Yield Maintenance

Yield maintenance is a clause in a fixed-rate loan that requires a borrower to pay a premium when repaying the loan before its scheduled maturity date. The premium compensates the lender for the interest income it expected to receive over the remaining loan term. For investors, traders, and new borrowers, understanding yield maintenance matters when assessing commercial property financing, structured loans, or debt investments. The clause can materially affect the cost of refinancing, selling an asset or settling a loan early.

Table of Contents

What is Yield Maintenance?
Understanding Yield Maintenance
Impact of Yield Maintenance
How is Yield Maintenance Calculated?
Examples of Yield Maintenance
Frequently Asked Questions

What is Yield Maintenance?

Yield maintenance is a form of prepayment protection used mainly in fixed-rate commercial loans. It allows a lender to preserve, or “maintain”, approximately the same economic return it would have earned if the borrower had continued making the scheduled payments until maturity.

The lender gets its principal sooner than anticipated when a borrower repays a loan early. Reinvesting that money might yield a lower return if current interest rates have dropped. The yield maintenance premium is meant to cover the present value of this anticipated shortfall.

Typically, this clause applies for a set period with a minimum premium, usually expressed as a percentage of the outstanding principal. It is generally best to check the specific terms before making an early repayment as these are specific to the facility agreement.

Understanding Yield Maintenance

Yield maintenance calculation compares two returns:

Interest rate in the original loan document.

The yield on a government security with a maturity generally corresponding to the remaining loan period.

If the loan rate is higher than the relevant government bond yield, the lender may suffer an investment loss when the loan is repaid. The borrower may therefore have to pay the difference, adjusted for the time value of money.

For example, assume a commercial borrower has a fixed-rate loan with a 6.5% interest rate. Four years remain before maturity, but comparable US Treasury yields are 4.2%. The 2.3 percentage-point difference represents the approximate interest spread that the lender may lose if the loan is settled immediately.

A lower government bond yield generally results in a larger premium because the lender has fewer opportunities to replace the original loan’s return. Conversely, if market yields rise above the loan rate, the calculated premium may fall significantly. Loan documents may nevertheless impose a minimum charge.

Although the concept is most commonly associated with commercial property lending in the US, Singapore-based investors may encounter similar provisions in cross-border financing and institutional loan arrangements. Always confirm the applicable benchmark, calculation date, and repayment conditions in the contract.

Impact of Yield Maintenance

Yield maintenance protects lenders and fixed-income investors against prepayment risk, cutting off their predictable stream of interest income. Prepayment risk, in simple terms, is the risk that a borrower will repay a loan early. It is particularly relevant when interest rates decline, as lower rates encourage borrowers to refinance and reduce the reinvestment yields available to lenders.

This creates a financial disincentive for borrowers to leave early. Prepayment can be expensive, particularly early in a loan’s term, when there may be a significant difference between the loan rate and current Treasury yields, as well as an outstanding balance.

Borrowers considering an early repayment need to carefully model yield maintenance costs. In some cases, particularly if rates have dropped substantially, the penalty can exceed the savings from refinancing, making it financially unappealing to pay off early.

How is Yield Maintenance Calculated?

The process will depend on the loan agreement, but a common procedure is:

Yield maintenance premium = Present value of remaining payments x (Loan rate – Benchmark yield)

A more detailed calculation usually involves the following steps:

Determine the outstanding principal on the proposed repayment date.

Identify the remaining scheduled interest and principal payments.

Select the benchmark government bond yield that matches the remaining loan term.

Discount the relevant future payments using that benchmark yield.

Compare the calculated amount with any minimum premium stated in the agreement.

Apply the higher amount if the contract requires a minimum charge.

The applicable benchmark is not necessarily a government bond with the same maturity as the original loan. It is usually associated with the time left until maturity or the end of the yield maintenance period. Government bond yields are published for standard maturities, so the agreement may specify whether to use the nearest maturity or an interpolated rate. The US Treasury calls these figures constant-maturity yields obtained from its daily par yield curve.

Borrowers should check that the formula includes the desired principal repayment, whether it is a balloon payment, monthly or annual compounding, rounding conventions, and administrative fees. An online rough estimate is not usually as reliable as a real payoff statement from your lender

Examples of Yield Maintenance

Assume the borrower has a US$10 million fixed-rate commercial loan with an interest rate of 6%. Maturity is in three years, and the benchmark Treasury yield is 4%.

The interest-rate difference is 6%−4%=2%.

The undiscounted annual interest difference is US$10 million × 2% = US$200,000.

Over three years, the undiscounted difference would be approximately US$600,000. Because the future payments are discounted to their present value, the actual yield maintenance premium would be lower than this simple estimate. Amortisation, payment timing, and any minimum premium could also affect the final amount.

This example shows that yield maintenance may be more expensive when market yields decline. If the benchmark yield fell to 2.5%, then the rate difference would rise to 3.5%, and the premium could be much greater.

Frequently Asked Questions

Why do lenders use yield maintenance clauses?

Lenders use these clauses to protect the anticipated return on fixed-rate loans. When market interest rates are lower and the returned capital can only be reinvested at a less appealing rate, they lessen the chance that a borrower will repay early.

How does yield maintenance benefit borrowers?

By increasing the availability of fixed-rate financing and possibly lowering its cost, it may indirectly help borrowers. The borrower gains more assurance regarding future interest expenses, while the lender is shielded from early repayment. The benefit is greatest when the borrower expects to keep the loan until maturity.

What is the difference between yield maintenance and prepayment penalties?

“Prepayment penalty” is a broad term for any charge imposed when a loan is repaid before its scheduled maturity. Yield maintenance is one specific type of prepayment penalty. Other methods may use a fixed percentage, a declining schedule or a set number of months’ interest. Yield maintenance is generally linked to the difference between the loan rate and a market benchmark.

Yield Maintenance vs. Defeasance: Which is More Beneficial?

Neither option is automatically better. Under yield maintenance, the borrower pays a premium calculated from the interest-rate difference. Under defeasance, the original loan remains outstanding while the borrower replaces the property’s cash flows with a portfolio of government securities or other permitted investments. Defeasance can offer greater flexibility in some transactions, but it may involve complex legal, administrative and transaction costs.

How Does Yield Maintenance Protect Lenders from Interest Rate Risk?

It compensates the lender for the present value of the difference between the original loan return and the return available from a comparable benchmark investment. As a result, an early repayment is less damaging when market rates have fallen. It does not eliminate every lending risk, but it specifically addresses the interest income risk created by early settlement.

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SIA Engineering: BUY with Target Price of S$3.77 as SAESL Drag Nears Its Peak

Published on Nov 14, 2026 16

Brief Overview SIA Engineering Co. Ltd reported second-quarter FY27 and first-half FY27 results that were largely stable, with PATMI changing 3.0% and negative 1.7% year-on-year to S$41.6 million and S$81.9 million respectively, forming 23% and 45% of Phillip Securities Research's full-year FY27e estimate. Revenue fell 10.7% and 9.7% year-on-year to S$331.0 million and S$658.6 million respectively, on lower pass-through materials revenue, although first-half FY27 revenue excluding materials rose 1.6% year-on-year. Associates' income increased 19% year-on-year to S$62.6 million in the first half, while joint venture income collapsed 94% to S$1 million, weighed down by SAESL expansion costs. Investment Positives Strong operational performance Adjusted operating profit, excluding a one-off impairment provision for an underperforming contract booked in the first half of FY26, rose 51% to S$25.7 million. The improvement was primarily driven by lower gestation losses at Base Maintenance Malaysia (BMM), where the airframe and line maintenance subsidiaries' operating loss narrowed 67.9% to negative S$2.6 million. Management does not expect BMM gestation costs to rise going forward. BMM's first hangar, which opened in May 2026, is now operating at full capacity. A second hangar arriving by the end of FY27 will absorb SIA's A350 retrofit programme from next year, freeing Singapore capacity for third-party work. This should support a recovery in Singapore airframe profitability. BMM is already serving third-party customers, including Air India, with which SIA Engineering signed a non-binding memorandum of understanding in July 2026 that could lead to an MRO joint venture in India. Healthy associates' contribution Share of associates' profits rose 19.0% year-on-year to S$62.6 million, primarily from Eagle Services Asia (ESA). With the majority of GTF powdered metal contamination inspections now completed, ESA's performance is being driven by routine repair and overhaul demand. Approximately 40% of A320neos use GTF engines. ESA's Eagle 2 expansion, built for approximately 250 engines per year, is running at full capacity, and the associate is pursuing further growth opportunities. New Safran LEAP joint venture In June 2026, SIA Engineering signed a joint venture agreement with Safran Aircraft Engines (SAE 51%, SIA Engineering 49%; approximately US$118 million investment) to build a full LEAP-1A/1B engine and module MRO shop in Singapore. SIA Engineering's existing LEAP quick-turn operations will transfer into the joint venture. The facility will progress from quick turn to module, piece-part and full MRO, targeting more than 100 engines a year by 2029. SIA Engineering's initial contribution of approximately US$57.8 million is mainly for equipment and buildings, with grants sought for training. Management sees an addressable base of approximately 6,000 engines within Safran's share of the OEM network. The analyst notes this is a larger opportunity than GTF, given LEAP's majority share on the A320neo and exclusivity on the 737 MAX. Importantly, management does not expect the new Safran LEAP joint venture, or the expanded Safran Landing Systems facility, to add significant gestation costs. Expansion into China SIA Engineering acquired 30% of Arport AME in August 2026, extending its line maintenance network to four Fujian airports. Growth hinges on Xiamen's move to the new Xiang'an airport in December 2026, where annual passenger capacity is expected to increase by approximately 55% to 45 million passengers. Margin expansion focus SIA Engineering is focusing on margin expansion for its core operations amid lower pass-through materials revenue. It is being selective in servicing contracts. The fleet under inventory technical management (ITM) shrank 17% to 137 aircraft from 166 in the first half of FY26, mainly from fewer A320s being serviced. The analyst believes SIA Engineering is declining or repricing contracts at renewal where rates no longer cover the higher cost base, trading fleet size for better margins. Investment Challenges Gestation at engine and components joint venture Share of joint venture profit fell 94% to S$1.0 million from S$18.7 million in the first half of FY26. SAESL's expansion costs currently being expensed include staff training, consultancy fees, and interest fees on loans taken to fund the expansion. These costs are expected to peak this financial year, with facility development work to be complete by March 2028. Lower revenue from pass-through materials Revenue declined 10.7% year-on-year in the second quarter and 9.7% year-on-year in the first half, primarily due to lower pass-through materials revenue, which is linked to the mix of work performed. While revenue excluding materials grew modestly, this remains a headwind to reported top-line figures. ITM risk exposure Under the ITM revenue model, which is based on flight hours for spare parts under the agreement and on a cost-plus-margin model for parts not under the agreement, SIA Engineering bears the risk of rising spare part costs for in-scope parts that are covered by a fixed flight-hour rate. Outlook Second-half FY27e performance should benefit from easing start-up losses at BMM, whose first hangar is now at full capacity. Management does not expect gestation costs to rise when the second hangar arrives by year-end. SAESL's expansion costs are expected to peak in FY26/27, with early revenue from the Seletar site and some cost tapering by year-end offering partial gestation relief. The new Safran LEAP joint venture and the expanded Safran Landing Systems facility are not expected to add significant gestation costs. Joint venture costs are expected to taper by the end of FY27/28. Recommendation & Target Price Phillip Securities Research maintains a BUY recommendation on SIA Engineering Co. Ltd with a lower target price of S$3.77, reduced from the previous S$3.90. The FY27e PATMI estimate has been reduced by 3.3% to reflect updated SAESL cost assumptions. SIA Engineering is trading at a FY27e price-to-earnings ratio of 18.6 times. Frequently Asked Questions [market_journal_faq] This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst. Disclaimer These commentaries are intended for general circulation and do not have regard to the specific investment objectives, financial situation and particular needs of any person. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. You should seek advice from a financial adviser regarding the suitability of any investment product(s) mentioned herein, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of units in any fund and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance. Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries. The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in these commentaries are subject to change, and PSPL shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will PSPL be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages. The companies and their employees mentioned in these commentaries cannot be held liable for any errors, inaccuracies and/or omissions howsoever caused. Any opinion or advice herein is made on a general basis and is subject to change without notice. The information provided in these commentaries may contain optimistic statements regarding future events or future financial performance of countries, markets or companies. You must make your own financial assessment of the relevance, accuracy and adequacy of the information provided in these commentaries. Views and any strategies described in these commentaries may not be suitable for all investors. Opinions expressed herein may differ from the opinions expressed by other units of PSPL or its connected persons and associates. Any reference to or discussion of investment products or commodities in these commentaries is purely for illustrative purposes only and must not be construed as a recommendation, an offer or solicitation for the subscription, purchase or sale of the investment products or commodities mentioned. This advertisement has not been reviewed by the Monetary Authority of Singapore.

DBS Group Holdings: Accumulate with Target Price of S$76.00 as Deposit Gains Lift NIM While Trading Fees Fall

Published on Nov 14, 2026 9

Brief Overview DBS Group Holdings reported third-quarter 2026 earnings of S$2.8 billion, slightly below Phillip Securities Research estimates, with nine-month 2026 results reaching 71% of the full-year forecast. The shortfall was driven by lower-than-expected markets trading and wealth management fees, as weaker Asian equity markets and a late-September rise in rates dampened trading volumes. Clients also slowed purchases of equity-structured products. Encouragingly, net interest income rose 4% year-on-year as loan growth, led by non-trade corporate lending, and hedging offset lower SORA. The exit net interest margin rose to 1.90% after SORA turned upward in September, and management indicated that Net Interest Income (NII) has passed its trough. The third-quarter dividend per share rose 8% year-on-year to 81 cents, comprising 66 cents ordinary and 15 cents capital return. Investment Positives Record net new money builds the foundation for wealth fee growth DBS achieved a record in wealth assets under management, reaching S$544 billion on the back of S$15 billion of net new money in the third quarter of 2026. Wealth management fees for the first nine months of 2026 rose 24% year-on-year to a record S$2.69 billion. A significant contributor to this growth is discretionary mandates, which generate a recurring fee on assets rather than per-trade commissions; these mandates have grown to S$59 billion of wealth AUM. Importantly, new money is invested gradually, meaning fees lag inflows. With only 59% of AUM currently invested, there remains substantial room for additional fee income as clients deploy their cash holdings. Deposit share gains protect the net interest margin DBS adopted a deliberate strategy of maintaining high deposit rates earlier in the year while competitors cut theirs. This approach enabled the bank to win deposit market share before conditions tightened. Deposits rose 10% year-on-year to S$650 billion, led by current and savings accounts, which funded 11% loan growth across non-trade corporate, government land sales, technology media and telecommunications, and financial institution lending. The exit NIM of 1.90% held firm through October. Notably, DBS's sensitivity to US dollar interest rates has improved: NII sensitivity fell to minus S$2 million per basis point, down from minus S$4 million previously. This means US rate increases now cost DBS significantly less. Treasury customer sales also contributed positively, rising 15% year-on-year on higher sales to wealth and institutional clients. Investment Challenges Markets trading income depends heavily on Asian markets Markets trading income fell sharply, declining 65% year-on-year to S$152 million. The drop was caused by weaker Asian asset prices, dislocated equity volatility, a late-September rate rise, and lower trading volumes. Unlike US peers, DBS does not have a prime brokerage business that could benefit from heavy equity trading activity. Additionally, wealth fees per dollar of invested AUM dipped as sales of equity-structured products slowed. Management has guided for FY27e non-interest income growth of low double digits if markets hold steady, but only high single digits if markets weaken further. Capital headroom is narrowing The bank's fully phased-in Common Equity Tier 1 ratio stands at 14.1%, down from 15.1% in the third quarter of 2025 after MAS cut the operational risk multiplier, and as risk-weighted assets grew with loans. While this remains above the target range of 12.5% to 13.5% — and management considers any level above 14% "very comfortable" — the buffer is shrinking. Full removal of the multiplier would add approximately 0.2 percentage points. Excess capital above 13% stands at roughly S$5 billion. Of the S$3 billion share buyback programme, only S$0.4 billion has been utilised. Management expects ordinary dividend per share growth to track earnings at approximately 5% per year. Outlook NII is expected to return to growth in FY27e. Management anticipates NII growth close to 5%, assuming two additional rate hikes and SORA averaging approximately 1.6%. Each basis point rise in SORA adds roughly S$10 million to NII. Deposit growth should moderate to mid-single digits, though higher Treasury bill yields could draw some deposits away. FY26e guidance remains broadly unchanged, with the exit NIM of 1.90% expected to hold in the fourth quarter of 2026. Artificial intelligence is helping to slow cost growth. Expense growth fell to 2–3% this year from approximately 8% previously, as AI tools raised staff productivity. DBS guides FY27e expenses to grow at mid-single digits, in line with total income, keeping the cost-to-income ratio in the low-40% range. The bank is reinvesting savings into wealth management, financial institution group, and payments, and continues to hire wealth relationship managers. AI tools enable each relationship manager to cover more clients, allowing wealth fees to grow faster than headcount. On capital returns, the 15 cents quarterly capital return is committed to the end of 2027. If the remaining S$2.6 billion of the buyback is not utilised, the board will consider extending the capital return beyond 2027. The S$2.6 billion equates to approximately 91 cents per share, or six additional quarters of the 15 cents capital return. Phillip Securities Research estimates dividends per share of S$3.30 for FY26e and S$3.54 for FY27e. Recommendation & Target Price Phillip Securities Research maintains an ACCUMULATE recommendation on DBS Group Holdings with a lower target price of S$76.00, reduced from the previous S$85.00. The reduction reflects a 4% cut to FY26e earnings estimates, driven by lower NII and trading income forecasts. The valuation assumes a 3.04x FY26e price-to-book value and a 17.5% return on equity estimate, derived from a Gordon Growth Model. DBS remains our top pick among the three Singapore local banks. It holds the highest ROE (FY26e ROE: DBS 17.5%, OCBC 14.3%, UOB 10.7%), and its NIM is rising unlike UOB's (exit NIM: DBS 1.90%, UOB 1.64%). The bank's strategy of holding deposit rates higher has won deposit share for two consecutive quarters, record net new money is building the base for wealth fees, and the estimated FY26e yield of 4.6% exceeds UOB's 4.2%, with the 15 cents capital return committed through end-2027. Frequently Asked Questions [market_journal_faq] This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst. Disclaimer These commentaries are intended for general circulation and do not have regard to the specific investment objectives, financial situation and particular needs of any person. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. You should seek advice from a financial adviser regarding the suitability of any investment product(s) mentioned herein, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of units in any fund and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance. Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries. The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in these commentaries are subject to change, and PSPL shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will PSPL be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages. The companies and their employees mentioned in these commentaries cannot be held liable for any errors, inaccuracies and/or omissions howsoever caused. Any opinion or advice herein is made on a general basis and is subject to change without notice. The information provided in these commentaries may contain optimistic statements regarding future events or future financial performance of countries, markets or companies. You must make your own financial assessment of the relevance, accuracy and adequacy of the information provided in these commentaries. Views and any strategies described in these commentaries may not be suitable for all investors. Opinions expressed herein may differ from the opinions expressed by other units of PSPL or its connected persons and associates. Any reference to or discussion of investment products or commodities in these commentaries is purely for illustrative purposes only and must not be construed as a recommendation, an offer or solicitation for the subscription, purchase or sale of the investment products or commodities mentioned. This advertisement has not been reviewed by the Monetary Authority of Singapore.

Singapore Equities: AI Indigestion Creates Opportunities in Semiconductors and Commodities

Published on Nov 14, 2026 12

Brief Overview Singapore equities endured a difficult month in October 2026. The Straits Times Index pulled back 5.3%, marking the steepest monthly decline since the 17% rout in March 2020. Cyclicals and commodities bore the brunt of the de-risking, alongside retreating banks. Conversely, Jardine Group counters led gainers. The Next50 mid-cap index shed 7%, while REITs proved resilient, easing just 1%. De-risking across AI exposures has weighed on global cyclicals, with a spike in AI equity and debt issuance pushing investors to reduce their exposure and concentration in the sector. Semiconductor stocks corrected 15%, while credit default spreads and borrowing costs rose sharply. Despite this, memory prices and GPU lease rates do not reveal any tapering in infrastructure demand. We remain positive on cyclicals, specifically semiconductors and commodities. Their multiples have de-rated, but earnings growth remains intact. The unwinding of the AI trade has capped interest rates, although the risk of another rate hike in December persists. Banks offer pricing power as interest rates firm up, with volume growth from loan expansion of 13%. Investment Positives AI infrastructure buildout remains firmly on track Hyperscalers remain committed to the buildout of AI infrastructure. Amazon has described AI as a once-in-a-lifetime opportunity. Its data centre capacity is largely sold out in 2027, with a good chunk sold in 2028. The negative free cash flows reported by hyperscalers are a symptom of the cycle: upfront capital expenditure needs to be incurred in building data centres before the revenue streams in. Data centre capital expenditure is expected to spike 45% to around US$1.2 trillion. No sign of demand weakness in underlying indicators Memory prices are still reaching new highs, and GPU lease rates show no sign of obsolescence or tapering. These are critical indicators for infrastructure demand, and both remain robust. We note that the AI adoption cycle is in its infancy, with physical infrastructure still being built out. In our view, it is hard to be an AI train wreck if it is so well telegraphed. Underlying AI demand is tremendous The strength of underlying demand for AI is illustrated by the 11-fold jump in Anthropic's revenue in the first nine months of 2026. Anthropic counts 11,900 substantial enterprise customers. This is still modest compared with the broader market opportunity implied by Salesforce's 150,000 customers, suggesting significant room for further penetration. Semiconductor earnings growth intact Semiconductors plunged 24% in October, but we see this as an opportunity. The earnings recovery only began early this year. Singapore semiconductor companies have an added earnings driver from new programmes as front-end equipment makers widen their supply chains. Hence, our semiconductor picks are Frencken and JEP. Commodities offer value Commodities dropped 20% in Oct, presenting another opportunity. Geo Energy is highlighted as a beneficiary, riding on expanding volumes, firmer prices and lower costs. Banks retain structural strengths While banks face near-term headwinds, wealth management fees are robust and interest income is bottoming. Banks offer pricing power as interest rates firm up, with volume growth from loan expansion of 13%. Historical precedent supports resilience During the dot-com boom (1995 to 2000), the market faced multiple drawdowns, including a 26% contraction over three months in 1998. The Nasdaq is currently approximately 8% below its peak, which suggests that selloffs do occur in bull markets and do not necessarily signal the end of the cycle. Investment Challenges AI de-risking is weighing on cyclicals The spike in AI equity and debt issuance has pushed investors to reduce their exposure and concentration in the sector. Hyperscalers are tapping more than US$400 billion in debt. Credit default spreads have been rising since October 2025, and borrowing costs have increased sharply. This de-risking has weighed heavily on global cyclicals and Singapore equities alike. AI proliferation disrupts parts of the technology ecosystem The proliferation of AI is starting to hurt other parts of the technology ecosystem. AI agents are disintermediating traditional search, while soaring memory prices are dampening PC hardware and software demand. Valuations remain elevated On an earnings yield basis, valuations are expensive. Even after the Oct sell-down, valuations remain above the historical mean. Banks face near-term headwinds Banks are contending with trading losses and the threat of a provisioning cycle in Indonesia. These headwinds may weigh on near-term performance, even as structural positives such as wealth management fees and firming interest income persist. Risk of further rate hikes The unwinding of the AI trade has capped interest rates for now, but the risk remains of another rate hike in December. This could affect market sentiment. Outlook We believe the AI adoption cycle is in its infancy, with physical infrastructure still being built out. Hyperscaler capital expenditure commitments remain strong, and underlying demand indicators such as memory prices and GPU lease rates are holding firm. The correction in Oct has de-rated multiples for cyclicals and commodities, but the earnings growth trajectory remains intact. The broader risk environment includes elevated valuations, rising credit default spreads, and the possibility of further rate hikes. Everything corrected in October except bonds. Across major sectors, all were in the red except REIT-retail. Technology and Indonesia-exposed names suffered the most. However, REITs demonstrated resilience, easing just 1% during the month. Recommendation Phillip Securities Research remains positive on cyclicals, specifically semiconductors and commodities. Our semiconductor picks are Frencken and JEP, based on intact earnings growth and additional earnings drivers from new programmes. Geo Energy is highlighted among commodities for its expanding volumes, firmer prices and lower costs. Banks retain medium-term appeal through pricing power, loan expansion of 13% and robust wealth management fees, even as near-term headwinds from trading losses and Indonesian provisioning risks persist. Frequently Asked Questions [market_journal_faq] This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst. Disclaimer These commentaries are intended for general circulation and do not have regard to the specific investment objectives, financial situation and particular needs of any person. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. You should seek advice from a financial adviser regarding the suitability of any investment product(s) mentioned herein, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of units in any fund and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance. Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries. The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in these commentaries are subject to change, and PSPL shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will PSPL be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages. The companies and their employees mentioned in these commentaries cannot be held liable for any errors, inaccuracies and/or omissions howsoever caused. Any opinion or advice herein is made on a general basis and is subject to change without notice. The information provided in these commentaries may contain optimistic statements regarding future events or future financial performance of countries, markets or companies. You must make your own financial assessment of the relevance, accuracy and adequacy of the information provided in these commentaries. Views and any strategies described in these commentaries may not be suitable for all investors. Opinions expressed herein may differ from the opinions expressed by other units of PSPL or its connected persons and associates. Any reference to or discussion of investment products or commodities in these commentaries is purely for illustrative purposes only and must not be construed as a recommendation, an offer or solicitation for the subscription, purchase or sale of the investment products or commodities mentioned. This advertisement has not been reviewed by the Monetary Authority of Singapore.

Alphabet Inc: Record Cloud Surge Offset by Search Slowdown — Target Price US$375

Published on Nov 12, 2026 33

Brief Overview Alphabet Inc delivered third-quarter 2026 earnings below Phillip Securities Research's expectations. Revenue increased 25 per cent year on year to US$127.6 billion, driven by strong growth in the core advertising and Cloud segments, while adjusted profit after tax and minority (PATMI) interests grew 10 per cent year-on-year to US$33 billion. Nine-month revenue and PATMI reached 72 per cent and 63 per cent respectively of full-year 2026 forecasts, subject to the seasonality of the advertising business. Google Cloud Platform growth was robust, while Search revenue slowed. Free cash flow remained negative at US$9.1 billion due to heavy artificial intelligence investment. Investment Positives Record Cloud Growth The standout development in the quarter was the record performance of the Cloud segment. Revenue surged 103 per cent year –on year to US$30.7 billion, the fastest growth recorded by the segment, compared with 34 per cent growth in the third quarter of 2025. This exceptional acceleration was driven by strong growth in Google Cloud Platform, particularly across infrastructure, platform services, and TPU system sales. Enterprise adoption of Gemini Enterprise remained robust, with model API usage rising to more than four times last year’s level and enterprise spending quadrupling year on year. Cloud operating income tripled year-on-year to US$11.1 billion, with the operating margin expanding by 1,250 basis points to 36.2 per cent, demonstrating significant operating leverage as the segment scales. Enterprise adoption of Gemini Enterprise remained robust, with model API usage rising to more than four times last year’s level and enterprise spending quadrupling year on year. Cloud operating income tripled year-on-year to US$11.1 billion, with the operating margin expanding by 1,250 basis points to 36.2 per cent, demonstrating significant operating leverage as the segment scales. We increased the financial year 2026 Cloud revenue forecast by 9 per cent to reflect accelerating growth in the fourth quarter, driven by initial revenue contributions from TPU systems and the gradual conversion of the sizeable backlog. Wider enterprise adoption of AI solutions is also expected to support incremental demand for compute, database storage and cybersecurity services. Investment Challenges Negative Free Cash Flow Continued Free cash flow was negative for the second consecutive quarter at negative US$9.1 billion, as third-quarter capital expenditure grew at its fastest pace since 2018 to support TPU system build-up. The US$51.4 billion capital expenditure was mostly directed towards servers and networking equipment, at 65 per cent of the total, with data centres accounting for the remaining 35 per cent. Free cash flow was further weighed down by a one-off US$5.2 billion cash payment relating to the European Commission fine issued in 2018, following the conclusion of the appeal process. We forecast negative free cash flow of US$18 billion and US$32 billion in financial years 2026 and 2027 respectively. The elevated cash outflows reflect upfront investment in expanding compute capacity to fulfil secured customer commitments, creating a timing mismatch between cash outflows and revenue realisation rather than signalling weakening demand. With industry-wide compute capacity remaining constrained, sustained AI infrastructure demand is expected to support Google Cloud's growth as additional capacity comes online and is monetised. Slowing Advertising Growth Advertising revenue growth moderated to 11 per cent year on year in the third quarter, reaching US$82 billion, compared with 13 per cent growth in the third quarter of 2025. Search revenue grew 12 per cent year on year to US$63.4 billion, down from 15 per cent in the prior year period, with management attributing the slower growth to lower monetisation of AI Mode despite search query growth reaching its highest level in five years. Strong user engagement was largely driven by AI-powered search, with queries being three times longer than traditional searches. YouTube advertising revenue growth also moderated to 9 per cent year on year to US$11 billion, down from 15 per cent, as foreign exchange headwinds offset continued momentum in brands and living room viewing. Beyond lower monetisation of AI searches, advertising revenue also declined on a quarter-on-quarter basis, partly reflecting weaker spending from APAC advertisers following the removal of the EU de minimis exemption and the normalisation of advertising spend following the FIFA World Cup. To capture monetisation opportunities from AI Mode, the company announced the expansion of advertisements into international markets and launched multi-turn advertisements in the United States. We reduced financial year 2026 and 2027 Search revenue forecasts by 1 per cent, now expecting the segment to grow 14 per cent and 11 per cent respectively. While the plan to expand advertisements on AI Mode is viewed positively as it could unlock additional monetisation by improving revenue per query, near-term margin headwinds are expected from higher compute costs associated with AI-powered Search compared to traditional Search. However, margins are expected to gradually recover as inference efficiency improves, with AI Mode response costs reaching the lowest level since launch in the second quarter of 2026. We also remain cautious about user retention, as users could increasingly shift towards competing AI search platforms and chatbots. Outlook The outlook is shaped by the tension between exceptional Cloud momentum and moderating advertising growth. Cloud revenue growth is expected to accelerate further in the fourth quarter, supported by TPU system contributions and backlog conversion, while wider enterprise AI adoption should drive incremental demand. However, Search and advertising face near-term headwinds from lower AI Mode monetisation and higher compute costs, though margins should gradually recover as inference efficiency improves. Free cash flow is expected to remain negative through financial year 2027 as the company continues to invest heavily in AI infrastructure, but we view this as a timing mismatch rather than a sign of weakening demand. Recommendation and Target Price Phillip Securities Research maintains its BUY recommendation on Alphabet Inc but has lowered the DCF-based target price to US$375, from the previous US$425. Financial year 2026 and 2027 PATMI estimates have been reduced by 10 per cent and 11 per cent respectively to reflect higher costs. The lower target price reflects the earnings revision, while the maintained BUY rating reflects confidence in the long-term AI growth trajectory and the substantial Cloud backlog providing revenue visibility. Frequently Asked Questions [market_journal_faq] This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst. Disclaimer These commentaries are intended for general circulation and do not have regard to the specific investment objectives, financial situation and particular needs of any person. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. 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Keppel Ltd: Asset Management Franchise Gains Momentum — Target Price S$13.80

Published on Nov 12, 2026 18

Brief Overview Keppel Ltd's key financial disclosures for the third quarter of 2026 showed nine-month net profit growing more than 20 per cent year on year, building on the 25 per cent growth recorded in the first half. Nine-month recurring income rose at a slower pace of more than 10 per cent year on year, compared with 13 per cent in the first half. The integrated power business saw nine-month EBITDA grow a disappointingly weaker 7 per cent year-on-year, as maintenance work on a turbine at Keppel Merlimau offset maiden earnings from the Keppel Sakra Cogen power plant. Investment Positives Accelerating Asset Management Growth The standout development in the quarter was the sharp acceleration in asset management fees, which spiked 48 per cent year-on-year to S$154 million in the third quarter. These fees were underpinned by robust new funds under management (FUM), which jumped to S$19.5 billion year-to-date in 2026, compared with just S$6.7 billion in the corresponding period of 2025. Approximately S$6 billion of new FUM was raised in the third quarter alone. The outlook for fees remains strong, with S$23 billion worth of deals in the pipeline. The asset management franchise is gaining meaningful traction by broadening its investor base to include sovereign wealth funds with much larger fund commitments. Investor breadth and the size of individual commitments have been rising, reinforcing the sustainability of the fundraising momentum. The group's target to double FUM to S$200 billion by 2030 remains unchanged, implying a compound annual growth rate of approximately 15 per cent. Monetisation Pipeline on Track Keppel is on course to realise at least S$1.5 billion of assets this year. Assets monetised and realised rose by S$380 million in the third quarter to S$940 million, driven by the S$343 million sale of a 40 per cent stake in Empire City in Vietnam. Beyond the current year, the monetisation pipeline remains substantial. A further S$611 million will be recognised in the second quarter of 2027 from the 51 per cent sale of Keppel South Central to Keppel REIT. Additional assets in the pipeline include the remaining 49 per cent of Keppel South Central, valued at approximately S$1 billion; a 50 per cent stake in Rigco's six operational rigs, valued at approximately S$600 million; and M1, valued at approximately S$1.2 billion. Together, these pipeline assets are equivalent to 16 to 24 cents of special dividend, representing a meaningful potential catalyst for shareholder returns. Investment Challenges Weaker Than Expected Power EBITDA Despite the commercialisation of the 600-megawatt Keppel Sakra Cogen power plant in May 2026, EBITDA from the integrated power business has slowed in the third quarter. Planned major maintenance on one of the four F-Class turbine units at Keppel Merlimau was a key contributor to the shortfall. This resulted in nine-month EBITDA growth of just 7 per cent year on year, down from 9 per cent in the first half. Infrastructure earnings face further downside risk from planned maintenance activities. Non-Core Portfolio Drag The non-core portfolio remains a drag on overall profitability. Overall net profit for the nine months fell 40 per cent year on year, driven by a 4 per cent reduction in the gross asset value of non-core assets remaining on the books. This decline stemmed from impairments, depreciation, operating costs and holding costs associated with these legacy assets. Outlook The asset management business is maintaining its fundraising momentum and building a stronger foundation of recurrent income. The franchise is broadening its investor base and securing larger commitments, which bodes well for the medium-term trajectory of management fees. On the infrastructure side, the near-term outlook is mixed. Planned maintenance work on turbine units will dampen earnings in the short term. However, improving electricity spreads — driven by liquefied natural gas shortages and strong mobility and industrial demand — are expected to provide upside to earnings in the fourth quarter of 2026. The monetisation pipeline remains a key feature of the investment case, with approximately S$2.8 billion of assets still to be realised, offering the potential for further special dividends. Recommendation & Target Price Phillip Securities Research maintains its BUY recommendation on Keppel Ltd with an unchanged target price of S$13.80. The financial year 2026 estimated adjusted profit after tax and minority interests is also unchanged. The analyst highlights the continued strengthening of the asset management franchise and the substantial monetisation pipeline as key supports for the investment case, while acknowledging near-term headwinds from power segment maintenance and the non-core portfolio drag. Frequently Asked Questions [market_journal_faq] This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst. Disclaimer These commentaries are intended for general circulation and do not have regard to the specific investment objectives, financial situation and particular needs of any person. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. You should seek advice from a financial adviser regarding the suitability of any investment product(s) mentioned herein, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products. Opinions expressed in these commentaries are subject to change without notice. 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Lendlease REIT: Retail Resilience Drives Performance as Target Price Lowered to S$0.73

Published on Nov 12, 2026 5

Brief Overview Phillip Securities Research has issued an update on Lendlease REIT (LREIT), maintaining a BUY recommendation while lowering the target price to S$0.73, down from S$0.77. Limited financials were provided this quarter. Retail rental reversion was strong at 10%, driven mainly by PLQ Mall and 313 Somerset, while Jem's retail reversion was slightly weaker. Tenant sales rose 8.1% year on year (excluding PLQ Mall), with gold and jewellery, beauty and wellness, and sports and athletics performing particularly well. PLQ Mall's asset enhancement initiative (AEI) is progressing across two floors, on track for completion by end-2026. Uniqlo and Footlocker's space at Level 2 has been split into five units, of which two are signed — one by a new-to-market tenant — while three remain in leasing. The cost of equity has been increased by 25 basis points to reflect a higher interest-rate environment. LREIT is trading at a FY27e price to net asset value ratio (P/NAV) of 0.81x with a dividend yield of approximately 7.14%. Investment Positives Strong Operational Performance LREIT's portfolio demonstrated robust operational metrics during the quarter. Portfolio retail rental reversion stood at 10%, compared with 11.7% in FY26, indicating sustained pricing power across its Singapore malls. Retail portfolio occupancy remained strong at 98.2%, with a marginal dip of 0.3 percentage points quarter on quarter attributed to PLQ Mall reconfiguration works rather than any fundamental weakening in demand. Tenant sales and visitation increased 8.1% and 6.7% year on year respectively, excluding PLQ Mall. When PLQ Mall is included, the increases were even more pronounced at 45.5% and 27.4% year-on-year. Footfall was bolstered by several catalysts: the reopening of Jem's cinema, a heavy events and promotions calendar at 313@somerset, and National Day-related events near PLQ Mall. Tenant retention was healthy at 87%, and notably, the tenants that replaced outgoing ones over the past year are outperforming their predecessors. Strong Capital Management The REIT's capital management continued to improve. The cost of debt fell to 2.5%, down from 2.75% during FY26, driven mainly by PLQ Mall loans that were refinanced at a lower borrowing cost. Gearing declined from 38.9% to 38.7% as gross borrowings fell 1.5% quarter on quarter to S$1,679 million. Liquidity remains ample, with S$383 million of undrawn committed facilities available. S$300 million of facilities, of which S$200 million is drawn, mature in April 2027 and will be refinanced at that time. Investment Challenges Slow Leasing Progress with Milan Building 3 The key negative identified in the report relates to the Milan Sky Complex Building 3, which is only 51% occupied. The building did not see any leasing progress during the quarter, despite floors being subdivided into smaller units. While agents have received the reconfigured space well, this interest has yet to convert into signed leases. Management described the past six to nine months as among the softest periods on record for Milan leasing. Improved occupancy is needed before a divestment of the asset can be pursued at attractive valuations. Additionally, management flagged aggressive low-cost Chinese e-commerce platforms as a new threat to multi-product stores, including those selling blind boxes and generic accessories, across its malls. Some established food and beverage brands have also been outcompeted by new entrants and mainland Chinese operators. Outlook The reconfiguration of 16,000 square feet of space at PLQ Mall is on track to be completed by the end of 2026. Grange House, adjacent to 313@somerset, is expected to be operationally ready by mid-2027, with rent commencing towards end of 2026 or early 2027. While Grange House represents less than 1% of portfolio income, the primary benefit will be the halo effect of a 3,000-person capacity Live Nation venue on 313@somerset footfall, enlarging the combined net lettable area to approximately 330,000 square feet in the Somerset precinct. Rent-free periods on the 51% leased portion of Building 3 should roll off, contributing income over FY27. Management is not pursuing acquisitions in the near term, with the Jem divestment gain held in reserve and larger Jem AEIs now feasible. Future performance depends on three key factors: the PLQ AEI completing on schedule across Levels 1 and 2, the successful divestment and capital recycling of Sky Complex Building 3, and Singapore retail reversions continuing at a strong pace. Recommendation & Target Price Phillip Securities Research maintains a BUY recommendation on Lendlease REIT. The DDM-based target price has been lowered to S$0.73, from the previous S$0.77, reflecting a 25-basis-point increase in the cost of equity to account for a higher interest-rate environment. Frequently Asked Questions [market_journal_faq] This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst. Disclaimer These commentaries are intended for general circulation and do not have regard to the specific investment objectives, financial situation and particular needs of any person. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. You should seek advice from a financial adviser regarding the suitability of any investment product(s) mentioned herein, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of units in any fund and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance. Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries. The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in these commentaries are subject to change, and PSPL shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. 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Microsoft Corp: Cloud Momentum Builds but Capital Intensity Weighs — Target Price US$515

Published on Nov 12, 2026 9

Brief Overview Microsoft Corp delivered first-quarter results for financial year 2027 in line with expectations, with revenue and profit after tax and minority interests both meeting 24 per cent of Phillip Securities Research's full-year 2027 forecasts. Revenue grew 19 per cent year on year, led by Cloud Azure growth of 48 per cent year on year. The analyst maintains a financial year 2027 revenue growth forecast of 17 per cent, with Azure expected to accelerate further to 49 to 50 per cent constant-currency growth in the second quarter. Capital expenditure is expected to accelerate in the second half of financial year 2027, driven by CPUs, higher memory and storage costs, and delayed third-party GPU capacity. Investment Positives Strongest Cloud Azure Growth in Five Years Microsoft Cloud Azure grew 48 per cent year on year in the first quarter of financial year 2027, its strongest growth rate in five years, with further acceleration to 49 to 50 per cent expected in the second quarter. The company added 24 new data centres during the quarter, bringing the total to 488 as of the fourth quarter of financial year 2026. Importantly, higher growth was not solely driven by new capacity but also came from existing infrastructure. Three key drivers underpinned this performance. First, GPU efficiency gains allowed existing GPUs to process more artificial intelligence workloads through better software and lower GPU idle time, without proportionally increasing hardware spending. Second, Microsoft allocated additional capacity to highest-value demand — specifically Foundry, the platform that developers use to build, deploy and manage AI applications and models — making more AI model capacity available to customers and driving higher token consumption. Third, higher-than-expected token pricing acted as an average revenue per user lever, as customers consumed higher-quality models for more complex reasoning tasks. This combination of efficiency improvements, capacity prioritisation and pricing power paints a picture of a cloud business that is generating incremental revenue from both new and existing infrastructure. Returns Improving Despite Enormous Capital Expenditure Microsoft Cloud revenue grew strongly by 30 per cent year on year to US$63.9 billion in the first quarter, comprising Azure and cloud-delivered services including M365 Commercial, Copilot, GitHub Cloud and others. Cloud revenue covered 1.4 times quarterly capital expenditure of US$45.2 billion, broadly flat year-on-year. Margins held up well despite continued AI infrastructure investment. Operating margin reached 50 per cent, up from 49 per cent in the first quarter of financial year 2026. Adjusted net margin, excluding the OpenAI investment impact, remained resilient at 39.4 per cent, up from 38.0 per cent in the second quarter of financial year 2026 and broadly comparable with 39.7 per cent a year ago. This suggests the infrastructure ramp has yet to materially dilute underlying profitability. Adjusted earnings per share grew strongly at 18 per cent year-on-year to US$4.89. Investment Challenges Weakening Windows OEM and Devices Segment The Devices and Consumer revenue segment declined 3 per cent year on year, with Windows OEM and Devices revenue underperforming significantly, falling 22 per cent year on year. This segment covers the licensing of Windows to PC manufacturers that pre-install it on their devices. Three factors contributed to the decline. First, OEMs and channel partners drew down elevated inventory levels following the previous quarter's inventory build-up. Second, weaker PC demand persisted amid rising memory costs and device prices, discouraging purchases. Third, the comparison base was tougher owing to the prior year's boost from the Windows 10 end-of-support cycle. The outlook has worsened, with Windows OEM and Devices expected to decline in the mid-30s percentage range in the second quarter of financial year 2027 as these factors persist. Rising Capital Intensity and Financing Cost Risks While liquidity remains sufficient with US$64.5 billion in cash and equivalents and positive free cash flow, capital intensity is rising. Capital expenditure reached 78 per cent of operating cash flow of US$58 billion in the first quarter. Depreciation and amortisation intensity rose to 12.7 per cent, up from 11.6 per cent in financial year 2026 and 12.1 per cent in financial year 2025. Notably, 75 per cent of the US$45.2 billion capital expenditure was directed to shorter-lived CPUs and GPUs, raising both depreciation charges and future replacement needs. Microsoft also added US$7.4 billion of finance leases and is reportedly seeking at least US$25 billion in bonds. Higher fixed costs from leases and debt make returns on AI infrastructure more dependent on sustained utilisation and monetisation. Outlook The analyst maintains a financial year 2027 group revenue growth forecast of 17 per cent. Azure is expected to grow 49 to 50 per cent in constant-currency terms in the second quarter, supported by OpenAI backlog conversion, strong enterprise AI adoption and global capacity expansion. Demand continues to outpace supply. M365 Commercial Cloud growth should remain supported by stronger monetisation of premium SKUs including Copilot, E5 and E7, alongside increased usage-based offerings. The PC hardware business is expected to remain weak owing to elevated inventory levels and weaker PC demand. Capital expenditure is expected to accelerate in the second half of financial year 2027, driven primarily by CPUs, including higher memory and storage costs, and delayed delivery of leased third-party GPU-as-a-service. Recommendation and Target Price Phillip Securities Research maintains its NEUTRAL recommendation on Microsoft Corp with an unchanged DCF-based target price of US$515. Financial year 2027 forecasts are also unchanged. The analyst notes that returns are improving despite elevated capital expenditure, with Cloud revenue growing 30 per cent year on year and operating margin at 50 per cent. However, capital intensity remains high, with 75 per cent of capital expenditure directed to shorter-lived CPUs and GPUs and depreciation intensity rising. Higher lease and debt funding may also raise fixed costs, tempering returns on AI infrastructure despite strong growth. Frequently Asked Questions [market_journal_faq] This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst. Disclaimer These commentaries are intended for general circulation and do not have regard to the specific investment objectives, financial situation and particular needs of any person. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. You should seek advice from a financial adviser regarding the suitability of any investment product(s) mentioned herein, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of units in any fund and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance. Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries. The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in these commentaries are subject to change, and PSPL shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will PSPL be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages. The companies and their employees mentioned in these commentaries cannot be held liable for any errors, inaccuracies and/or omissions howsoever caused. Any opinion or advice herein is made on a general basis and is subject to change without notice. The information provided in these commentaries may contain optimistic statements regarding future events or future financial performance of countries, markets or companies. 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NetLink NBN Trust Maintains Steady Cash Flow Despite Rising Costs, Target Price Raised to S$0.96

Published on Nov 12, 2026 8

Company Overview NetLink NBN Trust delivered a steady but unspectacular set of first-half results for the financial year ending 2027. Revenue and earnings before interest, taxes, depreciation and amortisation (EBITDA) came in within expectations, reaching 49 per cent and 50 per cent, respectively, of Phillip Securities Research's full-year forecasts. First-half EBITDA edged up 0.8 per cent to S$144.6 million, while distribution per unit (DPU) rose 1.1 per cent year on year to 2.74 cents. Revenue for the period was S$200.3 million, marginally higher than the S$199.9 million recorded in the prior corresponding half. Net profit, however, slipped 2.3 per cent to S$41.2 million. The improvement in other operating costs was attributable to the absence of a S$1.3 million write-off seen in the prior year and the reversal of an over-accrual of maintenance costs, the amount of which was not disclosed. Residential fibre connections are recovering following operators' exercise of removing inactive connections. Investment Positives Fully hedged interest rate exposure The standout positive in the our assessment is NetLink's proactive management of its debt costs. The trust has fixed or hedged all S$991 million borrowings at an interest rate of approximately 2.4 per cent, with an average debt maturity of 4.4 years. This is a significant improvement from the position as recently as March, when only 48 per cent of borrowings were at a fixed rate. In a rising interest rate environment, this hedging strategy provides considerable certainty over finance costs for the medium term and underpins the stability of cash flows available for distribution to unitholders. NetLink's distribution yield of 5.8 per cent is supported by these stable cash flows and the fully hedged financing structure. For income-focused investors, the predictability of finance costs at 2.4 per cent offers a degree of comfort, particularly given the volatility in interest rate markets. Investment Challenges Slow recovery in residential connections The key concern highlighted by the us is the pace of recovery in residential fibre connections. Following a contraction of approximately 6,000 connections in FY26 — driven by operators removing inactive connections — the net additions have turned positive. However, the annualised pace of recovery at roughly 10,000 connections is materially below Phillip Securities Research's forecast of 20,000 connections. This shortfall suggests that the structural demand recovery may take longer than initially anticipated, potentially constraining revenue growth from the residential segment. Rising cost pressures on EBITDA margins We expect EBITDA margins to remain under pressure from multiple fronts. The completion of the Seletar central office has led to higher staff and maintenance costs. Additionally, NetLink's new IT system incurs more in operating expenditure than in capital expenditure, adding a recurring cost burden. Together, these factors — IT costs, staff costs, and maintenance expenses — are expected to weigh on margins and limit EBITDA growth going forward. Lack of DPU growth diminishes yield appeal Perhaps the most significant challenge for NetLink is the absence of meaningful DPU growth. While the 5.8 per cent distribution yield is reasonable in absolute terms, the lack of growth in distributions makes it less compelling in an environment of rising inflation and interest rates. Income investors who can access alternative yield instruments with better growth prospects may find NetLink's static yield profile less attractive.lack of growth in distributions makes it less compelling in an environment of rising inflation and interest rates. Income investors who can access alternative yield instruments with better growth prospects may find NetLink's static yield profile less attractive. Outlook Our outlook for NetLink is cautious. EBITDA margins are expected to remain under pressure as the cost increases from the Seletar central office, the new IT system, and general staffing expenses continue to flow through. The absence of EBITDA and DPU growth means that distribution yield is likely to remain static, which reduces the trust's attractiveness in an inflationary and rising-interest-rate environment. While the fully hedged borrowing structure provides stability on the finance cost front, this alone may not be sufficient to drive re-rating or deliver the kind of total returns that investors are seeking in the current climate. Recommendation and Target Price Phillip Securities Research maintains a NEUTRAL recommendation on NetLink NBN Trust with an unchanged target price of S$0.96. The current unit price stands at S$0.94, implying modest upside to the target. The recommendation reflects the trust's stable but unexciting fundamentals — supported by fully hedged borrowings and a stable distribution yield of 5.8 per cent, but tempered by cost pressures, slow residential connection recovery, and the absence of meaningful DPU growth. There is no change to the FY27 forecast, recommendation, or target price. Frequently Asked Questions [market_journal_faq] This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst. Disclaimer These commentaries are intended for general circulation and do not have regard to the specific investment objectives, financial situation and particular needs of any person. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any person acting based on this information. You should seek advice from a financial adviser regarding the suitability of any investment product(s) mentioned herein, taking into account your specific investment objectives, financial situation or particular needs, before making a commitment to invest in such products. Opinions expressed in these commentaries are subject to change without notice. Investments are subject to investment risks including the possible loss of the principal amount invested. The value of units in any fund and the income from them may fall as well as rise. Past performance figures as well as any projection or forecast used in these commentaries are not necessarily indicative of future or likely performance. Phillip Securities Pte Ltd (PSPL), its directors, connected persons or employees may from time to time have an interest in the financial instruments mentioned in these commentaries. The information contained in these commentaries has been obtained from public sources which PSPL has no reason to believe are unreliable and any analysis, forecasts, projections, expectations and opinions (collectively the “Research”) contained in these commentaries are based on such information and are expressions of belief only. PSPL has not verified this information and no representation or warranty, express or implied, is made that such information or Research is accurate, complete or verified or should be relied upon as such. Any such information or Research contained in these commentaries are subject to change, and PSPL shall not have any responsibility to maintain the information or Research made available or to supply any corrections, updates or releases in connection therewith. In no event will PSPL be liable for any special, indirect, incidental or consequential damages which may be incurred from the use of the information or Research made available, even if it has been advised of the possibility of such damages. The companies and their employees mentioned in these commentaries cannot be held liable for any errors, inaccuracies and/or omissions howsoever caused. Any opinion or advice herein is made on a general basis and is subject to change without notice. The information provided in these commentaries may contain optimistic statements regarding future events or future financial performance of countries, markets or companies. You must make your own financial assessment of the relevance, accuracy and adequacy of the information provided in these commentaries. Views and any strategies described in these commentaries may not be suitable for all investors. Opinions expressed herein may differ from the opinions expressed by other units of PSPL or its connected persons and associates. Any reference to or discussion of investment products or commodities in these commentaries is purely for illustrative purposes only and must not be construed as a recommendation, an offer or solicitation for the subscription, purchase or sale of the investment products or commodities mentioned. This advertisement has not been reviewed by the Monetary Authority of Singapore.

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