DAILY MORNING NOTE | 31 July 2023

Last week, all three major central banks raised interest rates. Both the Federal Reserve and European Central Bank raised rates by 25 bps to 5.25% and 3.75% respectively. Bank of Japan effectively raised rates by allowing the 10-year bond yield to climb above 0.50% to an upper limit of 1% (aka yield curve control with “greater flexibility”). Powell was not committed for the upcoming September meeting, so this gives the Fed room to manoeuvre, with two more inflation and job reports before deciding. We think a pause is highly likely. Recent release of core PCE figures reveals inflation is now trending towards 3.7% YoY by this December, even below the Fed projection of 3.9%. ECB, like the Fed, is data-dependent for its September meeting but appears open to a pause unlike in the previous meeting. For the BOJ, we doubt there is another move as inflation (excluding food) is currently at 3% YoY, gradually approaching its 2% target. We think falling inflation and central bank pauses will be the narrative to push up asset prices.

In Singapore, the property sector is experiencing a significant cooldown, as seen in the 2Q23 data released by URA. Residential prices, rents and volume transacted are all slowing down. Prices were down 0.2% QoQ, the first such drop since the 1% fall observed during the pandemic in 1Q20. With unsold inventory climbing back to two-year highs of 17,500 units and government land sales at decade highs, prices should remain subdued. Rental growth has also eased to 2.8% QoQ after a torrid pace of 7.2% in the previous quarter. On a YoY basis, it is still trending at a 30% rise. New home sales volumes are down 20% YoY in 1H23 with annualised sales of 6,800, below industry estimates of around 9,000. Resale volumes followed a similar pattern, down 23% with annualised volumes of 12,200, again below the industry forecast of 14,500.

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

Singapore shares closed 1.01 per cent higher on Friday (Jul 28), making it four straight sessions of a higher finish. Banking stocks contributed to the better showing, with OCBC rising 1.2 per cent to S$13.22, UOB surging 3.4 per cent to S$29.89 and DBS up 1.5 per cent to S$34.26. National carrier Singapore Airlines (SIA) closed 0.8 per cent higher at S$7.58, after it reported a record quarterly net profit of S$734 million. Seatrium closed 2.1 per cent lower at S$0.143, on the back of its announcement that its net loss had deepened to S$264.4 million for its first half to June.

Wall Street stocks advanced on Friday (Jul 28), after a closely watched gauge showed that US inflation cooled further in June. The Dow Jones Industrial Average rose 0.5 per cent to 35,459.29, while the broad-based S&P 500 climbed 1 per cent to 4,582.23. The tech-heavy Nasdaq Composite Index surged 1.9 per cent to 14,316.66.

SG

Raffles Medical Group posted a revenue of S$370.9 million and profit after tax of S$60.4 million for 1H 2023. In contrast with 1H 2022, 1H 2023 revenue included fewer COVID-19 related activities. With more foreign patients returning to seek quality medical treatment in Singapore, the Group’s revenue from its hospital services grew by 5.7 per cent in 1H 2023 to S$160.4 million. The healthcare services division registered revenue of S$167.3 million for 1H 2023. As regular activities resumed in China and more patients returned for treatments at the Group’s medical clinics and hospitals, the revenue of Raffles China healthcare’s operations grew 16.2 per cent in 1H 2023 to S$28.8 million. In the rest of Asia, a similar trend was observed with 3.7 per cent growth in revenue.

Jardine Cycle & Carriage posted a net profit of US$648 million for the first half ended Jun 30, 2023, a 33 per cent increase from a year ago, following higher contributions from Astra and the direct motor interests business segment. The group’s revenue rose 9 per cent to US$11.7 billion, from US$10.7 billion the year before. Earnings per share was US$1.64, increasing from US$1.23 a year ago. The board has recommended an interim dividend of 28 US cents per share, unchanged from H1 2022, to be paid out on Oct 6.

DFI Retail Group has returned to profitability with earnings for the 1HFY2023 ended June 30 of US$8 million ($10.66 million), compared to a loss of US$58 million in the same period a year before. This brings their earnings per share to 0.61 US cents. The 1HFY2023 sales for the group, inclusive of 100% of associates and joint ventures, were slightly behind those of the prior year at US$13.5 billion, primarily due to reduced sales at Yonghui. An interim dividend of 3 US cents per share has been declared, an increase from the 1 US cents per share in 2022.

Hongkong Land has reported a loss of US$333 million ($443.6 million) for the 1HFY2023 ended June, down from its earnings of US$292 million for the same period the year before. The figure reflected unrealised losses from the group’s revaluations of US$755 million from its investment properties. The revaluation loss is largely due to the group’s Hong Kong office portfolio following a “modest decrease” in market rents and slight cap rate expansion.

Mandarin Oriental has recorded an underlying profit of US$28 million ($37.29 million), a reversal from its underlying loss of US$21 million in the same period last year, and more than double in 2019. This was driven by the recovery of key owned hotels in Asia, according to the group. An interim dividend of 1.5 US cents per share has been declared.

Agribusiness group Wilmar International said on Sunday (Jul 30) that it has entered into a deal with several Moroccan investors to dispose of its entire 30.1 per cent equity stake in Casablanca Stock Exchange-listed Cosumar. The total cash consideration for the sale is about 5.96 billion Moroccan dirhams (about S$812.3 million). The carrying value of the investment in Cosumar in Wilmar’s books was US$336.2 million as at Dec 31, 2022. Cosumar’s main business is the production of sugar through the processing of sugar cane and sugar beet in Morocco as well as the refining of imported raw sugar and the marketing and distribution of these products. “The completion of the Cosumar transaction, targeted to happen at the latest in the fourth quarter of 2023, is subject to certain conditions, including regulatory approvals,” Wilmar said.

Hotel Properties Limited (HPL) is guiding for a net loss in the 1HFY2023 ended June despite an improvement in its performance. The loss comes on the back of higher interest costs and share of losses from associates and jointly-controlled entities, says the group. It will be releasing its results on or before Aug 14.

Wing Tai’s wholly-owned subsidiary Wincove has rescinded its contract to acquire Holland Tower. According to the company, this is due to the non-fulfilment of “certain condition thereunder”. The non-completion of the acquisition has no material impact on the group’s net asset value (NAV). On March 15, Wing Tai announced that Wincove had successfully tendered for the collective purchase of the freehold Holland Tower for $76.3 million, or $1,746 sq ft per plot ratio (psf ppr).

US

The personal consumption expenditures (PCE) price index increased 0.2% last month after edging up 0.1% in May, the Commerce Department said. Food prices dipped 0.1% while the cost of energy products increased 0.6%. In the 12 months through June, the PCE price index advanced 3.0%. That was the smallest annual gain since March 2021 and followed a 3.8% rise in May. Core PCE price index was at 4.1%, the smallest advance since September 2021.

ExxonMobil on Friday (Jul 28) reported a 56 per cent slump in second-quarter profit, joining rivals hurt by a sharp drop in energy prices but delivering results in line with an earnings preview the oil major released earlier this month. Second-quarter results from oil majors have tumbled from huge profits booked a year ago after Russia’s invasion of Ukraine sent oil and gas prices soaring. Net income was US$7.88 billion, or 1.94 cents per share, versus a record US$17.85 billion a year earlier. Yet excluding last year’s record second quarter, Exxon posted its strongest result for the months of April to June in more than a decade, helped by cost cuts and the sale of less profitable assets.

Chevron Corporation reported earnings of US$6.0 billion (US$3.20 per share – diluted) for second quarter 2023, compared with US$11.6 billion (US$5.95 per share – diluted) in second quarter 2022. Included in the current quarter was a one-time tax benefit of US$225 million related to impairments that were recognized in prior periods. Foreign currency effects increased earnings by US$5.8 billion (US$3.08 per share – diluted) in second quarter 2023 compared to adjusted earnings of US$11.4 billion (US$5.82 per share – diluted) in second quarter 2022. “Our quarterly financial results remain strong, and we returned record cash to shareholders,” said Mike Wirth, Chevron’s chairman and chief executive officer. Chevron plans to further increase its investments in the United States with the announced agreement to acquire PDC Energy, Inc.

Procter & Gamble on Friday (Jul 28) beat estimates for quarterly sales and profit buoyed by the consumer goods giant’s multiple price hikes even as it joined other multinational companies in flagging weak demand in China. Overall volumes fell 1 per cent in the fourth quarter, in part due to soft demand in Greater China, while average prices across P&G’s product categories rose 7 per cent. P&G forecast fiscal 2024 profit per share growth in the range of 6 per cent to 9 per cent, equating between US$6.25 and US$6.43, compared to estimates of US$6.38.

French drugmaker Sanofi on Friday increased its guidance for full-year earnings, citing strong sales of anti-inflammatory treatment Dupixent and closely-watched new drug launches. The Paris-based drugmaker predicted an increase in 2023 adjusted earnings per share by a “mid single-digit” percentage, excluding the effect of currency swings. The negative currency impact on 2023 earnings would likely be between 6.5% and 7.5%. Sanofi reported a 1% decline in quarterly business operating income, or adjusted earnings before interest and tax, of 2.73 billion euros. Competition for established medicines such as multiple sclerosis pill Aubagio, blood thinner Lovenox and long-acting insulin product Lantus continued to drag on sales growth. Revenue from eczema and asthma drug Dupixent, jointly developed with Regeneron, surged by a currency-adjusted 34% to 2.56 billion euros.

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

RESEARCH REPORTS

CapitaLand Ascott Trust – Still room for RevPAU growth

Recommendation: Accumulate (Downgraded), Last Done: S$1.10

Target price: S$1.20, Analyst: Darren Chan

– 1H23 DPU of 2.78 cents (+19% YoY) was in line with expectations and formed 43% of our FY23e forecast, with seasonally stronger performance expected in the second half of the year. Excluding one-off items relating to realised exchange gain from the repayment of foreign currency bank loans and settlement of cross currency interest rate swaps, DPU increased 37% YoY.

– 2Q23 portfolio RevPAU rose 20% YoY to S$149, reaching 98% of pre-COVID 2Q19 levels on the continued improvement in portfolio occupancy (75% vs 70% in 2Q22) and average daily rates (ADR).

– Downgrade from BUY to ACCUMULATE, DDM-TP trimmed from S$1.26 to S$1.20. FY23e/FY24e DPU is lowered by 4%/6% on higher interest assumptions. CLAS remains our top pick in the sector owing to its mix of stable and growth income and geographical diversification. The current share price implies an FY23e dividend yield of 5.7%.

Keppel Corp – Building strategic infrastructure assets

Recommendation: ACCUMULATE (Maintained); Last Done: S$7.20

Target Price: S$7.70; Analyst: Peggy Mak

– 1H23 earnings were in line. Net profit from continuing operations rose marginally by 2.5% YoY, due to strong energy sales and spreads, which offset lower development and fair value gains from real estate, and higher interest expense.

– It booked S$3.1bn exceptional gain from the disposal of Keppel Offshore & Marine (KOM) and 2-month share of KOM’s loss. Distribution-in-specie of SembCorp Marine shares lowered equity by S$3.8bn (S$2.19/share).

– Proposed a distribution-in-specie of 1 Keppel REIT (KREIT) unit for every 5 Keppel Corp shares, equivalent to about S$0.18 per Keppel Corp share. Its stake in KREIT will reduce by 9.4% to 37%.

– Maintain ACCUMULATE and raised our TP to S$7.70, from S$7.01 previously. Keppel has garnered several leading-edge renewable energy projects that position it as a first-mover in the transition to new energy technology.

Sheng Siong Group Ltd – Back to revenue growth

Recommendation: BUY (Upgraded; TP S$1.98, Last close: S$1.63; Analyst Paul Chew

– 2Q23 results were within expectations. 1H23 revenue and PATMI were 50%/48% of our FY23e forecast. Despite record gross margins, PATMI was down 0.4% YoY due to a jump in wages and utilities.

– After four quarters of decline, revenue grew 4.7% YoY in 2Q23. We estimate growth was driven by new stores (+3.5% pts) and same-store sales (+1.5% pts).

– New stores, recovery in same-store sales, interest income and higher gross margins will support earnings. But any improvement will be offset by a jump in operating expenses led by utilities and wages. Our FY23e expectations are a modest 1.5% earnings growth. No change to our FY23e earnings and target price of S$1.98, pegged to 22x PE, a 10-15% discount to the 5-year historical average of 25x PE. We upgrade to BUY from ACCUMULATE due to the recent performance of the share prices.

SIA – Restoration of capacity by competing carriers

Recommendation: REDUCE (Maintained); Last Done: S$7.58

Target Price: S$6.80; Analyst: Peggy Mak

– 1Q24 net profit accounts for 42% of our FY24e estimate. We maintain our estimates as we expect yields and loads to fall in the coming quarters with more carriers restoring capacity aggressively.

– Strong passenger load (+49% YoY) driven by seasonal peak demand and re-opening in key Asian markets offset weaker cargo volume (-11.3% YoY). Other tailwinds include lower jet fuel price (-17% YoY), higher interest income (+S$144mn) and higher associates’ contributions (+S$80.9mn). We expect these tailwinds to fade.

– We maintain a REDUCE recommendation and TP of S$6.80, based on 1.1x price to book for FY24e. This is in line with historical P/B of 1.1x.

United Overseas Bank Limited – Continued NII growth boosts earnings

Recommendation: Buy (Maintained), Last done: S$29.89, TP: S$35.90, Analyst: Glenn Thum

– 2Q23 adjusted earnings of S$1,507mn were slightly above our estimates due to higher other non-interest income and higher NII offset by lower-than-expected fee income growth and higher allowances. 1H23 adjusted PATMI was 54% of our FY23e forecast. 2Q23 DPS was up 42% YoY to 85 cents.

– Positives include NII growth of 31% YoY and other non-interest income surging by 113% YoY, while negatives include fee income decline of 8% YoY and allowances increasing 38% YoY. Management has maintained its loan growth guidance of low to mid-single digit and credit costs at around 25bps, while lowering its guidance of NIMs to 2.10-2.15% (prev. 2.10-2.20%) and fee income growth from double digit to high single-digit growth for FY23e.

– Maintain BUY with a higher target price of S$35.90, from S$35.70. We raise FY23e earnings by 4% as we raise other non-interest income estimates but lower NII, fee income and increase provisions estimates for FY23e. We assume 1.48x FY23e P/BV and ROE estimate of 12.9% in our GGM valuation.

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