DAILY MORNING NOTE | 11 May 2023

Market Trend Analysis – Topic #2 – History Says Buy the Fed Pause

Analyst: Zane Aw

-With the Fed opening the door to a pause in the current tightening cycle, investors ponder how does the market perform in the months after Fed policy rate peaks and subsequently when the committee cuts rates

-History suggests investors are rewarded for buying the Fed pivot as the S&P 500 tends to rally in the months after the Fed policy rate peaks and cuts occur. Unless we enter into a major recession, Fed pauses tend to generate very healthy average returns of 8.86% in 12 months

-Following a Fed rate cut, the effect is neutral for the market for the first quarter with an average return of 0.95%. However, the market reacts positively in the longer run with average return increasing over time, with 4.68% for half a year and 11.39% for a full year since the first cut

Singapore stocks ended largely flat on Wednesday (May 10), as investors remained cautious ahead of the release of US inflation data, inching down 0.02 per cent or 0.66 point to 3,242.29. Gainers outnumbered losers 273 to 255, with 1.2 billion securities worth S$815.1 million changing hands. The top gainer was Sembcorp Industries, which gained 1.5 per cent or S$0.07 to S$4.66. The top decliner was Yangzijiang Shipbuilding, which fell 1.6 per cent or S$0.02 to S$1.22. The trio of local banks traded mixed. DBS fell 0.3 per cent or S$0.08 to S$31.62, and UOB lost 0.2 per cent or S$0.05 to S$28.12. OCBC rose 0.6 per cent or S$0.07 to S$12.32.

Wall Street stocks mostly climbed on Wednesday as better inflation data offset worries about stalled talks between political leaders that have raised fears of a US default. The Dow Jones Industrial Average ended 0.1 per cent lower at 33,531.33. The broad-based S&P 500 added 0.5 percent at 4,137.64, while the tech-rich Nasdaq Composite Index gained 1.0 percent to 12,306.44. Google parent Alphabet shot up 4.0 per cent after it showcased the company’s Bard artificial intelligence program at its annual developers conference, parrying efforts by rival Microsoft. Airbnb slid 10.9 per cent on disappointment over the travel platform’s second-quarter outlook.

SG

Shares of Sembcorp Industries hit an eight-year high on Wednesday (May 10), after the group said there is no definitive deal to sell its waste management unit. The company’s shares reached a high of S$4.73 as at 9.18 am on Wednesday, up 3.1 per cent or S$0.14. The last time the counter closed near this level was Apr 22, 2015. The group said it has not entered into a definitive transaction for any potential sale with a party, adding that there is no certainty that any such a transaction will materialise.

BRC Asia reported on Wednesday (May 10) a 34 per cent year-on-year decline in net profit for its first half on the back of lower revenue. Net profit for the six months ended Mar 31, 2023 fell to S$26.2 million from S$39.8 million in the year-earlier period. An interim dividend of S$0.05 per share was declared, down from S$0.06 per share a year earlier. Revenue fell 10 per cent on year in the first half to S$717.1 million, primarily attributable to lower contractual offtake due to slower site progress. BRC Asia said it has seen a “moderate recovery” in project contractual offtake in April and a normalisation of the prices of key construction materials.

UMS Holdings reported on Wednesday (May 10) a 10 per cent year-on-year decline in net profit for its first quarter amid slightly lower revenue and higher expenses. Net profit for the three months ended Mar 31, 2023 fell to S$17.4 million from S$19.4 million in the year-ago period. The board declared an interim dividend of S$0.01 per share, unchanged from a year earlier. UMS noted that its bottom line was affected mainly by higher expenses and a foreign exchange loss of S$200,000 arising from the weaker US dollar. Revenue for the first quarter fell 5 per cent on-year to S$80.8 million. This came amid lower revenue from its largest semiconductor segment, which fell 1 per cent on year to S$72.9 million.

Prime US Reit posted a 7.2 per cent fall in net property income to US$23.6 million for its first quarter ended Mar 31, 2023, from US$25.4 million the year before. Gross revenue for the quarter dropped 1.7 per cent to US$40.2 million, from US$40.8 million. Distributable income in Q1 slipped 22.5 per cent to US$14.9 million, from US$19.2 million in the year-ago period. In terms of leasing activity, Prime US Reit booked a total of 64,400 sq ft leased at a negative rental reversion of 2.6 per cent, but with positive net effective rent reversion. The Reit’s portfolio has a weighted average lease expiry of 3.9 years, with a debt headroom of US$200 million at a leverage limit of 43.7 per cent.

Sasseur Real Estate Investment Trust (Sasseur Reit) posted a distribution per unit (DPU) of S$0.01849 for the first quarter ended Mar 31 – a 1.5 per cent increase from the previous year. The manager of the Reit attributed the DPU to strong sales performance. Rental income under the Reit’s entrusted management agreement model fell 2.1 per cent to S$33.1 million for Q1 2023, with gains from the 7.7 per cent rise in rental income in yuan eroded by the depreciation of the currency against the Singapore dollar. Distributable income fell 4 per cent to S$23.7 million, from S$24.7 million previously. Portfolio occupancy rose slightly to 96.6 per cent, from 95.4 per cent in Q1 2022, driven by an increase in occupancy in Chongqing Bishan. Weighted average lease expiry stood at 2.1 years by net lettable area.

Singapore Airlines (SIA) announced that it intends to redeem 50 per cent of the zero-coupon mandatory convertible bonds (MCBs) issued in June 2021. SIA said on Wednesday (May 10) that the accreted principal amount payable, being 108.243 per cent of the principal amount of the MCBs, will be approximately S$3.4 billion. The yield-to-call works out to be 4 per cent per annum. This redemption will be carried out on a prorated basis, with the redemption amount to be paid to eligible bondholders on Jun 26. The redemption will be fully funded by the airline’s cash reserves, which stood at S$15.4 billion as at Dec 31, 2022.

Keong Hong Holdings saw its net loss narrow to S$3.7 million for its half year ended Mar 31, 2023, from S$10.8 million in the year-ago period. This is even as revenue more than doubled to S$118.1 million, from S$54.7 million a year earlier. Keong Hong attributed the revenue gains to progress made in its various ongoing construction projects. Loss per share for the half year stood at 1.58 Singapore cents, up from 4.59 cents the previous year. No dividend was declared for the half year, unchanged from the year before.

Civmec reported on Wednesday (May 10) a 20.2 per cent year-on-year increase in net profit for its third quarter, despite lower revenue. Net profit for the three months ended Mar 31 rose to A$14.6 million (S$13.09 million) from A$12.1 million in the year-ago period. Its revenue for the third quarter fell 2.7 per cent to A$187.8 million, from A$192.9 million in Q3 FY22. Civmec said the group secured several new contracts as well as contract extensions during the quarter, and maintained a “strong order book” of close to A$1.2 billion.

Centurion’s revenue rose to S$47.1 million for the first quarter ended Mar 31 from S$45.1 million the year before. This was mainly driven by increases in occupancies and positive rental revisions across its purpose-built workers’ accommodation (PBWA) in Singapore and Malaysia, and its purpose-built student accommodation (PBSA) in Australia, the group said in a business update on Wednesday (May 10) night.

US

The consumer price index increased 0.4% for the month, in line with the Dow Jones estimate, according to a Labor Department report Wednesday. However, that equated to an annual increase of 4.9%, slightly less than the 5% estimate. Excluding volatile food and energy categories, core CPI rose 0.4% monthly and 5.5% from a year ago both in line with expectations. Increases in shelter, gasoline and used vehicles pushed the index higher, and were offset somewhat by declines in prices for fuel oil, new vehicles and food at home.

European Union (EU) antitrust regulators are set to approve Microsoft’s US$69 billion acquisition of Activision next week, with May 15 as the likeliest date, people familiar with the matter said. The European Commission’s imminent clearance comes nearly three weeks after the UK competition authority blocked the deal. The EU antitrust enforcer is expected to clear the acquisition after Microsoft agreed to licensing deals with cloud streaming rivals including Nvidia, Ukraine’s Boosteroid and Japan’s Ubitus. It also has agreements with Nintendo and US distributor Valve, owner of Steam, to bring Activision’s Call of Duty to their gaming platforms should the acquisition go through.

Disney reported its second quarter results on Wednesday. Overall, for the three-month period ended April 1, Disney reported net income of $1.49 billion, or 69 cents a share, compared with $597 million, or 26 cents a share, a year earlier. Revenue for the quarter rose 13% year over year to $21.82 billion. A bright spot for Disney came from its parks, experiences and products divisions. However, Disney+ saw a 2% decline in memberships, falling to 157.8 million subscribers from 161.8 million as of Dec. 31. The majority of these losses came from an 8% drop in membership at India’s Disney+ Hotstar. An additional 600,000 subscribers were lost domestically. The company said that its streaming losses narrowed as price increases helped offset the subscriber loss.

Electronic Arts (EA) reported record revenue for its fiscal fourth quarter, beating analysts’ estimates thanks to higher player engagement with franchises like its popular soccer title. Quarterly bookings, or adjusted revenue, rose 11 per cent to US$1.95 billion. Analysts were expecting US$1.73 billion on average. Adjusted earnings rose to US$1.77 a share for the quarter ended Mar 31, the company said, beating estimates of US$1.31. The company said Fifa 23 achieved the most successful launch in the franchise’s history.

Roblox posted a bigger quarterly loss on Wednesday (May 10), hurt by higher expenses to support the expansion of its platform. Net loss attributable to common stockholders was US$268.3 million, or 44 cents per share, compared with net loss of US$160.20 million, or 27 cents per share, a year earlier. However, the company posted net bookings of US$773.8 million in the first quarter, compared with US$631.2 million a year earlier. Analysts were expecting net bookings of US$765.9 million.

Paramount Global is letting go about 25 per cent of the staff in its domestic cable networks and shutting down MTV News after four decades on the air. Employees are being notified on Tuesday (May 9), the company said in a statement. Paramount is combining nine separate teams into one. It had already announced plans to merge its Showtime and MTV studios.

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

RESEARCH REPORTS

Lendlease Global Commercial REIT – Resilient Performance

Recommendation: Maintained (Buy), Last Done: S$0.68
Target price: S$0.91, Analyst: Liu Miaomiao

– No financials provided in this operational update. Portfolio occupancy remained stable at 99.8% QoQ but experienced a slight drop of 0.1% YoY. With higher rental reversion in retail, 3QFY23 reversions of c.3.3% improved from 1HFY23’s c.2%.

– Tenant sales at 313@Somerset and JEM are still trending above pre-Covid levels, c.15% and c.20% higher respectively. Cost of debt currently at 2.51% (+0.16% QoQ and +1.53% YoY).

– Maintain Buy with unchanged target price of S$0.91. We expect the organic growth from the additional GFA, higher positive rental reversion from the retail and onboarding of Live Nation to potentially offset the headwinds in borrowing cost. There is also an estimated S$5bn of assets in the pipeline from the sponsor.

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