DAILY MORNING NOTE | 14 August 2023

Trade of the Day

Walt Disney Company (NYSE: DIS)

Analyst: Zane Aw

(Current Price: US$91.76) – TECHNICAL BUY
Buy price: US$91.76 Stop loss: US$86.00
Take profit 1: US$102.00 Take profit 2: US$108.00

Week 33 equity strategy: It was a busy week filled with results. Most sectors reported weak earnings. These included consumer, electronics, plantations, recruitment and rubber gloves. Weak consumer demand was pronounced in Vietnam and Indonesia, where lower-income households are still reeling from the effects of high inflation. Electronics demand is still sluggish with most guiding for recovery in early 2024. Palm oil prices are starting to recover after a weak 2Q23. Demand waned when buyers switched to sunflower oil that traded at a discount. The discount has disappeared and incremental demand is coming from Indonesia’s higher consumption of biodiesel (from B30 to B35). Production has been below trend due to the rainy season and lack of fertilisation. Rubber gloves are still faced with intense competition from China, which is pricing gloves 15-20% below Malaysian counterparts. With utilisation rates still low at 50%, any recovery in margins or prices will require a significant amount of time.

Sectors that gave a more positive outlook were worker dorms in Singapore, infrastructure projects and hospitality. Adding to the other types of bed crunch is workers’ dorm bed crunch. Demand has surged due to an influx of workers to address delayed construction and housing projects. The estimated demand is 434k against current supply of 402k. The recent jump in housing rents has also fuelled demand for worker dorms. Rates are likely to rise from S$300 to above $400 per month per bed. Any incremental rise in rents drops straight to the bottom line. Hospitality in Singapore in 2H23 looks promising with the recent spike in arrivals from China. In July, visitor arrivals from China leapt 14-fold to 231k, more than double the previous month.

Paul Chew
Head Of Research
paulchewkl@phillip.com.sg

Singapore stocks ended lower on Friday (Aug 11), after the Republic revised down its gross domestic product (GDP) growth for the second quarter, and narrowed its full-year growth forecast for 2023. It fell 0.9 per cent or 28.65 points to 3,294.28, after 1.1 billion securities worth S$1 billion changed hands. Losers outnumbered gainers 319 to 263. For the week, it was down 0.3 per cent. Singapore’s official full-year growth forecast for 2023 has been narrowed to a range of 0.5 per cent to 1.5 per cent, down from 0.5 per cent to 2.5 per cent, as the external demand outlook for the rest of the year remains weak. This comes as GDP growth for the Q2 was revised downwards to 0.5 per cent on the year, from the advance estimate of 0.7 per cent.

US stocks closed mixed on Friday (Aug 11), as investors digested the news that producer inflation came in higher than expected last month. Data published earlier on Friday showed US wholesale prices picked up in July on a surge in services costs, although the overall inflation figure remains muted. The Dow Jones Industrial Average closed up 0.3 percent at 35,281.40, while the broad-based S&P 500 dropped 0.1 percent to 4,464.05. The tech-rich Nasdaq Composite Index experienced the largest daily decline, falling 0.6 percent to end the week at 13,644.85.

SG

TMW Maxwell sold just seven out of a total of 324 units at its Phase One sales launch with the transacted price ranging between S$1.5 million and S$2.47 million, which works out to a per square foot (psf) range of S$3,143 to S$3,739. A SingHaiYi spokesperson told The Business Times that the seven units were sold at an average psf price of S$3,310. The sales outcome for the mixed-use development project by CEL Development, Singhaiyi Investments and Chuan Investments was much lower than expected by market watchers who had anticipated a take-up rate of at least 20 per cent, going by response to recent launches. A total of 80 units were offered for sale at the Phase One sales launch, and the remaining units will be released for sale subsequently in phases, the developer said on Sunday (Aug 13).

Yangzijiang Financial Holding on Saturday (Aug 12) reported earnings of S$162.5 million for the first half of the fiscal year ended June, up 19.2 per cent from a net profit of S$136.4 million in the corresponding year-ago period. On a per-share basis, earnings rose to S$0.0439 from S$0.0345. The company said this figure was boosted by its earnings growth, as well as its share buyback activity over the last 12 months. No dividend was declared for the period under review, as the company’s policy is to declare a dividend annually.

United Hampshire US real estate investment trust on Saturday (Aug 12) posted a distribution per unit (DPU) of US$0.0265 for the first half of the year, down 8.9 per cent from US$0.0291 in the corresponding year-ago period. The trust said the manager has opted to retain distributable income totalling US$1.5 million as capital reserves for asset enhancement and development initiatives. One example of such initiatives include the new Academy Sports + Outdoors store at Port St Lucie, the Reit said. Excluding this retention, the Reit’s DPU figure for H1 would have held steady at US$0.0291.

EC World Real Estate Investment Trust (Reit) distribution per unit fell 25.9 per cent to 2.053 Singapore cents for the first half ended Jun 30, 2023, from 2.77 Singapore cents in the corresponding period last year. This follows a 12 per cent drop in gross revenue to S$55.7 million in H1, from S$63.3 million a year ago. Income available for distribution also contracted by 25.9 per cent to S$16.6 million, from S$22.4 million in the year-ago period. Net property income (NPI) experienced a 10.6 per cent year-on-year decrease to S$51.8 million, from S$57.9 million the previous year. The Reit’s manager attributed the lower revenue and NPI to the weakening of the Chinese yuan, a decline in late-fee income and other operating income, as well as the cessation of income contribution from Fu Zhuo Industrial. The Hangzhou port property was seized by Chinese authorities for public use last March.

Hong Leong Asia on Friday (Aug 11) posted a net profit of S$30.9 million for the first half of the year, down 27.6 per cent from earnings of S$42.7 million in the year-ago period. Earnings per share stood at S$0.0412 for the half year, down from S$0.0569 the previous year. The group attributed the decline to the absence of a one-off gain from disposal of assets held for sale. Adjusting for the S$10.6 million one-off gain on disposal of assets held-for-sale in H1 last year, net profit would have declined 3.7 per cent, the group said.

REAL estate management services provider LHN Limited board of directors said on Friday (Aug 11) it intends to transfer the listing of the company from the Catalist board of the Singapore Exchange (SGX) to the mainboard. The group submitted an application for the transfer on Friday, it said in a bourse filing. LHN said transferring to the mainboard will provide the group with a more suitable platform for the listing and trading of its shares, given its substantial growth since its listing on the Catalist board. The group’s board also reckons that the mainboard will improve its image locally and abroad, as well as give it greater visibility and recognition in the market and among investors. “This enables the company to recruit better talents, strengthen its brand and enlarge business opportunities.”

Agri food giant Olam Group on Friday (Aug 11) reported a net profit of S$48 million, down 88.8 per cent from earnings of S$429.1 million in the year-ago period. The group said this was due to a one-off exceptional loss on lower almond yields in Australia which brought the group’s net exceptional loss to S$136.1 million, as well as significantly higher net interest costs of S$245.9 million. The board of directors has declared an interim dividend of S$0.03 per share for the period under review, down from S$0.04 per share in the year-ago period. The dividend will be paid out on Aug 28. The group also saw reduced contributions from Olam Agri following the sale of the 35.4 per cent stake.

Philippine liquor giant Emperador reported its revenue climbed 11 per cent to 31 billion pesos (S$742 million) in the first half of this year from a year ago, as its global whisky segment continued to perform. In a bourse filing on Friday (Aug 11), the company that is dual listed on the Philippine Stock Exchange and the Singapore Exchange said the whisky segment showed a “stellar performance”, while its brandy segment also demonstrated some growth – despite facing inflationary headwinds. It said that growth in the whisky segment was driven by Emperador’s whisky portfolio, which continued to grow at double-digit rates in the first six months of 2023. Key markets recording these strong double-digit growth rates were Asia and the United States.

US

The US dollar rose on Friday (Aug 11) after a slightly bigger increase in US producer prices in July lifted Treasury yields higher even as speculation grows that the Federal Reserve is at the end of hiking interest rates. Rebounding cost of services at the fastest pace in nearly a year pushed the Producer Price Index (PPI) higher and unsettled traders who also saw the yen cross the 145-for-US$1 threshold that triggered Japanese intervention in September 2022. The PPI for final demand rose 0.3 per cent, the Labor Department said. The CPI data on Thursday showed consumer inflation rose 0.2 per cent last month, matching the gain in June, and by 3.2 per cent in the 12 months through July. Data has pointed to a decelerating pace of inflation, raising bets the Fed won’t hike rates any further. But after the Treasury raised its borrowing estimate for the third quarter, yields have moved higher.

Softbank Group is in talks to acquire the 25 per cent stake in Arm it does not directly own from Vision Fund 1 (VF1), a US$100 billion investment fund it raised in 2017, according to people familiar with the matter, potentially delivering a win for investors who have waited years for strong returns. The discussions come as SoftBank is preparing to list the chip designer on Nasdaq next month at a valuation of US$60 billion to US$70 billion. If the negotiations lead to a deal, the Japanese tech investor would be delivering a major, immediate windfall to VF1 investors, including Saudi Arabia’s Public Investment Fund and Abu Dhabi’s Mubadala. They nursed losses after many of SoftBank’s bets on startups such as workspace provider WeWork and ride-sharing firm Didi Global soured. The alternative – letting VF1 sell its Arm shares in the stock market over time following the initial public offering (IPO) – would typically take at least one to two years given the size of the stake. It would also be more risky for the fund’s investors since it is possible that Arm’s shares could drop following the IPO.

Hundreds of small shareholders in Credit Suisse will file a legal suit over the bank’s forced rescue merger with UBS to obtain compensation for their losses. The complaint will be filed Monday in Zurich, Arik Roschke of the Swiss shareholders’ defence association (SASV) told the AWP news agency, confirming the report. Around 1,000 shareholders have joined the complaint by becoming SASV members, he said. Swiss officials, afraid that Credit Suisse could collapse with possibly catastrophic consequences for the global financial system, arranged a rushed marriage in March with UBS, the nation’s largest bank. Credit Suisse shareholders felt burned by the merger terms, which valued the bank’s equity capital at roughly three billion Swiss francs (S$4.3 billion). That valuation, decided during a weekend of frantic negotiations, was much less than the seven billion francs just days before the deal was announced.

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

RESEARCH REPORTS

HRnetGroup Limited – Stability creeping in

Recommendation: BUY (Maintained); TP S$0.88, Last close: S$0.745; Analyst Paul Chew

– The results were below expectations. 1H23 adjusted PATMI was 40% of our FY23e forecast. Weakness in earnings was largely due to professional recruitment contracting 34% YoY in revenue. North Asia experienced a major decline in technology hiring.

– Flexible staffing was resilient with revenue suffering a modest 0.5% YoY decline. The reduction in pandemic-related roles was replaced with luxury retail, consumer and logistics.

– We lowered our FY23e earnings by 11% to adj. PATMI of S$56mn. We cut our professional recruitment volume and price assumptions. Our BUY recommendation is maintained with a lower target price of S$0.88 (prev. S$0.98). The target price is 12x PE FY23e ex-cash. We believe hiring activities will trend sideways in 2H23 after the stellar growth in FY22, propped up by technology and pandemic-related placements.

Pan-United – Volume catches up; surprise margin improvement

Recommendation: BUY (Maintained); Last Done: S$0.395

Target Price: S$0.50; Analyst: Peggy Mak

– 1H23 earnings beat our expectations, at 63% of FY23e, due to widening gross margins to 21.3% (+1.6% pt YoY) on improved product mix. Construction activities picked up from May, and PanU’s volume in 1H23 caught up to level that of 1H22.

– The company expects volume to rise in 2H23, with buoyant demand from public and private housing developments and infrastructure projects. We think the higher gross margin is sustainable, due to: 1) a higher mix of products which offer low-carbon solutions to the customers; and 2) higher fees from batching services offer to HDB construction work. Credit risks have risen with some construction companies facing distress. However, the impact on PanU is manageable as it supports mainly government projects.

– We raised our FY23e net earnings estimates by 36% to account for the higher margin. Maintain BUY with unchanged TP of S$0.50. The business generates strong operating cash flow, underpinning a dividend yield of 5%.

PRIME US REIT – Navigating through the storm

Recommendation: BUY (Maintained), Last Done: US$0.192

Target price: US$0.39, Analyst: Darren Chan

– 1H23 DPU of 2.46 US cts (-30.1% YoY) was in line with our estimates at 50% of FY23e forecast. The decline of was due to Prime increasing management fees paid in cash from 20% to 100%, higher interest expense, lower occupancy, and higher operating expenses. Excluding the change in management fees paid in cash, DPU is still down c.24% YoY.

– Portfolio occupancy dropped to 85.6% from 88.6% in 1Q23, with overall rental reversions of +9.5%.

– Maintain BUY, DDM-TP lowered from US$0.46 to US$0.39. Our cost of equity increased from 13.75% to 15.95% due to the inherent weakness of the US office sector. Catalysts include improved leasing and a greater return to the office. Prime is currently trading at 0.25x P/NAV, and we believe that most of the negatives are already priced in. The current share price implies FY23e/FY24e DPU yield of 25/27%.

PropNex Ltd – Expecting a stronger 2H23

Recommendation: ACCUMULATE (Downgraded); TP S$1.16, Last close: S$1.03; Analyst Paul Chew

– 1H23 results were below expectations. Revenue and PATMI were 33%/30% of our FY23e forecast. Adjusted PATMI declined 24% YoY to S$20.8mn. Cooling measures and a dearth of new launches pushed revenue lower.

– We expect the pick-up in new launches and market share to drive a stronger performance in 2H23. We expect 8,100 units to be launched in 2H23 compared with 1H23’s 3,400. Market share from the recent launches has been around 43%.

– We lower our FY23e earnings by 9% to S$62.1mn and reduce the DCF target price to S$1.16 (prev. S$1.20). Our recommendation is downgraded from BUY to ACCUMULATE. The dividend yield is attractive at 6.3%, well supported by FCF and S$140mn net cash on balance sheet. We expected a rebound in 2H23 as it will benefit from larger number of new launches and market share gains. Meanwhile, private resale support will come from its large price discounts compared to new launches and surge in completions. HDB resale will be resilient from attractive grants and more units reaching their minimum occupancy period.

Thai Beverage PLC – The beer is flat

Recommendation: BUY (Maintained); TP S$0.75, Last close: S$0.575; Analyst Paul Chew

– Results were below expectations. 9M23 revenue and PATMI at 71%/65% of our FY23e forecasts. Weakness in beer sales was steeper than expected.

– Spirits revenue climbed 12% YoY to THB28.5bn in 3Q23, largely on 10% volume jump and improvement in selling price from better mix of brown spirits and price adjustment. 3Q23 spirits volume was a record 152.7mn litres.

– We lower our FY23e revenue by 10% and PATMI 7%. Beer contribution to group PATMI around 8% due to the large minority interest. The weakness in beer volumes was steeper than expected. Sabeco is facing major volume contraction due to weak macro conditions in Vietnam affecting discretionary spending such as alcohol. Our BUY recommendation is maintained but target price is lowered from S$0.80 to S$0.75. We peg 18x FY23e earnings for the core operations, its historical average. And listed associates are valued at market valuations.

FAANGM Monthly July 23 – Earnings rebound with fundamentals improving

Recommendation: OVERWEIGHT (Upgraded); Analysts: Jonathan Woo, Maximilian Koeswoyo, Zane Aw, Phillip Research Team

– FAANGM was the laggard again in July, up 2.9% compared to the S&P 500’s gain of 3.1%. The Nasdaq outperformed, up 3.8%.

– Digital Advertising companies META and GOOGL were the largest gainers for the month, rising 10% and 11% respectively after issuing better-than-expected forward guidance during their 2Q23 earnings results. The standout here was AMZN’s 90% YoY spike in adj. earnings.

– For 2Q23 earnings, FAANGM stocks on average beat their revenue guidance by 2%, and also saw sharp re-accelerations in adj. earnings growth due to better cost efficiencies, and stronger top line growth. We are starting to see some recovery in digital advertising, and AI-driven Cloud activity, which we believe could be the beginning of a sustained period of margin expansion for most FAANGM stocks. As such, we upgrade our recommendation on FAANGM to OVERWEIGHT.

Block Inc – Cost-cutting measures boost profitability

Recommendation: BUY (Maintained); TP: US$83.00

Analyst: Ambrish Shah

– 1H23 revenue beat expectations, at 53% of our FY23e forecasts. Net loss was worse than expected at 77% of our FY23e forecasts due to lower-than-expected gross margins. 2Q23 net loss improved 41% YoY to -US$123mn driven by higher operating leverage.

– For 3Q23e, Block expects consolidated gross profit growth of 21% YoY. Cash App gross profit is expected to grow 27% YoY fueled by growth in user base and customer engagement. For FY23e, Block raised its outlook for adj. EBITDA to US$1.5bn (prev. US$1.36bn).

– We maintain a BUY recommendation with a lower DCF target price of US$83 (WACC 7.1%, g 4%), down from US$91. Our FY23e revenue is increased by 9% due to strong momentum in its Cash App segment; while we have increased our net loss by 12% to account for lower gross margins. We believe Block is well-positioned to benefit from its diversified portfolio of consumer banking solutions to lower-income and underbanked demographic, resurgence of discretionary spend, and ongoing shift to cashless payments.

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