DAILY MORNING NOTE | 28 October 2022

Local shares advanced further on Thursday (Oct 27) as investors shrugged off fears of inflation and interest rates, but opted to capitalise on market opportunities amid the announcements of Q3 corporate earnings. The benchmark Straits Times Index rose 0.2 per cent or 6.86 points to finish the day at 3,015.24. Advancers outpaced decliners 279 to 214, with daily turnover coming in at 1.6 billion securities worth a collective S$1.2 billion. Indices across the region ended the day mixed. The Nikkei 225 slipped 0.3 per cent and the KLCI fell 0.1 per cent. The Kospi added 1.7 per cent; the Hang Seng Index rose 0.7 per cent and the ASX 200 was up 0.5 per cent. Jardine Matheson Holdings was the biggest decliner on Thursday. The counter fell 1 per cent or US$0.48 to US$45.72. Nio was another top decliner, shedding 3.5 per cent or US$0.37 to close at US$10.28. Thinly-traded Great Eastern was the top gainer, adding 1.2 per cent or S$0.21 to S$17.87. Ahead of their earnings results releases, banks ended Thursday mixed. DBS rose 0.6 per cent or S$0.18 to S$32.81, and OCBC inched up 0.3 per cent or S$0.04 to S$11.78. UOB, meanwhile, fell 0.2 per cent or S$0.06 to S$26.02. Sembcorp Marine was the most heavily traded counter for the day, ahead of the announcement of the revision of terms for its deal with Keppel Offshore and Marine. Some 180 million shares were traded over the course of the day, and the counter rose 1.7 per cent or S$0.002 to close at S$0.122.

Wall Street stocks were mixed on Thursday as markets took in a range of company earnings, with the Nasdaq slumping on weak results from Facebook parent Meta while the Dow ended higher. The movements came after Meta reported a plunge in its quarterly profits, dragging the firm’s shares 24.6 per cent lower. Google parent Alphabet and Microsoft had earlier reported weak earnings as well, and the tech-rich Nasdaq Composite Index closed 1.6 per cent down to 10,792.68. But the Dow Jones Industrial Average was up 0.6 per cent at 32,033.28, helped by a better-than-expected performance from companies such as McDonald’s and Caterpillar. The broad-based S&P 500 Index lost 0.6 per cent to 3,807.30. This came on the back of data showing that the US economy expanded 2.6 per cent in the third quarter, although economists warned of a less rosy outlook ahead with consumer spending softening and business investment weakening. The yield on the benchmark 10-year Treasury note slid to 3.94 per cent, falling below the 4 per cent threshold, on hopes that the Federal Reserve will soon pivot from its policy of aggressive interest rate hikes aimed at countering inflation. A smaller-than-expected rate hike on Wednesday from the Bank of Canada also boosted hopes for a similar shift soon from the Fed.

Top gainers & losers



Sembcorp Marine and the offshore and marine (O&M) arm of Keppel Corporation have entered into revised agreements regarding their merger. Instead of a one-for-one share exchange between Sembcorp Marine and the combined entity, which was the original plan, Sembcorp Marine will now directly buy over all of Keppel O&M’s stake from Keppel, excluding its legacy rigs and associated receivables, for S$4.5 billion, said both companies in separate bourse filings on Thursday (Oct 27).

Analyst comment: “The revised transaction structure directly benefits SMM as: 1) acquisition consideration is reduced by 387mn or 10% of mkt cap; 2) lower dilution as there will be a reduction in new SMM shares issued of 3.1bn; 3) it provides greater certainty of deal completion. The decoupling of the Asset Co transaction from the KOM-SMM deal also provides greater certainty on the outcome of Keppel’s stranded rigs.”

Terence Chua, Senior Research Analyst, terencechuatl@phillip.com.sg

Keppel Corporation posted a 24 per cent rise in revenue to S$6.8 billion year on year for the first nine months of 2022. Excluding discontinued operations, the conglomerate’s revenue grew 15 per cent to S$5 billion over the same period. In its business update on Thursday (Oct 27), the company noted that net profit for the same period also rose year on year due to stronger performance from the energy and environment as well as asset management segments. Still, net profit for the third quarter of 2022 fell year on year due to the absence of the gain from the en bloc sale of a project in China. Keppel attributed the growth in revenue to higher contributions from Keppel Infrastructure, Keppel Offshore & Marine (O&M), telco M1 and asset management arm Keppel Capital. It also noted that its net gearing increased to 0.79 times as at Sep 30, 2022, from 0.68 times on Jun 30, 2022. As at Sep 30, 70 per cent of Keppel’s borrowings were on fixed rates, with an average interest cost of 2.88 per cent and weighted tenor of about three years. The company attributed the higher gearing ratio to the payment of 2022’s interim dividend and the repurchase of shares as part of its share buyback programme.

Singapore’s Treasury bill (T-bill) with a six-month tenor auctioned on Thursday (Oct 27) reported a cut-off yield of 4.19 per cent per annum – a record high in decades and 42 basis points higher than the 3.77 per cent on the issuance a fortnight ago. The risk-free fixed income instrument last achieved a yield of 4 per cent in 1989 after peaking at 4.73 per cent in 1988, according to the Monetary Authority of Singapore (MAS) website, which showed results dating back to 1987. Yields on six-month T-bills started to nudge above 3 per cent in September, jumping from 2.99 per cent for the Sep 1 auction to 3.32 per cent for the issuance a fortnight later, amid a rising interest rate environment as the United States central bank goes on a hiking spree to arrest runaway inflation. and there is a spill-over effect in Singapore. The T-bill auctioned on Thursday received applications amounting to S$10.9 billion against an allotment of S$4.6 billion. All non-competitive applications of S$1.8 billion were allotted while only 14 per cent of competitive applications were allotted at the cut-off yield. Meanwhile, the November Singapore Savings Bond (SSB) closed on Wednesday with applications totalling S$2.2 billion vying for an allotment size of S$900 million, with those who applied for S$10,000 or lower getting their full allotment (subject to the individual allotment limits). Those who applied for S$10,500 or higher were allotted either S$10,000 or S$10,500, with about 29.2 per cent of these applicants selected at random and allotted the additional S$500, according to the results published on MAS’ website on Thursday. This tranche of SSB offers a first-year interest rate of 3.08 per cent and a 10-year average rate of 3.21 per cent – both all-time highs.

Far East Hospitality Trust (FEHT) reported a 12 per cent year-on-year increase in its income available for distribution for Q3 2022, to S$15.1 million from S$13.5 million in Q3 2021, according to a business update provided via bourse filing on Thursday (Oct 27). This increase comes on the back of lower real estate investment trust (Reit) manager fees and finance expenses, which contributed to net property income (NPI) rising 7.8 per cent year on year to S$19.7 million, from S$18.3 million in the same period last year. Gross revenue also rose marginally by 2 per cent to S$21.2 million for the quarter. The Reit’s manager noted that this increase was led by growth in the hotel segment, which hiked 4.7 per cent to S$14.9 million in Q3. Meanwhile, revenue from serviced residences (SR) and commercial premises slipped by 3.1 per cent to S$2.6 million and 4.3 per cent to S$3.7 million, respectively. This was due to the divestment of Central Square at 20 Havelock Road, which was completed in March 2022, said FEHT’s manager, without which revenue would have grown a respective 44.9 per cent and 19.1 per cent year on year. For its hotels portfolio, FEHT recorded a dip in average occupancy in Q3 2022 by 3.1 percentage points to 76.1 per cent – mainly due to the exit of government contracts for some of the Reit’s hotels. The trust’s Elizabeth Hotel, located at Orchard Road, was also closed for renovation during that period but has since reopened as Vibe Hotel Singapore Orchard in September 2022. This comes despite the revenue per available room and average daily rate more than doubling by 101.9 per cent and 107.6 per cent year on year to stand at S$105 and S$137, respectively. FEHT’s SR portfolio, on the other hand, saw strong demand and support from long-stay corporate sources, highlighted its manager. Its average occupancy grew 18.4 percentage points to 90.4 per cent while its revenue per available unit surged by 66.7 per cent to S$214. Its average daily rate also increased 32.4 per cent to S$235. With the reopening of borders and return of tourism, the trust expects its hotel and SR portfolios to perform well for the rest of 2022.


The United States economy rebounded following two quarterly contractions thanks in part to resilient consumers and businesses, though inflation and higher interest rates leave growth vulnerable in the coming months. Gross domestic product (GDP) rose at a 2.6 per cent annualised rate in the July to September period after falling for the first two quarters, the Commerce Department’s preliminary estimate showed on Thursday (Oct 27). Personal consumption, the biggest part of the economy, climbed at a 1.4 per cent pace, better than forecast but still a slowdown from the prior quarter. The median projection in a Bloomberg survey of economists called for a 2.4 per cent rise in GDP and a 1 per cent advance in personal consumption. That said, a key gauge of underlying demand that strips out the trade and inventories components – inflation-adjusted final sales to domestic purchasers – rose 0.5 per cent in the third quarter, one of the slowest since the start of the pandemic. While the details of the report showed firm business investment and continued consumer spending on services, the biggest contributor to GDP was the volatile net exports category. Government spending also rose firmly, but the housing sector was a significant drag on growth. Though the quarterly expansion may help alleviate concerns that the US is already in a recession, the economy’s main engine – consumer spending – remains under pressure from the highest inflation in a generation. A strong labour market and savings amassed over the course of the pandemic have so far provided Americans the wherewithal to keep spending. It’s unclear how long households can hold up as the Federal Reserve’s efforts to tame inflation pose headwinds to growth. In the near term, it’s driven up mortgage rates to the highest in two decades, causing a rapid deterioration of the housing market. And in the coming year, many economists expect the central bank’s actions to ultimately push the economy into recession. The personal consumption expenditures price index, an inflation measure followed by Fed officials, grew an annualised 4.2 per cent in Q3, the slowest pace since the end of 2020. Stripping out food and energy, the index rose 4.5 per cent. September data will be released on Friday.

Apple posted weaker-than-expected iPhone and services sales in its latest quarter, marring an otherwise upbeat report and sparking concerns about two areas that were expected to be highlights. The iPhone, Apple’s flagship device, generated about US$42.6 billion in the fiscal fourth quarter, the company said on Thursday (Oct 27). Analysts had estimated nearly US$42.7 billion. Services – a key growth area in recent years – brought in US$19.2 billion. That was well short of the almost US$20 billion projection. Though overall revenue was greater than expected, the results dashed hopes that Apple would have a blowout quarter and sidestep a broader tech slump. Alphabet, Amazon.com, Meta Platforms, Microsoft and others all delivered gloomy earnings reports in recent days, sending their shares tumbling. With loyal customers still eager to snap up its pricey products, Apple was seen as an outlier. The company also released its latest iPhone earlier in the year than usual, giving the fourth quarter a greater portion of sales from Apple’s flagship device. But roaring inflation and a broader slowdown in consumer spending, particularly for personal devices, may be weighing on the company. Apple’s stock slid in late trading following Thursday’s report, though it later pared some of the losses. The shares had declined 18 per cent this year heading into the earnings – a better performance than most major indexes. The S&P 500 has lost 20 per cent in 2022, and the tech-heavy Nasdaq Composite Index is down 31 per cent. The Cupertino, California-based company didn’t provide a revenue forecast for the current quarter, continuing an approach it adopted at the start of the Covid-19 pandemic. But analysts estimate sales of about US$128 billion, which would be an all-time record. Apple’s overall revenue grew 8.1 per cent to about US$90.1 billion in the fourth quarter, which ended Sep 24. That beat the US$88.6 billion estimate, because of better-than-expected growth in its Mac and wearables businesses. Apple’s iPhone remains its biggest source of sales, and the company was expected to get a boost from an earlier release this quarter. The period included about nine days of sales of the iPhone 14, iPhone 14 Pro and iPhone 14 Pro Max. But the iPhone 14 Plus – a new format that has seen a tepid response from consumers – didn’t launch until the current quarter. While the iPhone 14 Pro looks similar to the past two models, new features like a 48-megapixel back camera and the Dynamic Island interface have helped entice shoppers.

Amazon on Thursday predicted a slowdown in sales growth during the year-end holiday shopping season, sending shares in the e-commerce colossus tumbling. Sales could grow as little as 2 per cent in the final three months of this year, the company said, crimped by a strong US dollar that makes products more expensive in other countries. Amazon shares plunged some 20 per cent in after-market trades but regained some ground, down about 14 per cent to US$95.32 at 2130 GMT. The company nevertheless returned to profit in the third quarter after two consecutive quarters of losses, with a net profit of US$2.87 billion for the period from July to September, according to the statement issued Thursday. Sales in the recently ended third quarter increased 15 per cent to US$127.1 billion, compared with US$110.8 billion during the same period a year earlier, it reported. Customer response to big Amazon sales events in the past four months has been “quite positive” and “it’s clear that particularly during these uncertain economic times, customers appreciate Amazon’s continued focus on value and convenience,” said chief executive Andy Jassy. While it has a lucrative AWS cloud computing unit and its Prime video offering, Amazon is a retailer at heart, noted independent tech analyst Rob Enderle of Enderle Group. “When people are having a hard time making ends meet, retail tends to take a hit,” Enderle said. And while founder and former chief executive Jeff Bezos was savvy about retail, “he went off to play with rockets” at his Blue Origin enterprise leaving Amazon in the hands of Jassy, known for his cloud computing prowess, the analyst added. “Amazon is not a cloud company, it is a retail company, and a cloud computing guy is in charge,” Enderle contended.

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


Alphabet Inc. – Challenged by pullback in advertising spend

Recommendation: BUY (Maintained); TP: US$124.00, Last Close: US$94.93

Analyst: Jonathan Woo

• 3Q22 results miss on both revenue and earnings. 9M22 revenue/PATMI at 68%/58% of our FY22e forecasts. Revenue miss due to incremental pullback in advertising spend and FX headwinds.
• Cloud momentum continuing with 38% YoY growth for 3Q22.
• Net margin down 9% YoY to 20% due to increasing OPEX and FX headwinds. FX drag expected to worsen in 4Q22.
• We cut our FY22e revenue/PATMI forecast by 6%/20% to account for a pullback in advertising spend, higher-than-expected operating expenses, increasing FX headwinds, and unrealized losses on equity investments. We maintain a BUY recommendation with a lowered DCF target price of US$124.00 (prev. US$139.00), with a WACC of 7.3% and terminal growth of 3.5%.

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