DAILY MORNING NOTE | 25 September 2023
Week 39 equity strategy: The Federal Reserve kept interest rates unchanged at 5.25-5.5%. There were two other key messages. Firstly, the Fed is prepared to raise rates once more time this year. We find this unlikely as we expect inflation (or core PCE) will continue to trend lower as the key home rent index has started to slow significantly. Secondly, the Fed signalled interest rates will be maintained at a higher level than originally anticipated due to better labour and economic conditions. Interest rates are 50 basis points higher at 5.1% in 2024 than the Fed initial projections. This implicitly means one rate cut from current levels.
We have a positive stance on REITs. Our optimism is grounded on relative outperformance rather than absolute returns. We expect REIT outperformance is due to a decelerating economic environment and peak in interest rates. Their price to book valuations is also at their lows. The business model for REITs does not currently work with the recent surge in interest rates. Without the benefit of a positive rental carry (cap rate lower than borrowing cost) when making acquisition there is little room to grow DPU. It will take time for rents to outpace the spike in interest rates.
Head Of Research
Singapore shares ended Friday (Sep 22) slightly higher after paring early losses, rising 0.1 per cent or 2.01 points to 3,204.82 at the close. Genting Singapore closed 1.2 per cent lower to S$0.85, making it one of the top losers. UOB dipped 0.1 per cent to S$28.22, DBS inched up 0.1 per cent to S$33.25, while OCBC rose 1 per cent to S$12.61.
Wall Street stocks edged lower on Friday (Sep 22), extending a losing streak as markets continued to anticipate a period of persistently elevated interest rates. The broad-based S&P 500 finished at 4,320.06, down 0.2 per cent for the day. The Dow Jones Industrial Average dropped 0.3 per cent to 33,963.84, while the tech-rich Nasdaq Composite Index lost 0.1 per cent at 13,211.81.
HSBC Institutional Trust Services (Singapore), the trustee of Frasers Centrepoint Trust (FCT), has entered into a sales and purchase agreement to divest 143.9 million units in Malaysia’s Hektar Real Estate Investment Trust (Hektar Reit) for RM128.1 million (S$37.4 million) to unrelated third parties. FCT currently holds 30.7 per cent of the total number of Hektar Reit units in issue. This represents 154.5 million units of a total of 498.8 million units. Following completion of the divestment, FCT will hold 2.1 per cent of the total number of Hektar Reit units in issue. The trust’s manager said it intends to divest these remaining Hektar Reit units “in due course”. On the rationale for the divestment, the trust’s manager said FCT’s unitholding in Hektar Reit is non-core to its portfolio and investment strategy. The divestment is expected to be completed in the fourth quarter of 2023.
Geo Energy Resources has secured US$220 million in term loan facilities from Bank Mandiri to be used for funding acquisitions, working capital and other capital expenditure requirements. The loan facilities will provide the group with strong working capital and liquidity to unlock the value of its core asset – the Triaryani mine, which has proved and probable reserves of almost 300 million tonnes, Geo said. The loan will allow the group to also ramp up production levels and fund the mining and infrastructure development required to support and achieve the Triaryani mine’s targeted production volume of 25 million tonnes annually.
The manager of Keppel DC REIT (KDCREIT) announced that Keppel DC REIT Fin. Company, a subsidiary of KDCREIT, has obtained a Sustainability-Linked Islamic Credit Facility guaranteed by Perpetual (Asia), in its capacity as trustee of KDCREIT, pursuant to a master murabahah agreement dated September 22. The multi-currency credit facility is worth $120 million and is a sustainability-linked murabahah revolving credit facility.
Microsoft got a huge boost in its attempt to clear the final global regulatory hurdle for the US$69 billion Activision Blizzard deal, after the UK’s antitrust watchdog said the revised deal offer from the tech giant appeared to address its concerns. The Competition and Markets Authority (CMA) said on Friday (Sep 22) that it will consult on the new offer, but Microsoft’s proposal opens the door to the deal being cleared. The new proposal offered to sell some gaming rights to French publisher Ubisoft Entertainment. Microsoft executive Brad Smith said the firm will continue to work towards winning final approval to close the deal by Oct 18.
Broadcom shares fell following a report that Alphabet’s Google is considering dropping the company as a supplier of artificial intelligence (AI) chips as soon as 2027. Business publication The Information reported on Thursday (Sep 21) that Google executives had set a goal earlier this year to move away from Broadcom after a prolonged stand-off over the price it pays for chips, citing an unidentified person familiar with the matter. Separately, Google has worked since last year to shift to Marvell Technology for chips that connect servers to Ethernet switches, The Information said.
Apple’s latest iPhones and watches went on sale on Friday (Sep 22). The devices are going on sale in about 40 countries in its first wave, including in Australia, Hong Kong, mainland China, the US, UK and France. So far, the new devices have fared well for Apple, based on the initial online sales of the product. New online orders for the highest-end iPhone 15 models won’t arrive for customers until at least mid-November in several countries – a sign of high demand – while reservations for in-store pickups quickly sold out.
Brightspring Health Services has confidentially refiled for a listing with a goal of raising US$1 billion, according to people familiar with the matter. A listing by the home and community-based health-care services provider backed by KKR & Co is slated for the fourth quarter, said the sources. KKR and BrightSpring haven’t made a final decision on details and timing of a listing and their plans could still change, the people added. BrightSpring now serves 350,000 senior and speciality patients daily in 50 states, according to its website.
Citigroup has warned UK-based employees of the likelihood of redundancies as the lender pushes ahead with a sweeping reorganisation, according to a memo seen by Reuters on Friday (Sep 22), a move that could affect hundreds of jobs in the country. The bank has about 16,000 employees in the UK. It did not tell Britain and North Ireland-based employees how many jobs would be eliminated. It is also not known which areas of the bank’s UK operations will be targeted for layoffs.
Goodyear Tire & Rubber said on Friday (Sep 22) that it plans to cut 700 jobs and sell about 100 retail stores and fleet locations, under a rationalisation plan for its Asia-Pacific segment. The move is expected to improve the segment’s operating income by approximately US$50 million to US$55 million in 2025, the tire manufacturer said, adding that the plan would also improve profitability in its Australia and New Zealand operations. The company said the approved plan that is part of its broader restructuring effort would be completed by the end of 2024. The pre-tax charges are estimated between US$55 million and US$65 million.
Cainiao Network Technology, the logistics arm of Alibaba Group, is planning to file for its Hong Kong initial public offering (IPO) as soon as next week, said people familiar with the matter, potentially making it among the first of the Chinese tech firm’s units to go public. Cainiao promises to deliver packages in China within 24 hours and anywhere else in the world in 72 hours, said its website. The company is targeting to raise at least US$1 billion in the share sale, though it is still early to decide on the valuation, said the sources. No final decision has been made and details could still change, they said.
Source: SGX Masnet, Bloomberg, Channel NewsAsia, Reuters, CNBC, WSJ, The Business Times, PSR
Recommendation: BUY (Initiation); TP S$0.61, Last close: S$0.525; Analyst Paul Chew
– After five years of revenue decline, we expect a turnaround for Valuetronics after securing four new customers for FY24e/FY25e.
– The new factory in Vietnam will allow customers to de-risk from a China supply chain faced with high US tariffs and escalating geopolitical tension.
– Valuations are attractive at 1.1x EV/EBITDA with a dividend yield of 5%. Valuetronics carries a net cash of HK$1bn (S$177mn) on its balance sheet, or 80% of the market cap. We initiate coverage with a BUY recommendation and target prices of S$0.61. We peg our target price to industry valuations of 11x PE 1-year forward earnings. Valuetronics has an existing share buy-back plan to purchase an estimated 60mn shares (or S$32m) at the current price.
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