Price targets:
DBS Group Research ‘buy’ 68 cents
OCBC Investment Research ‘hold’ 50 cents
Potential for a special dividend
Analysts are mixed over Starhill Global REIT ’s outlook after the REIT reported a distribution per unit (DPU) of 1.8 cents for 1HFY2025 ended Dec 30, 2024, 1.1% higher y-o-y. Gross revenue for the period increased by 1.7% y-o-y to $96.3 million thanks to higher contributions from the REIT’s properties in Singapore and Perth and the appreciation of the Malaysian ringgit against the Singapore dollar (SGD). However, the increases were partly offset by weaker contributions from Myer Centre Adelaide and higher operating expenses for the REIT’s properties in Australia.
In their Jan 27 report, DBS Group Research analysts Geraldine Wong and Derek Tan say they continue to like the REIT as it is one of the higher yielding REITs within the REITs sector in Singapore, as well as its conservative leverage ratio of 36%. The analysts have kept a “buy” call on Starhill Global REIT with an unchanged target price of 68 cents. Their target price implies a forward FY2025 yield of 7.4% based on the REIT’s last-traded price of 50 cents at the time of the report.
Wong and Tan also like the REIT for several reasons, such as its Singapore-focused portfolio and high exposure to master and anchor leases. The analysts note that these leases help shield the REIT’s higher operating expenses, including utility costs.
Based on its 1HFY2025 results, Starhill Global REIT’s DPU was in line with the analysts’ estimates. They also note the REIT’s stable portfolio occupancy and high single-digit positive reversions for its Singapore leases.
In addition, Wong and Tan see a higher rental upside for Wisma Atria, one of the REIT’s properties, for several reasons, including the mall’s asset enhancement initiatives (AEIs), which are scheduled to begin in the middle of this year. This time, the AEI will centre on the conversion of its level 7 carpark space into an office space, which is likely to free up another 3,250 sq ft of office net lettable area (NLA). Including the revamp of the mall’s drop-off point, the conversion AEI has been budgeted at $4 million with a target return on investment of over 8%.
Noting that the plans for conversion came shortly after the REIT’s divestment of its strata office units on level 12 in October 2024, the analysts believe that the additional office post-conversion could reap close to $7 million if sold, based on the REIT’s divestment price of $2,100 per sq ft back then.
The analysts believe any gains from the REIT’s divestment in October could fund further AEIs at the mall or be distributed to unitholders as a special dividend.
The analysts also note that Wisma Atria’s location in Orchard Road puts it in a good position to capture the return of tourists, especially with the Singapore Tourism Board’s (STB) forecast of a 30% to 60% recovery in Chinse arrivals this year.
Meanwhile, OCBC Investment Research (OIR) analyst Ada Lim is less upbeat on the REIT with an unchanged “hold” call and the same target price of 50 cents.
The REIT’s 1HFY2025 results were “steady” with “no surprises”, with its half-year DPU making up 49.2% of her initial full-year forecast. The analyst notes the REIT’s broad-based revenue growth while flagging foreign exchange (forex) headwinds and higher operating expenses from Australia.
The extension of the master tenancy at Lot 10 was already a base case assumption, which Lim incorporated into her model previously.
With about 85% of its FY2024 gross revenue derived from its retail space, Lim sees Starhill Global REIT as a potential beneficiary of the robust tourism trends in Singapore, ongoing revitalisation plans for the Orchard Road belt, as well as increasing private wealth in the city-state which may attract new or existing luxury brands to establish or expand their presence in Orchard malls, hence supporting occupier demand.
Including the REIT’s latest credit metrics, Lim has increased her FY2025 and FY2026 DPU estimates by 0.4% and 0.6%, respectively, although her fair value estimate has dipped to 50 cents from 55 cents as she increases her risk-free rate assumption by 25 basis points to 2.75%. The increased risk-free rate assumption reflects expectations of fewer rate cuts by the US Federal Reserve this year. — Felicia Tan
Centurion Corp
Price target:
RHB Bank Singapore ‘buy’ $1.16
Multiple positive factors
RHB Bank Singapore analyst Alfie Yeo has kept his “buy” call on Centurion Corporation with a higher target price of $1.16 from $1.06, as he sees several positive factors for the company going ahead.
For one, Centurion remains “well positioned” to see better rental rates in Singapore due to the shortage of dormitories.
“Purpose-built workers accommodation (PBWA) bed rates in Singapore have continued to be robust and due to the demand-supply situation, we see ongoing upward rental reversions lifting average bed rates going forward,” Yeo writes in his Feb 3 report.
Due to the expected strong demand, the analyst has increased his bed rate assumptions for Singapore PBWAs for FY2025 to FY2026 from $450–$500 per bed per month from $400–$450. Current market rates run up to $600 per bed, Yeo notes. As a result of the increased rate assumptions, the analyst has raised his FY2025 to FY2026 earnings estimates by 9% per year.
Yeo also sees Centurion’s longer-term growth prospects supported by its overseas properties. The company entered the Hong Kong PBSA market by securing a master lease in July 2024 for a property in Sheung Shui in Hong Kong’s New Territories. The lease is for a term of five years and 11 months with an option to extend for another five years. According to Centurion’s investor presentation dated Nov 5, 2024, the property was turned into a PBWA for non-local workers in various sectors, including food and beverage (F&B) and was progressively operational from November 2024.
“Drivers include rising foreign worker demand in the Enhanced Supplementary Labour Scheme (ESLS), which received 66,230 worker import applications, especially for the F&B sector,” Yeo notes.
Other upsides include Centurion’s revenue for the 9MFY2024 being “on track”. 9MFY2024 revenue rose by 25% y-o-y to $187 million. The company’s occupancy rate of its purpose-built student accommodation (PBSA) assets rose by eight percentage points y-o-y to 98% as at 9MFY2024. Its PBWA occupancy rate dipped by one percentage point y-o-y to 95% during the same period.
Another plus is Centurion’s potential REIT listing, which involves some of its PBSA and PBWA assets. Centurion announced its intention to establish a REIT on Jan 6, although the listing details have yet to be finalised.
“The intention of the REIT is to deliver more growth, be asset-light and allow the REIT to carry the assets on its books,” says Yeo. “The listco should eventually develop, acquire and manage assets, and acquire leases while earning fee income, including asset management fees.”— Felicia Tan
CDL Hospitality Trusts
Price targets:
DBS Group Research ‘buy’ $1.10
RHB Bank Singapore ‘neutral’ 93 cents
Lower target prices on local hotel glut
RHB Bank Singapore and DBS Group Research have trimmed their target prices on CDL Hospitality Trusts (CDLHT) following its results for 2HFY2024 ended Dec 31, 2024.
DBS’s Geraldine Wong and Derek Tan have kept their “buy” call but with a lower target price of $1.10 from $1.20.
Still, CDLHT has “attractive valuations for a Singapore-focused hotel play” and “continues to be one of the top proxies” within the S-REIT space for a turn in interest rates. “Notably, CDLHT saw a 40 basis point [bp] q-o-q dip in borrowing costs, after peaking in 3QFY2024,” state the DBS analysts in their Feb 3 note.
With 34% of its loan book to be refinanced in FY2025 and a “low” fixed-hedge profile of 32%, Wong and Tan are optimistic that CDLHT will be a “top beneficiary” of lower interest rates once cuts materialise in 2025.
CDLHT’s gearing remains at a “comfortable” 40.7% as at Dec 31, 2024. The average cost of debt decreased by 40bps q-o-q to 4.0%, leading to a “stable” interest coverage ratio (ICR) ratio of 2.30%. “CDLHT forecasts flat interest costs for FY2025 (currently at 3.0%) but anticipates potential savings, as 34% of its loan book is due for refinancing in 2025 and it has a low fixed-hedge profile of 32%,” write the analysts.
CDLHT reported 2HFY2024 gross revenue of $132.9 million, down 4% y-o-y, with the further normalisation of travel in key markets and ongoing asset enhancement initiatives (AEI) at two properties.
Net property income (NPI) declined 9.0% y-o-y to $68.7 million due to higher operating expenses in the UK and interest expenses.
Distributable income declined 11% y-o-y to $35.4 million, mainly due to negative NPI contribution from the new build-to-rent property, The Castings, and higher interest costs.
Distribution per unit (DPU) for 2HFY2024 declined 12% y-o-y to 2.81 cents, which translates to a full-year DPU of 5.32 cents, in line with DBS’s estimates.
CDLHT’s Singapore operational performance in 2HFY2024 extended its revenue per available room (RevPAR) weakness in 3QFY2024, with a 10% y-o-y decline in both quarters. This is in line with DBS’s 2025 thesis for a year of moderation for hotels.
“Given the current oversupply of hotel rooms in Singapore, our outlook for growth in Singapore hotels for FY2025 is neutral to cautious,” say Wong and Tan.
The DBS analysts’ RevPAR projections for CDLHT’s Singapore hotel properties are now “flat for the next one to two years”, reflecting reduced room inventory at W Hotel as the property enters its next phase of asset enhancement work to refurbish rooms.
The AEI work is expected to cost $30 million and is planned for completion by 3QFY2025, in time for the peak travel season in Singapore, says DBS.
Marginally negative hotel income from Singapore is offset by flat borrowing cost y-o-y and incremental contribution from UK assets Benson Yard, The Castings and Hotel Indigo Exeter.
CDLHT posted a four percentage point (ppt) y-o-y decline in occupancy to 79% and a 5.5% decline in average daily rate (ADR) to $246.
RevPAR performance in 2HFY2024 was led by Japan, which continues to captivate tourists, rising 17% y-o-y. Other key markets in Europe and the Maldives saw growth within the low- to mid-single-digit range y-o-y. In contrast, New Zealand saw an 11% y-o-y decline in RevPAR due to ongoing refurbishment work at Grand Millennium Auckland, resulting in a 20% decline in room inventory for most of 2HFY2024.
DBS has a “flat” DPU outlook for CDLHT, with an upside opportunity to ride the softening interest rate outlook in FY2025. However, Wong and Tan have not priced the softening rate outlook into their estimates.
The pivot towards the build-to-rent sector, among other possible lodging asset classes, highlights management’s strategic intent to build resilience through diversity and earnings stability, say the DBS analysts.
With two recent acquisitions within the UK — Indigo Hotel Exeter and the purpose-built student accommodation Benson Yard — CDLHT’s UK income exposure is expected to go north of 20%, says DBS.
“CDLHT managers remain opportunistic in pursuing accretive overseas acquisitions, with the UK remaining a favoured market,” they add.
Maiden contributions from Hotel Indigo Exeter and Benson Yard and stabilisation of The Castings at 85% occupancy for 2025 should support income going forward, say Wong and Tan.— Jovi Ho
Genting Singapore
Price target:
CGS International ‘add’ $1.05
'Stunted’ tourism recovery but better profitability seen in 2HFY2025
Genting Singapore, which operates Resorts World Sentosa, is likely to report subdued 4QFY2024 numbers, says CGS International’s Tay Wee Kuang.
In contrast, Marina Bay Sands, held by parent company Las Vegas Sands, enjoyed record high mass gross gaming revenue, supported by its refurbishment programme.
Meanwhile, Resorts World Sentosa has been renovating 384 rooms since last March. Along with other upgrading works on the Universal Studios and the SEA aquarium, potential visitors might have thus been turned away, says Tay in his Feb 3 note.
The contrast between the two integrated resorts aside, Tay observes that the overall recovery in Singapore tourism seems “stunted”, with the most recent November arrivals just 80.5% of the 2019 pre-pandemic level.
This comes after monthly international visitor arrivals (IVAs) recovered to 94.6% in March 2024 following various blockbuster events, such as the airshow and Taylor Swift and Coldplay concerts.
“We think this suggests that Singapore’s attractiveness as a tourist destination is driven by events rather than attractions,” says Tay.
“With an inferior line-up of events in 2025, we expect IVAs for 2025 to come in comparable to 2024’s, which could translate to a lack of volume-driven growth for Genting Singapore ,” he adds.
Nonetheless, citing how Genting Singapore is now trading at “depressed valuations”, Tay has kept his “add” call on this counter.
He is also looking forward to a significant lift in earnings in the second half of FY2025 with the gradual rollout of its new attractions, such as the newly revamped Hard Rock Hotel, Minion Land in Universal Studios and the Singapore Oceanarium.
Tay has also kept his target price of $1.05, pegged at eight times FY2026 EV/Ebitda, 0.5 standard deviations below its five-year mean. — The Edge Singapore
Yangzijiang Shipbuilding (Holdings)
Price target:
DBS Group Research ‘buy’ $3.80
Improving margins and record order book
Ho Pei Hwa of DBS Group Research has raised her target price for Yangzijiang Shipbuilding (Holdings) from $2.88 to $3.80 while keeping her “buy” call, as she expects better earnings from not just a bigger order book but also expanding margins.
Ho says in her Jan 31 note that the company’s improving corporate governance and pivoting towards cleaner vessels, such as dual-fuel containerships and gas carriers, which now account for around 70% of its order book, could draw more interest from environmental, social and governance funds.
She expects the company to secure more orders for liquefied natural gas carriers, which have high technical barriers to entry and could be a significant growth opportunity.
“The market has yet to fully appreciate the potential for earnings growth from its record-high order backlog as well as potential yard expansion of around 20%–30%,” says Ho.
The company has built up an order book of around US$24 billion ($32.5 billion), which is at a record high, boosting earnings visibility through 2027.
Ho estimates Yangzijiang Shipbuilding to generate a 14% CAGR in earnings growth over the next two years.
Besides revenue growth, the company is seen to enjoy improving margins, as two-thirds of its orders are made up of higher-margin contracts to build containerships. It is enjoying lower costs of steel and favourable forex as well.
With improving earnings, Ho believes Yangzijiang Shipbuilding, holding its payout ratio at around 30%, can pay a dividend of 9.5 cents for FY2024, up from 6.5 cents paid for FY2023.
Ho observes that the company’s payout ratio has ranged between 30% and 40%.
For the current FY2025, the company might pay between 11.5 and 13.5 cents, assuming a payout ratio of 34%, translating into a yield of 4%.
“Given its strong cash flow generation, there is potential for further upside in the payout ratio to as high as 40%,” says Ho.
Her new target price of $3.80 is based on 2.5 times FY2025 P/B (11 times implied P/E), justified by its consistently high return on equity of more than 20% and 3%–4% dividend yield. — The Edge Singapore
