DAILY MORNING NOTE | 19 February 2024

Trades Initiated in the past week


Week 8 Equity Strategy: The recently announced 2024 Singapore budget has limited immediate impact on the equity market, as anticipated. Compared to last year’s budget, there was more support for retirees and reskilling of the workforce. The reskilling programme particularly stood out. The generous training allowance ( up to 50% of the previous monthly pay for two years) when enrolled in a full-time course was akin to unemployment benefits. Nuclear and hydrogen were the clean fuels mentioned for the country’s energy transition. The need to also safeguard energy security will be an opportunity for both conglomerates – Keppel and Sembcorp. Finally, our version of the minimum salary or local qualifying salary has been raised from S$1,400 to S$1,600.

Recent inflation data exceeding expectations propelled bond yields close at their year highs. US core CPI in January climbed 3.9% YoY (Dec23: +3.9%), a tad above expectations. Holding up the CPI has been stubborn services trending around 7% YoY. Further dampening hopes of a rate cut were comments by FOMC member Bostic that he is not yet comfortable that inflation is declining to their 2% objective. The January core producer price index rose 1.9% and above expectations. Expectations are the key core PCE reading to be released at month-end will similarly disappoint. Our view is the inflation downtrend is intact. This final leg to pull down the services will be slower, especially with a buoyant labour market.

On stocks, the UK is another country on the heels of a rate cut. Inflation of 4% is more than 2-year lows. Rate cuts will benefit the valuation of Elite REIT’s assets in the UK and the attractiveness of its 14% plus dividend yield. UMS Holdings rallied off Applied Materials (AMAT) better than expected guidance. The guidance was underwhelming as revenue growth is expected to decline 2% YoY. Nevertheless, sentiment and flow drove AMAT shares up by 6%. We believe that with AI, the whole semiconductor supply chain is enjoying a significant re-rating. Keppel Pacific Oak (KORE) experienced a dramatic 40% collapse in its share price in a single day. Although it could have paid US$26mn in dividends, it opted to suspend payments until 2026 to conserve liquidity and cap gearing. Ironically, the market has punished KORE for reinvesting in its future. Capex is now crucial to retain and attract tenants. There is no bank funding for office real estate in the US.

Paul Chew
Head Of Research

Singapore shares extended the previous day’s gains on Friday (Feb 16), staying in positive territory throughout the trading session, including during Finance Minister Lawrence Wong’s Budget 2024 speech. It advanced 45.25 points or 1.4 per cent to 3,221.94, buoyed partly by overnight gains on Wall Street as it put behind the mid-week’s inflation jitters following hot US inflation data. The local market’s key barometer had a strong holiday-shortened week, having gained 84 points or 2.7 per cent. Singapore’s key exports posted a double-digit jump in January, far exceeding market expectations. The latest data validates the ongoing narrative of the Singapore economy’s continued recovery. Some of the key measures under Budget 2024 included support for businesses and households facing rising cost pressures and several key tax changes.

Wall Street stocks retreated on Friday after a bigger than expected increase in wholesale prices poured cold water on hopes that the Federal Reserve would cut interest rates soon. The Dow Jones Industrial Average ended 0.4 per cent down at 38,627.99, while the broad-based S&P 500 Index lost 0.5 per cent to 5,005.57. The tech-rich Nasdaq Composite Index dropped 0.8 per cent at 15,775.65. The slide came after US wholesale prices increased more than anticipated, gaining 0.3 per cent in January on higher services costs.

Top gainers & losers


Events Of The Week



In A first for aviation, Singapore company Nandina REM (Nandina) will recycle carbon fibre from retired aircraft for use in new aircraft. While other companies already produce such recycled carbon fibre reinforced plastic (CFRP), this is typically of a lower quality than virgin carbon fibre and has not been used in new aircraft before. Nandina announced the debut of its recycled carbon fibre material, which will be used for non-critical aircraft components as well as electric vehicles (EVs) on Monday (Feb 19) and it will be present at the Singapore Airshow 2024, which runs from Feb 20 to 25. The company recycles materials from decommissioned aircraft and supplies them to the aviation industry. It also has a platform for tracing the source, delivery, location, and uses of its recycled materials.

Electronic components and consumer products distributor Serial System is expecting a net loss for the financial year ended Dec 31, 2023. Based on a preliminary review of the group’s unaudited financial results, the net loss is primarily due to loss allowance for trade receivables, net foreign exchange loss, inventory obsolescence and higher interest expenses, it said on Saturday (Feb 17) in a filing to the Singapore Exchange. The group said: “The weak financial performance is also attributable to the slowdown in consumer and industrial demand in Asia, especially China, amid macro challenges around inflationary pressures, high interest rates, currency volatilities and ongoing geopolitical tensions.”

Developer TID began previews of its Lentoria project at Lentor Hills on Saturday (Feb 17), with prices starting from S$1,965 per square foot (psf). Located in District 26, the 99-year leasehold Lentoria will house 267 units. It is the fourth new launch in Lentor, out of six Government Land Sales (GLS) sites sold so far. One-bedroom units of 538 sq ft start from S$1.18 million (S$2,190 psf). Two-bedroom units, sized from 700 sq ft to 732 sq ft, start from S$1.4 million (S$1,965 psf). Three-bedroom units, which range from 915 sq ft to 1,119 sq ft, start from S$1.8 million (S$1,974 psf). Four-bedroom units range from 1,206 sq ft to 1,345 sq ft, and pricing will be announced shortly, TID said. TID is a joint venture between Hong Leong Group and Mitsui Fudosan.


OpenAI has concluded a deal with investors that reportedly values the California start-up at US$80 billion or more, after a roller-coaster year for the inventor of ChatGPT. The agreement would mean the value of the company – a world leader in generative artificial intelligence (AI) – would have nearly tripled in under 10 months. The reported deal would have the San Francisco-based firm selling existing shares to investors led by Thrive Capital. It would permit executives and employees to sell shares at a highly favourable price, just three months after the firm survived a major crisis when company co-founder and chief executive Sam Altman was fired and then brought back only days later. OpenAI led a revolution in artificial intelligence when it placed its ChatGPT program online in late 2022.

The European Union (EU) is close to hitting Apple with its first ever antitrust fine as well as a ban on App Store rules that the bloc believes thwart competition, according to the Financial Times. The fine of around 500 million euros (S$725 million) is expected to be announced next month, the FT said, citing five sources it did not name. Apple could have been fined as much as 10 per cent of its annual global sales. The probe was sparked by a complaint in 2019 from Sweden’s Spotify Technology, which claimed it was forced to ramp up its monthly subscription price to cover costs associated with Apple’s alleged stranglehold on how the App Store operates. The European Commission homed in on Apple’s so-called anti-steering rules in a formal charge sheet in February 2023, saying the conditions were unnecessary and meant customers faced higher prices.

The US dollar retreated on Friday (Feb 16) amid concerns about the strength of the US economy after higher-than-expected producer prices raised expectations that the Federal Reserve will desist from cutting interest rates until at least the middle of the year. The rise in producer prices reported by the Labor Department was the largest in five months and followed a hotter-than-expected report on Tuesday for consumer prices last month. But data on Thursday for US retail sales in January showed the sharpest drop in 10 months, giving some in the market pause as the report suggested slowing momentum in consumer spending as sales were revised lower in November and December too.

Oil prices settled higher on Friday as geopolitical tensions in the Middle East more than offset a forecast from the International Energy Agency for slowing demand. Brent crude futures settled up 61 cents, or 0.74 per cent at US$83.47 a barrel. US West Texas Intermediate crude settled US$1.16, or 1.49 per cent, higher at US$79.19 with the nearby March contract expiring on Tuesday. The April contract rose 87 cents to US$78.46. For the week, Brent gained more than 1 per cent and the U.S. benchmark rose about 3 per cent. The growing risk of a wider conflict in the Middle East supported crude prices.

Softbank Group founder Masayoshi Son is seeking as much as US$100 billion to bankroll a chip venture to compete with Nvidia and supply semiconductors essential for AI, according to people with knowledge of the matter. Code-named Izanagi, the project marks the billionaire’s next big endeavor as SoftBank sharply curtails startup investments. Son envisions creating a company that can complement chip design unit Arm Holdings and allow the billionaire to build an AI chip powerhouse, said the people, who requested anonymity because the discussions remain private.

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


Singapore Strategy Budget 2024 – The Social Health Ageing Retire Educate (SHARE) Budget

Analyst Paul Chew

– FY2023 overall fiscal deficit was S$3.6bn (0.5% of GDP), much larger than the estimated deficit of S$0.4bn (or 0.1% of GDP). The primary balance was better than expected, but a jump in special transfer (Majulah Package) by S$7.5bn widened the expected deficit. FY2024 is expected to show a surplus of S$0.8bn (or 0.1% of GDP).

– The budget theme was for a SHARED future. Social support for the cost of living and reducing inequality, raising the eligibility of healthcare subsidies, more facilities for the aged, extra payouts for retirees, and more aggressive programs to upskill the workforce.

– Compared to last year’s budget, there is the usual cost of living package, but more focus was given to building up the nest egg for seniors and upskilling the workforce. Absent were higher consumption taxes on the wealthy. The focus on infrastructure spending shifted from climate-related spending to energy transition. The increased spending and handouts for households will benefit consumer spending, especially for staples. Beneficiaries will be supermarkets and suburban malls.

Magnificent-7 Monthly: Jan 24 – AI still the main driver

Recommendation: OVERWEIGHT (Maintained); Analysts: Jonathan Woo, Zane Aw, Helena Wang, Phillip Research Team

– MAG-7 began 2024 on strong footing, posting a +2.0% gain in January, beating both the Nasdaq (+1.6%) and the S&P 500 (+1.2%).

– NVDA (+24.2%) was the biggest gainer, spurred by accelerating AI-related demand, while TSLA (-24.5%) was the main laggard due to margin headwinds and soft FY24e growth outlook.

– MAG-7 companies reported accelerating revenue and earnings growth for the quarter ending Dec 23. The average earning growth was 55%. Guidance was for continued growth in the near term. AI-related demand remains robust across the board, with pricing for digital advertisements finally stabilising. Demand for tech hardware was soft, with EV margins hurt by ongoing price wars. We maintain an OVERWEIGHT recommendation on the MAG-7.

Singapore REITs Monthly – Hit by higher financing costs

Recommendation: Overweight (Maintained); Analyst: Darren Chan

– The S-REITs Index fell 4.4% in January after gaining 8.9% in December. The top performer for the month was Frasers Centrepoint Trust (FCT SP, ACCUMULATE, TP S$2.38). It gained 1.8% after commendable results and the proposed acquisition of a further 24.5% stake in NEX. The worst performer was Prime US REIT (PRIME SP, BUY, TP US$0.37) – it fell 30.4% after gaining 95.1% the month earlier, due to portfolio valuation and gearing concerns. The retail sub-sector was the outperformer in January, gaining 0.3%, lifted by FCT. The worst performing sub-sector was overseas commercial. It fell 13.2% after gaining 39.7% in December, dragged down by Singapore-listed US office REITs.

– S-REITs are now trading at their 10-year average forward dividend yield of c.6.1%. P/NAV of 0.9x is 1.4x s.d. below the mean of 1.03x. From the 23 REITs which announced dividends thus far, 74% saw a contraction in DPU. Highest growth in DPU were from hospitality REITs.

– We remain OVERWEIGHT on S-REITs as we enter a monetary easing cycle. We continue to favour REITs with a healthy balance sheet, strong sponsors, and improving operating metrics such as REITs in the hospitality and retail sub-sector. Catalysts are expected from a pick-up in the economy, asset recycling and interest rate cuts. Top picks are CapitaLand Ascott Trust (CLAS SP, ACCUMULATE, TP S$1.04) and Frasers Centrepoint Trust (FCT SP, ACCUMULATE, TP S$2.38).

Singapore Banking Monthly – Loans and interest rates dip further

Recommendation: Overweight (Maintained); Analyst: Glenn Thum

– January’s 3M-SORA was down 5bps MoM to 3.69% and was 5bps lower than the 4Q23 average. This is the largest MoM decline since July 2020. 3M-HIBOR was down 55bps MoM to 4.82%, the largest MoM decline since January 2023.

– Singapore domestic loans dipped 2.4% YoY in December, below our estimates. The loan decline was the smallest decline recorded in 11 months. The CASA balance was maintained at 18.5% (Nov23: 18.5%).

– Maintain OVERWEIGHT. All three banks declined in January. The worst performer was DBS with a 4.6% decline. We remain positive on banks. NIMs may see flat growth despite the higher-for-longer interest rate environment, but a recovery in loan growth and fee income will uplift profits. Bank dividend yields are also attractive with upside surprises due to excess capital ratios and a push towards higher ROEs.

Silverlake Axis Ltd – Quality of earnings improving

Recommendation: Buy (Maintained), Last done: S$0.25, TP: S$0.36, Analyst: Glenn Thum

– 2QFY24 earnings of RM39.8mn met our estimates. 1HFY24 earnings were at 49% of our FY24e. The 5% YoY dip in earnings came from lower-than-expected non-recurring revenue and higher-than-expected OPEX.

– 2QFY24 recurring revenue comprising maintenance and enhancement services, insurance ecosystem transactions and services, and retail transactions processing revenue grew 4% YoY, while non-recurring revenue comprising software licensing, software project services and sale of system software and hardware products fell 4% YoY. Orderbook is RM790mn (1QFY24: RM720-730mn) with the total deals pipeline at RM1.4bn. One imminent MOBIUS deal with a Thailand bank worth ~RM30mn.

Maintain BUY with a lower target price of S$0.36. Our FY24e estimates remain unchanged. The quality of Silverlake’s earnings is improving. Recurrent revenue is building up from new products (MOBIUS, Symmetri), and maintenance revenue expanding with rising security enhancement of core SIBS software. Our target price is pegged to 19x P/E FY24e. We expect MOBIUS and the recovery in bank IT spending after two cautious pandemic years to be the key growth drivers for the company.

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