Brokers' call: SMRT Corporation

SMRT CORPORATION

Broker: OCBC Investment Research

Target Price: $1.51

Call: Hold

The share price of SMRT Corporation (SMRT) has significantly outperformed the broader Singapore market (STI), rising 6.3 per cent this year to date, while STI recorded a substantial 12 per cent decline over the same period.


Cost pressures may continue to mount for SMRT with repair and maintenance expenses, like the deployment of gantry cranes (above). ST PHOTO: CHEW SENG KIM

The better-than-expected third-quarter results for financial year 2016 was the key driver for such gains. Revenue grew 4.6 per cent year on year with growth across most business segments, while profit after tax and minority interests jumped 63.5 per cent as operating expenses grew at a slower pace on cheaper energy costs.

While SMRT has stated progress is being made on rail reform, clarity is needed over the timeline and structure of reform. On its operations, an unexciting growth outlook is expected in the near term due to management-guided fall of $5 million to $6 million in fourth-quarter revenue due to potential rider cannibalisation from the launch of Downtown Line 2, and 1.9 per cent fare reduction. Cost pressures may continue to mount, especially for repair and maintenance expenses as well as staff costs. Management has guided for rail-related maintenance expenses to increase further to 50 per cent of rail revenue.


PERENNIAL REAL ESTATE HOLDINGS

Broker: DBS Group Research

Target Price: $1.32

Call: Buy

PREH's value lies in its global land bank located in China, Malaysia and Ghana, where it has an attributable development pipeline of commercial, retail, hotel and residential gross floor area. These are projected to be completed from this year.

Earnings are underpinned by a stable portfolio of operational investment properties in Singapore and China, and recurring property management fees. The current attributable value of PREH's development properties on the books stands at $1.7 billion, excluding Ghana.

In terms of geographical breakdown, China accounts for approximately 78 per cent of this value, while Singapore accounts for the remaining 22 per cent. When fully completed, we estimate gross development values of $3.7 billion in China and $600 million in Malaysia.

In April, PREH announced a 55 to 45 joint venture with Shangri-La to develop a 1.7 million sq ft gross floor area integrated project in the airport district of Accra, capital of Ghana. Total completion of this acquisition, which is pending master planning approval, could add an additional 6 to 8 cents to our revalued net asset valuation per share.


TRENDLINES GROUP

Broker: DBS Group Research

Target Price: 28 cents

Call: Buy

Trendlines (TTGL) is a seed-stage investor in medical and agriculture technology start-ups.

Unlike traditional venture capitalists, incubators provide start-ups with a higher level of support, such as technology labs, staffing, physical space, and strategic guidance, in addition to funding.

TTGL is considered the best incubator in the Medtech space and is the only government- franchised incubator in Agtech space.

B.Braun, a German healthcare provider with €5.4 billion (S$8.5 billion) in sales, is a strategic investor with a 4.2 per cent stake.

TTGL has a portfolio of 46 companies, of which 17 are in commercialisation stage.

The real value of an incubator lies in helping its portfolio of companies to raise more funds and exit profitably eventually. TTGL has a track record of raising follow-on funds for 75 per cent of its portfolio companies and divesting five portfolio companies over the last five years.

With net cash of US$22 million (S$31 million), the forecast is a 15 per cent compound annual growth rate in portfolio value over financial years 2015 to 2017. Three companies within its portfolio are exploring merger and acquisition opportunities. Even if one of them materialises, TTGL may beat forecasts.

A version of this article appeared in the print edition of The Straits Times on February 15, 2016, with the headline 'Brokers'Call'. Print Edition | Subscribe