DAILY MORNING NOTE | 8 July 2024

Trades Initiated in Past Week

Week 28 Equity Strategy: US payrolls in June added 206,000 jobs, slightly ahead of the 191,000 forecast. Behind the headline numbers remains a slowing economy. Almost 75% of the jobs added were government and healthcare-related. This is above the 2023 average of 56% and pre-pandemic (2017-19) 28%. The unemployment rate also ticked up from 4.0% to 4.1%. The concern now is the Sahm rule: Where the average unemployment rate rises 50bps or more above the lowest 3MMA over the previous year, the economy is in recession. The difference is now 40 bps. A slowing economy and rate cuts lead to our overweight rating on REITs. The S-REIT index is now trading at an attractive 6.5% dividend yield with the worst in interest expense headwinds ending this year.

We initiated coverage on First REIT with a BUY recommendation and target price of $0.30. The dividend yield is attractive at 9.6% anchored by 15 hospitals in Indonesia. Healthcare is a structural growth industry in Indonesia. Its major tenant, Siloam Healthcare, registered an earnings growth of 30% YoY in 1Q24. The two major risks for First REIT are the Indonesia rupiah and Lippo Karawachi (LPKR). We think the downside in rupiah is capped by the minimum annual rent escalation of 4.5%. LPKR still subsidises the rent and accounts for 35% of rental income by tenant mix. This will gradually decline as Siloam contributes more via the performance-based rent. Another de-risking is LPKR de-leveraging by selling a 10.4% stake in Siloam for US$240mn to CVC Capital. We think Siloam will eventually look to repurchase all its hospitals from First REIT to reduce or cap its rental expenses.

Singapore-listed companies have multiple asset exposure in the UK. It includes hotels, offices, student housing, transportation and renewable energy. UK government finances are tight. Debt to GDP is 101%. The new Labour government’s four key initiatives are to build more houses, reduce immigration, fund new green infrastructure and lower the huge backlog in healthcare access. The pure-play UK company under our coverage is Elite UK REIT [BUY, TP GBP0.32]. The macro optimism for Elite will be more social spending under Labour compared to the austerity programmes under the previous government. Around 93% of its rental income is from the UK Department for Work and Pensions. Another macro catalyst is interest rate cuts. Inflation has already hit the Bank of England’s 2% target but interest rates remain at a 16-year high of 5.25%. Expectations are for at least 1 rate cut this year. CDL [BUY, TP S$6.87] has 20% of its assets in the UK. Plans to build more homes, if successful, could negatively impact rented home and student accommodation in the long term. On transport, ComfortDelGro [BUY, T S$1.63] could benefit from plans to privatise more bus services and integrate more services.

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

Singapore shares fell on Friday (Jul 5), tracking declines by regional indices. Singapore shares fell 0.9 per cent or 29.07 points to 3410.81. The biggest gainer was CapitaLand Integrated Commercial Trust, which rose 0.5 per cent or S$0.01 to S$2. The largest decliner was CapitaLand Investment, which fell 2.2 per cent or S$0.06 to S$2.65.

Wall Street stock indexes closed firmer on Friday (Jul 5), with the tech-heavy Nasdaq and benchmark S&P 500 hitting record highs, as new data showing US labour market weakness boosted expectations for interest rate cuts as early as September. The Dow Jones Industrial Average rose 67.87 points, or 0.2 per cent, to close at 39,375.87. The S&P 500 gained 30.17 points, or 0.5 per cent, at 5,567.19 and the Nasdaq Composite advanced 164.46 points, or 0.9 per cent, to 18,352.76.

Top gainers & losers

Events Of The Week

SG

Singapore Airlines (SIA) and Indonesian flag carrier Garuda Indonesia have received approval from the Competition and Consumer Commission of Singapore for a joint venture (JV) agreement. The two companies said on Friday (Jul 5) that the JV will allow them to collaborate on a wider range of commercial activities that will benefit both airlines, as well as Singapore and Indonesia. These activities may include operating joint revenue-sharing flights between the two countries; coordinating flight schedules to offer travellers more options; “seamless connectivity” between Singapore, Indonesia and other countries; and exploring joint sales and marketing initiatives that provide greater value to both airlines’ customers. Shares of SIA closed at S$6.98 on Friday, down S$0.03 or 0.4 per cent, before the announcement.

HO BEE Land priced S$160 million in fixed-rate green notes due 2029 at 4.35 per cent, it said on Friday (Jul 5). The notes fall under the real estate group’s S$800 million multi-currency medium-term note programme. Ho Bee expects to issue the notes on Jul 11, 2024; they mature on Jul 11, 2029. Net proceeds from the issuance will be used to fund or refinance eligible green projects in Ho Bee’s green finance framework. This may include borrowings from banks, including the joint lead managers, who will receive a portion of the proceeds from the notes issue. Shares of Ho Bee Land closed flat at S$1.86 on Friday.

The trustee-manager of mainboard-listed Asian Pay Television Trust (APTT) on Friday (Jul 5) announced a major renewal of its board, with chief executive Brian McKinley to step down from his role on Jul 31. He will be succeeded by chief financial officer Somnath Adak, who will become the new CEO from Aug 1. McKinley will also step down from his role on Jul 31. He will be succeeded by chief financial officer Somnath Adak, who will become the new CEO from Aug 1. McKinley will also step down from the board from Jul 15 but will continue to support the trustee-manager as a consultant. With reduced debt levels and a stronger balance sheet, trustee-manager board chair Yong Lum Sung said APTT “is now in a stronger position to navigate an increasingly challenging and competitive environment” as compared to 2017. Units of APTT closed flat at S$0.077 on Friday, before the announcement.

US

An eight-day winning streak for Tesla shares sent the world’s most valuable automaker into positive territory for the first time this year. Tesla closed up 2.1 per cent on Friday (Jul 5) for its longest streak of consecutive daily gains in nearly a year. Over that span the stock has gained 38 per cent, adding US$220 billion in market capitalisation. Earlier this week, the rally got a boost from second quarter deliveries that beat the average analyst estimate. The carmaker on Tuesday said it delivered 443,956 vehicles in the second quarter, exceeding the average of 439,302 that analysts on Wall Street had estimated, but falling compared with prior quarters.

More than five years after two fatal 737 MAX crashes, Boeing faces a fresh legal reckoning now that prosecutors have concluded the company flouted an earlier settlement addressing the disasters. The aviation giant had been on a Friday (Jul 5) night deadline to accept or reject a Department of Justice (DOJ) proposal that would require it to plead guilty to fraud during the certification of MAX airplanes, sources told AFP. Boeing’s latest legal predicament was triggered by a DOJ determination in mid-May that the company ignored a 2021 deferred prosecution agreement (DPA) by not meeting requirements to improve its compliance and ethics program after the MAX crashes. In a May 14 letter to the US court, DOJ officials said that Boeing breached its obligations under the DPA by “failing to design, implement, and enforce a compliance and ethics program to prevent and detect violations of the US fraud laws throughout its operations.”

VISA and Mastercard will extend caps on tourist card fees agreed five years ago with EU antitrust regulators by another five years to 2029, the European Commission said on Friday (Jul 5). Visa, the world’s largest payments network operator, and its closest rival Mastercard, in 2019 agreed to a 0.2 per cent fee cap on non-EU debit card payments carried out in shops and a 0.3 per cent fee limit on credit card payments to settle an EU antitrust investigation and avoid hefty fines. The fee caps are due to end in November this year.

APPLE said on Friday (Jul 5) it has approved Epic Games’ games marketplace app on iPhones and iPads in Europe, after the Fortnite maker escalated its feud with the technology giant, accusing it of hindering its efforts to set up a games store on the devices. Apple said the latest spat concerned the Epic Sweden AB Marketplace and has nothing to do with the video games maker’s Fortnite app which has already been given the green light. Apps developers and antitrust regulators have criticised Apple’s tight control of the iOS app ecosystem. Before Apple’s announcement, Epic said the iPhone maker had twice rejected documents the video-game publisher submitted to launch the Epic Games Store because the design of certain buttons and labels was similar to those used by its App Store.

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

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