DAILY MORNING NOTE | 19 October 2023

Trade of the Day

Food Empire Holdings Ltd (SGX: F03)

Analyst: Zane Aw

(Current Price: S$1.10) – TECHNICAL SELL
Sell price: S$1.10 Stop loss: S$1.15 (-4.55%)
Take profit 1: S$1.04 (+5.45%) Take profit 2: S$0.950 (+13.64%)

Singapore shares finished Wednesday (Oct 18) lower, reversing gains from the day before. It slipped 35.21 points or 1.11 per cent to 3,136.62. Across the broader market, decliners outnumbered advancers 354 to 231 as 1.2 billion securities worth S$943 million changed hands. Markets within the Asia-Pacific finished mostly higher, except for the Hong Kong and Chinese markets. The Hang Seng Index on Wednesday fell 0.2 per cent to 17,732.52, while the SSE Composite Index dropped 0.8 per cent to 3,058.71. This comes after China’s third-quarter GDP data showed a 4.9 per cent improvement year on year, lower than the previous quarter’s 6.3 per cent expansion, but higher than analysts’ expectations. In other parts of Aisa, the Nikkei 225 closed Wednesday marginally higher, up 0.01 per cent to 32,042.25. The Kospi rose 0.1 per cent to 2,462.60, and the ASX 200 gained 0.3 per cent to 7,077.60. Malaysia’s KLCI closed up 0.1 per cent to 1,446.54.

US stocks fell on Wednesday as underwhelming earnings and ongoing fighting in the Middle East weighed on investor optimism. The Dow Jones Industrial Average fell 1.0 per cent to 33,665.08. The broad-based S&P 500 sank 1.3 per cent to 4,314.60, while the tech-heavy Nasdaq Composite Index dropped 1.6 per cent to 13,314.30. The yield on the popular 10-year US Treasury rose above 4.9 per cent for the first time since 2007, as traders prepared for the likelihood of interest rates remaining higher for longer. Yields and prices move inversely to one another, meaning that when the price of a bond falls, its yield rises. The 10-year bond is used to help price everything from mortgages to home loans and when it rises, so does the pain for consumers.

SG

Parkway Life Real estate investment trust (PLife Reit) announced on Wednesday (Oct 18) the acquisition of two nursing homes in Osaka for a total purchase price of 1.8 billion yen (S$16.4 million). The healthcare-focused Reit is buying the properties from K.K. FDS, a Japanese real estate developer. The purchases will take PLife Reit’s portfolio in Japan to 59 properties, valued at approximately S$710.7 million. The acquisition is being made at about 11.9 per cent below valuation, with the transaction expected to be completed by Q4 2023. PLife Reit will be working with a new operator, K.K. Biscuss, which runs 17 nursing and/or aged-care facilities in the Osaka and Hyogo prefectures.

The interim manager of Sabana Industrial Real Estate Investment Trust (Sabana Reit) on Wednesday (Oct 18) announced the real estate investment trust (Reit) had achieved total portfolio occupancy of 91.8 per cent for the third quarter ended Sep 30, down 2.1 percentage points from its second quarter occupancy of 93.9 per cent. However, this was higher than the 89.1 per cent total portfolio occupancy it netted in the corresponding year-ago period. The Reit’s interim business update for Q3 did not include a net income figure. It also does its distributions on a half-yearly basis. In the update, Reit manager Sabana Real Estate Investment Management (SREIM) noted that the Reit had renewed 212,735 square feet (sq ft) of leases, higher than the 134,409 sq ft of renewed leases it logged in Q2.

Keppel Pacific Oak US Reit (Kore) said its third-quarter distributable income was down 10.7 per cent to US$13.1 million, from US$14.6 million in the corresponding period a year ago. This was mainly due to higher financing costs as a result of rising interest rates, said the Reit’s manager in its key business and operational updates for Q3 2023 on Wednesday (Oct 18). For the nine months period ended Sep 30, distributable income logged a larger decline of 15.2 per cent to US$39.2 million, from US$46.2 million in the corresponding period in 2022. Net property income rose 3.7 per cent to US$22.1 million, and gross revenue increased 3.3 per cent to US$38.4 million for Q3 2023. As at end-September, Kore’s aggregate leverage stood at 39.1 per cent with no long-term refinancing requirements until the Q4 2024; the weighted average term to maturity of its debt was 2.9 years, said the manager. The Reit’s portfolio weighted average lease expiry by cash rental income was 3.6 years, while committed occupancy was at 91.4 per cent as at end-September.

Medical skincare provider Niks Professional is offering 21.8 million shares at S$0.23 apiece as it seeks to list on the Catalist board of the Singapore Exchange. The 21.8 million shares comprise 20.8 million placement shares and one million public shares. The placement shares include around 3.7 million reserved shares for management, employees and directors. The new shares will represent 16.8 per cent of the company’s enlarged share capital. The company will raise S$5 million in gross proceeds, with net proceeds coming to S$3.3 million. Of the latter, 24 per cent will go towards funding organic growth; 66 per cent towards acquisitions, joint ventures and/or strategic alliances; and 10 per cent for general working capital. Based on the issue price of S$0.23, Niks Professional will have a market capitalisation of S$29.9 million at listing.

US

The value of distressed US commercial real estate neared US$80 billion in the third quarter, its highest level in a decade, as rising interest rates and sagging office demand shook the property market. The value of buildings in bankruptcy, repossessed by lenders or in the process of liquidation increased by a net US$5.6 billion in the quarter, MSCI Real Assets reported. Office properties accounted for 41 per cent of the US$79.7 billion total. The office sector, battered by remote work and declining tenant demand for space, “continued to be the driving force behind growing distress, providing 93 per cent of the additional balance for the quarter,” MCSI said in the report. While the level of distress is still less than half of that reached in the depths of the global financial crisis, MSCI identified US$215.7 billion of properties that are potentially troubled, with issues such as delinquent payments or slow lease-ups. Apartment buildings accounted for almost a third of those at-risk properties – “likely a function of the greater number of multifamily assets” rather than a crumbling of the sector, MSCI said. US commercial-property values fell 9 per cent in the year through September, and total transactions plunged 53 per cent, MSCI reported separately.

Semiconductor equipment maker ASML Holding reported on Wednesday (Oct 18) third-quarter earnings of 1.9 billion euros (S$2.75 billion), in line with analyst expectations, and said it expected 2024 sales to be about flat. Analysts had forecast net profit for Europe’s largest technology firm at 1.81 billion euros for the three months ended Sep 30, according to LSEG data. The earnings figure for the year earlier period had been 1.7 billion euros. “The semiconductor industry is currently working through the bottom of the cycle and our customers expect the inflection point to be visible by the end of this year,” chief executive Peter Wennink said. He reiterated that the company expected sales growth of 30 per cent for all of 2023. However “customers continue to be uncertain about the shape of the demand recovery … we therefore expect 2024 to be a transition year”. ASML dominates the market for lithography systems, machines that each cost hundreds of millions of euros are used by chip makers such as TSMC, Samsung and Intel to help create the tiny circuitry of chips.

Netflix is raising prices for some customers in the US, UK and France after posting its best quarter for subscriber growth in years, a sign of management’s confidence in the future at an otherwise dreary time in media. The world’s top paid streaming service said on Wednesday (Oct 18) it added 8.76 million customers in the third quarter, far exceeding analysts’ forecasts and boosting its overall subscriber base to 247.2 million. The company credited a strong programming slate and its crackdown on password sharing. Investors have worried that Netflix might lose customers if it forced people who were sharing accounts to buy their own subscriptions. But the crackdown has led to a surge in new customers without a major increase in cancellations. Netflix is now on track to add more than 20 million customers this year, a big jump from fewer than nine million in 2022. Netflix’s revenue increased nearly 8% to $8.54 billion for the quarter. The company forecast that revenue will jump 11% in the fourth quarter, reaching $8.69 billion.

Morgan Stanley posted third-quarter results Wednesday that topped profit estimates on better-than-expected trading revenue. Profit fell 9% to $2.41 billion, or $1.38 a share, from a year ago, the New York-based bank said in a statement. Revenue grew 2% to $13.27 billion, essentially matching expectations. Morgan Stanley’s trading operations helped offset revenue misses elsewhere at the firm. The bank’s bond traders produced $1.95 billion in revenue, roughly $200 million more than the StreetAccount estimate, while equity traders brought in $2.51 billion in revenue, $100 million more than expected. But the bank’s all-important wealth management division generated $6.4 billion in revenue, below the estimate by more than $200 million, as compensation costs in the division rose. Net interest income sank 9% from the second quarter and will fall again in the fourth quarter, the bank’s CFO warned. Investment banking accounted for another miss in the quarter, producing $938 million in revenue, below the $1.11 billion estimate, as the company cited weakness in mergers and IPO listings. The bank’s investment management division essentially met expectations with $1.34 billion in revenue.

United Airlines said more expensive jet fuel and a halt to the carrier’s Tel Aviv flights during the Israel-Hamas war will eat into its profits in the last three months of the year. United shares tumbled 9.7% on Wednesday to $36.24, a one-year low. For the current quarter, the Chicago-based carrier estimated adjusted earnings of between $1.50 and $1.80 a share, below analysts’ forecasts of $2.06. United would then earn between $9.55 and $9.85 a share, on an adjusted basis, down from its forecast in July of between $11 and $12 a share, based on its projection for the fourth quarter. Jet fuel prices in major U.S. airports are up nearly 25% since the start of summer. United and other U.S. and international carriers halted their flights to Israel earlier this month. United had more service to Israel than any of the U.S.-based airlines with service from Washington, D.C.; Newark, New Jersey; and San Francisco, accounting for 2% of its capacity.

Tesla reported third-quarter results after the bell on Wednesday. Shares rose as much as 2.4% in after-hours trading after the report crossed, but then sank more than 3% after CEO Elon Musk cautioned that the Cybertruck would not deliver significant positive cashflow for 12 to 18 months after production begins, and emphasized that the company is focused on making its cars more affordable amid a high-interest rate environment. GAAP (non-adjusted) net income for the quarter was $1.85 billion, or 53 cents per share. Total gross profit declined 22% year-over-year. Total operating margin came in at 7.6%, down significantly from the year-ago quarter’s figure of 17.2%. The company reported $19.63 billion in automotive revenue and $1.56 billion in revenue from its energy generation and storage business. Within automotive revenue, the portion from regulatory credits grew in the third quarter to hit $554 million, up from $282 million the previous quarter and $286 million in the third quarter last year.

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

RESEARCH REPORTS

FAANGM Monthly Sep 23 – Weakness amidst higher rates

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

– FAANGM was the laggard for a 4th straight month, declining -5.7% in September. S&P 500 and Nasdaq were also down -4.9% and -5.1%, respectively, with the market repricing a higher-for-longer interest rate narrative set by the Fed.

– META was the biggest gainer (+1.5%) as shares consolidated after a big drawdown in Aug. NFLX was the main laggard (-12.9%), with investors concerned over tepid advertising revenue growth and vague long-term margin guidance.

– Weakness in demand for tech hardware persists, although we are encouraged by green shoots in digital advertising and Cloud. In addition, FAANGM valuations are looking more attractive, with its 12M Forward P/E continuing to trend downwards, -1 Std Dev away from its 10-year average. We maintain an OVERWEIGHT recommendation on FAANGM.

Keppel DC REIT – Waiting for acquisitions

Recommendation: BUY (Upgraded), Last Done: S$1.91

Target price: S$2.26, Analyst: Darren Chan

– 3Q23 DPU of 2.492 Singapore cents (-3.6% YoY) was in line with our expectations. It formed 25.1% of our FY23e forecast.

– 3Q23 revenue/NPI growth of 0.5%/0.8% YoY, driven by contributions from acquisitions and positive income reversions and escalations, was more than offset by higher finance costs (+56.9% YoY) and less favourable forex hedges.

– Upgrade from NEUTRAL to BUY with an unchanged DDM-derived target price of S$2.26 due to the recent share price performance. DPU growth catalysts include more accretive acquisitions and lower-than-expected interest costs. Organic growth will stem from renewals in FY24e (27.7% of leases expire in 2024). We expect revenue growth of c.4% for FY24e, barring contributions from potential acquisitions. The current share price implies FY23e/24e DPU yields of 5.2%/5.4%. No change to our forecasts.

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