Monthly Market Wrap: Banks, Singtel, SATS, Yanzijiang help STI rise 3.7% for July to 3,455.94

Date: August 1, 2024

  • The STI regained the 3,400 level and came close to 3,500 in July
  • Banks, Singtel, Yangzijiang and SATS helped index add 3.7%
  • In the US, The Dow surged 4.4%, the S&P rose 1.1% but Nasdaq fell 0.8%
  • US Federal Reserve held rates steady, left door open for Sep rate cut
  • MAS announced new leverage guidelines for S-REITs
  • Average S-REITs gearing ratio is 39.1%: SGX Research
  • Q2 bank earnings likely to be stable but unlikely to beat Q1’s outperformance
  • OCBC’s 93.52% of Great Eastern fell short of compulsory acquisition threshold
  • Offer to privatise Second Chance at S$0.30 per share

 

The 3,500 level was challenged, but not beaten – yet

From a technical perspective, July will stand out as the month in which the Straits Times Index broke above the 3,400 level for the first time in two years, and came within reach of closing above 3,500.

If it had, it would’ve been the first time in about six years that the index managed that feat; as it turned out, the month-high closing was 3,499.89 on 15 July.

Thereafter, a large selloff in US tech stocks in the third week dragged the STI lower, where it eventually ended the month at 3,455.94.

Despite that bout of weakness, the index still managed to record a decent gain of 123 points or 3.7% for the month. Most of this rise came courtesy of the banks and Singtel, though there were also notable contributions from SATS which added S$0.43 or 15% to S$3.28 and Yangzijiang Shipbuilding which rose S$0.23 or 9.3% to S$3.28.

How Wall Street fared

For July, the Dow rose 1,724 points, or 4.4% to 40,842.79 marking its best month of the year. The S&P 500 rose 1.1% on the month to 5,522.30. The Nasdaq Composite, despite a large rebound on the final day of the month, finished the month down 0.8% at 17,599.4, which is its worst July performance since 2014 and its worst month since April.

As expected, the US Fed held rates steady, left door open for Sep rate cut

At its 31st July policy meeting, the US Federal Reserve lived up to expectations by keeping interest rates on hold. However, after the decision, Fed Chair Jerome Powell said, “a reduction in our policy rate could be on the table as soon as the next meeting in September.”

That said, he stressed the Federal Open Market Committee has “made no decisions about future meetings.”

MAS announced new leverage guidelines for S-REITs

The Monetary Authority of Singapore (MAS) announced last month a proposal to simplify the leverage requirements for all Singapore REITs (S-REITs) – it proposes for a single aggregate leverage limit of 50% and a minimum interest coverage ratio (ICR) of 1.5 times to be applied for all S-REITs.

Currently, S-REITs have a leverage limit ratio of 45% if the ICR is 2.5 times or below, and a limit of 50% if the ICR is above 2.5 times. MAS last increased the leverage limit in April 2020 to provide more flexibility for S-REITs to manage their capital structures during the Covid period.

The latest proposal is aimed at simplifying the leverage requirements, foster prudent borrowings, and ensures that REITs can adequately service debt obligations and have sufficient earnings to pay their interest expenses.

Average S-REITs gearing ratio is 39.1%: SGX Research

According to SGX Research in a 29 July Market Update, S-REITs maintain an average gearing ratio of 39.1%, based on latest company filings which were extracted on mid-day Jul 26, 2024. More than half the sector has gearing ratios below its average.

SGX Research said the five S-REITs that maintain the lowest gearing ratios are Sasseur REIT (25.2%), Paragon REIT (29.9%), Far East Hospitality Trust (31.5%), AIMS APAC REIT (32.6%), and Frasers Logistics & Commercial Trust (32.7%), adding that the five S-REITs with the highest ICR (adjusted ICR used where available) were Daiwa House Logistics Trust (12.0x), ParkwayLife REIT (11.1x), IREIT Global (7.1x), Frasers Logistics & Commercial Trust (5.9x), and Keppel DC REIT (5.1x).

“At 39.1% and a regulatory limit of 50%, this translates into over S$20 billion of potential debt headroom for the sector to fund capital-intensive acquisitions’’ said SGX Research.

Q2 bank earnings likely to be stable but unlikely to beat Q1’s outperformance

All three banks rose to record highs in early July but their Q2 earnings announcements which are due in early August are expected to be stable but are unlikely to beat Q1’s figures.

In a Business Times report on 29 July, RHB analysts were quoted saying that the surge enjoyed by the banks has led to dividend yield compression. “The yield is now close to that being offered by the market, making it a challenge for the sector to meaningfully outperform the market in the second half of 2024, especially nearing the rat cut cycle’’ said RHB.

CGS International analysts Lim and Andrea Choong noted that the banks are likely to have softer Q2 earnings, compared to Q1, which had been boosted by wealth management and treasury income.

They said net interest margin (NIM) performances in Q2 could be mixed – between subtracting two basis points (bps) to adding two bps – due to the banks’ differing asset repricing and funding cost reduction strategies.

“With the business environment staying conducive, fees should still broadly sustain in Q2 FY2024. Wealth management fees should still hold at relatively high run-rates, in our view, as investors stay risk-on amid the market volatility and interest rate uncertainty,” they said.

US election implications for the banks

US President Joe Biden’s pulling out of re-election on Jul 21 increased the chance of a closer presidential race while lowering the risks of a scenario where Trump governs unopposed, said Mansoor Mohi-uddin, chief economist of Bank of Singapore in the same Business Times report.

He noted that inflation, Treasury yields and the US dollar are expected to rise under Trump’s proposed policy setting.

Under a Trump scenario, in addition to higher bond yields being positive for banks, UOB Kay Hian (UOBKH) analyst Jonathan Koh expects the US to pivot further away from China. This means that OCBC and UOB can also benefit from an accelerated supply chain reorientation to ASEAN countries due to their extensive networks within those countries.

CGS International analysts Lock Mun Yee and Lim Siew Khee believe that while Singapore banks can benefit from the potential Trump win in terms of net interest margin sustaining at a higher new normal, the pickup in wealth management and loan growth could slow amid higher-for-longer rates.

“As long as the interest rate outlook remains unclear, we think treasury income may still benefit from the volatility,” said Lock and Lim in a 23 July report.

Koh anticipates one rate cut for the fourth quarter of 2024, and said banks provide attractive value with a low price-to-book ratio of 1.28% and high dividend yield of 6% in 2025.

He maintains an “overweight” rating on the banking sector. OCBC is his top pick due to the lender’s commitment to a dividend payout ratio of 50%, focus on trade and investment flows within Asean, as well as a “defensively low” estimated FY2025 price-to-book ratio of 1.14 times.

OCBC’s 93.52% of Great Eastern fell short of compulsory acquisition threshold

OCBC and its concert parties garnered 93.52% of shares in Great Eastern at the close of the offer on July 12, which was lower than the 98.87% shareholding required to trigger a compulsory acquisition of shares that OCBC does not already own in the insurer.

It also fell short of the 97.17% level at which frontline regulator SGX RegCo may have directed Great Eastern to make an offer to delist.

Trading in GEH’s shares was suspended with effect from 9 am on Jul 15, as the number of shares in public hands has dipped below the 10% free float threshold.

Offer to privatise Second Chance at S$0.30 per share

The founder and chief executive of Second Chance Properties, Mr Mohamed Salleh Marican last month proposed to privatise the company at S$0.30 per share in cash through a voluntary unconditional offer.

As at July 10, the company has an issued and paid-up share capital of about $174.7 million, comprising 927.8 million shares. Salleh and his family own around 789.2 million shares in Second Chance, representing about 85.06% of the total number of issued shares.

 

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