DAILY MORNING NOTE | 1 August 2022

WALL Street stocks finished a strong week on a positive note Friday (Jul 29), extending its rally to 3 days behind strong gains from Amazon, ExxonMobil and other giants following earnings results.Investors shrugged off the latest indicator of persistent inflation, as Commerce Department data showed the personal consumption expenditures price index jumped 1.0 per cent in June compared to May, outpacing personal income gains, which rose just 0.6 per cent. But stocks continued to push higher, rising again after the Federal Reserve’s second straight 75 basis point increase and negative GDP data suggesting a heightened risk of a US recession. The broad-based S&P 500 finished at 4,130.29, up 1.4 per cent for the day and 4.3 per cent for the week. The Dow Jones Industrial Average climbed 1.0 per cent to 32,845.13, while the tech-rich Nasdaq Composite Index jumped 1.9 per cent to 12,390.69.

SG

CREDIT Bureau Asia (CBA), which runs the largest consumer credit bureau in Singapore, is eager for the local digital banks to finally launch. CBA’s growth is linked to the growth of its member network. The inclusion of a new financial institution in Credit Bureau (Singapore)’s (CBS) platform has a ripple effect, amplifying the data pool for all members while creating more revenue opportunities for the group. CBS’ fees are based on how many reports it generates for its customers (the banks), whether each report comes with a score, the size of the portfolio the customer is monitoring, and the number of triggers or alerts sent out. When an individual signs up for a new credit card or loan with a digital bank, the bank uses CBS’ platform to generate a credit report. But it is not only the digital banks that will generate these reports. If the consumer has existing relationships with other banks, CBS’ monitoring system alerts them to the consumer’s increased credit exposure. The banks might decide to review that customer’s status, prompting them to pull reports of their own.

In the current earnings season to-date, 23 S-Reits and property trusts have released their financial results or business updates for period ending Jun 30. Another 15 trusts are expected to announce between Aug 1 to Aug 12.Last week, 14 S-Reits and property trusts unveiled half year or first quarter financial results ending Jun 30 while another 4 released quarterly business updates. Starhill Global Reit (SGReit) also announced its full year earnings last week. SGReit reported full year net property income (NPI) of S$144.7 million, increasing 7.4 per cent from last year. As a result, income available for distribution grew 1.8 per cent on a full year basis to S$89.8 million. The Reit manager will retain S$1.9 million of the H2 FY21/22 income available for distribution for working capital requirements.The Reit manager noted that its Singapore portfolio, comprising interests in Wisma Atria and Ngee Ann City, continue to contribute the bulk of total revenue at 59.9 per cent of total revenue in H2 FY21/22. During the period, Wisma Atria and Ngee Ann City saw significant improvements in tenant sales and shopper traffic with the arrival of international tourists, as well as increased domestic consumption following the relaxation of Covid-19 safe management measures.

The manager of First Reit on Friday (Jul 29) reported a 1.5 per cent increase in its distribution per unit (DPU) for first half of 2022, boosted in part by income from newly acquired nursing homes in Japan.DPU was 1.32 cents for the six months ended Jun 30, compared with 1.30 cents in the same period last year, the interim financial statements of the real estate investment trust (Reit) indicated. Net property and other income in H1 jumped 40.2 per cent year on year to S$52.7 million, while its distributable amount rose 20.9 per cent year on year to S$25.3 million.Its manager said this was due to new income contribution from the 12 nursing homes in Japan acquired on Mar 1 as well as from the restructured master-lease agreements for 14 Indonesia hospitals, the manager said.

US

The US dollar dropped to a 3-week low in choppy trading on Friday (Jul 29), as investor concerns about recession outweighed inflation worries, for now, amid a mixed batch of economic data. There was also a lot of month-end position-squaring, analysts said.Earlier, US economic numbers showed that inflation continued its red-hot rise in June, keeping the Federal Reserve on track to raise interest rates as aggressively as it deems necessary.The personal consumption expenditures (PCE) price index jumped 1 per cent last month, the largest increase since September 2005 and followed a 0.6 per cent gain in May. In the 12 months through June, the PCE price index advanced 6.8 per cent, the biggest gain since January 1982. Excluding the volatile food and energy components, the PCE price index shot up 0.6 per cent after climbing 0.3 per cent in May.The dollar initially rose on the inflation numbers, but gains fizzled amid the final University of Michigan report showing consumers’ inflation expectations slipped in July.

OPEC’S new secretary general said that Russia’s membership in Opec+ is vital for the success of the agreement, Kuwait’s Alrai newspaper reported on Sunday, quoting an exclusive interview with Haitham al-Ghais. He said Opec is not in competition with Russia, calling it “a big, main and highly influential player in the world energy map”, Alrai reported. Opec+ is an alliance of the Organization of the Petroleum Exporting Countries (Opec) and allies led by Russia. Al-Ghais, Kuwait’s former Opec governor, will head his first Opec+ meeting on Aug 3, in which the group will consider keeping oil output unchanged for September, despite calls from the United States for more supply, although a modest output increase is also likely to be discussed, eight sources told Reuters last week.AL-Ghais told Alrai that “Opec doesn’t control oil prices, but it practices what is called tuning the markets in terms of supply and demand,” describing the current state of the oil market as “very volatile and turbulent.”He added of the recent hikes in oil prices, “As for me, I still stress that the recent rise in oil prices is not only related to the developments between Russia and Ukraine.“

A HONG Kong politician has urged HSBC to spin off its Asia business and appoint representatives of Chinese insurer Ping An to its board, as the global lender prepares to meet with Hong Kong shareholders this week. Ping An Insurance Group Co of China Ltd, the bank’s biggest shareholder, called on London-headquartered HSBC in April to explore strategic options such as spinning off its mainstay Asian business to unlock greater shareholder value. Since then, the proposal has won support from some retail investors in Hong Kong who were disgruntled with dual-listed HSBC’s decision to cancel its dividend payment in 2020. “We would suggest separate out its (HSBC) Asian Business for HSBC. Bringing back primary listing in Hong Kong is the best way to protect interest for minority shareholders,” Christine Fong, a district council member in Hong Kong, said in a Facebook post on Sunday (Jul 31). “We suffered the 2020 cancel dividend lesson, that’s why we strongly support Ping An should take seats in director board of HSBC,” she said. HSBC derived about 65 per cent of its reported profit before tax in 2021 from Asia, with Hong Kong its biggest market.

Source: SGX Masnet, The Business Times, Bloomberg, Channel NewsAsia, Reuters, CNBC, PSR

RESEARCH REPORTS

Keppel Corporation – Another step toward transformation into an asset light recurring income business model

Recommendation: BUY (Maintained), Last Done: S$6.88

Target price: S$8.95, Analyst: Terence Chua

• 1H22 net profit below expectations, at 43% of FY22e profit but interim dividend of 15 cents exceeds expectations. Net profit of $498mn (+66% YoY) was slightly under our expectations as Urban Development dragged due to headwinds from China’s property market.

• $710mn of assets monetised YTD, on-track to hit $5bn target by end-2023. However, we expect that the Group will cross the $5bn mark by 1Q23 should the proposed O&M transactions are completed on schedule in 4Q22.

• We welcome the bolder statements made on Keppel Land’s transformation to be asset-light. We believe this will not only crystalise the value of its landbank, but it will also allow the Group to re-invest the proceeds into new growth areas and share some of the gains with shareholders through dividends.

• Maintain BUY with higher SOTP TP of $8.95 (prev.$7.07). We revised our valuation on Keppel O&M (KOM) and Keppel Land after greater clarity on its monetisation path. We valued the Group based on the four new segments unveiled during Vision 2030 to better reflect the Group’s reporting segments going forward. Our TP translates to about 1.2x FY22e book value, a slight premium to its historical average as the Group’s transformation plans gain traction and ROE rises to 8.8%. Catalysts expected from approvals obtained for the transaction.

Sheng Siong Group Ltd – Sales normalising, but with exceptional margins

Recommendation: BUY (Maintained); TP S$1.86, Last close: S$1.60; Analyst Paul Chew

• 1H22 PATMI beat expectations at 59% of our FY22 forecast. Gross margins surprised on the upside, a record 30.2% in 2Q22 (2Q21: 28.8%).

• Revenue is beginning to contract with the relaxation of social and work restrictions. Grocery demand will soften with less home dining post-pandemic. A 5% net increase in store footprint will be supportive of revenue in 2H22.

• We are lifting our FY22e earnings by 6%, from higher gross margins. Our BUY recommendation is maintained. The target price is lifted from S$1.75 to S$1.86, due to higher earnings. Valuation is pegged to 23x PE, a 10% discount to the 5-year historical average of 25x PE. We expect revenue to normalise in FY22e/FY23e, placing downward pressure on growth. New store openings of three to five per year, rising market share and improving gross margins will help stem part of the earnings decline.

United Overseas Bank Limited – Boosted by higher net interest income

Recommendation: Buy (Maintained), Last done: S$27.55

TP: S$35.70, Analyst: Glenn Thum

• 2Q22 earnings of S$1,113mn were in line with our estimates due to higher net interest margin and healthy net interest income growth. 1H22 PATMI is 43% of our FY22e forecast.

• NII was up 18% YoY from a NIM increase of 11bps YoY to 1.67% and loan growth of 8% YoY. Fee income fell 1% QoQ while other non-interest income was up 170% QoQ. Management is guiding single-digit loan growth with higher NIMs, stable cost-to-income ratio and slightly higher provisions.

• UOB has guided NIM to expand at 9bps each quarter and to reach 1.90% by the end of 2022. We estimate 2H22 NII to jump 7% YoY.

• Maintain BUY with an unchanged target price of S$35.70. Our FY22e estimates remain unchanged. We assume 1.46x FY22e P/BV and ROE estimate of 11.5% in our GGM valuation. There is upside to our estimates from further GP write-backs and higher NIMs. Every 25bps rise in interest rates can raise NIM by 0.04% and PATMI by 4.3%.

Meta Platforms Inc – Reels drives positive user growth

Recommendation : BUY (Maintained); TP: US$221.00, Last Close: US$159.10

Analyst: Jonathan Woo

• 2Q22 revenue in line with expectations, with earnings missing target slightly. 1H22 revenue/PATMI at 43/42% of our FY22e forecasts.

• Reels driving positive user growth across all metrics for 2Q22, with 15% YoY increase in ad impressions. Business messaging potential additional revenue driver because of its growing popularity amongst SME business owners.

• Soft revenue guidance for 3Q22 from slowing advertising demand and 600 basis points YoY revenue headwind from strengthening US dollar.

• We lower our FY22e revenue/PATMI forecast by 5/10% to account for slower revenue growth, slightly higher-than-expected R&D expenses, and increasing FX headwinds. We maintain a BUY recommendation with a lowered DCF target price of US$221.00 (prev. US$231.00).

Microsoft Corp – Azure deals supporting growth

Recommendation: BUY (Maintained); TP: US$332.00

Analyst: Ambrish Shah

• 4Q22 results were in line with expectations. FY22 revenue/PATMI was at 99% of our forecasts. Total revenue grew 12% YoY to US$51.9bn in 4Q22, mainly due to Productivity and Business Processes and Intelligent Cloud revenues. PATMI was only up 2% YoY as margins contracted due to investments in cloud engineering and FX headwinds (4% of 4Q22 PATMI).

• Azure revenue grew 46% YoY in constant currency in 4Q22 driven by continued demand for cloud computing. Office 365 Commercial revenue grew 19% YoY due to higher volumes and prices.

• We maintain a BUY recommendation with a lower DCF target price of US$332 (WACC 7.1%, g 4%), down from US$338. This is mainly because we reduced our FY23e revenue/PATMI by 3%/4% to account for headwinds from a stronger USD and slowing sales of PCs. Overall, we believe that Microsoft will be a long-term beneficiary of continued shift to the cloud, businesses reopening, cybersecurity upgrades, and price increases at renewals.