DAILY MORNING NOTE | 22 August 2022
Local shares ended the trading week in the red, as investors took stock of inflation levels and potential hikes in interest rates in the months ahead. The Straits Times Index (STI) shed 0.8 per cent or 26.97 points to end Friday (Aug 19) at 3,246.51. Decliners outnumbered advancers 264 to 214, after 1.3 billion securities worth some S$989 million changed hands. On the local bourse, companies from the Jardine group dominated the list of top advancers. Jardine Matheson was the biggest gainer, adding 0.9 per cent or US$0.46 to US$52.27. Jardine Cycle and Carriage was up 1.3 per cent or S$0.42 to S$32.32, while DFI Retail Group rose 2.9 per cent or US$0.08 to US$2.83. DBS was the top decliner, shedding 1.2 per cent or S$0.40 to S$32.04. Other lenders were also down – UOB fell 0.7 per cent or S$0.20 to S$26.80 and OCBC lost 1.5 per cent or S$0.18 to S$12.21.
Wall Street stocks fell Friday (Aug 20) on lingering worries about inflation and higher equity valuations, snapping a four-week winning streak of weekly gains. The broad-based S&P 500 finished at 4,228.48, down 1.3 per cent for the day and a bit more than 1 per cent for the week in the index’ first decline in 4 weeks. The Dow Jones Industrial Average shed 0.9 per cent to 33,706.74, while the tech-rich Nasdaq Composite Index dropped 2 per cent to 12,705.22. Among individual companies, Occidental Petroleum surged almost 10 per cent after US authorities granted Warren Buffett’s Berkshire Hathaway permission to acquire up to 50 per cent of the energy company’s common shares. Bed Bath & Beyond plunged more than 40 per cent after activist investor Ryan Cohen sold his stake in the home goods store.
Oxley Holdings posted a S$20.3 million loss attributable to shareholders for the second half of the fiscal year ended June 2022, more than doubling from its loss of S$9.6 million the year before. According to the property developer’s financial statements filed after the market opened on Friday (Aug 19), this was largely due to a steep decline in revenue, lower profit margins and continued losses booked from discontinued operations. A final dividend of 0.25 Singapore cent per share has been proposed. Revenue for H2 FY2022 fell 46 per cent on-year to S$419.5 million from S$781.9 million as the group registered lower contributions from its overseas projects in Cambodia, the UK, Ireland and Malaysia, which more than offset year-on-year topline gains from development projects in Singapore and the sale of land parcels in Australia. A decline in gross profit margin – mainly due to lower margins from local development projects coupled with reduced revenue from overseas projects – led to a 73 per cent fall in gross profit for the half year to S$56 million, against S$206.1 million in gross profit for H2 FY2021. In its results filing, Oxley said it is in the midst of selling its assets in Vietnam and believes this will contribute positively to the group’s cash flows in H1 of FY2023 should the transaction successfully complete. The group is anticipating most of its Singapore development projects to be completed by end-2022, and its gearing ratio to be reduced significantly upon the repayment of project loans. This would allow the group to effectively mitigate the impact of gradual interest rate hikes on its borrowing costs, it said. Construction of its Riverscape (UK) and Dublin Arch (Ireland) projects have also commenced, and TOP (temporary occupation permit) is expected in 2024 and 2025, added the group. Shares of Oxley last ended Thursday unchanged at S$0.174 before the group called for a trading halt on Friday morning, pending the results announcement. Oxley requested to lift the halt on trading from 10.15 am on the same day.
Systems integration solutions provider Nordic Group reported a 49 per cent increase in H1 net profit to S$11.6 million from the S$7.8 million recorded in the previous corresponding financial period. Its revenue also jumped – rising 62 per cent to S$79.8 million from S$49.8 million previously, the mainboard-listed group reported in its business update for the first fiscal half ended Jun 30 on Friday (Aug 19). Gross profit was also up, 65 per cent to S$23 million from S$14 million previously. In its outlook, the group said it remains positive over the long-term prospects in the marine, offshore oil and gas industries, and also the petrochemical, pharmaceutical, infrastructure, semiconductor and security services sectors. It is also optimistic with the contract wins secured to date, the prudent cost and risk management initiatives undertaken and the opportunities for further mergers and acquisitions, it added. “The group is, however, mindful of the possibility of new Covid-19 variants pushing the global supply chain and travel back on restrictions. The global inflationary pressures are also monitored to adjust for the impact on the necessary materials,” noted Nordic Group. Shares of the counter closed down 1.18 per cent or S$0.005 to S$0.420 on Friday, before the announcement was made.
Real estate-focused investment holding company Tuan Sing Holdings has proposed to acquire and privatise commodities trading group SP Corporation via a scheme of arrangement. Tuan Sing currently holds about 80.2 per cent of SP’s total issued share capital, or about 28.1 million shares. In a joint announcement issued on the Singapore bourse on Saturday (Aug 20), both companies said they entered into an implementation agreement setting out the terms and conditions of the scheme. The scheme consideration for each scheme share is S$1.59 in cash. Each SP share was last transacted at S$0.59 on Aug 18, before the announcement. The scheme consideration is equivalent to SP’s book value per share as at Jun 30, 2022. SP is engaged in commodities trading activities in coal, rubber, metals as well as other commodities and products used in the energy, metal and automotive industries in Asia. Tuan Sing will be funding the acquisition using internal cash resources. SP shares closed flat at S$0.59 on Friday while Tuan Sing shares also ended flat, at S$0.365.
Oil prices steadied on Friday (Aug 19), but fell for the week on a stronger US dollar and fears that an economic slowdown would weaken crude demand. Brent crude futures settled at US$96.72 a barrel, gaining 13 cents. US West Texas Intermediate (WTI) crude ended 27 cents higher at US$90.77. Both benchmarks fell about 1.5 per cent on the week. Oil briefly jumped in volatile trade on comments made by Richmond Federal Reserve president Thomas Barkin that the Fed would balance its rate hike path with uncertainty over any impact on the economy. But crude pared its gains as investor concerns about upcoming rate hikes settled back in. In a sign of easing oil supply tightness, the price gap between prompt and second-month Brent futures has narrowed by about US$5 a barrel since the end of July to under US$1. The spread for WTI has shrunk to a 39-cent premium from a nearly US$2 premium in late July. Data earlier this week showed US crude inventories fell sharply as world’s top producer exported a record 5 million barrels of oil per day last week, with oil companies finding demand from European nations looking to replace Russian crude. However, the number of US oil rigs, an early indicator of future supply, was unchanged at 601 this week, according to Baker Hughes Co, as energy companies slowly increase production to pre-pandemic levels with shale oil output in September expected to hit its highest since March 2020.
Elon Musk has approached brain chip implant developer Synchron Inc about a potential investment as his own company Neuralink plays catch-up in the race to connect the human brain directly to machines, according to four people familiar with the matter. Synchron, which is based in the New York City borough of Brooklyn, is ahead of Neuralink in the process to win regulatory clearance for its devices, the sources said. It has not decided whether it would accept an investment and no deal is certain, the sources added. Founded in 2016, Synchron has developed a brain implant that would not require cutting in to the skull to install it, unlike Neuralink’s product. Its goal is to help paralyzed patients operate digital devices with their mind alone. Synchron crossed a major milestone last month by implanting its device in a patient in the United States for the first time. It received FDA clearance for human trials in 2021 and has completed studies in 4 people in Australia.
Copper prices inched higher on Friday (Aug 19) but were set to end the week slightly lower as traders balanced hopes for solid demand in China with pessimism about the global economy. Inflation data in Germany and Japan on Friday and statements from European and US central bankers this week suggest that rapid, economically damaging interest rate rises will continue. Investors turned cautious, pushing down global equities and driving up the US dollar – pressuring dollar-priced metals by making them costlier for buyers with other currencies. Traders were also wary that Covid-19 lockdowns and energy rationing in some parts of China could impact metals production. Rationing has shut some zinc smelters, said consultants CRU. But Chinese demand is unlikely to revive strongly because its property market is in crisis, infrastructure construction is not rapid enough and export demand is weak, said Julius Baer analyst Carsten Menke. Benchmark copper on the London Metal Exchange (LME) was up US$4 at US$8,035 a tonne in official open-outcry trading but down 0.7 per cent for the week. Prices of the metal used in power and construction have risen from a low of US$6,955 a tonne in July but are down around 17 per cent this year. Many analysts predict rapid copper supply growth next year and a market surplus.
Source: SGX Masnet, The Business Times, Bloomberg, Channel NewsAsia, Reuters, CNBC, PSR
Recommendation: BUY (Maintained); TP S$0.60, Last close: S$0.405; Analyst Paul Chew
• Earnings were below expectations. 1H22 revenue and PATMI were 52%/37% of our FY22e forecast. Additional cost from investments in AI project and change in recognition of bonus provision. Earnings from COVID-19 PCR tests swung from $3mn net profit a year ago to S$50k net loss.
• During the quarter, the number of clinics increased by 8 during to 149, a 19% YoY jump. Together with Malaysia, Q &M has 350 dentists.
• We lower our FY22e PATMI by 16% to S$22mn. We are incorporating additional cost for the AI project and even weaker earnings from Acumen. The target price is lowered to S$0.60 (prev. S$0.71). We value core dental operations at 25x PE FY22 earnings, in line with industry peers. Listed associate, Aoxin Q & M Dental (S$0.17, Not Rated), is valued at market price with a 20% discount. The company is expanding its dental clinics at the fastest pace since inception. We estimate CAGR of 18% over the next two years.
Recommendation: BUY (Maintained); TP S$1.26, Last close: S$1.11; Analyst Paul Chew
• 1H22 revenue and PATMI were 64%/68% respectively of our FY22e forecast. Results were above expectations due to a surge in charter rates. 1H22 PATMI spiked 128% to U$16.4mn. The interim dividend more than tripled to 6.5 cents.
• Average charter rate per day in 1H22 jumped 78% YoY to US$19.4k. This is above our modelled US$18.k assumption. Vessel operating days declined 5% YoY due to dry docking.
• Despite the earnings beat, we are maintaining our FY22e forecast. The Baltic Exchange handy size index in July and August has slipped around 25% against the 1H22 average. It points to a much weaker charter rate in 3Q222. Another drag in 2H22 will be the 110 days of dry docking for 4 of the 10 dry bulk vessels. There was a 6% decline in operating days. Our BUY recommendation and target price of S$1.26 is unchanged. The target price is pegged to 3x P/E FY22e, in line with industry peers. Supply of dry bulk vessels remains constrained with new orders at only 7% of fleet capacity, a 30-year low.
Recommendation: BUY (Upgraded), Last done: S$10.00TP: S$11.71, Analyst: Glenn Thum
• FY22 revenue of S$1.1bn was slightly below our estimates, at 94% of FY22e, while earnings of S$452mn met our estimates, at 99% of our FY22e. Variance came from lower-than-expected equity revenue due to lower treasury income. FY22 DPS was stable at 32 cents.
• FICC and DCI grew 19%/3% YoY, led by an increase in OTC FX revenue and an increase in data and services subscriptions.
• Excluding treasury income, revenue was up 7% YoY, driven by higher derivatives volumes across equities, currencies and commodities.
• Equities – Cash & Derivatives was 4% higher YoY as higher trading and clearing revenue was offset by lower treasury income due to the lower net yield.
• Upgrade to BUY with a higher target price of S$11.71. Our TP is pegged to 26x FY23e P/E, +2SD of its 5-year mean. Catalysts include continued growth from new acquisitions and higher treasury income as the higher interest rates start to kick in.
Recommendation: BUY (Maintained); TP: US$110.00, Last Close: US$77.00Analyst: Jonathan Woo
• 1H22 revenue was at 42% our FY22e forecasts. Net loss was worse than expected at 79% of our FY22e forecasts due to higher operating expenses and tax rate.
• 29% YoY revenue growth, with 51%/214% YoY growth in Shopee and SeaMoney. Shopee generated more international (ex-China) revenue than competitor, Alibaba, and was close to achieving positive adjusted EBITDA per order in APAC for the quarter.
• Net loss grew 115% YoY due to increasing expenses in G&A and R&D, and US$177mn goodwill impairment loss. Shopee revenue guidance for FY22e suspended due to uncertain macroeconomic environment, and shift in focus towards profitability metrics.
• We lower our FY22e revenue slightly to reflect weaker e-commerce growth, and we increase our net loss forecasts by 43% to reflect higher expenses. We maintain a BUY recommendation with a lowered DCF target price of US$110.00 (prev US$150.00), with an increased WACC of 7.6%, lower EBITDA and a terminal growth rate of 3.0%.
Analyst: Zane Aw
Recommendation: Technical BUY
Buy limit: 1.14 Stop loss: 1.05 Take profit 1: 1.52 Take profit 2: 1.80
Frencken Group Ltd (SGX: E28) A potential bullish reversal to the upside.
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