Brokers' Call: First Reit

FIRST REIT

Broker: CIMB

Call: Buy

Target Price: $1.51

First Reit's distribution per unit stood at 4.1 cents for the first half of the 2015 financial year.

Second-quarter gross revenue grew 8.5 per cent year on year, largely because of acquisition and higher contributions from Indonesia and Singapore properties. But property operating expenses were up by 19 per cent on the back of higher property tax, building audit fees and legal expenses incurred for lease renewals.

But First Reit has continued to show strong inorganic growth potential driven by the asset pipeline from its sponsor, healthy gearing at 32.9 per cent and the recently proposed increase in regulatory gearing limit to 45 per cent.

The Reit has a proven acquisition track record in Indonesia, which has been yield-accretive to shareholders.


NEO GROUP

Broker: RHB

Call: Buy

Target Price: $1.20

Neo Group has built itself a recognisable brand in Singapore's food-catering market since the establishment of Neo Garden in 1992.

It is the market leader in food catering, with more than 10 per cent share. The group launched a new central kitchen in October last year which is expected to double its catering capacity.

With added facilities to capture the burgeoning demand for food catering services, the revenue compound annual growth rate is expected to be 24 per cent over the financial year to March 31 next year.

An improvement in its overall Ebit (earnings before interest and taxes) margin is expected to be at 11.3 per cent by the 2018 financial year, up from 9.7 per cent next year and led by increased economies of scale.

Despite its small market cap, its valuation is undemanding compared with its peers, as a three-year net profit compound annual growth rate of 28 per cent is expected for the group (versus the peer average of 15 per cent).


OSIM INTERNATIONAL

Broker: Maybank Kim Eng

Call: Hold

Target Price: $1.75

Discretionary spending in Osim's core markets remains lacklustre, especially in North Asia, which contributed an estimated

65 per cent to its revenue from massage chairs and accessories, and 40 per cent to its high-end TWG tea business last year.

Earnings per share was cut by 16 per cent to 19 per cent on lower same-store sales assumptions for North and South Asia. Osim is still building a base for its next growth phase, which involves expanding TWG.

It recently acquired a 21 per cent stake in Hong Kong-based cosmetics company Laboratoires du Palais Royal Limited (LDPRL) for US$2 million (S$2.7 million) and an 8.8 per cent stake in Singapore-based technology solutions provider Trek 2000 for $11 million. Trek is profitable but LDPRL may not be. Until this base is fully built, volatile earnings are expected.

Net profit for the 2015 financial year is expected to fall 21 per cent to $81.2 million.

The second-quarter results are likely to reflect this with a potential 33 per cent year-on-year fall in net profit to $20 million.


ASCENDAS REIT

Broker: OCBC Research

Call: Hold

Target Price: $2.52

Ascendas Reit (A-Reit) reported a decent set of results for the first quarter. Distribution per unit grew 5.5 per cent year on year to 3.84 cents on the back of a 10.6 per cent increase in gross revenue to $180.5 million.

It achieved positive rental reversions of 6.6 per cent over its preceding contracted rental rates.

Overall portfolio occupancy inched up 1.1 percentage points from the previous quarter to 88.8 per cent.

This was a gradual improvement over the past two quarters.

However, the management still has work to do to backfill the remaining vacancies, given the large upcoming supply of industrial properties and the muted economic outlook.


SHENG SIONG GROUP

Broker: DBS Group Research

Call: Buy

Target Price: $1

The earnings of Sheng Siong Group are firing on all cylinders. It is on track towards its 50-store target, and its margin expansion trend is performing to expectations.

The company is one of the most well-run grocery retailers in Asean, leading regional peers in profitability, cashflow generation, and working capital management.

Dividend continues to be attractive at 4 per cent, based on forecast of 3.6 cents for the 2016 financial year .

Earnings of $13.6 million were in line with expectations, driven by both revenue growth and margin expansion.

Sheng Siong's management is targeting to have 50 stores islandwide eventually.

Revenue growth will be led by new store openings, since same-store sales growth is low at less than 0.5 per cent.

Excessive discounts and promotions in the market by competitors will ultimately result in lower margins.

A version of this article appeared in the print edition of The Straits Times on July 27, 2015, with the headline 'Brokers' Call: First Reit'. Print Edition | Subscribe