DAILY MORNING NOTE | 5 December 2022

**Do note that the last day of Morning Note Issuance is on 15 December 2022. Morning Note will resume in January 2023**

Trade of The Day

Technical Pulse: DraftKings Inc

Analyst: Zane Aw

Recommendation: Technical BUY
Buy stop: US$15.76 Stop loss: US$13.30 Take profit 1: US$21.40 Take profit 2: US$27.50

Technical Pulse: Is the US market bottom in?

Reasons why stocks could continue to suffer in 2023

Analyst: Zane Aw

Since the S&P 500 sank to its year-low level at 3,491.58 points on 13 October this year, the index has rallied over 15% and is now holding above the 4,000 mark.

Asian equities, including Singapore’s, were down on Friday (Dec 2), tracking a mixed Wall Street where two of the three key indices had closed lower. Manufacturing activities in the US contracted in November while October’s core inflation rate at 5 per cent remains far above the Federal Reserve’s 2 per cent target. Investors are keenly watching for the non-farm payroll data for clues of the Fed’s interest rate decision this month, as the central bank has said its move will be data dependent. The Singapore bourse fell 1 per cent or 33.59 points to 3,259.14 on Friday. It managed a 0.6 per cent rise for the week. Shares of ground handler and inflight caterer Sats fell 2.9 per cent to S$2.67, a day after the company unveiled its funding structure for the proposed acquisition of air cargo handler Worldwide Flight Services. The mainboard-listed firm said it would raise up to S$800 million via a renounceable underwritten rights issue to partially fund the deal. Conspicuously absent is an undertaking by majority shareholder and state investor Temasek to underwrite the fundraising. Sats had said that would trigger a mandatory general offer, or Temasek would have to ask other shareholders for a waiver to not make such an offer. Digital Core Reit, a data centre real estate investment trust, slumped 5.7 per cent to US$0.575, a day after announcing it intends to proceed with an all-debt-funded acquisition of a 25 per cent interest in a Frankfurt facility for US$140 million, aborting an earlier plan for equity fundraising. Across the broader Singapore market, gainers beat decliners 254 to 241, with a turnover of 1.2 billion securities worth S$1.11 billion.

Wall Street stocks were mixed at the end of Friday’s (Dec 2) session as markets assessed the implications of a solid jobs report for US monetary policy. The world’s biggest economy added 263,000 jobs in November, more than anticipated, while the unemployment rate remained at 3.7 percent, Labor Department data showed. Government figures also indicated a bigger jump in hourly wages than analysts had benchmarked. Stocks initially tumbled on the release as markets feared it would extend the period of ultra-aggressive Federal Reserve interest rate hikes to counter inflation. But markets recovered throughout the day, lifting the Dow Jones Industrial Average narrowly into positive territory to close at 34,429.88, up 0.1 per cent. The broad-based S&P 500 slipped 0.1 per cent to 4,071.70, while the tech-rich Nasdaq Composite Index lost 0.2 per cent at 11,461.50. Among individual companies, Boeing jumped 4.0 percent following a Wall Street Journal report that United Airlines is close to agreeing to order dozens of Boeing 787 Dreamliners. United shares were flat.

Week 49 Strategy: Fed chair Jerome Powell’s speech and robust US jobs data point to a slower pace of interest rate hikes but not the endpoint (of 5%) or the duration rates stay elevated. With a dearth of economic data and the upcoming FOMC meeting on 13 December, we expect a sideways direction for the market this week. China’s steadfast moves to relax COVID-19 measures will underpin the strength in Singapore’s re-opening sectors such as transportation, hospitality and even telecommunications. RevPAR in Singapore is already at record levels, 23% above pre-pandemic. The freezing of withdrawals for Blackstone’s non-traded REIT is an indication that a rush for liquidity can yield attractive valuations in REITs.

Paul Chew

Head of Research

paulchewkl@phillip.com.sg

SG

The iEdge S-Reit Index recovered 5.7 per cent in total returns in November, after a 5.6 per cent decline in October. It outperformed the FTSE EPRA Nareit Developed Index which gained 3.5 per cent during the same period. Interest rates and economic growth in key Asian markets continued to be key drivers during the month. On a year-to-date total return basis, S-Reits have seen a 10.9 per cent decline, against the Straits Times Index’s 9.6 per cent gain, while the FTSE EPRA Nareit Developed Index has seen a decline of 21.1 per cent. Top performing sub-segments within the S-Reits sector in November were data centre, diversified and industrial S-Reits which saw average total returns of 12 per cent, 8 per cent and 4 per cent respectively. S-Reits within the healthcare segment were the only ones which averaged negative total returns. During the month of November, retail investors have been a key driver in the sector’s fund inflow activities, accumulating net retail inflows of S$54 million. Institutional investors on the other hand, net sold S$95.6 million for the sector. In terms of sub-segments, retail flows were driven by inflows seen in office (+S$31.1 million), industrial (+S$10.8 million) and healthcare S-Reits (+S$4.6 million). Diversified (+S$12.3 million) and data centre S-Reits (+S$5.2 million) were the only sub-segments that received net institutional inflows. Six S-Reits recorded double-digit total returns last month: Digital Core Reit (+18.1 per cent), CapitaLand China Trust (+16.5 per cent), Daiwa House Logistics Trust (+16.1 per cent), OUE Commercial Reit (+12.3 per cent), SPH Reit (+10.4 per cent) and CapitaLand Integrated Commercial Trust (+10.1 per cent). Digital Core Reit (DCReit) has just updated that it will proceed with the fully debt-funded acquisition of a 25 per cent interest in a freehold data centre in Frankfurt, Germany for approximately US$140 million. The transaction is expected to be distribution per unit (DPU) accretive by 2 per cent on a pro forma basis and marks Digital Core Reit’s maiden acquisition since listing in 2021. In its latest business update, DCReit reported 9M 2022 net property income of US$53 million, 5.7 per cent above the IPO forecast. However, distributable income came in at US$34 million, missing the forecast by 3.4 per cent. The Reit noted that while the business is not completely immune to broader macroeconomic trends, data centre demand is durable. It believes in the strong support from its sponsor, Digital Realty, and that it can afford to be patient while waiting for an opportune time to execute its next phase of growth plans.

There were 24 primary-listed companies conducting share buybacks over the five sessions ended Dec 1, with a total consideration of S$10.6 million, matching the consideration pace for the preceding week. For the companies, Singapore Technologies Engineering (ST Engg) led the consideration tally, buying back 500,000 shares at S$3.49 per share. The company has bought back 0.18 per cent of its issued shares (excluding treasury shares) on the current mandate. On Nov 28, ST Engg provided a business update, highlighting that group 9M 2022 revenue reached S$6.5 billion, a 19 per cent increase from 9M 2021, with strong contract wins of S$10.3 billion in 9M 2022, including S$4.8 billion secured in Q3 2022.

On Dec 1, Digital Core Reit Management bought back 1.1 million units of Digital Core Reit at 61.9 US cents per share. With a consideration of US$681,923, the units represented 0.1 per cent of the issued units. This week (Dec 6) will mark the one-year anniversary since the listing of Digital Core Reit which is sponsored by Digital Realty. As of Sep 30, the Reit’s portfolio value was US$1.45 billion, with 10 data centres and 100 per cent occupancy based on net rentable area.

US

Job growth was much better than expected in November despite the Federal Reserve’s aggressive efforts to slow the labor market and tackle inflation. Nonfarm payrolls increased 263,000 for the month while the unemployment rate was 3.7%, the Labor Department reported Friday. Economists surveyed by Dow Jones had been looking for an increase of 200,000 on the payrolls number and 3.7% for the jobless rate. The monthly gain was a slight decrease from October’s upwardly revised 284,000. A broader measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons edged lower to 6.7%. The numbers likely will do little to slow a Fed that has been raising interest rates steadily this year to bring down inflation still running near its highest level in more than 40 years. The rate increases have brought the Fed’s benchmark overnight borrowing rate to a target range of 3.75%-4%. In another blow to the Fed’s anti-inflation efforts, average hourly earnings jumped 0.6% for the month, double the Dow Jones estimate. Wages were up 5.1% on a year-over-year basis, also well above the 4.6% expectation. The Dow Jones Industrial Average fell as much as 350 points after the report on worries the hot jobs data could make the Fed even more aggressive. However, stocks shaved most of their losses as the trading session neared its close. Treasury yields initially jumped on the jobs news before turning mixed later. Leisure and hospitality led the job gains, adding 88,000 positions. Other sector gainers included health care (45,000), government (42,000) and other services, a category that includes personal and laundry services and which showed a total gain of 24,000. Social assistance saw a rise of 23,000, which the Labor Department said brings the sector back to where it was in February 2020 before the Covid pandemic. Construction added 20,000 positions, while information was up 19,000 and manufacturing saw a gain of 14,000. On the downside, retail establishments reported a loss of 30,000 positions heading into what is expected to be a busy holiday shopping season. Transportation and warehousing also saw a decline, down 15,000. The numbers come as the Fed has raised rates half a dozen times this year, including four consecutive 0.75 percentage point increases. Despite the moves, job gains had been running strong this year if a bit lower than the rapid pace of 2021. On monthly basis, payrolls have been up an average of 392,000 against 562,000 for 2021. Demand for labor continues to outstrip supply, with about 1.7 positions open for every available worker. Fed Chairman Jerome Powell earlier this week said the job gains are “far in excess of the pace needed to accommodate population growth over time” and said wage pressures are contributing to inflation. “To be clear, strong wage growth is a good thing. But for wage growth to be sustainable, it needs to be consistent with 2 percent inflation,” he said during a speech Wednesday in Washington, D.C. Markets expect the Fed to raise its benchmark interest rate by 0.5 percentage point when it meets later this month. That’s likely to be followed by a few more increases in 2023 before the central bank can pause to see how its policy moves are impacting the economy, according to current market pricing and statements from several central bank officials. Friday’s numbers had little impact on rate expectations, with traders assigning a nearly 80% probability that the Fed would step down to a half-point increase, according to CME Group data. Powell has stressed the importance of getting labor force participation back to its pre-pandemic level. However, the November reports showed that participation fell one-tenth of a percentage point to 62.1%, tied for the lowest level of the year as the labor force fell by 186,000 and is now slightly below the February 2020 level.

OPEC+ agreed Sunday to stick to its oil-output targets two days after the Group of Seven nations agreed to a price cap on Russian oil, amid mounting concerns over new Covid-related lockdowns in China and lingering uncertainty over Russia’s ability to export crude. During a virtual meeting, the Organization of the Petroleum Exporting Countries and the Russia-led bloc—a group collectively known as OPEC+—decided to maintain production cuts of 2 million barrels a day initially agreed to in October, OPEC said. Known in OPEC parlance as a “rollover,” it will allow the group time to assess the market impact of the price cap of $60 a barrel on Russian oil, the delegates previously said. Some members had previously considered the possibility of a production increase to fill a possible gap in Russian output. But members are now grappling with oil prices that have fallen 13% in the past month. Brent crude, the international benchmark, was at $85.42 on Friday, and West Texas Intermediate, the U.S. benchmark, was at $80.34—far below the $90-a-barrel level where some oil-market analysts say the group wants to see prices. Prices have come under downward pressure from Chinese Covid-19 lockdowns that have prompted concerns in OPEC of weakening oil demand. Oil prices fell Friday after the EU agreed to the cap, as traders discounted fears the mechanism will force much Russian oil out of the market and cause a supply issue. Russian crude has traded at a steep discount this year. The U.S. and its allies designed the price to cut into Moscow’s oil revenues while keeping Russian oil, a key part of global supply, available on the market. It aims to take advantage of the concentration of key maritime services in the West to try to curb Moscow’s ability to wage war in Ukraine. Still, OPEC delegates have said the production plans might be raised early next year. They said they trust estimates that Russian oil exports could fall by more than 1 million barrels a day of crude due to the price cap. The prediction is consistent with the International Energy Agency, which advises consumer nations, and foresees a decline of 1.4 million barrels a day. Russian oil production stood at 9.9 million barrels a day in October. The alliance isn’t planning to review its production until its next meeting on June 4. But OPEC said Sunday it was ready “to meet at any time and take immediate additional measures to address market developments” if needed. OPEC+’s decision to cut production in October angered the White House and congressional Democrats, who said it undermined global efforts to blunt Russia’s war in Ukraine and viewed it as a political slap in the face to President Biden ahead of midterm elections. But U.S. officials have said privately in recent days they wouldn’t complain to the cartel if it kept curbs as prices have eased significantly, according to people familiar with the matter.

Blackstone Inc. shares took a big hit after the investing giant’s real-estate fund aimed at wealthy individuals said it would limit redemptions. Blackstone Real Estate Income Trust Inc., more commonly known as BREIT, said Thursday in a letter posted to its website that the amount of withdrawals requested in October exceeded its monthly limit of 2% of its net-asset value and its quarterly threshold of 5%. That spooked Blackstone shareholders, who sent the company’s stock down nearly 10% at one point Thursday morning. More recently, they were down 7.1% Thursday, giving the company a market value of more than $100 billion. BREIT, a nontraded real-estate investment trust whose net-asset value now totals $69 billion, has been one of Blackstone’s biggest growth engines in recent years. It has helped the private-equity firm attract a new class of investors who might not be wealthy enough to invest in its traditional funds but want access to private assets. BREIT is designed to generate steady cash flows for its investors. It has delivered net returns of 9.3% year-to-date and 13.1% annually since inception, with an annualized distribution rate of 4.4%, according to its website. Despite those healthy returns, the vehicle has had an increase in redemption requests from investors in recent months. With the stock market down and bonds performing poorly, wealthy investors in need of liquidity have few areas of their portfolio where they can sell at a profit. The bulk of the redemption requests for BREIT are coming from Asia, according to a person familiar with the matter. “Our business is built on performance, not fund flows, and performance is rock solid,” a Blackstone spokesman said in a statement. “BREIT has delivered extraordinary returns to investors since inception nearly six years ago and is well positioned for the future.” The fund has invested heavily in rental housing and logistics in the Sunbelt region of the U.S. where valuations have held up, he said. Blackstone executives have said BREIT’s withdrawal thresholds were designed to prevent it from having to become a forced seller. The firm said the vehicle has $9.3 billion of immediate liquidity and $9 billion of debt securities it could sell if needed. BREIT said separately on Thursday it agreed to sell its 49.9% stake in MGM Grand Las Vegas and the Mandalay Bay to its co-owner Vici Properties Inc. The deal values the properties at $5.5 billion and will deliver a profit of more than $700 million to Blackstone, which bought them less than three years ago. The deal was struck at premium to where BREIT was valuing the assets on its books, according to a person familiar with the matter. The sale of the casino properties will give BREIT $1.27 billion in cash that it can use in part to cover the uptick in its redemptions.

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

RESEARCH REPORTS

Thai Beverage PLC – Bounce in beer and property

Recommendation: BUY (Maintained); TP S$0.80, Last close: S$0.64; Analyst Paul Chew

– Earnings were above expectations due to higher associate earnings. FY22 revenue and PATMI at 101%/109% of our FY22e forecasts. Associate earnings almost doubled from a gain on disposal and reversal of write-down on properties held for sale.

– Beer volumes recovered strongly post-lockdown in Vietnam. Total volumes jumped 54% YoY with EBITDA doubling. Final dividend up 20% YoY to Bt0.60 (S$0.023).

– We maintain our BUY recommendation with an unchanged target price of S$0.80. Our target is pegged at 18x FY23e earnings for the core operations, its 5-year average. And listed associates valued at market valuations. We expect FY23e to be a year of growth as the re-opening of borders and entertainment outlets resume; increased selling prices; and demand further spurred by multiple events including the World Cup and upcoming elections. Gross margins are expected to improve as commodity prices taper down but higher marketing spend will dampen the margin improvements.

BRC Asia – Earnings ahead, 1H23 to be impacted by “Heightened Safety”

Recommendation: Buy (Maintained), Last Done: S$1.83

Target price: S$2.30, Analyst: Terence Chua

– FY22 net profit was ahead of our expectations at 112% of our FY22e forecasts. Revenue was in-line at 99% of FY22e. Earnings were above expectations as higher-than-expected volume moved despite the “Heightened Safety” period imposed.

– $11mn net reversal for onerous contracts made. With steel rebar prices declining ~20% in 2H22, the Group benefitted from write-backs. GP margins improved 500bps for the period.

– Construction order books grew to $1.4bn from $1.135bn in the previous quarter. Strong demand for public housing and infrastructure projects in Singapore continued to drive up the Group’s order books.

– Maintain BUY with a higher target price of S$2.30. Our TP is based on 7x FY22e P/E, lowered from 8x previously, on account of the uncertain external environment. But our TP is raised to $2.30 from $2.26 as we roll forward our valuation to FY23e. We kept FY23e earnings unchanged as we expect construction activity to continue its recovery after 1H23.

Singapore Banking Monthly – Interest rates climb while loans growth slows

Recommendation: Overweight (Maintained)

Analyst: Glenn Thum

– November 3M-SORA was up by 41bps MoM to 2.69%. YTD22 3M-SORA is up 87bps.

– Singapore domestic loans grew 2.75% YoY in October, below our estimates, while Hong Kong’s domestic loans declined 2.70% YoY in October. CASA balance stable at 21.1%.

– Maintain OVERWEIGHT. We remain positive on banks. Bank dividend yields are attractive at 5% with upside surprise due to excess capital ratios. We expect bank NIMs to rise another 34bps in 4Q22. SGX is another beneficiary of higher interest rates [SGX SP, BUY, TP S$11.71].

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