DAILY MORNING NOTE | 7 August 2023
All three banks have released their 2Q23 results. In general, most exceeded expectations and interim dividends surprised with a whopping 40% YoY jump. Banks are now paying an annualised dividend yield of around 5%, OCBC is offering the highest at 6%. Driving up earnings has been a major 37% YoY jump in net interest income for the banks. Banks enjoy two features most sought after in a rising rate environment. Firstly, variable-rate loans can reprice immediately higher when interest rates rise. Additionally, banks possess pricing power due to their concentrated market share and locked-in loan contracts. Secondly, there is the availability of zero-interest loans (aka CASA deposits). Despite the recent jump in interest rates, around 50% of deposits or S$640bn are still current account and savings accounts, or CASA. All the banks are exiting their 2Q23 with high NIM suggesting further QoQ improvement. Higher for longer interest will see interest margins elevated and earnings less volatile.
Headline news has been the downgrade of US credit rating by Fitch from AAA to AA+. US government debt to GDP of 112% is far higher than the other nine AAA-rated countries (including Singapore) with median debt to GDP of 39%. Singapore’s 168% debt to GDP is largely to facilitate debt market development and create a benchmark risk free yield curve. Bulk of the debt is government securities, including non-tradeables issued to CPF. There are also reserve transfers to GIC and bonds for infrastructure. Despite the downgrade, the near-term impact on US Treasuries is minimal. It is still considered a safe haven asset or collateral with zero risk weighting to commercial banks. Even fixed-income fund mandates may exempt Treasuries from any rating requirements.
Head Of Research
Singapore stocks ended the previous week lower (Aug 4), tracking overnight losses on Wall Street. The trio of local banks saw mixed trading on Friday. UOB was the biggest loser, falling 3.4 per cent or S$1.02 to S$28.80. OCBC also closed lower, losing 0.8 per cent or S$0.10 to S$12.94. Meanwhile, DBS gained 1.5 per cent or S$0.49 to close at S$34.25. The biggest gainer on the benchmark index was Yangzijiang Shipbuilding, which rose 1.9 per cent or S$0.03 to close at S$1.58.
Wall Street closed lower on Friday (Aug 4) after a report of slowing US labour market growth, and all three major indexes posted weekly losses as investors braced for more possible downside surprises a day after disappointing earnings from Apple. Apple’s shares fell 4.8 per cent, its biggest daily percentage decline since Sep 29, 2022, that dented the S&P 500 by about 16 points the day after the iPhone maker forecast a continued slide in sales. A partial counterweight to Apple for the S&P 500 and Nasdaq was Amazon.com. Its shares rose 8.3 per cent the day after the online retailer issued an upbeat third-quarter outlook. Amazon’s rise were an 11-point positive for the S&P 500.
BRC Asia’s 3Q23 (ended Jun) revenue fell 10.8% YoY but grew 22.4% QoQ as safety measures imposed at worksites were lifted in late May. The decline in gross profit was smaller at 5.6% YoY, possibly due to lower provision for onerous contracts as steel prices has fallen 25% YoY. Net profit, however, was 10.9% YoY higher.
Industry demand for steel rebars rose by 2.3x MoM to 152K tons in May, although prices continued to decline by 4% MoM. Net gearing picked up again to 0.5x (Jun: 0.38x) suggesting that BRC is stocking up for higher deliveries. More details after the analyst briefing on 8 Aug (BUY TP S$1.99).
Manager of Research
S-REITS’ benchmark iEdge S-Reit index returned 1.8 per cent in the month of July, extending from the 0.3 per cent total returns in June, and in line with the FTSE EPRA Nareit Developed Index. In terms of net fund flows over the month, retail investors net bought S$8.2 million of S-Reits while institutional investors net sold S$86.4 million in the sector. However, there were 10 S-Reits and property trusts which recorded net institutional inflows in the month of July. They were Keppel DC Reit, CapitaLand Integrated Commercial Trust (CICT), CapitaLand India Trust (Clint), ESR-Logos Reit, Far East Hospitality Trust, Digital Core Reit, Paragon Reit, Sasseur Reit, First Reit, and BHG Retail Reit. The 10 S-Reits and property trusts recorded combined net institutional inflows of over S$38.2 million.
Frasers Hospitality Trust (FHT), in a business update on Friday (Aug 4), said it had observed a “sustained recovery” in its markets for its third fiscal quarter ended June. It said that its revenue per available room (RevPAR) for its Singapore portfolio rose to S$283 in Q3 from S$225 in the year-ago period. Its nine-month RevPAR figures have come in at S$281, up from S$159 in FY2022’s period and S$244 in 2019’s nine-month period. Average daily rate (ADR) for the nine months ended Jun 30 rose 60.7 per cent, and occupancy was up 6.9 percentage points as Singapore’s tourism sector continued its recovery. FHT added that the return of “marquee events” in Singapore had also contributed to the improved figures. Stapled securities of FHT closed flat at S$0.48 on Friday before the business update.
ESR Group and activist investor Quarz, which have been trading blows over an attempt to internalise Sabana Industrial Reit’s manager, defended their positions ahead of an Aug 7 extraordinary general meeting (EGM) that will decide the fate of the real estate investment trust (Reit). ESR said it has always supported Sabana’s growth, while Quarz pledged to engage with all stakeholders to support the internalisation of the manager. ESR, which is opposing the internalisation, rejected claims that it has conflicting interests. The Securities Investors Association (Singapore) or Sias had asked how it would respond to unitholders who believe ESR has an interest in maintaining the status quo, as a stronger and larger Sabana Reit could become a credible competitor to ESR-Logos Reit.
General Motors (GM) said on Friday (Aug 4) it plans to boost employment next year, despite concerns raised by autoworkers that the shift to electric vehicles (EV) will reduce labour needs. GM, Ford Motor and Chrysler-parent Stellantis last month opened contract talks with the United Auto Workers (UAW) union ahead of the Sep 14 expiration of the current four-year labour deals. GM manufacturing chief Gerald Johnson said on Friday he did not agree it would need fewer workers for EV production. Last year, Ford said EVs, which are simpler and have fewer mechanical parts, will require 40 per cent less labour to build than current internal combustion engine (ICE) vehicles. GM has vowed to end the sale of new ICE vehicles by 2035. Another key issue in the talks involves pay and treatment of workers at GM’s joint venture battery plants.
The greenback fell on Friday (Aug 4), paring almost all the week’s gains, after slowing US jobs growth in July encouraged hopes of a soft economic landing, but higher wages suggested the Federal Reserve may need to keep interest rates higher for longer. The US economy added fewer jobs than expected last month. However, solid wage gains and a drop in unemployment to 3.5 per cent signalled continued tightness in the labour market. The US dollar index, a measure of the currency against six peers, fell 0.4 per cent after climbing on Thursday to 102.84, the highest since Jul 7. The decline was the US dollar’s biggest single-day loss in three weeks.
Google-parent Alphabet has cut its stake in trading app Robinhood Markets by nearly 90 per cent, a regulatory filing showed on Friday (Aug 4). The disclosure comes days after Robinhood said it had achieved profitability for the first time as a public company in the second quarter. Robinhood has been struggling to regain its footing after emerging as the breakout financial technology app during the pandemic, when several retail traders were drawn to its platform because of its commission-free trades and easy-to-use interface. However, the Federal Reserve’s tightening cycle last year hammered equities, especially high-flying tech stocks in which there was a lot of retail interest, denting Robinhood’s business. Robinhood shares have lost 86 per cent since hitting their peak in August 2021. Alphabet had around 612,214 shares in Robinhood as at June 30, compared with 4.9 million shares in the previous quarter.
Source: SGX Masnet, Bloomberg, Channel NewsAsia, Reuters, CNBC, WSJ, The Business Times, PSR
Recommendation: ACCUMULATE (Downgraded); Last Done: S$5.60
Target Price: S$6.00; Analyst: Peggy Mak
– 1H23 net profit beat our estimates, due to the surge in Singapore power prices (USEP), which peaked in May to S$492/MWh, and widening margins from lower gas prices. USEP has retreated to about S$200/MWh in July. Together with temporary price controls implemented by the Energy Market Authority (EMA) from 1 July, we think 2H23e conventional energy margin would normalize.
– SCI began to accrue interest income of S$122mn from S$2bn deferred payment note it received from the sale of Indian power plants in Jan 2023. This includes a S$38mn fair value gain from a stronger Rupee. But it also booked a one-time non-cash accounting loss of S$78mn on reversal of currency translation and capital reserves.
– We raise FY23e net profit estimates by 19.8% to factor in the stronger 1H23. We also lift TP to S$6.00 (previously S$5.06), based on an average 9x EV/EBITDA of FY24e estimates for the renewable energy players. Downgrade to ACCUMULATE due to recent price performance.
Recommendation: ACCUMULATE (Upgraded); TP S$1.21, Last close: S$1.08; Analyst Paul Chew
– 2Q23 revenue was below expectation but EBITDA exceeded. 1H23 revenue and EBITDA were 44%/58% of our FY23e estimates. Equipment sales was down 21% YoY in 2Q23, but margins were strong due to lower and delayed investments in the DARE+ transformation strategy.
– FY23e EBITDA guidance was raised by between 6 and 10%. We expect the planned S$310mn in Dare+ expenditure over the next 3 years to be cut by around S$25mn. Negotiations and rationalisation have helped lower expected spend.
– We lower FY23e revenue by 7% on account of weaker mobile equipment sales and project delays in cybersecurity. Conversely, EBITDA is raised by 6% from rationalisation and delay in Dare+ spending. We raise our recommendation from NEUTRAL to ACCUMULATE. Our target price is increased from S$1.08 to S$1.21, pegged at 6.5x FY23e EV/EBITDA, in line with other mobile peers.
Recommendation: NEUTRAL (Maintained); TP S$15.20, Last close: S$14.38; Analyst Paul Chew
– 2Q23 PAT was down 26% YoY to S$66.7mn. Results were below expectations. Revenue and PAT were 44%/45% of our FY23e forecast. Medical devices demand is down post-pandemic and other electronic products face overstocking. Interim dividend is maintained at 25 cents.
– We expect the weakness in revenue to persist until year-end. Recovery will come from new products such as EV chargers, semiconductor equipment and data centres.
– We lower our FY23e PATMI by 5% to S$296mn. Our revenue estimates are cut by 8% to S$3.3bn. We maintain our NEUTRAL recommendation. Valuations and dividend yield of 5.2% have turned more attractive, but there is little visibility of a recovery in the near-term. The target price is lowered to S$15.20 (prev. S$17.10), 15x PE FY23e. Our target valuations have been lowered as current earnings have a higher composition of interest income (7% vs 2% historically).
Recommendation: NEUTRAL (Maintained); TP: US$183.00; Last Close: US$181.99
Analyst: Maximilian Koeswoyo
– 3Q23 results were within our expectations. 9M23 revenue/PATMI at 77%/76% of our FY23e forecasts. iPhone revenue declined 2% YoY in 3Q23.
– Revenue contraction was lower than company guidance due to strength in emerging markets and sales recovery in Greater China. Services growth re-accelerated, resulting in gross margin expansions.
– Mac and iPad are expected to decline by double digits in 4Q23 while mostly offset by the acceleration of iPhone and Services growth. 4Q23 revenue to fall 1-2% YoY.
– We maintain our NEUTRAL rating with an unchanged target price of US$183.00, a WACC of 6.5%, and a terminal growth rate of 3%.
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