DAILY MORNING NOTE | 1 November 2022

Singapore shares began the week on an encouraging note, taking the cue from Wall Street’s rally last Friday (Oct 28) and optimism across most key bourses in the region. Investors shrugged off weak manufacturing data out of China and looked ahead to the US Federal Reserve meeting this week. The Straits Times Index (STI) rose 33.92 points or 1.1 per cent to 3,093.11 to log its fifth consecutive gain. Most other key bourses in the region – from Japan, South Korea, Taiwan, Australia to Malaysia – finished higher, while China and Hong Kong bucked the trend. On the local bourse, some 1.82 billion securities worth S$1.68 billion were traded. Gainers outpaced losers, with 292 counters up and 247 down. Gains were led by the three banks, with UOB posting the biggest jump, buoyed by record-high third-quarter earnings released last week. Raffles Medical Group issued its Q3 report card on Monday, showing a 62.1 per cent year-on-year increase in net profit to S$38.3 million on the back of a nearly 7 per cent rise in revenue to S$199.5 million a year ago. The counter rose S$0.06 or 4.7 per cent to S$1.33. Wilmar International last Friday reported a 35 per cent jump in Q3 net profit to US$766 million from a year ago, while revenue rose 10 per cent to US$19 billion, owing to better sales across the group’s feed and industrial products, as well as food products businesses. The counter closed S$0.28 or 7.8 per cent higher at S$3.88.

Wall Street stocks fell Monday (Oct 31), snapping the Dow’s winning streak, following disappointing Chinese and European data as markets look ahead to a key US Federal Reserve decision. China’s purchasing managers’ index, a key gauge of manufacturing, fell to 49.2 in October, below the 50-point mark separating growth from contraction due to Covid-19 restrictions. Meanwhile, Eurozone economic growth fell to 0.2 per cent in the third quarter, as inflation hit another record high on the back of soaring energy prices. Ending six straight days of gains, the Dow Jones Industrial Average finished down 0.4 per cent at 32,732.95. The broad-based S&P 500 shed 0.8 per cent to 3,871.98, while the tech-rich Nasdaq Composite Index fell 1.0 per cent to 10,988.15. Markets are looking ahead to this week’s Fed meeting. Investors are expecting the US central bank to again undertake a 0.75 percentage point interest rate hike in its latest move to combat inflation. But there will be much focus on the tone from Fed chair Jerome Powell at a news conference Wednesday following the policy announcement. Hopes that the Fed could soon moderate its stance in light of weakening economic data have lifted stocks in recent weeks. The agenda also includes October jobs data and reports on the manufacturing and services sectors.

Top gainers & losers



Raffles Medical reported a 62.1 per cent year-on-year increase in net profit to S$38.3 million in Q3, from the S$23.6 million posted in the same period last year. Its revenue also rose 6.5 per cent year on year to S$199.5 million, from S$187.3 million in Q3 2021. This is mainly due to the return of foreign patients seeking treatment at Raffles Hospital as border restrictions eased and the increase in locals undergoing elective surgeries that had been delayed during the pandemic, said Raffles Medical in a business update on Monday (Oct 31). The group noted that year to date, net profit has surged 57.3 per cent to S$98.2 million, from S$62.4 million in the corresponding period last year. Revenue also climbed 9.6 per cent to S$581.8 million year to date, from S$531.1 million in the same period last year. Raffles Medical attributed its overall performance to “better cost control and deployment of manpower, together with lower inventories and consumables as well as a reduction in purchased and contracted services”. In the future, the group expects inflationary pressures and rising interest rates to dampen demand, with supply chain and labour constraints having a negative impact on its performance. Covid-19 related services will also taper off as the pandemic situation improves, it added. Still, Raffles Medical believes it will remain profitable for the rest of 2022, especially as more foreign and local patients return for treatments at its various medical facilities. Shares of Raffles Medical closed flat at S$1.27 on Friday.

Japfa posted a net profit of US$46.3 million for the first nine months ended September, down 59 per cent from a net profit of US$113.9 million in the year-ago period. This comes despite a 10 per cent increase in revenue to US$3.7 billion for 9M FY2022, which was mainly driven by higher sales volume across all segments, up from US$3.4 billion the year before. Operating profit fell 16 per cent to US$223.7 million, down from US$266.5 million the year before, with operating profit margin seeing a 1.9 percentage point drop to 6 per cent. Profit margins were impacted by higher raw material prices across all businesses, as well as weaker performance of its swine operations in Vietnam due to price volatility and higher costs, the group said. Cost of sales increased 14 per cent to US$3.2 billion during the period. Earnings per share fell to 2.27 US cents for the period, down from 5.58 cents a year ago. Shares of Japfa closed S$0.005 or 1 per cent higher at S$0.51 on Monday, before the announcement.

Capitaland Ascendas Reit (Clar) posted a positive rental reversion of 5.4 per cent for lease renewals in Q3 ended September, down from 13.2 per cent in Q2, the manager announced in a quarterly business update on Monday (Oct 31). It expects rental reversion for FY2022 to be in the “positive mid-single digit range”. In the year to date, rental reversion stands at 8 per cent. The Reit manager noted that the “heightened risk environment” continues to put pressure on the global outlook. “In addition to rising interest rates and inflation, the export bans by the United States of certain advanced materials and technologies to China has added to the uncertainty and volatility in the global supply chains,” it said. It also warned that the ongoing Russian-Ukraine war will continue to have some “destabilising” effect on global markets, which may have some impact on tenants’ businesses as well as on Clar’s operating costs. Clar’s portfolio occupancy rose slightly to 94.5 per cent at the end of Q3, down from 94 per cent as at end-June. Overall weighted average lease expiry (WALE) stood at 3.9 years. Occupancy in Singapore came in at 91.8 per cent for the quarter, down from 91.9 per cent as at end-June. It recorded 51.6 per cent for occupancy of investments completed in the last 12 months, down from 87.8 per cent as at end-June. Clar also announced the acquisition of two properties in Singapore for S$296.7 million in Q3. One was the Philips APAC Centre at 622 Toa Payoh Lorong 1, a six-storey high-tech industrial property; the other property was a Grade-A five-storey ramp-up cold storage logistics at 1 Buroh Lane in Jurong. The manager said it has implemented a higher service charge for its Singapore leases from October this year, to help navigate and mitigate rising utility and interest expenses. In the US market, occupancy declined marginally to 94.8 per cent as at end-September, from 95.3 per cent in end-June. This was due to lower occupancies in the business space portfolio, the manager said. In Australia, occupancy rose to 99.1 per cent from 96.6 per cent in end-June due to “positive leasing momentum for logistics spaces”, which included 92 Sandstone Place in Brisbane, and 162 Australis Drive in Melbourne. Meanwhile, in the United Kingdom and Europe, occupancy rose to 99.4 per cent, mainly due to full occupancy at a logistics property, Transpennine 200 in Greater Manchester. Units of Clar closed at S$2.62 on Monday, down S$0.01 or 0.4 per cent, before the business update.

Capitaland China Trust (CLCT) reported gross revenue of 1.4 billion yuan (S$272.3 million) for the first nine months ended Sep 30, 2022, rising 7 per cent from 9M 2021 gross revenue of 1.3 billion yuan on the back of positive rental reversions. Net property income (NPI) came in at 970.8 million yuan (S$188.8 million) for 9M 2022, up 7.5 per cent from 903.4 million in 9M 2021. In a business update on Monday (Oct 31), CLCT’s manager said the Reit’s new economy portfolio saw full contributions from business parks and logistics parks over the period. As at end-September, occupancy for the business park portfolio stood at 94.3 per cent with a weighted average lease expiry (Wale) of 1.6 years by gross rental income (GRI), and 1.7 years by net lettable area (NLA). Logistics parks booked an overall occupancy of 96.6 per cent. Its Wale by GRI and NLA was 1.3 years and 1.4 years, respectively. Together with strong performance from sectors such as engineering and electronics, as well as broad-based higher rent per sq m for the new economy segment, this led to a positive reversion of +5.6 per cent for the new economy portfolio. The retail portfolio also achieved its first positive reversion of +4.9 per cent since the start of Covid-19, said the manager, boosted by the completion of CapitaMall Wangjing’s asset enhancement initiative. Occupancy as at end-September was 96.7 per cent, while Wale by GRI and NLA stood at 2.2 and 3.4 years, respectively. For the Q3 ended September 2022, traffic for the retail portfolio was up 37.5 per cent quarter on quarter – while Q3 sales grew 33.7 per cent over the previous quarter. The manager also observed overall improvements for the retail portfolio post lockdowns in H1 of 2022. Looking ahead, the manager believes CLCT’s alignment with China’s strategic policy directions well places the trust to capture growth opportunities across asset classes. Units of the Reit closed down 0.5 per cent or S$0.005 at S$0.98 on Friday.


President Joe Biden threatened Monday to pursue higher taxes on oil company profits if industry giants do not work to cut gas prices. Biden has criticized oil companies that have made record-high profits as consumers struggle to keep up with high gas prices. The price of a gallon of gas was $3.76 on Monday, according to AAA, down from a record of over $5 in June but still higher than a year ago. “Their profits are a windfall of war,” Biden said, referring to Russia’s war in Ukraine, which prompted Western sanctions that reduced oil supply. “It’s time for these companies to stop their war profiteering.” “If they don’t they’re going to pay a higher tax on their excess profits,” he said. With eight days to go before Election Day, White House messaging has focused on how Democrats are working to improve the economy and how Republicans would make it worse. Inflation and the economy consistently rank as the top issue for voters — and higher gas prices stretched consumer budgets for much of this year. Any new taxes on oil profits would need congressional approval, which may prove difficult as Democrats control both chambers of Congress by slim margins. Republicans, who generally support lower taxes, also hope to win back one or both chambers of Congress in the Nov. 8 midterms. Biden stressed that he is “a capitalist” but added that companies are making “profits so high it’s hard to believe.” Shell made $9.5 billion in profits in the third quarter, almost double what it made in the same period last year, Biden said. Exxon’s profits in the third quarter were $18.7 billion, nearly triple what Exxon made last year and the most in its 152-year history. Biden has made pleas to oil companies to increase production rather than to enrich shareholders in recent weeks as the price of gas remains high. Republicans, who generally support lower taxes, also hope to win back one or both chambers of Congress in the Nov. 8 midterms. Biden stressed that he is “a capitalist” but added that companies are making “profits so high it’s hard to believe.” Shell made $9.5 billion in profits in the third quarter, almost double what it made in the same period last year, Biden said. Exxon’s profits in the third quarter were $18.7 billion, nearly triple what Exxon made last year and the most in its 152-year history. Biden has made pleas to oil companies to increase production rather than to enrich shareholders in recent weeks as the price of gas remains high.

Treasury yields rose on Monday as markets looked ahead to the Federal Reserve’s November meeting beginning Tuesday. The 10-year Treasury yield was up by 5 basis points to 4.058%. The yield on the policy-sensitive 2-year Treasury rose by 7 basis points to 4.493%. Yields and prices have an inverted relationship. One basis point equals 0.01%. Traders are widely expecting the Federal Reserve to hike interest rates by 75 basis points this week. This would be the sixth rate hike of the year as the central bank fights to curb high inflation. Markets are also hoping to gain some clarity regarding the Federal Reserve’s future policy pathway from the meeting, as questions remain over how high rates will be hiked in late 2022 and throughout 2023. There are concerns that rate hikes are dragging the U.S. economy into a recession, and economic data has been sending mixed signals about inflation.

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


CapitaLand Ascott Trust– Rebound Underway

Recommendation: Buy (Upgraded), Last Done: S$0.955

Target price: S$1.13, Analyst: Darren Chan

– No financials provided in this business update. 3Q22 gross profit is at c.90% of pre-COVID-19 levels. Portfolio RevPAU jumped 88% YoY to S$132 due to higher average daily rate and occupancy (>70%), and is c.87% of 3Q19 pro forma RevPAU.
– 76% of debts at fixed rate. Every 50bps rise in interest rates would impact DPU by c.2%.
– Upgrade to BUY, DDM-TP lowered from S$1.24 to S$1.13. FY22e-FY24e DPU lowered by 5-7% on the back of foreign currency headwinds and an enlarged share base from the private placement as we pencil in the acquisition of S$318.3mn in assets. Our cost of equity increased from 8.14% to 8.34% on a higher risk-free rate assumption. Catalysts include the reopening of China, opportunistic divestments, and acquisitions of extended stay assets to raise the proportion of stable income sources to 25-30% to cushion the impact from recessionary concerns, rising inflation and macroeconomic uncertainties.

Spotify Technology S.A. – Volume and price growth

Recommendation : ACCUMULATE (Downgraded); TP: US$111.00, Last Close: US$80.58

Analyst: Jonathan Woo

– 3Q22 revenue beat expectations modestly on FX tailwinds; earnings missed due to higher than expected expenses. 9M22 revenue at 71% of our FY22e forecasts, with net loss EUR130mn more than our FY22e forecasts.
– Total MAUs/Premium Subscriptions beat guidance, showing resilience through an uncertain macro environment, up 20%/13% respectively. Premium ARPU was up 7% YoY.
– Gross Margin of 24.7% missed guidance by 0.5%, with higher-than-expected expenses led by 14% negative FX movements.
– We maintain a BUY recommendation with a reduced DCF target price of US$111.00 (prev. US$117.00) as we lower FY22e net loss forecasts by ~EUR500mn on the back of higher expenses.

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