Daily Morning Note – 18 August 2021

Dear valued client,

Wall Street’s five-day streak of records ended with a thud Tuesday following a lackluster US retail sales report that exacerbated worries about the latest Covid-19 wave. The anaemic sales figure proved a catalyst for a sell-off after both the Dow and S&P 500 notched successive records over the last week. The Dow Jones Industrial Average dropped 0.8 per cent to 35,343.28. The broad-based S&P 500 shed 0.7 per cent to 4,448.08, while the tech-rich Nasdaq Composite Index fell 0.9 per cent to 16,700.07.

Tokyo’s benchmark Nikkei index opened flat on Wednesday after Wall Street shares slipped and with Japan struggling to control a surge in virus cases. The Nikkei 225 index added 0.02 per cent, or 4.37 points, to 27,428.84 in early trade, while the broader Topix index rose 0.03 per cent, or 0.63 points, to 1,916.26.


SG News

Independent financial adviser in favour of SPH’s media restructuring. financial adviser to Singapore Press Holdings’ (SPH) independent directors has recommended that shareholders vote in favour of the proposed hiving off of its media business. In a letter to the SPH board, Evercore Asia (Singapore) said that “from a financial point of view”, directors should recommend to shareholders that they vote in favour of the restructuring as it will prevent the company and its shareholders from incurring potentially significant and recurring losses from its media arm. The exercise will allow SPH to “set a clear strategic direction” with a focus on the real estate sector and related segments of student accommodation and aged care while eliminating the risks and uncertainties associated with the media business.

Sea Ltd‘s Q2 net loss widens to US$433.7m even as revenue rises. Sea, which owns e-commerce platform Shopee and game developer Garena, has plunged deeper into the red. The Singapore-based Internet company posted a net loss of US$433.7 million in the second quarter, greater than the US$393.5 million net loss recorded in the same period a year earlier. Revenue, however, more than doubled to US$2.3 billion for the three months ended June 30, up 158.6 per cent from US$882 million in the previous year, driven by growth in its gaming and e-commerce arms. Sales in digital entertainment contributed the most to its revenue at US$1 billion, up 166.8 per cent from US$383.9 million in 2020, fuelled by more quarterly paying users and active users on its platform. Quarterly active users grew by 45.1 per cent to 725.2 million, quarterly paying users grew by 84.8 per cent to 92.2 million.

Singtel, SATS, SingPost, ST Engineering lift salary freezes, restore pay as economy recovers. Several large Temasek-linked employers have unwound salary freezes or cuts that were implemented last year as Singapore battled the spread of Covid-19 and companies attempted to rein in costs without letting workers go. This comes as market sentiment has improved and companies are reporting increased profits. In response to queries from The Business Times, a SATS SATS: S58 0% spokesperson said the company had on April 1 this year unwound pay cuts it had implemented on Feb 19, 2020. The company added that it would continue to manage costs prudently by “balancing profitability with the long-term sustainability of the business”.

FTSE 100 to lose second-biggest name as BHP goes home to Australia. The UK’s blue-chip FTSE 100 Index will lose its second-biggest stock by market value and the world’s biggest mining company, after BHP Group announced plans to simplify its listing structure. BHP will move to a primary listing in Australia after collapsing a dual arrangement that dates back to the company’s creation 20 years ago, when Australia’s BHP merged with rival Billiton. The change, one of several announced Tuesday that also included a plan to exit the oil and gas business, means BHP can be more nimble in pursuing deals, chief executive Mr Mike Henry told reporters.

US News

U.S. homebuilder confidence falls to 13-month low in August. U.S. homebuilder confidence in the market for single-family homes fell in August to its lowest reading in 13 months, driven by higher construction costs and supply shortages, a report released on Tuesday showed. The NAHB/Wells Fargo Housing Market index declined 5 points to a reading of 75 this month, its lowest level since July 2020, from 80 in July. Economists polled by Reuters had expected the index to remain unchanged from the month prior. A reading above 50 means more builders view market conditions as favorable than poor. The index hit an all-time high of 90 in November 2020. Surging home prices and limited supply has put a lid on home sales throughout this year. Consequently, fewer U.S. consumers believe that now is a good time to purchase a home.

Satellite company Spire begins trading on the NYSE after completing SPAC merger. Small satellite builder and data specialist Spire Global began trading on the New York Stock Exchange on Tuesday, becoming the latest space company to close a SPAC merger and go public. The company merged with special purpose acquisition company NavSight, which valued Spire at $1.6 billion in equity.

Retail sales drop worse-than-expected 1.1% in July as rising Covid fears hit consumers. hoppers in the U.S. cut back their purchases in July even more than expected as worries over the delta variant of Covid-19 dampened activity and government stimulus dried up. Retail sales for the month fell 1.1%, worse than the Dow Jones estimate of a 0.3% decline and below the upwardly revised 0.7% increase in June. Excluding automobiles, sales declined 0.4%, according to Commerce Department figures released Tuesday.

Home Depot — The home improvement retailer’s shares dropped more than 4% after reporting second-quarter results. Comparable-store sales fell short of forecasts, however, rising 4.5% compared to a StreetAccount consensus estimate of 5%. However, Home Depot earned $4.53 per share, 9 cents a share above estimates. Revenue also topped forecasts.

Shares of 23andMe surged over 14% in midday trading after Credit Suisse initiated coverage of the stock with an outperform rating, saying in a note to clients that the company’s database would be hard to match for pharmaceutical research.

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


Sembcorp Industries – Impaired profitability

Recommendation: Neutral (Downgrade), Last Done: S$1.97

Target price: S$2.01, Analyst: Terence Chua

– Revenue was ahead of our expectations, at 57% of FY21e estimate. Net profit, however, missed at 14.7% of FY21e dragged by S$212mn impairment for its 49%-owned JV Chongqing Songzao.

· Underlying business resilient. Net profit before exceptional items was 69% higher YoY, driven by higher contributions from all key revenue segments.
· 2H21 to be affected by longer-than-expected planned maintenance shutdowns in Singapore, India and Myanmar as well as weaker demand due to a resurgence of COVID-19 Delta variant in key markets.

· We remain Neutral while reducing our target price to S$2.01 from S$2.07, still pegged at 1.0x FY21e P/B. We reduce FY21e earnings by 34% as we bake in impairments of S$212mn and lower Conventional Energy profits in 2H21.

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