DAILY MORNING NOTE | 25 August 2022

The Singapore market closed lower on Wednesday (Aug 24) amid mixed regional trade. Its benchmark Straits Times Index (STI) dropped 0.4 per cent or 12.73 points to 3,233.48. Losers outnumbered gainers 260 to 225 in the broader market, with 1.4 billion shares worth S$992.3 million changing hands. Frasers Logistics and Commercial Trust came in at the bottom of the STI performance chart, sliding 2 per cent to S$1.38. Following behind was Capitaland Investment, which fell 1.3 per cent to S$3.76. OCBC extended its 2-day losing streak into a third day, closing 0.8 per cent lower at S$11.99. UOB also traded lower, by 0.6 per cent or S$0.16 to end at S$27.35. DBS was among 4 STI counters that closed higher, rising 0.2 per cent or S$0.05 to hit S$32.85. The top STI performer of the day was Yangzijiang Shipbuilding, which climbed 1.1 per cent or S$0.01 to end at S$0.95. In the broader market, Marco Polo Marine was the most actively traded counter by volume. It closed up 5.9 per cent at S$0.036, after 92.4 million of its shares worth S$3.3 million changed hands.

Wall Street equities broke a 3-day skid, ending higher on Wednesday (Aug 24) as traders looked through mixed data to buy shares. But investors remain focused on a speech Friday by the US central bank chief at the Jackson Hole policy conference in Wyoming, hoping – but perhaps no longer expecting – to hear hints of a coming respite in aggressive interest rate hikes. With inflation still at a 40-year high, economists and Federal Reserve officials have stressed that the benchmark lending rate will continue to rise. The Dow Jones Industrial Average gained 0.2 per cent to finish the day at 32,969.23. The broad-based S&P 500 rose 0.3 per cent to 4,140.77, while the tech-rich Nasdaq Composite Index added 0.4 per cent to end at 12,431.53.

SG

Singapore Telecommunications’ net profit for the first quarter ended Jun 30 was up 41.3 per cent to S$628 million from S$445 million last year, said the telco giant in a regulatory filing on Wednesday (Aug 24). This was mainly due to a better operational performance and “exceptional gains” from India’s Bharti Airtel. A dilution of the group’s effective shareholding in Australia Tower Network also gave its Q1 net profit a lift, added Singtel. The group’s Q1 earnings before interest, taxes, depreciation and amortisation (EBITDA) fell 2 per cent to S$977 million from S$997 million, while operating revenue for the quarter slipped 5.6 per cent from S$3.8 billion to S$3.6 billion in Q1 2022. This was largely due to the absence of Optus’ national broadband network migration revenue and contributions from Amobee. Amobee was classified as a “subsidiary held for sale” in March. The telco also took a hit from a 4 per cent depreciation of the Australian dollar. On an underlying basis, operating revenue and Ebitda would have grown 1.8 per cent and 2.9 per cent respectively, mainly driven by Optus and its Singapore consumer business arms on the back of a roaming rebound from the broader relaxation of Covid-19 restrictions. Singtel’s shares closed $0.01 lower at S$2.62 on Wednesday.

Zhongxin Fruit has announced earnings of RMB47.43 million ($9.63 million) for the FY2022 ended June, reversing from its RMB3.87 million loss in the FY2021. For the period, earnings per share (EPS) stood at RMB4.49 on a fully diluted basis. Revenue for the FY2022 stood at RMB141.8 million, 8.4% higher y-o-y. In the same period, the group recorded higher sales volume due to higher customer demand for concentrated fruit juices. The group’s cost of sales remained relatively stagnant at RMB104.3 million, down 2.3% from FY2021. FY2022’s gross profit stood 55.8% higher y-o-y at RMB37.5 million as gross profit margin (GPM) improved by eight percentage points y-o-y to 26%. The higher GPM was mainly due to the lower average procurement cost of raw materials and higher operating efficiency which resulted from the implementation of cost control measures. In the FY2022, the group’s operating profit stood at RMB47.4 million due to the receipt of settlement payment of RMB27.5 million from the ultimate beneficial controlling shareholder of Sanmenxia Tianyu Investment Co., Ltd in the 1HFY2022. Shares in Zhongxin Fruit closed 0.6 cents or 13.64% up at 5 cents on Aug 24.

Olam Group’s food, feed and fibre operating business Olam Agri has obtained a US$2.9 billion facility with a 3-year tenor to refinance its existing loans, and for general corporate purposes. The loan is based on Poseidon Principles, a framework for integrating climate considerations into lending decisions to promote international shipping’s decarbonisation. In a press statement on Wednesday (Aug 24), Olam Agri said the facility saw participation from a “large and diverse group” of 16 lenders including DBS, MUFG Bank and Natixis – who also served as joint Poseidon Principles programme co-ordinators for the facility. HSBC was appointed the facility agent. The facility is guaranteed by Olam Group with Olam Agri subsidiaries, Olam Global Agri and Olam Global Agri Treasury, as co-borrowers. Shares of Olam ended Tuesday flat at S$1.48.

US

Meta Platforms reached a US$37.5 million settlement of a lawsuit accusing the parent of Facebook of violating users’ privacy by tracking their movements through their smartphones without permission. A preliminary settlement of the proposed class action was filed on Monday (Aug 22) in San Francisco federal court and requires a judge’s approval. It resolved claims that Facebook violated California law and its own privacy policy by gathering data from users who turned off Location Services on their mobile devices. The users said that while they did not want to share their locations with Facebook, the company nevertheless inferred where they were from their IP (internet protocol) addresses, and used that information to send them targeted advertising. Monday’s settlement covers people in the United States who used Facebook after Jan 30, 2015. Meta denied wrongdoing in agreeing to settle. It did not immediately respond on Tuesday to requests for comment.

Intel and Canada’s Brookfield Asset Management agreed to jointly fund up to US$30 billion for the US chipmaker’s leading-edge chip factories in Arizona, fuelling Intel’s ambition to bring more chip production onshore without weighing on its balance sheet. Brookfield’s infrastructure affiliate will invest up to US$15 billion for a 49 per cent stake in the expansion project, while Intel will retain majority ownership and operating control of the 2 chip factories meant to make advanced chips in Chandler, Arizona. The investment is an expansion of an agreement signed by Intel and Brookfield in February to explore finance options to help fund new Intel manufacturing sites. The 2 companies didn’t disclose specific terms. David Zinsner, Intel’s finance chief, told analysts the interest rate was between 4.4 per cent and 8.5 per cent, which is more expensive than debt financing but cheaper than equity financing. For private capital providers like Brookfield, foundries represent a cash-flow generating investment opportunity resembling private equity investments in infrastructure, such as data centres and fibre, signalling investors’ long-term confidence in semiconductor demand. Through the deal, Intel could preserve debt capacity for other priorities with financing commitment for a multi-year project, while maintaining operational control.

US pending home sales fell in July for the sixth time this year to the lowest level since the start of the pandemic, extending the housing market’s sharp downturn as high borrowing costs sideline prospective buyers. The National Association of Realtors’ (NAR) index of contract signings to purchase previously owned homes decreased 1 per cent from a month earlier to 89.8, according to data released on Wednesday (Aug 24). That followed a nearly 9 per cent decline in June. The median estimate in a Bloomberg survey of economists called for a 2.6 per cent drop in July. High home prices and a run-up in mortgage rates this year have pushed home ownership out of reach for many would-be buyers. The pullback has been swift and severe, with a range of measures pointing to weaker sales and construction activity. The monthly bill on a typical home with a 20 per cent down payment rose to US$1,841 in the second quarter, according to a separate NAR report out earlier this month. That’s up 32 per cent, or US$444, from the first quarter and a 50 per cent jump from a year earlier. Pending home sales are often looked to as a leading indicator of existing-home purchases given properties typically go under contract a month or 2 before they’re sold.

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

RESEARCH REPORTS

City Developments Limited – Lifted by hospitality and divestment gains

Recommendation: ACCUMULATE (Downgraded), Last Done: $8.21

Target price: $8.86, Analyst: Terence Chua

Buy limit: 310.60 Stop loss: 292.00 Take profit 1: 350.00 Take profit 2: 375.00

· 1H22 revenue of S$1.47bn (+23.5% YoY) in line at 46% of our forecast. PATMI exceeded at 107% due to divestment gains from Millennium Hilton Seoul of $526.2mn and $94mn gains from deconsolidation of CDLHT, excluding which, performance would have been in line.

· All three core segments improved. Strong residential sales (712 units sold, in line) and recovery in the hospitality segment (RevPAR +110% YoY), which has turned EBITDA positive. Investment properties portfolio recovered with office and retail above expectations.

· 639-unit JV EC project, Copen Grand set to be launched in 4Q22; demand for project expected to be robust. Hotel operations to also benefit from reduction of Covid-19 restrictions, M&A and divestment opportunities.

· Downgrade to ACCUMULATE and lower RNAV-derived TP of $8.86 (prev. $9.19). We view CDL as a proxy for the Singapore residential market and hospitality recovery. CDL is trading at an attractive 40% discount to our RNAV/share of S$13.64. Asset monetisation, unlocking value through AEIs and redevelopments, and faster-than-expected recovery in hospitality portfolio are potential catalyst for CDL, which could help narrow the discount between CDL’s share price and RNAV. However, TP is reduced to $8.86 as we incorporate higher borrowing costs for FY22e/FY23e along with slower profit recognition for its residential properties.