DAILY MORNING NOTE | 16 September 2022

The Straits Times Index (STI) rebounded from sharp losses the previous day to edge up 0.3 per cent or 9.96 points to close at 3,267.98 points on Thursday (Sep 15), tracking gains on Wall Street. In the wider Singapore market, losers outnumbered gainers 226 to 218, with 1 billion shares worth S$962.1 million traded. “Following the biggest drop in more than 2 years, US stocks are rebounding as investors still believe the US Federal Reserve will pivot before they risk sending the economy into a severe recession,” said Oanda senior market analyst Edward Moya. Market sentiment also improved as the US released its producer price index (PPI) data for August overnight. “PPI numbers show that underlying trends are improving and that should lead to optimism that we will continue to see prices come down over the next few months,” Moya added. Performance was mixed across key Asian markets. Japan’s Nikkei 225 index added 0.2 per cent, Hong Kong’s Hang Seng Index rose 0.4 per cent and Australia’s S&P/ASX 200 index closed 0.2 per cent higher, while South Korea’s Kospi lost 0.4 per cent and the FTSE Bursa Malaysia KLCI dipped 0.1 per cent. Emperador (EMI) will replace ComfortDelGro in the STI at the close on 16 Sep.

US stocks ended sharply lower on Thursday, battered again by worrisome economic data and concerns about the impact of further aggressive Federal Reserve action next week. Equities got off to a good start after US President Joe Biden announced a tentative deal to avert a potentially damaging railroad strike, but those gains fizzled. The Dow Jones Industrial Average dropped 0.6 per cent to finish at 30,961.88. The broad-based S&P 500 fell 1.1 per cent to 3,901.35, while the tech-rich Nasdaq Composite Index sank 1.4 per cent to end at 11,552.36. While the railroad deal avoided another painful hit to supply chains, a raft of economic data did not help the cause. US retail sales rose surprisingly in August in the latest illustration of the resiliency of American consumers. However, the report also downgraded sales in the prior month, tempering the good news. And while weekly jobless claims retreated once again, US industrial production fell modestly in August. Shares have taken a beating recently after troubling inflation data for August, showing widespread price increases in the month, solidified the view the Fed will raise the benchmark lending rate by 0.75 percentage point, with some floating the possibility of an even more aggressive step. Among individual companies, Adobe plunged 16.8 per cent after agreeing to acquire Figma, an Internet-based collaborative design platform, for US$20 billion in cash and stock.

SG

The Monetary Authority of Singapore (MAS) has unveiled a road map of growth strategies for the financial sector, with projections for over 3,000 net jobs being created per year and for the sector to grow faster than the broader economy. The new Financial Services Industry Transformation Map (ITM) 2025, launched by Deputy Prime Minister (DPM) Lawrence Wong on Thursday (Sep 15), sets out plans for Singapore to deepen capabilities and grow in areas such as sustainable and transition financing, private credit, philanthropy and the digital asset ecosystem. MAS is also looking to foster a “skilled and adaptable workforce”, and announced that S$400 million has been committed to fund grants in a Talent and Leaders in Finance programme. Singapore’s central bank estimates that the financial sector will create between 3,000 and 4,000 net jobs on average each year, between 2021 and 2025. It also projects that the financial sector will grow by an average of 4 to 5 per cent per annum over the same period. This is higher than private-sector economists’ estimates for gross domestic product (GDP) growth – 3.5 per cent in 2022 and 2.8 per cent in 2023 – going by MAS’ survey of professional forecasters released this month. The latest industry road map builds upon the ITM launched in 2017. DPM Wong, who is also Finance Minister and MAS’ deputy chairman, said they have exceeded the targets set out previously. Between 2016 and 2020, the financial services sector grew by an average of 5.7 per cent per annum, exceeding the 4.3 per cent target, MAS said on Thursday. The sector also created an average of 4,100 net jobs each year, above the target of 3,000. While the financial sector has done well, DPM Wong added that the external environment has become more complex and challenging. “We are only just recovering from the Covid-19 pandemic. But we don’t get to take a breather – we are now entering into a phase of elevated macroeconomic and geopolitical risks,” he said. “Drivers like technology and digitalisation have the potential to transform and disrupt financial markets and services, so finance must also step up and take bold steps.”

GSH Corporation has closed its first initial issue of digital commercial paper and raised S$19.54 million in gross proceeds, the mainboard-listed player said in a regulatory filing on Thursday (Sep 15). The issue, launched under a S$200 million multi-tranche unsecured commercial paper facility programme and to be listed on the ADDX Platform, offers an interest rate of 4.10 per cent per annum and matures 3 months from the date of its listing. Sam Goi Seng Hui, Gilbert Ee Guan Hui and Juliette Lee Hwee Khoon were among the subscribers of the issue with their holdings of S$11.82 million amounting to 60.5 per cent of the issue. Goi is a controlling shareholder and executive chairman of GSH, a group that engages in property development, hospitality business and frozen food trading. Lee is a non-executive director while Ee is the chief executive officer and executive director of GSH. The counter was flat at S$0.178 at market close on Thursday, before this announcement was made.

Mainboard-listed electronics component distributor Excelpoint Technology will delist on Sep 19, as acquisition of the company has been completed. In a regulatory filing on Thursday (Sep 15), Excelpoint Technology said that the scheme of arrangement that effected the acquisition by WT Semiconductor Holdings had taken effect on Sep 6 and payment made to shareholders on Sep 15. Albert Phuay founded the firm, which was listed in 2004. He would, post acquisition, invest for a 20 per cent stake in WT Semiconductor Holdings, and remain as the CEO of Excelpoint Technology, according to an earlier statement.

Straits Trading has decided it is in the interest of shareholders to first proceed with its proposed special dividend, before formally garnering shareholder approval at an extraordinary general meeting. The decision came after the conglomerate-investment company received an irrevocable undertaking from a shareholder with sufficient voting rights to pass the resolution for the proposed distribution, according to a bourse filing on Thursday (Sep 15). This undertaking would allow the company to ratify shareholders’ approval at a later date, but no later than the next annual general meeting. Straits Trading obtained the irrevocable undertaking from Tecity, a controlling shareholder of The Cairns, which directly holds more than 50 per cent of Straits Trading’s shares. On Aug 14, Straits Trading declared a special dividend via distribution in specie, distributing either ESR shares or Straits Trading shares to entitled shareholders. The special dividend came after the company posted strong first-half 2022 results driven by the divestment of ARA Asset Management to ESR Group. Entitled shareholders may choose to receive 145 ESR shares or 180 new Straits Trading shares for every 1,000 Straits Trading shares owned. Chew Gek Khim, executive chairman of Straits Trading, had said that the special dividend serves to reward shareholders for their continued support and allow them to participate further in the company’s growth. Straits Trading shares closed 1.3 per cent or S$0.04 higher at S$3.22 on Thursday.

US

SEA’s top management will forgo their salaries and tighten company expense policies, as the Singapore gaming and e-commerce giant tries to shield itself from the economic slowdown threatening tech companies. “The leadership team has decided that we will not take any cash compensation until the company reaches self-sufficiency,” chief executive officer Forrest Li said in an internal memo sent to staff on Thursday (Sep 15), days after Sea shut down operations in some markets and trimmed staff across its divisions. “We can now see that this is not a quickly passing storm: these negative conditions will likely persist into the medium term.” In his 1000-word missive, seen by Bloomberg News, the billionaire addressed head-on the struggle for Sea in an era of rising interest rates, accelerating inflation and a volatile market. The company has lost about US$170 billion of market value since an October high on questions about its money-making prospects and a global decline in tech stocks. “With investors fleeing for ‘safe haven’ investments, we do not anticipate being able to raise funds in the market,” Li said, reiterating that the company’s primary objective for the next 12 to 18 months is to achieve positive cash flow as soon as possible. The company will cap business travel to economy class flight fares, with travel meal expenses limited to US$30 a day. It will also curb spending on hotel stays for business trips to US$150 a night, and cull reimbursement for meals and entertainment bills. “The only way for us to free ourselves from relying on external capital is to become self-sufficient, generating enough cash for all our own needs and projects,” Li said.

FedEx on Thursday withdrew its full-year guidance and announced significant cost-cutting measures following what it called softness in global volume of shipments. “Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S.,” CEO Raj Subramaniam said in the release. “While this performance is disappointing, we are aggressively accelerating cost reduction efforts.” As part of these cost-cutting initiatives, FedEx will close 90 office locations, close five corporate office facilities, defer hiring efforts, reduce flights and cancel projects. FedEx stock fell about 12% in extended trading Thursday. The updates come alongside fiscal first-quarter earnings that fell well short of Wall Street expectations. The company was scheduled to release results and hold a conference call with executives next week, but issued the report early. The performance led FedEx to withdraw its full-year forecast that was set in June, citing a volatile environment that precluded prediction. The company reduced its forecast for capital expenditure for the year by $500 million to $6.3 billion. The company cited specific weakness in Asia as well as challenges to service in Europe for its underperformance in the first quarter. While these factors choked shipping volume, the company said operating expenses remained high. FedEx reported an adjusted operating income of $1.23 billion. For its fiscal second quarter the company expects adjusted earnings per share of at least $2.75 on revenue of between $23.5 billion to $24 billion. Wall Street analysts were looking for Q2 EPS of $5.48 and revenue of $24.86 billion, according to Refinitiv.

Adobe announced Thursday that it will acquire design software firm Figma in a deal worth about $20 billion in cash and stock. Shares of Adobe sank 17%, their biggest plunge since 2010. Figma, founded in 2012, creates cloud-based design software that allows teams to collaborate in real time. It competes head-to-head with Adobe’s XD program. The company was valued at $10 billion in its last funding round in 2021. Figma, whose backers include the likes of Index Ventures, Greylock Partners and Kleiner Perkins, is expected to generate more than $400 million in annual recurring revenue this year, sources familiar with the company’s financials previously told CNBC. Adobe confirmed Figma’s ARR will surpass $400 million exiting 2022. That means Adobe is paying in the neighborhood of 50 times revenue at a time when sales multiples for cloud software are contracting dramatically from their record highs reached last year. For the top cloud companies in the BVP Nasdaq Emerging Cloud Index, forward multiples have fallen to just over 9 times revenue from about 25 in February 2021. Adobe said it will integrate some of the features from its other products, such as illustration, photography and video technology, into Figma’s platform. Adobe sells a range of software services for photo and video professionals, like Photoshop, Illustrator, Premiere Pro and more. Once the deal closes, Figma co-founder and CEO Dylan Field will continue to run the company. He’ll report to David Wadhwani, president of Adobe’s digital media business. Adobe also announced fiscal third-quarter results. It reported earnings of $3.40 per share, adjusted, topping Refinitiv estimates of $3.33 per share. It posted $4.43 billion in revenue, which matched analyst expectations of $4.43 billion. The company issued mixed guidance for the fiscal fourth quarter. Adobe said revenue in the quarter will be $4.52 billion, compared with consensus estimates of $4.6 billion, according to StreetAccount. It expects to report earnings of $3.50 per share, adjusted, above a StreetAccount forecast of $3.47 per share.

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

RESEARCH REPORTS

Sembcorp Industries – Energy bill cap expected to have subdued impact

Recommendation: ACCUMULATE (Maintained), Last Done: S$3.28

Target price: S$3.68, Analyst: Terence Chua

– The UK’s new leader, Liz Truss, has capped consumer energy bills at £2,500 (S$4,081) for two years to cushion rising energy prices. The price cap imposed, limits the amount energy suppliers can charge for its tariffs.

– Impact on SCI expected to be subdued as the price cap will be funded by the UK government. The UK is also not a significant contributor to its overall portfolio of energy assets.

– Review of the UK’s net zero strategy is underway, which could slow move to renewables. Liz Truss has announced dozens of new North Sea licenses in an effort to boost domestic oil and gas production.

– We maintain ACCUMULATE with unchanged target price of $3.68. Our earnings and call is unchanged while our target price is maintained at $3.68, still based on 1.2x P/BV, the average of its peers.