DAILY MORNING NOTE | 5 June 2023
Analyst: Zane Aw
– In the earlier report dated 10th April, we looked into the “Sell in May and Go Away” adage and the resulting conclusion was investors should remain vested through May as the predictive power of this adage is questionable and the saying has been significantly off the mark in the last decade
– The historical 3 & 6 months returns following May for the past 30 years further lends credence that investors should remain vested. In the 3 months following May, the S&P 500 has yield gains in 19 of the 30 years (63.3%) with an average return of 0.83%. For the 6 months return following May, the index has generated positive returns in 21 of the 30 years (70%) with a higher average return of 3.95%
– To sum up, investors are usually rewarded with positive average returns over the following 3 & 6 months, with higher average returns generated over a longer timeframe
Week 23 equity strategy. Market optimism is back. With better-than-expected US job gains and a technical breakout above 4200 for S&P 500, the market narrative is back to soft landing and further rate hikes.
We are less constructive with regard to the market. Firstly, we believe the recent job gains should be viewed in the context of replenishing the significant losses experienced during the pandemic, rather than indicating a robust underlying economy. The average job addition pre-pandemic was 2.28mn per year (2015-19). Since the pandemic, the average job additions per year is only 1.27mn. Secondly, the May new orders PMI in the US sits at 42.6. These are lows since the pandemic and readings only seen during recessions. Thirdly, with the Fed focused on job slack (ratio of vacancies to unemployed) and payroll gains, we anticipate a delayed reaction from the central bank in response to the weakening economy. Any monetary stimulus will be slower than in previous cycles due to stubborn inflation.
In a higher for longer interest rates and inverted yield curve scenario, a winner will be Singapore banks. Floating-rate loans become a particularly attractive asset. It can capture the rise in interest rates. And inverted yield curve means the front end of the curve is higher in interest rates, where most banks price their loans. Between 60-70% of bank loans are on a floating rate basis.
A Shanghai-listed logistics company, Milkway Chemical Supply Chain Service Co, via a local-incorporated unit, is offering 22.66 cents for LHN Logistics, valuing it at around S$38mn.
LHN Logistics was listed at 20 cents last April in an all-placement offer. LHN Group has a 84.05% stake in LHN Logistics.
Milkway’s offer price is a premium of 34.8% over the LHN Logistics’ last traded price. Milkway’s offer is final.
We view the offer as positive for LHN Group (BUY, TP S$0.47).
Firstly, the value of LHN’s stake in LHN Logistics at the offer price is S$31.9mn (or S$0.078 per LHN share). We expect LHN to dividend some of the proceeds back to shareholders.
Secondly, LHN Logistics has a net debt of S$5.8mn. Thus, helping is de-gearing the LHN’s balance sheet together with the cash proceeds.
Thirdly, valuation of the offer is around 9.5x PE FY23 (based on annualised 1H23 results). It is more than double LHN valuations of 4x PE FY23e.
On the flip side, the completion LHN Logistics new ISO depot was an added growth driver for LHN.
No change to our recommendation and target price of LHN.
Head Of Research
Singapore stocks ended the shorter trading week higher on last Thursday (Jun 1), as investors seized opportunities in the local market following the US House vote to raise the debt ceiling. Advancers narrowly inched past decliners 270 to 269, after 1.4 billion securities worth S$1.3 billion changed hands.
Wall Street stocks rose sharply on Friday (Jun 2), closing out the week on a high following a bumper jobs report and a deal in Congress to avert a US debt default. The tech-rich Nasdaq Composite Index rose 1.1 per cent to finish the week on a new 13-month high of 13,240.77. The Dow Jones Industrial Average rose 2.1 per cent to 33,762.76, and the broad-based S&P 500 closed 1.5 per cent higher at 4,282.37.
A chemical supply chain service provider in China, Milkyway Chemical, intends to make a voluntary general offer for all the issued and paid-up ordinary shares in Catalist-listed LHN Logistics at an offer price of S$0.2266 per share in cash. The offer price represented a 34.9 per cent premium over LHN Logistics’ closing price of S$0.168 per share on Jun 1, and a 44.5 per cent premium over its volume-weighted average price per share for the six months ended Jun 1, LHN Logistics said in a bourse filing on Sunday (Jun 4). LHN Logistics reported a net asset value of S$0.0783 per share as at Mar 31, 2023. It is a subsidiary of real estate company LHN Limited, which owned 84.05 per cent of LHN Logistics’ shares as at Sep 30, 2022.
Medical supplies company Pasture Holdings is offering 20 million placement shares at S$0.25 apiece as it seeks a listing on the Catalist board of the Singapore Exchange (SGX). The company will raise gross proceeds of S$5 million and net proceeds of around S$3.1 million from the placement. The 20 million placement shares represents around 15.2 per cent of the company’s share capital of 132 million shares immediately after completion of the placement. Based on the offer price of S$0.25, the company would have a market capitalisation of S$33 million.
Thanks to the recovery of traffic, Changi Airport Group has reported earnings of $33 million for the year ended March 23, a sharp swing from a net loss of $838 million suffered in the year earlier. Revenue in the same period doubled to $1.88 billion. As at March, passenger traffic has recovered to 82% of the pre-pandemic levels. For the whole of FY2023 ended March, Changi handled 42.6 million passengers, an eightfold increase, reaching 62% of pre-pandemic levels.
The US dollar rose on Friday (Jun 2) after May’s non-farm payrolls report showed employment numbers surged, while traders weighed the merits of the US Federal Reserve possibly skipping a rate hike in June. The dollar index, which measures the US currency against six others, was last up 0.435 per cent at 103.980, on track for its largest daily percentage gain since mid-May.
UBS Group is due to report its earnings on Jul 25, but complexities include unfinalized details of government support in its emergency takeover of Credit Suisse and different accounting systems of the two banks may delay its second-quarter results until end-August when it could also provide an update on its plans for Credit Suisse Group’s local business. UBS is gearing up for an estimated US$34.8 billion gain as a result of its rescue of Credit Suisse, while warning it also faces billions in potential legal and regulatory costs.
Walt Disney will record a US$1.5 billion expense related to programmes it is removing from the Disney+ streaming platform. The expense is part of a previously announced plan to write down some programming, the company said in a filing Friday (Jun 3), and will be recorded in the current fiscal third quarter. In May, Disney said it was weighing a write-off of up to US$1.8 billion to reflect the diminished value of movies and TV shows that were coming off the Disney+ service. In the filing Friday, Disney said it anticipates another US$400 million impairment charge related to film and TV content.
Gold slipped on Friday (Jun 2) as hotter-than-expected US jobs data lifted Treasury yields, but was on track for a weekly gain as a higher unemployment reading kept alive hopes that the Federal Reserve would pause interest rate hikes. Spot gold was down 1.4 per cent at US$1,951.13 per ounce by 6.17pm GMT, after hitting a seven-session high earlier. US gold futures settled 1.3 per cent higher at US$1,969.6. Bullion has gained 0.2 per cent so far last week, and is set to break a three-week losing streak. US nonfarm payrolls grew by 339,000 in May, beating expectations for an increase of 190,000, but the unemployment rate rose to 3.7 per cent from a 53-year low of 3.4 per cent in April.
Source: SGX Masnet, Bloomberg, Channel NewsAsia, Reuters, CNBC, WSJ, The Business Times, PSR
Recommendation: NEUTRAL (Maintained); Last Done: S$2.49
Target Price: S$2.51; Analyst: Peggy Mak
• FY23 revenue grew 49.4% YoY, which included a full-year contribution from 65.4%-owned HK cargo handler AAT. However, operating loss rose 12.7% YoY, dragged down by cost escalation (+48.1% YoY), S$44mn in M&A expenses, and weak performances from AAT, Malaysia ground handling and Saudi Arabia cargo handling. Net loss would be S$77.6mn if government relief were excluded.
– Staff costs surged by 62.0% YoY, a combination of inflationary pressure and restoration to full capacity ahead of the recovery in flight volume. As at March 2023, the number of flights at Changi Airport was 25% below pre-pandemic level.
– Balance sheet has turned into net debt, with net gearing at 0.33x. Consolidation of Worldwide Flight Services (WFS) could raise FY24e net gearing to 0.84x, we estimate.
– Maintain NEUTRAL with a lower target price of $2.51 (prev. $2.92). We see multiple headwinds ahead: 1) Slowdown in air cargo volume; 2) higher interest expense from the acquisition cost and debt at WFS; 3) air travel demand might plateau from 2H24e with rising recessionary risks.
Recommendation: Initiate (Buy), Last Done: S$0.75
Target price: S$0.90, Analyst: Liu Miaomiao
– 1Q23 tenant sales jumped 17.9% YoY. We expect FY23e tenant sales to rise by 25% given the re-opening in China, 18 days of closure a year ago and the shift in consumption towards bargains in outlet malls. 1Q23 DPU of 1.849 cents was highest since listing.
– Stable income base guaranteed by the sponsor with 3% annual rental escalation provides a cushion 5.4% dividend yield from this fixed component alone. Potential accretive acquisition of Xi’an asset drive DPU up by 4%.
– We initiate coverage with a BUY recommendation on Sasseur REIT and a DDM-based target price of S$0.90. Accretive inorganic growth, the better-than-expected tenant sales growth are potential re-rating catalyst and attractive yield of 8.7% paid quarterly.
Recommendation: ACCUMULATE (Downgraded); TP: US$226.00
Analyst: Ambrish Shah
– 1Q24 revenue/Adj. PATMI was within expectations at 24%/23% of our FY24e forecasts, excluding a restructuring charge of US$0.7bn. Revenue grew 11% YoY to US$8.2bn due to higher subscription sales. PATMI spiked 611% YoY (71% normalized) driven by higher operating leverage.
– Future contracted revenue or remaining performance obligations (RPO) grew by 11% YoY to US$46.7bn. For FY24e, Salesforce maintained its total revenue guidance of US$34.6bn (up 10% YoY), while raised its GAAP EPS outlook to US$2.68 from US$2.60 taking the midpoint. Adj. operating margin expected to be 28% up from 22.5% in FY23.
– We downgrade to ACCUMULATE from BUY recommendation after the recent jump in its stock price. We increase our DCF target price to US$226.00 (prev. US$219.00) with a WACC of 7% and terminal growth of 4%. Our FY24e revenue estimates remain unchanged, while we have increased our PATMI by 2% due to lower expenses. Salesforce enjoys longer term tailwinds from cloud-based digital transformation trends as companies look to form a more holistic views of their customers.
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