DAILY MORNING NOTE | 26 February 2024

Trades Initiated in the past week

Factsheets


Week 9 Equity Strategy: 22nd Feb was a record breaker. Nvidia’s market cap rose a record US$276bn in a single day. This one-day move is equivalent to 70% of the entire Singapore equities market cap of US$400bn. The value of shares traded on that day was even more spectacular. Value traded that day was US$66bn against Singapore value traded of US$1bn. Singapore equities risk remaining value traps and valuation continuing to de-rate as global liquidity just flows to US equities. The situation is made worse by passive funds designed to invest in the largest and inherently the most overvalued stocks.

Nvidia results were stellar. Earnings jumped almost 6x YoY to US$12.8bn in the January quarter. It all stems from the insatiable demand for data centre semiconductors (or H100 AI GPUs), allowing the company to earn 50% net margins. Guidance is for another 3x YoY jump in revenue for the next quarter. Thereafter, revenue is expected to slow as the base effect is removed. AI chip sales for Nvidia are likely running at an annualised revenue of US$60bn-70bn. This looks high compared with hyperscalers’ (Meta, Google, Amazon, Microsoft) combined capital expenditure is US$150bn. If we aggressively double the potential with new demand from sovereign AI, specialised AI cloud providers and corporate demand, a wild guess for AI chips demand is US$100bn-$150bn. A return needs to be justified from such a huge capex and not many companies have the balance sheet of the hyperscalers.

In our meeting with a company with property development projects in China, demand is worse than expected and recovery unknown. In their recent launches, only 13% of the units were sold. If we include the entire size of the project, the sell-through rate is a worrying 6%. Households are paying down their loans or deleveraging rather than considering purchasing property. This developer is not cutting prices since it is unlikely to move units anyway. Bearing the brunt of price weakness is the secondary market where the price decline is more drastic. Government land sales are also down 90%. Even with the lack of supply,unsold inventory is still high at around 3 years.

Paul Chew
Head Of Research
paulchewkl@phillip.com.sg


Singapore shares fell 1.2 per cent on Friday (Feb 23) with losers beating gainers 326 to 252 across the broader market. The biggest loser was Genting Singapore as the company shed 9.7 per cent or S$0.10 to S$0.93 after it delivered weaker-than-expected Q4 financials on Thursday. Emperador was the only counter in the black, gaining 1 per cent or S$0.005 to S$0.505.

The S&P 500 and Dow Jones Industrial Average eked out another closing record high on Friday, with all three Wall Street benchmarks scoring weekly gains. The S&P 500 gained 0.03% to end at 5,088.8 points, while the Nasdaq Composite lost 0.28% to 15,996.82. The Dow Jones Industrial Average rose 0.16% to 39,131.53. AI poster child Nvidia advanced again, rising 0.4%, and briefly traded above US$2 trillion in market valuation for the first time.

Top gainers & losers

Factsheets


Events Of The Week

Factsheets


SG

APAC Realty has reported a 59.9% y-o-y decline in its net profit for the FY2023 ended Dec 31, 2023, at S$10.6 million, a continuous drop in its earnings for two consecutive years. The group’s net profit attributable to shareholders saw a 55.7% y-o-y decline for the period to S$11.78 million. The earnings per share for the FY2023 has therefore declined 55.6% y-o-y to 3.32 cents, from 7.48 cents in the same period a year before. APAC Realty’s board of directors has declared a final dividend of 1.4 cent per share for 2HFY2023. Together with the interim dividend of 1.1 cent per share paid out on Sept 8, 2023, the total dividend in FY2023 stands at 2.5 cents. The group’s revenue for the FY2023 came in at S$557.3 million, a 21% y-o-y decrease compared to S$705.0 million for the same period a year ago, following a decrease in property transactions completed during the period.

Hotel operator Banyan Tree Holdings has recorded earnings of S$31.7 million for the FY2023 ended Dec 31, 2023, a significant increase over its earnings of S$767,000 in FY2022 when the company first reversed into the black after the Covid-19 pandemic. This comes on the back of a 21% y-o-y increase in revenue to S$327.9 million in FY2023, with all operating segments recording better performances as tourism rebounded. The company recorded a surge in FY2023 operating profit which more than doubled to S$90.1 million. For the full-year period, the company recorded a significant 35% increase in hotel revenue per available room (RevPAR), and record-breaking S$377.7 million in sales for its residences segment. Banyan Tree has declared a final dividend of 1.2 cents for FY2023.

BHG Retail REIT has reported a distribution per unit (DPU) of 0.43 cents for the FY2023 ended Dec 31, 2023, 62% lower y-o-y from FY2022’s DPU of 1.17 cents. Similarly, the REIT’s DPU of 0.08 cents for the 2HFY2023 was 80.5% lower y-o-y than 2HFY2022’s DPU of 0.41 cents. Meanwhile, gross revenue in 2HFY2023 was S$0.1 million or 0.2% higher y-o-y than 2HFY2022 and FY2023’s gross revenue of S$62.0 million was S$4.5 million or 6.7% y-o-y lower than FY2022’s S$66.4 million. The REIT’s net property income (NPI) of S$17.1 million in 2HFY2023 was S$0.4 million or 2.3% higher y-o-y than 2HFY2022’s S$16.7 million, while FY2023’s NPI of S$35.0 million was S$2.8 million or 7.3% lower y-o-y than FY2022’s S$37.7 million. Overall, both the REIT’s gross revenue and property operating expenses declined mainly due to the weakening of Renminbi (RMB) against the Singdollar and loss of income during its assets enhancement initiative (AEI) period, with a foreign exchange (forex) loss of S$5.5 million in FY2023. The portfolio occupancy rate was 95.6% as at Dec 31, 2023, slightly higher than 95.2% as at Dec 31, 2022.

Kim Heng has reported earnings of S$1.6 million for its FY2023 ended Dec 31, 2023, 79% down y-o-y from FY2022’s S$7.4 million. This translates to an earnings per share (EPS) of 0.2 cents, 80% lower than FY2022’s EPS of 1.0 cent. Meanwhile, although revenue increased by 28% y-o-y to S$102.0 million in FY2023 from S$79.8 million in FY2022, cost of sales in FY2023 increased by 33% to S$69.1 million from S$52.1 million in FY2022. Kim Heng’s gross profit margin also decreased from 34.7% in FY2022 to 32.3% in FY2023, mainly due to lower profits from its equipment rental segment. Following the company’s results, a final dividend of 0.21 cents per ordinary share on a one-tier tax-exempt basis for the FY2023 has been recommended for shareholders’ approval at its 2024 annual general meeting, which is to be convened.

Precision plastics manufacturer, Fu Yu Corp has reported losses of S$10.1 million for its FY2023 ended Dec 31, 2023, down from FY2022’s earnings of S$14.6 million. This translates to a loss per share of 1.34 cents, from FY2022’s earnings per share (EPS) of 1.93 cents. Meanwhile, the company’s FY2023 revenue of S$190.4 million decreased by 20.7% y-o-y from S$240.2 million in the year before, which it attributes to the weaker first half of 2023 amid economic uncertainty, geopolitical tensions and a higher interest rate environment. The majority of Fu Yu Corp’s incurred net loss stems from lower topline and higher labour and energy costs, expenses related to the development of its Smart Factory in Singapore, a foreign exchange (forex) loss of S$0.5 million mainly due to the voluntary liquidation of its Fu Yu Moulding and Tooling subsidiary (FYSCS) in Shanghai, as well as the S$2.7 million non-cash impairment of goodwill in connection with its investment in FYSCS. Gross profit also decreased by 64.6% y-o-y from S$37.6 million in FY2022 to S$13.3 million in FY2023. As such, no dividends have been recommended or declared as the company is in a loss-making position.


US

Berkshire Hathaway on Saturday reported a big rise in operating earnings in the fourth quarter, thanks to huge gains in its insurance business, while its cash pile expanded to record levels. The Omaha-based conglomerate posted operating earnings — which refers to profits from businesses across insurance, railroads and utilities — of US$8.481 billion in the quarter ending December. That’s 28% above the US$6.625 billion from the year-ago period. For the full year 2023, that brought operating earnings up to US$37.350 billion, up 17% from US$30.853 billion in the prior year. Berkshire also held US$167.6 billion in cash in the fourth quarter, a record level that surpasses the US$157.2 billion the conglomerate held in the prior quarter.

Warner Bros Discovery fell short of Wall Street estimates for quarterly revenue on Friday (Feb 23), weighed down by the absence of blockbuster releases due to the lingering impact from the Hollywood strikes and a weak advertising market. Despite the twin summer Hollywood strikes by writers and actors coming to an end, studios are still facing delays in the release of new content, especially given the lengthy post-production process. The media company, forged by the union of WarnerMedia and Discovery, reported overall fourth-quarter revenue of US$10.28 billion, missing analysts’ average estimate of US$10.35 billion. Customers’ shift to streaming from linear TV has shackled the company as it seeks to boost growth at its streaming services while staving off declines at its cable business. Advertising revenue at its networks segment declined 12 per cent to US$1.95 billion. Warner Bros Discovery had 97.7 million global streaming customers at the end of the quarter, up from 95.1 million in the previous quarter.

KKR & Co is nearing a deal worth about US$4 billion to buy a software business from Broadcom, according to people with knowledge of the matter. The acquisition could be announced as soon as Monday (Feb 26), said the people, who asked not to be identified because the details have not been made public. Broadcom is selling its so-called end-user computer unit, which it inherited as part of its US$61 billion acquisition of software maker VMware in 2023. The business provides software enabling users to access desktops and applications remotely.

United Airlines on Friday (Feb 23) became the third major US airline to hike checked baggage fees for customers traveling in North America after American Airlines and JetBlue Airways announced similar increases. United passengers flying economy in the US after Feb 24 will pay US$40 for a first checked bag, or US$35 paid in advance. A second checked bag will cost US$50 at the airport and US$45 in advance. US airlines collected nearly US$6.8 billion in baggage fees in 2022 – and US$5.5 billion in the first nine months of 2023. Four years ago, United raised prices for checked bags at airports by US$5 to US$35, or US$30 if travellers pay in advance online. This week, American Airlines raised fees for a first checked bag to US$35 if booked in advance online, or US$40 at the airport. JetBlue said the cost of a first bag was rising to US$35 if booked online in advance or US$45 at the airport.

Ford Motor said on Friday it had halted shipments of all 2024 model year F-150 Lightning electric pickup trucks, so it could perform quality checks for an issue it did not specify. The No. 2 U.S. automaker said the shipment halt began on Feb. 9. It did not say when it expected to resume shipments that had begun in January of the EV truck. A spokesperson declined to say what quality issue was being checked. Ford also said that this week it began shipping the first newly designed gas-powered 2024 model F-150 pickups to dealers. Ford said it expects “to ramp up shipments in the coming weeks as we complete thorough launch quality checks to ensure these new F-150s meet our high standards.”

Shopee said on Friday (Feb 24) it has opened its tenth distribution centre in Brazil, near the city of Goiania, its first in the country’s central west region. Shopee, owned by Singapore’s Sea, established a marketplace in Brazil in 2020 in its first foray outside of Asia. It now claims over three million local merchants in Brazil, who account for more than 90 per cent of its sales nationally. The firm did not give details on the size of the distribution centre.

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


RESEARCH REPORTS

United Overseas Bank Limited – NII hurt by NIM decline and flat loan growth

Recommendation: BUY (Maintained), Last done: S$28.25, TP: S$34.90, Analyst: Glenn Thum

– 4Q23 adjusted earnings of S$1,498mn were slightly above our estimates due to higher fee income and other non-interest income, but offset by lower-than-expected NII and higher allowances. FY23 adjusted PATMI was 102% of our FY23e forecast. 4Q22 DPS was up 13% YoY to 85 cents; the full-year FY23 dividend rose 26% YoY to 170 cents, with the dividend payout ratio stable at 50%.

– Positives include fee income growth of 17% YoY and other non-interest income rising by 54% YoY, while negatives were NII declining by 6% YoY as NIMs fell 20bps and allowances increasing 17% YoY. Management has provided FY24e guidance of low-single-digit loan growth, NIM to sustain at the current level of ~2% as funding costs have stabilised and expectations for rates to maintain till 2H24, double-digit fee income growth from the Citi acquisition, stable cost-to-income ratio of around 41-42% and credit cost to come in at the lower end of 25-30bps.

– Maintain BUY with a lower target price of S$34.90 (prev. S$35.90). We lower FY24e earnings by 9%. Our NII is reduced as we assume softer NIMs and increased allowances, offset by higher fees and other non-interest income. We assume 1.41x FY24e P/BV and ROE estimate of 13.9% in our GGM valuation. FY24 will be another year of growth from stable NIMs, loan recovery, and double-digit fee income growth will boost earnings.

Venture Corporation Ltd – Recovery back-loaded

Recommendation: NEUTRAL (Maintained), Last done: S$13.72, TP: S$12.75, Analyst: Paul Chew

– 2023 results were within expectations. Both revenue and PATMI were 99% of our FY23 forecast. Earnings weakness persisted into the 4Q23, with PAT declining 25% YoY to S$67.4mn. The final dividend was unchanged at 50 cents and full-year at 75 cents.

– The outlook provided by the company, we believe, is for revenue softness to persist into 1H24 before recovery in the later part of the year. We believe driving growth will be new products by customers in semiconductor equipment, data centres connections, and medical and luxury consumer products.

– We nudge our FY24e earnings to be 2% higher and maintain our NEUTRAL recommendation. Our target price is raised modestly to S$12.75 (prev. S$12.50), based on a 2 year historical PE ratio of 13x. The dividend yield of 5.5% is reasonable, and the balance sheet is healthy, with record cash holdings of S$1bn. Visibility to earnings growth is poor and depends on customer confidence to launch new products.

Singapore Telecommunications Ltd – Bruised by currency

Recommendation: BUY (Maintained), Last done: S$2.37, TP: S$2.80, Analyst: Paul Chew

– 3Q24 earnings were within expectation. 9M24 revenue and EBITDA were 73%/75% of our FY24e forecast. Currency was almost a 2% point drag to earnings.

– 3Q24 associate contribution disappointed with an 8% YoY decline to S$374mn. Airtel Africa suffered a YTD24 translation of S$130mn following a massive depreciation of the Nigerian Naira during the quarter. Direct stake in Airtel Africa has been divested.

– We maintain BUY with an unchanged target price of S$2.80. We lowered our associate earnings by 10% due to the weakness in Airtel Africa. But this was offset by a lower finance expense assumption. Our FY24e PATMI is reduced by 3%. We expect an upside surprise in EBITDA margins in 4Q24 if Singtel can deliver its S$200mn of cost out by the end of FY24. Mobile price repair is underway in multiple countries where Singtel operates. We expect this to drive earnings together with plans to monetise S$4bn of assets further.

HRnetGroup Limited – Expecting growth to creep up

Recommendation: BUY (Maintained), Last done: S$0.73, TP: S$0.85, Analyst: Paul Chew

– Results were marginally below expectations. FY23 revenue and adjusted PATMI were 97%/95% of our forecast. 2H23 grew 5% YoY to S$27mn. Professional recruitment revenue was weaker than expected with a decline of 30% YoY. Placements were the lowest since listing.

– Flexible staffing remained resilient. Margins were softer with the absence of pandemic-related roles. Growth was from finance and manufacturing.

– Hiring in technology roles from start-ups to semiconductors has been a growth vertical for HRnet. However, the pace of hiring in this segment has slowed significantly. Growth will now come from capturing a larger share of customer budgets. HRnet office network and sphere of service including solutions in instant pay and claims, can raise the support of client needs in the region. Flexible staffing is benefiting from a rising wage environment, tight supply of local manpower and increased outsourcing. General hiring conditions are weak, particularly in China. We lowered our FY24e earnings by 11% to S$57mn. Our BUY recommendation is maintained. With the more tepid growth, we are reducing our valuation metric to 11x PE ex-cash FY24e (prev. 12x PE). Target price lowered from S$0.88 to S$0.85. It remains at a huge discount to global peers trading at an average PE of 19x.

PRIME US REIT – No breach, but refinancing risks persist

Recommendation: BUY (Maintained), Last done: US$0.132, TP: US$0.30, Analyst: Darren Chan

– FY23 DPU of 2.71 US cts (-58.6% YoY) was below our estimates due to Prime paying only 0.25 US cts in 2H23 (c.10% of 2H23 distribution) to preserve capital for capex needs. Assuming a 100% payout ratio, FY23 DPU of 4.86 US cts would have aligned with our FY23e forecast at 99%. Prime also announced a 1-for-10 bonus issue (c.43% of 2H23 DI), translating to a value of 1.03 US cts, based on a unit price of US$0.103.

– The YoY decline in FY23 distributable income (-25%) was due to Prime increasing management fees paid in cash from 20% to 100%, higher interest expense, and lower portfolio occupancy. Excluding the change in management fees paid in cash, distributable income is down 18.9% YoY. Portfolio valuations fell 8.7%, taking gearing to 48.4%, just under the MAS limit of 50%.

– Maintain BUY, DDM-TP lowered from US$0.37 to US$0.30 as we roll over our forecasts. FY24e DPU estimate lowered by 77% after factoring in the enlarged share base from the bonus issue, a lower portfolio occupancy, and a payout ratio of 25%. The key risk entails refinancing US$478mn (68% of total) debt under its main credit facility expiring in July 24, though management has expressed confidence in their ability to do so. Prime is now focusing on deleveraging and has set a target to execute US$100mn of deleveraging in 2024. Assuming a 25% payout ratio in FY24e, the current share price implies an FY24e DPU yield of 8%. Prime is currently trading at 0.22x P/NAV.

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