• December’s 3M-SORA was up by 39bps MoM to 3.08%. 4Q22 3M-SORA was up 252bps YoY.
• Singapore domestic loans grew 0.67% YoY in November, below our estimates, while Hong Kong’s domestic loans declined 3.02% YoY in November. CASA balance dipped slightly to 20.7%.
• 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 major beneficiary of higher interest rates [SGX SP, BUY, TP S$11.71].

 

3M-SOR and 3M-SIBOR continued to climb in December

Interest rates continued to increase in December. The 3M-SORA was up 39bps MoM to 3.08%, while the 3M-SIBOR was up 23bps MoM to 4.24%. The SORA MoM increase was 2bps lower than the previous month, but still the third highest on record, while the SIBOR MoM increase was 15bps lower than the previous month’s increase of 38bps. The 4Q22 3M-SORA average of 2.68% was 125bps higher than its 3Q22 average of 1.43% and improved by 252bps YoY. The 4Q22 3M-SIBOR average of 3.96% was 149bps higher than its 3Q22 average of 2.47% and improved by 352bps YoY (Figure 1).

 

 

Recovery of treasury income to boost SGX’s earnings

Treasury income dipped in FY21 and FY22 due to the low interest rate environment. However, we expect a rebound in treasury income in FY23e by at least 8%. Based on historical data, we can see that SGX’s treasury income is lagging behind the Fed Fund Rates (Figure 2). As a majority of SGX’s collateral balances (FY22: S$13.9bn) are placed in Fixed Deposits (FDs) with the tenure spread out, certain deposits are yet to matured and the interest rates have not been refreshed. Nonetheless, moving into FY23 we should expect the treasury income to recover to pre-pandemic levels as they get placed into higher interest FDs. For context, in FY20, SGX earned a yield of 98 basis points on collateral balances of S$13.7bn resulting in treasury income of S$135mn when the Fed fund rate peaked at 2.50%. Treasury income in FY22 was S$49mn, an average yield on collateral of only 36 basis points.

 

 

Singapore loans growth slowing down

Overall loans to Singapore residents – which captured lending in all currencies to residents in Singapore – rose by 0.67% YoY in November to S$816bn. This was below our estimate of mid-single digit growth for 2022 as the rise in interest rates started to be more fully felt by consumers.

Business loans grew by 0.43% YoY in November, as business loans dipped by 1.49% for the month. Loans to the building and construction segment, the single largest business segment, grew 2.64% YoY to S$171.4bn, while loans to the manufacturing segment grew 3.41% YoY in November to S$26.2bn.

Consumer loans were up 1.04% YoY in November to S$313.3bn, aided by strong loan demand in the housing segment. Housing loans, which make up ~70% of consumer lending, grew 3.97% YoY in November to S$222bn for the month.

Total deposits and balances – which captured deposits in all currencies to non-bank customers – grew by 6.36% YoY in November to S$1,719bn. The Current Account and Savings Account (CASA) proportion dipped slightly to 20.7% (Oct22: 21.1%) of total deposits, or S$356bn, as there was a move towards FDs due to the high interest rate environment.

 

Hong Kong loans growth dipped in November

Hong Kong’s domestic loans growth declined 3.02% YoY and 0.35% MoM in November. The YoY decline in loans growth for November was higher than the decline of 2.70% in October, while the MoM loans growth decline of 0.35% was 87bps lower than October’s loans growth decline of 1.22%.

 

Source: Phillip Capital Research - 13 Jan 2023

• The results were better than expected. 1H23 revenue and PATMI (excluding one-offs) were 49%/67% of our FY23e forecast. The continued push towards branded products drove gross margins to 29%, and is ahead of our modelled 26% from increases in selling price.
• 2Q23 earnings jumped 38% YoY to US$49.5mn supported by revenue growth (+7%) and expansion in both gross (+2% points).
• We raise our F23e earnings by 19% to adjusted US$123mn. We maintain our BUY recommendation and nudge our target price lower to S$0.67 (prev. S$0.69), pegged to 8x FY23e P/E, a huge 50% discount to the industry valuation due to its smaller market cap and higher gearing. Del Monte valuations are attractive at 4x PE FY23e and an 8% dividend yield. Multiple rounds of price increases and new products have supported gross margin expansion despite cost pressures. The drive towards more branded and new products in the US continues to bear fruit.

 

 

The Positives

+ Record gross margins. Gross margin climbed to record high 29.4%, a 2% point rise YoY. Margin gains were from US operations from multiple price increases over the past 18 months. These have supported margins despite raw material and logistics cost pressure. There was also operating leverage from a slower 6% rise in general and administration expenses. 

+ Sharp rebound in Philippines. Sales in the Philippines and International (DMPI) recovered strongly in 2Q23, surging 22% YoY in peso terms to PHP11.3bn. However, revenue in USD terms only improved by 5% due to the weakness in the Philippine peso. Growth stemmed from the transition to new distributors in the last quarter and a rebound in food service (+21% YoY) and convenience stores (+48% YoY) as the lockdowns ease.

 

The Negative

– Rise in net debt by US$505mn to US$2bn. Net debt to EBITDA climbed from 4.3x to 5.6x over the past six months. Whilst total net debt has risen by US505mn YoY to US$2bn in May 2022. Driving up debt levels was: (i) US$366mn increase to US$1250mn; (ii) US$70mn for the purchase of Kitchen Basics. The 40% YoY jump in inventory was due to higher cost of materials, which we believe was in preparation for a strong holiday season. We expect debt to remain elevated due to the redemption of a 6.5% US$100mn Preference Shares in Dec2022. Around 15-20% of total debt is on fixed rates.

Source: Phillip Capital Research - 12 Dec 2022

• Workplace incidents hampered the recovery. As a result of the Heightened Safety period imposed by the Ministry of Manpower (MOM), local construction projects are, in general, progressing slower than expected. YTD22 contracts awarded is down 9.4% YoY.
• According to data from the Building and Construction Authority (BCA), demand for ready-mixed concrete (RMC) for the first nine months of 2022 was ~8.8mn cu/m, about 8% lower than our estimate and up 14.2% YoY.
• Maintain BUY with unchanged target price of S$0.54. We trim FY22e/FY23e earnings by 12%/11% respectively on account of the Heightened Safety period imposed. Our TP is unchanged as we roll forward our valuations, still based on 12x FY23e P/E, a 20% discount to its 10-year historical average P/E on account of the still uncertain business environment.

According to data from the BCA, demand for RMC for the first nine months of 2022 was ~8.8mn cu/m, about 8% lower than our estimate but higher than ~8.5mn cu/m in the same period last year (Figure 1). The construction recovery has slowed, with contracts awarded for the first nine months of 2022 5.3% lower than 2021. Construction progress payments for the same period, however, rose in 2022 by 14.2%.

No results update from PanU as it has moved to half-yearly reporting.

 

The Positives

+ Construction progress payments for first 9 months of 2022 rose 14.2% YoY. We believe construction progress payments were higher due to the relaxation of border restrictions on the inflow of migrant workers in 2022. This is an important metric, as it tracks work done in the sector.

 

The Negative

– Workplace fatalities hampered recovery. As of 1 Sept 2022, the number of workplace fatalities stands at 36 for the whole of 2022, up from the 28 workplace fatalities reported for the first six months of 2022, many of which were in the construction industry. As a result of the Heightened Safety period imposed by the Ministry of Manpower (MOM), local construction projects are, in general, progressing slower than expected. The time-outs and punitive measures imposed on the sector has slowed construction progress.

 

– Contracts awarded for first 10 months of 2022 9.4% weaker than 2021. Despite the strong pipeline of projects, contracts awarded slowed in 3Q22 as workplace fatalities hampered project progression rates.

Source: Phillip Capital Research - 12 Dec 2022

• FY22 revenue and adjusted PATMI was 91%/100% of our FY22e forecasts. 2H22 adjusted PATMI declined 45% YoY to S$13.4mn due to the absence of worker dormitory earnings.
• Co-living revenue continues to grow strongly with 38% YoY growth in 2H22. Growth was driven by an estimated 25% growth in rooms and a mid-teens rise in room rates.
• Earnings in FY23e will be supported by an estimated 60% expansion in co-living capacity (under Coliwoo brand) by 600 rooms to around 1,600. The new 411 units in Mount Elizabeth will be one of the largest sites for Coliwoo. The absence of dorm earnings will be a drag in 1H23.  We maintain a BUY with lower TP of S$0.47 (prev. S$0.51) due to decline in valuations of listed LHN Logistics (LHNL SP, Not Rated). Core business valuations are pegged to 6.5x FY23e P/E, while the industry is trading at 13x. Stock is also trading at 35% discount to book value of S$0.455 with a dividend yield of around 6%.

 

The Positive

+ Co-living riding on surge in rental rates and capacity. Co-living revenue jumped 38% YoY from higher rental rates and a 25% rise in room capacity in FY22e. New capacity additions were 320 Balestier Road, 75 Beach Road, 115 Geylang Road and a JV properties at 40 and 42 Amber Road and 471 Balestier Road. Fair value gains caused a spike in PBT for co-living.

 

The Negatives

– Facilities management dragged down by dormitory. Facilities management earnings dropped 37% YoY in 2H22 to S$4.4mn. The decline was due to the exit of the dormitory business in mid-2022. The drag from dorm earnings will persist into 1H23.

– Rise in net debt from investment properties. Net debt has risen from S$63mn to S$107mn in FY22. The increase in net debt was due to S$53mn invested in investment properties. We expect stability in FY23e cash-flows, as the focus will be on launching and raising occupancy levels of Mount Elizabeth Coliwoo. Bulk of the debt is on fixed rates for the next two years.

Source: Phillip Capital Research - 12 Dec 2022

• Securities volume softening while derivatives volumes trending at 10% growth rate, and derivatives pricing climbing to record levels.
• Pick up in treasury income to accelerate in FY23 as higher interest rates kick in. We estimate Treasury income to rise at least 8% YoY in FY23.
• We maintain BUY with an unchanged target price of S$11.71. Our estimates remain unchanged, and our target price remains pegged to +2SD of its 5-year mean or 26x P/E. Catalysts include continued growth from derivatives volumes and fees, and higher treasury income as the higher interest rates start to kick in.

Securities volumes dip while derivatives volumes trend upwards

SGX’s securities volume is trending downwards, with the 5MFY23 securities daily average volume (SDAV) down 10.5% YoY at 1,095mn contracts as the market sentiment remained subdued due to macroeconomic factors, and the volumes moderated from a record year in FY22. However, SGX’s derivatives volume is trending upwards, with the 5MFY23 derivatives daily average volume (DDAV) up 9.4% YoY. As market volatility continues to rise, derivatives volume can climb for the rest of FY23e.

 

 

Treasury income to tick up in FY23

Treasury income dipped in FY21 and FY22 due to the low interest rate environment (Figure 3). However, we expect a rebound in treasury income in FY23e by 8%. Looking at the chart below, we can see that SGX’s treasury income is lagging behind the Fed Fund Rates. As a majority of SGX’s collateral balances (FY22: S$13.9bn) are placed in Fixed Deposits (FDs) with the tenure spread out, certain deposits have not matured yet and the interest rates have not been refreshed. Nonetheless, moving into FY23 we should expect the treasury income to recover to pre-pandemic levels as they get placed into higher interest FDs. In FY20, SGX earned a yield of 98 basis points on collateral balances when Fed fund rate peaked at 2.50%.

Source: Phillip Capital Research - 8 Dec 2022

• Under StarHub’s DARE+ transformation (2022-26) to reduce cost and create new revenue streams, S$310mn of investments are required from FY22-24e. Around S$75mn has been spent with the bulk (est. S$150mn) to be spent in FY23e.
• EBITDA is expected to return to the FY21 baseline of S$500mn by FY24 (FY22e: S$415mn).
• The 3-5 month delay in project implementation and higher cost in cloud infrastructure will elevate the operating cost and Capex in FY23e. We have not modelled the higher cost pending FY23e guidance, but there is upside risk. Our FY22e and FY23e forecasts are unchanged, but the target price is maintained at S$1.15, pegged at 7x FY22e EV/EBITDA, in line with other mobile peers. We maintain an ACCUMULATE recommendation.

 

Key Highlights

Higher cost expected in FY23e. The investments in StarHub’s DARE+ transformation (2022-26) is raised by S$40mn to S$310mn due to increased investments in cloud infinity. Around 24% or S$75mn (Figure 1) has been spent in FY22e including EPL costs, 5G and start-up costs of new businesses. Another S$150mn is expected to be spent in FY23e. The doubling of investments over FY22e is due to the 3-5 month delay in implementation plus an increase in budgeted investments.

 

Figure 1: Huge opex coming in FY23e

Source: PSR

 

Bulk of the cost savings in IT. Based on the DARE+ transformation roadmap, cost saving and profit growth of S$105mn will materialise in FY24.  Around 90% are cost savings. We expect the bulk of the cost savings from FY24 to come from lower maintenance cost and software license fees of legacy systems. Another area of cost saving will be the reduced footprint of physical stores as the business model turns more digital.

 

Revenue opportunities are less visible. We were less clear on the revenue opportunities post the DARE+ transformation. In consumer mobile, new verticals are being introduced including Gamehub (allowing consumers to play games with expensive hardware with the use of cloud), Protecthub+ (device security and hardware replacement) and Lifehub (mobile health services partnering Alexandra Hospital). The priorities for Ensign are to expand regionally and proprietary solutions (e.g. AI cyber detection).

Source: Phillip Capital Research - 8 Dec 2022