The latest Phillip Securities Research Morning Call provided comprehensive insights into market developments, featuring updates on Micron’s quarterly results, CDL’s strategic review, technical analysis of major indices, and Singapore’s economic indicators. The session highlighted both opportunities and challenges across various sectors and geographies.
Micron Shows Promising Signs with Strategic Customer Agreements
Micron Technology delivered fourth-quarter results that met expectations, with revenue and earnings driven primarily by rising average selling prices (ASPs) for both DRAM and NAND memory products amid ongoing shortage conditions. The most significant development was Micron’s announcement of 10 new Strategic Customer Agreements (SCAs), bringing the total to 26 agreements expected to exceed 35% of revenue through 2030.
These SCAs represent a marked improvement over previous long-term contracts, featuring stricter terms including “take or pay” contracted volumes requiring 20% deposits and price floors to mitigate future downcycles. This structure should provide greater revenue stability and earnings predictability for the memory giant.
However, Micron also announced higher capital expenditure guidance for the first half of fiscal 2025, representing more than 60% of previous guidance. Management justified this increase as necessary to meet customer demand through facility expansions in the US, Singapore, and Taiwan.
Looking ahead, Micron anticipates substantial share repurchases starting 9 December, as the two-year CHIPS Act restriction period expires. The company plans to return 100% of excess cash through buybacks, potentially totaling US$70 billion based on current projections, which could boost earnings per share by approximately 6%.
CDL’s Strategic Review Faces Market Scepticism
City Developments Limited (CDL) unveiled its “GET Plus” strategy, a three-year plan focusing on four core sectors: residential, commercial, hospitality, and living. The strategy involves US$5 billion in growth investments and US$6 billion in divestments for capital recycling and deleveraging.
Key objectives include maintaining dividend payouts above 35% of reported earnings, reducing leverage to 55% by FY2029 from current levels of 75%, and doubling assets under management from US$5 billion to US$10 billion. The company expects to unlock over US$1 billion in divestment gains from the planned asset sales.
Despite these ambitious plans, CDL’s share price declined 15% following the announcement. Market scepticism stems from the lack of detailed financial outcomes, absence of specific ROE targets, and limited visibility on the financial benefits of the strategy. Unlike comparable strategic reviews by peers like Hong Kong Land, CDL’s plan was perceived as less concrete and execution-dependent.
The geographic focus remains on Singapore as the core market, with plans to gradually exit Australia except for hospitality assets. Of CDL’s 54 owned hotels valued at US$8.6 billion, management categorised 60% as core assets to retain, 20% for enhancement through asset improvement or redevelopment, and 20% (US$1.8 billion) for divestment.
Strong Singapore Economic Data Signals Recovery
Singapore’s economic indicators showed remarkable strength, with the PMI reaching its highest level in almost eight years and accelerating from the previous month. The banking sector demonstrated exceptional loan growth of 13.5%, representing a record acceleration and doubling the 6% growth from a year ago.
This robust loan growth, driven primarily by data centers, technology, energy, renewables, and acquisition financing, provides banks with both volume increases and pricing power as SORA rates turn positive year-over-year. Manufacturing remains the fastest-growing loan segment, while housing and consumer loans maintain stable mid-single-digit growth rates.
The strong economic momentum in Singapore contrasts with challenges elsewhere, as semiconductor exports from Korea continued robust growth at 26.3% in September, indicating sustained demand in the technology sector.
Technical Analysis Points to Cautious Optimism
The S&P 500 showed resilience despite a slight 0.2% decline last week, holding key support at 5,655 around the gap-fill level and 20-day moving average. The index maintained its breakout above a wedge consolidation pattern, with Friday’s gap higher suggesting continued underlying strength.
Historical analysis of weak market breadth conditions provides encouragement. When less than 25% of S&P 500 constituents trade above their 50-day moving averages – a condition that occurred on 20 September – markets have historically performed well afterward, averaging 1.8% gains one week later and nearly 16% a year later.
September proved challenging across most asset classes, with only Bitcoin ETFs posting gains (+5.4%) while gold ETFs declined 6.7%. October expectations remain muted, with most assets likely to consolidate sideways, though gold, Singapore equities, and the Hang Seng Index may extend their weakness.
EQDP Program Shows Structural Impact on Small-Mid Caps
The Equity Development Partnership Program (EQDP) continues demonstrating its structural catalyst effect on Singapore’s small and mid-cap stocks. Since the program’s announcement in February, dedicated Singapore equity funds have grown five-fold from US$1 billion to US$5 billion by August, with OCBC’s fund expanding most dramatically from US$200 million to US$2 billion.
The program has also increased institutional participation, with more small-mid cap stocks achieving 5% institutional stakes. While recent performance has been mixed, the historical pattern shows strong outperformance typically occurs 6-12 months after fund allocation rather than immediately following announcements.
Sector Outlook: Semiconductors and Oil & Gas Favored
For attractive EQDP allocation targets, analysts favor the semiconductor sector, noting the upcycle only began in early 2024 when TSMC raised capital expenditure. Singapore semiconductor companies are just beginning to show earnings improvement from this cycle, suggesting continued momentum ahead.
The oil and gas sector also presents opportunities due to expected capital expenditure increases driven by high oil prices and energy security concerns. However, the construction sector faces headwinds from elevated diesel prices related to Middle East conflicts, though private sector demand shows signs of strengthening with contract awards up 25% year-to-date through July.
Frequently Asked Questions
Q: Why did the market react negatively to CDL's strategic review compared to Hong Kong Land's positive reception?
A: Hong Kong Land provided more explicit details, including US$10 billion in asset sales with 20% allocated to share buybacks. CDL's plan was less concrete – they're selling US$6 billion but reinvesting US$5 billion for growth, creating confusion about actual shareholder returns. Hong Kong Land even sold Hong Kong properties and tied CEO compensation to asset sale targets, showing stronger commitment to execution.
Q: What's driving Singapore's exceptional 13.5% loan growth, and how does this benefit banks?
A: The growth is driven by data centers, technology, energy, renewables, and acquisition financing, primarily in the manufacturing segment. This benefits banks through both volume increases and pricing power as SORA rates turn positive year-over-year. However, it mainly helps maintain net interest income rather than accelerate it, as margin compression from rate changes is offset by volume growth.
Q: With Micron's substantial share buyback program starting in December, what should investors expect?
A: Micron plans to return 100% of excess cash (after maintaining a cash buffer) through buybacks, potentially totaling US$70 billion. At current share prices, this could boost earnings per share by 6% and act as a share price catalyst, similar to Nvidia's recent positive market reaction to their buyback announcement.
Q: How significant is the EQDP program's impact on Singapore's small-mid cap market?
A: Very significant structurally. Singapore-dedicated equity funds have grown five-fold to US$5 billion since the program's announcement, with increased institutional participation evident in more 5% stakes. Historical patterns show strongest outperformance occurs 6-12 months after fund allocation rather than immediately after announcements.
Q: What's the outlook for Singapore's construction sector given recent headwinds?
A: Mixed. Elevated diesel prices from Middle East conflicts continue pressuring infrastructure players and main contractors. However, private sector demand is strengthening with contract awards up 25% year-to-date. Individual companies with specific catalysts like progress payments from major projects (Terminal 5, HDB BTO) may still perform well despite sector headwinds.
Q: Why are semiconductor stocks like Micron underperforming despite positive fundamentals?
A: The sector experienced significant deleveraging in Korean markets from June to August, affecting global memory stocks including Micron. This deleveraging indicated excessive prior speculation. Current valuations appear healthier with forward P/E ratios of 5-6 times compared to target prices based on 12 times P/E, suggesting potential upside as sentiment normalises.
Q: What should investors know about the technical outlook for major markets?
A: The S&P 500 shows resilience holding key support levels, with historical weak breadth conditions actually predicting positive future returns (average 16% gains twelve months later). However, October may see muted performance across most asset classes, with range-bound trading likely for equities, bonds, oil, and Bitcoin.
Q: How does the rising interest rate environment affect REITs and property stocks?
A: REITs are down 13% and trading at 0.85 times price-to-NAV, with weak sentiment anticipating potential Fed rate hikes. Rising rates create multiple headwinds: higher borrowing costs, cap rate expansion affecting property valuations, and generally negative sentiment. Some negatives may already be priced in, but performance will remain challenged in a rising rate environment.
Q: What's the investment case for Singapore banks given the strong loan growth?
A: Banks benefit from both loan volume growth and pricing power as SORA rates turn positive. The 13.5% loan growth is exceptional and broad-based across manufacturing sectors. However, this mainly helps maintain rather than accelerate net interest income growth. Banks with stronger fee income growth from wealth management (like OCBC and DBS) are better positioned than those lagging in high-net-worth client acquisition (like UOB).
Q: Should investors consider CDL at current depressed levels?
A: They should stay cautious. CDL trades at significant discounts to net asset value (US$7 share price vs. US$15 RNAV), but this has been persistent. The strategic review doesn't address this discount through share buybacks, instead allocating US$5 billion to growth investments. Without concrete steps to narrow the RNAV discount, the share price de-rating may continue despite the stock appearing "cheap" on paper.
This article has been auto-generated using PhillipGPT. It is based on a report by a Phillip Securities Research analyst.
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