DAILY MORNING NOTE | 29 August 2022

The Singapore market ticked marginally higher on Friday (Aug 26) as most global indices traded up ahead of US Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole Symposium. Its benchmark Straits Times Index (STI) closed 0.05 per cent or 1.73 points higher at 3,249.53, with the session dampened by surprisingly poor factory production growth results for July. Gainers outnumbered losers 271 to 213 in the broader market, with 1.67 billion shares worth S$906.7 million changing hands. Major indices in Japan, South Korea and Australia rose between 0.2 and 0.8 per cent; Hong Kong’s Hang Seng Index led the region’s gains, climbing 1 per cent.

Wall Street ended Friday (Aug 26) with all 3 benchmarks more than 3 per cent lower, as Federal Reserve chief Jerome Powell’s signal that the central bank would keep hiking rates to tame inflation nixed nascent hopes for a more modest path among some investors. The Nasdaq led declines among the 3 US benchmarks, registering its worst daily performance since June 16, weighed by high-growth technology stocks which tumbled after rallying the previous day in anticipation of Powell’s scheduled speech to the Jackson Hole central banking conference in Wyoming.

SG

Bill Chang, Singtel group enterprise chief executive, readily acknowledges that the telco’s carriage business, which includes selling data and fixed voice services, has been under pressure. “The carriage business has been one that is, generally in the market, seeing slow growth, and declining growth in some areas, because of (the availability) of bigger bandwidth; and people are competing heavily on price,” he said. For the 6 months to Mar 31, Singtel saw its group enterprise segment’s operating revenue decline 2.5 per cent to S$1.87 billion. In particular, data and internet revenue declined 2.6 per cent to S$705 million. But the company isn’t intending to cede market share in favour of margins. Rather, Chang believes it is essential for the telco to maintain its market leadership – not just in Singapore but in the Asia-Pacific region as well. Singtel is hoping to migrate its clients to software-defined wide area networks (SD-WANs), which have emerged as the next evolution of corporate networking. According to Chang, the introduction of SD-WANs has helped mitigate some of the revenue loss from competitive pricing pressure and lower volumes as businesses consolidate their networks.

Funds under the CPF Investment Scheme (CPFIS) lost an average of 8 per cent in the quarter ended Jun 30, as rising interest rates and recession fears hit global stock and bond markets. Still, they outperformed the MSCI World Index, which fell 13.8 per cent in the same period. On a 1 year cumulative basis, however, CPFIS funds’ returns were down 14.2 per cent, which was worse off than the MSCI World’s 11.3 per cent fall. On a 3-year cumulative basis, returns for the CPFIS funds were up 8.5 per cent, said Morningstar Asia on Tuesday (Aug 23). This comes as the US market faced an unusual combination of losses in both stock and bond markets in the first half, resulting in fixed-income securities not providing investors their usual refuge, Morningstar said. Market conditions “shifted quite dramatically” at the start of this year amid surging inflation, tightened monetary policies, the Russia-Ukraine war and the resultant energy and food shortage, said Patrick Ge, Morningstar’s senior manager research analyst. Equities and bonds in Asia also took a hit from China’s Covid-19 lockdowns and the liquidity crisis among its property developers.

Semiconductor play Micro-Mechanics said in a bourse filing on Saturday (Aug 27) that it achieved its “highest-ever” quarterly results for the 3 months ended Jun 30 as net profit leapt 22.7 per cent to S$5.9 million, from S$4.8 million a year ago. This came as revenue grew 14.8 per cent in the quarter to S$22 million, from S$19.1 million a year earlier, amid a 46.5 per cent jump to its US sales to S$5.6 million, and a 6.9 per cent jump to its sales in China, its largest market, to S$6.4 million. Over the same period, its Singapore market registered double-digit sales growth of 33.5 per cent to S$2.6 million, the company, which manufactures high precision tools and parts used in process-critical applications for the semiconductor industry, added. Earnings per share stood at 4.22 Singapore cents for the quarter, up from 3.44 Singapore cents a year ago.

US

The dollar dipped against other major currencies on Friday (Aug 26), ahead of US Federal Reserve Chair Jerome Powell’s widely-anticipated speech at the Jackson Hole symposium. Traders are looking for clues on the US central bank’s tightening plans to combat rampant inflation. The dollar index – which tracks the greenback against six major currencies – has steadily gained over the past two weeks and is just shy of the two-decade peak of 109.29 it hit in mid-July. After making small gains earlier in the session, it slipped a quarter of a per cent on the day to 108.210. “(Powell) is likely to focus on the short-term challenges and endeavour to leave no doubt about the Fed’s determination in the fight against inflation,” Esther Reichelt, a forex analyst at Commerzbank, said in a note. “If he succeeds convincingly, he could support the dollar, at least in the short term.”

Etsy said on Friday (Aug 26) US sellers on its marketplace will either need to self-verify their bank accounts or do it via third-party, riling up sellers over data privacy concerns. The sellers Reuters talked to and several others on discussion forums were annoyed over the move, saying the recommended mode of verification involved providing financial technology platform Plaid with their banking username and password. “This is so typical of Etsy on any controversial subject but, when it has to do with our finances, it’s unacceptable,” said Dorothy Domingo, who has been selling functional pottery on Etsy since 2008. Plaid, which last year agreed to pay US$58 million to settle a case that alleged it used financial information without consent, did not immediately respond to a request for a comment. “In connection with anti-money laundering and related regulations in the United States, marketplaces like Etsy are adjusting practices to further verify any American bank accounts on file,” Etsy said. The company has also provided sellers the option to self-verify their bank accounts with test deposits, but one seller said the process was tedious.

Meta Platforms’ chief of its virtual reality social platform Horizon, the main gateway for accessing the metaverse that the company is pouring billions of dollars into building, is leaving for a new opportunity, he told Reuters on Friday (Aug 26). A spokesman for Facebook-owner Meta confirmed the departure of vice president Vivek Sharma and said his team would report directly to Vishal Shah, vice president of Metaverse. Sharma declined to elaborate. Sharma was responsible for developing the persistent, immersive virtual environment that users experience when inside Meta’s metaverse, primarily accessible via the company’s virtual reality devices such as its Oculus headsets. Although the business associated with the company’s virtual worlds is still nascent, the aim is to make those worlds the main place where brands and third-party developers can reach Meta’s user base if the metaverse takes off. Platforms created by Sharma’s team include Horizon Worlds, an expansive VR world-building platform, and Horizon Venues, which is focused on virtual events.

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

RESEARCH REPORTS

Hyphens Pharma International – Franchise expands with acquisitions

Recommendation: BUY (Maintained); TP S$0.43 Last close: S$0.31; Analyst Paul Chew

• 1H22 revenue and PATMI were 54%/67% of our FY22e forecast. Earnings were above expectations due to a then higher-than-expected earnings contribution from newly acquired Novem Ltd and associates.

• Underlying organic growth was an 11% YoY rise in PATMI to S$4.8mn. Growth was broad-based across specialty pharma and proprietary brands.

• We maintain our FY22e earnings. We expect some upfront staff and technology costs in 2H22 with the establishment of DocMed to develop a healthcare platform for doctors, drug companies and other medical vendors. Our BUY recommendation and DCF target price of S$0.43 is maintained. With Novem, Hyphens can profitably develop the public sector channel for its specialty products to complement its strength in private sector clinics.

Singapore Telecommunications Ltd – Currency drag this quarter

Recommendation: ACCUMULATE (Maintained); TP S$3.05, Last close: S$2.65; Analyst Paul Chew

• 1Q23 results were within expectations. 1Q23 revenue and EBITDA were 24%/24% of our FY23e estimates. We removed Amobee from our forecast. It has been classified as a subsidiary for sale. There was a 4% headwind from Optus due to weaker AUD.

• 1Q23 underlying EBITDA expanded 3% YoY (or up 5% in constant currency) to S$977mn, excluding NBN migration revenue and Amobee. Regional associates’ earnings rose 12% YoY to S$411mn. The 6% depreciation in the Thai Baht and Philippine Peso also impacted earnings.

• Our FY23e PATMI is raised 5% to S$2.15bn to account for the S$129mn exceptional gain from dilution of stake in Australia Tower Network and share of Airtel revaluation of foreign currency convertible bonds. Revenue and EBITDA forecasts were modestly impacted by the removal of Amobee. Our ACCUMULATE and SOTP TP are maintained at $3.05. Singtel has also announced a 3.3% stake in Bharti Airtel worth S$2.25bn to Bharti Telecom. The gain on sale for Singtel is S$0.6bn. We view the disposal positively. It reflects the ability to realise gains from its portfolio of associates trading at a holding company discount and an opportunity for special dividends.

TDCX Inc – Triples client additions

Recommendation : BUY (Maintained); TP: US$16.39, Last Close: US$9.49, Analyst: Jonathan Woo

• 1H22 revenue was in line, at 47% of our FY22e forecasts. PATMI was above expectations, at 56% of our FY22e forecasts due to lower-than-expected expenses.

• Tripled 1H22 client additions compared with 1H21, adding a leading regional airline and a leading car e-commerce platform. Benefitting from travel & hospitality rebound, only 16% shy of pre-pandemic peak.

• We raise our FY22e PATMI by 9% to S$96mn on widening margins primarily due to lower-than-expected interest expenses, while keeping FY22e revenue unchanged. We maintain a BUY recommendation with an increased DCF target price of US$16.39 (prev. US$15.76), a WACC of 10.4%, and a terminal growth rate of 3.0%.