DBS Group Holdings Ltd – Last NIM Rally

  • 2Q19 Revenue and PATMI grew 15.8% YoY and 20.2% YoY respectively. Exceeding our estimates by 4-5%.
  • Stronger than expected 2Q19 NIM of 1.91%. NIM expanded 6bps YoY and 3bps QoQ as loans were repriced with higher interest rates in Singapore and Hong Kong.
  • Loans growth slowed to 3.7% YoY, with an increase in non-trade corporate loans offset by the continued decline in housing loan growth.
  • Declared a quarterly dividend of 30 cents per share. We forecast 2019 dividend of $1.20/share.
  • Maintain ACCUMULATE at a lower target price of S$27.60. Our TP is based on target price-to-book of 1.4x, derived from the Gordon Growth model (long term ROE assumption: 12.5%, COE: 9.3% (Beta: 1.2x), Growth: 2.0%). We toned down terminal growth from 2.5% to 2.0%.

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The Positives

+ Record NIM in 1Q19 broke new high in 2Q at 1.91%. NIM rose 6bps YoY and 3bps QoQ to 1.91% due to stronger than anticipated hold up of SIBOR and HIBOR, combined with higher push-through of loan repricing. We expect modest headwind impact from potential US interest rate cuts in 2H19 and DBS guided that each 25bps fed rate cut in 3Q and 4Q could translate into a 1bps and 1-2bps NIM contraction respectively. However, DBS built up some longer-term positions and a similar lag repricing effect of lower interest rates should provide some buffer. We previously expected a couple more quarters of NIM expansion from 1Q’s 1.88% before reaching 1.90%. However, with a strong 2Q NIM, we believe NIM has reached its peak this quarter and would contract from 3Q onwards. We lower our NIM forecast for 2019 and 2020 NIM to 1.89% & 1.88% respectively.

+ CIR well contained, improving 2p.p. to 42%. Positive JAWS resulted in improvement in CIR with well-managed expenses. We expect full-year CIR to be higher at 43% due to seasonality movements with staff costs and 2H CIR to be slightly higher.

+ Rebound in other non-interest income by 87.9% YoY. Trading income rose 57.3% to $357mn while gains on investment securities quadrupled to $131mn from a low base. Compared to the previous quarter, non-interest income was little changed as a decline in trading income was offset by higher gains on investment securities.


The Negatives

– A moderate rise in GP with a net increase of $57mn QoQ to reflect heightened economic uncertainty and geopolitical tensions. DBS took a more conservative stance this quarter by building up some GP due to the overall uncertainty in the environment. Due to the ultra-conservative stance DBS made over the years, there is potential upside in the next 1-2 years with opportunities to sharpen some of the cumulative allowances made as well as possible recoveries.

– Gross customer loans grew 3.70% YoY to $355bn, the slowest in 3 years. The growth this quarter was driven by corporate non-trade loans from broad-based activities across the region offset by the continued decline in housing loan growth. Some of the drawdown in the loans pipeline did not materialize due to uncertainties in the environment resulted in slower loan growth. DBS guided for some pick up in trade loan growth in 2H19 due to festive seasonality and new mortgage bookings in 2Q to translate to more drawdowns in 3Q onwards. DBS maintains a mid-single-digit loan growth guidance for 2019.


Investment Actions

Maintain ACCUMULATE at a lower target price of S$27.60. Our TP is based on target price-to-book of 1.4x, derived from the Gordon Growth model (long term ROE assumption: 12.5%, COE: 9.3% (Beta: 1.2x), Growth: 2.0%). We toned down terminal growth from 2.5% to 2.0%.

Dividend yield support. We forecast FY19 DPS of $1.20, giving a 4.5% dividend yield support.


Frasers Centrepoint Trust – All the right moves, in all the right places

The Positives

+ Better performance despite softer retail sector outlook. Shopper traffic up 6.1% YoY, due to higher traffic at NPNW and YewTee Point. Tenant sales psf grew a modest 2.9% YoY for the two months ending May 2019. Revenue improved 1.6% YoY with all malls recording higher revenues, save for Causeway Point (CWP) whose occupancy took a hit due to AEI works for the underground pedestrian link (TBC December 2019). Largest contributors to revenue growth were NPNW (+3.8%), Changi City Point (+5.5%) and Bedok Point (+13.9%).

+ Higher portfolio occupancy and positive rental reversions. Portfolio occupancy improved from 96.0% to 96.8%. Better occupancy at all malls except Changi City Point (-30bps) and Anchorpoint (occupancy unchanged). Significant improvements in occupancy at Bedok Point (88.7% to 95.0%), YewTee Point (94.1% to 96.5%) and Northpoint City North Wing (NPNW) (96.5% to 97.1%). Positive rental reversions at all malls, except YewTee Point (-2.5%), with reversions for the portfolio as a whole coming in at +3.1%.

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The Negatives

– Post-Waterway Point acquisition gearing increased to 32.7% (FY18 28.6%) and lower interest coverage ratio of 4.5x (FY18 5.6x). Gearing increased a significant 410bps post-Waterway Point acquisition. However, the gearing of 32.7% is still conservative in our view, given the gearing limit of 45%. Borrowing cost ticked up 10bps to 2.7% due to higher percentage of borrowing on fixed cost (3Q19/FY18 67%/64%).



FCT’s malls are located in suburban residential areas with comparatively lower retail space per capita, for instance, <3 sqft of mall floorspace per capita versus >6 sqft in the central parts of Singapore (Figure 1). FCT’s biggest asset, CWP, stands to gain tremendously from the transformation of Woodlands Regional Centre, which will anchor itself as the largest economic hub in the North region. Waterway Point (33.3% stake), FCT’s latest acquisition, is also primed to benefit from the absence of supply coming onto the outer north-east area, and will likely remain the dominant mall.

FCT’s interest in PGIM increased from 18.8% to 21.13% due to the redemption of PGIM shareholders from the fund. Together with Sponsor Frasers Property Ltd’s (FPL) 53.74% stake, the group has a 74.87% stake in PGIM. As a private fund, PGIM does not enjoy tax transparency treatment that FCT does – we estimate PGIM’s tax rate to be approximately 10% – 15%. PGIM’s portfolio consists of several suburban retail malls and further entrenches FCT’s presence in the suburban retail space. With the group’s controlling stake in PGIM, FCT’s acquisition of some of PGIM’s assets appears to be in the cards and would yield immediate tax savings.


Upgrade to ACCUMULATE with higher TP of S$2.77 (prev. S$2.31).

We adjusted our forecast to account for the acquisition of the 33.3% stake in Waterway Point and FCT’s increased stake in PGIM. We reduced the risk-free rate owing to the lower interest rate environment – and in doing so, our cost of equity is reduced from 6.90% to 6.55%. We believe there is further upside to FCT’s valuation, with growth catalysts stemming from

  • Pipeline assets (Figure 2)
  • Possible acquisition of PGIM’s assets (Figure 3)
  • Re-positioning of CWP
  • FCT’s capability to tap on the renewed strength in fringe retail rents (Figure 4).

CapitaLand Commercial Trust – Forging ahead with AEIs and acquisition in Germany

The Positives

+ Positive rental reversions ranging 4.4% to 27.5% above the average expiring rent. With office rents still growing, albeit at a slower rate (2Q19: 1.3% vs 1Q19: 3.2% QoQ), CCT was able to capture positive rental reversions. Reversions ranged 4.4% to 27.5% above the average expiring rents.

+ AEIs at 21 Collyer Quay and 6 Battery Road to give ROI of c.9% and c.8%. AEI at 21 Collyer Quay comes after a 14-year master lease to HSBC (ending April 2021) and capitalises on transitional occupancy downtime, before the lease to We Work kicks in early 2Q21. The AEI will cost S$45mn and the refreshed building will be able to command higher rents, giving an estimated 9% ROI. S$35mn AEI to create a new through-block link with F&B units in the retail podium, and reconfigure space in levels 3 to 10 of the office block. The office tower will remain in operation and while the AEI is conducted in phases from 1Q20 to 3Q21. ROI of c.8% is expected to come from better floor configuration as well as new F&B tenants in the podium block.

+ New seven-year lease of 21 Collyer Quay to We Work commencing early 2Q21 (post-AEI). This will put CCT’s exposure to co-working operators at 7%. The lease has no break clause and periodic rental step-ups.   

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The Negatives

– DPU disruption is possible as revenues affected by the lack of income during AEI. 21 Collyer Quay will not be generating cash rents during the AEI and fit-out period from 2Q20 to 2Q21. However, the long runway until 2Q20 gives CCT the ability to grow revenues to offset maintain DPU stability. If approved, the proposed acquisition of MAC (elaborated below) and subsequent completion in 4Q19 will help to grow and stabilize DPUs. Options to distribute capital gains and tax savings exist which the management can explore. However, the management has also expressed that their focus will be on longer-term growth over transitional disruptions to DPU.

– A slight dip in occupancy, mainly due to AST2. Occupancy at AST2 fell 2.3pp from 98.1% in 1Q19 to 95.8% in 2Q19, due to non-renewal of a single tenant.


What else was new?

The proposed acquisition of 94.5% effective stake in Main Airport Centre (MAC), an 11-story office building located in near the 3rd busiest airport in Frankfurt, Germany. Total acquisition outlay is expected to be S$390 and translates to a 4.0% NPI yield (based on committed occupancy of c.90%) and pro-forma 1H19 DPU accretion of 1% (40% debt) to 2.5% (100% debt). Pro-forma leverage expected to increase from 34.8% to 35-37% and will increase CCT’s exposure to Germany from 5% to 8%.

Marco conditions for the airport submarket look positive with vacancy rates for the airport submarket (4.0%) consistently lower than the broader Frankfurt office market (7.5%). The airport submarket rents are also competitive relatively to CBD districts. (€25.5 vs €27.1 psm/month).

This proposed acquisition comes one year after the acquisition of Galileo, CCT’s first foray overseas, located in the Frankfurt CBD Banking district. CapitaLand will hold the remaining 5.5% stake in Galileo. If approved by the unitholders at the September 2019 EGM, the acquisition will be headed for a 4Q19 completion.

CCT has closed the private placement of c.102mn new units for $220mn, 98.5% or S$216.7mn will be used to partially fund the acquisition of MAC. Without further equity  raising, the LTV for this acquisition will be c.56%.



Outlook remains positive for CCT, with expiring rents for 2019 and 2020 on the downtrend ($10.35/$9.60 psf, 2021: $10.69 psf), below the average market rent of $11.30. Average annual supply of office space coming onto the market from 2019 to 2023 (0.8mn sqft) is 27%  lower than the 10-year average supply of 1.1mn sqft and should help to support rents and deliver positive rental reversions for CCT.


Maintain NEUTRAL with higher TP of $2.18 (prev. $1.93).

We revise our forecasts to incorporate newly announced AEIs, new shares from placement to fund the acquisition of MAC, and the proposed acquisition of MAC. Our higher TP of $2.18 is partly due to the items previously mentioned, and a downward revision of our COE from 6.76% to 6.34%, due to the lower interest rate environment. We maintain NEUTRAL due to the run-up in prices year-to-date and the expensive valuation of >2 std. dev P/NAV which CCT now trades at. Our TP translates to a distribution yield of 4.1% and limited upside of 1.5%.