Debt crisis averted, it’s back to economic, inflation and interest rate concerns

Date: June 12, 2023

• The STI added 20 points or 0.6% at 3,186.97
• Markets are back to waiting for US interest rate signals, hoping for a pause in rate hikes
• Chance of a pause at this week’s meeting is 71%
• Cyxtera’s bankruptcy thrusts three S-Reits into the spotlight
• Cash offer for Challenger raised from S$0.56 to S$0.60 per share
• Quarz Capital requisitioned EGM to replace Sabana Reit’s manager
• Golden Energy’s shareholders voted in favour of delisting and distribution of GEMS shares
• Wall St – S&P 500 is officially back in bull market territory

 

The STI added 20 points or 0.6% at 3,186.97, FOMC now the focus

Now that the US debt ceiling crisis has been averted, markets last week turned their attention to the upcoming US Federal Open Markets Committee  (FOMC) meeting. According to the CME FedWatch Tool, the market is pricing in a 71% probability that the Fed will not raise interest rates, and a 29% chance that if there is a rate hike, it will be 25 basis points.

However, given that the Bank of Canada last week raised its rates by 25 basis points when the market had been expecting a pause in rate hikes, there is always a chance that the Fed might also not pause.

Perhaps not surprisingly, traders were cautious last week, though gains in Singapore Airlines, Sats and Sembcorp Industries helped the Straits Times Index add 20 points or 0.6% over the week at 3,186.97.

Average daily turnover was a mediocre S$1.08b, compared to S$1.43b the week before, although the latter had been elevated by 31 May “portfolio rebalancing’’.

Cyxtera’s bankruptcy thrusts 3 S-Reits into focus

Data centre operator Cyxtera Technologies Inc last week filed for US bankruptcy protection in New Jersey, two years after the company went public, as it struggles to pay down debt and faces a severe funding crunch.

Cyxtera is a tenant in the GV7 Data Centre in London which is owned by Keppel DC Reit. However, Keppel DC Reit on Tuesday said the GV7 Data Centre accounts for less than 2% of its assets under management (AUM) and has “no material impact’’ on dividends that investors can expect.

Also on Tuesday, Mapletree Industrial Trust (MINT) announced that its 3^rd largest tenant filed for bankruptcy in the US. The Reit manager did not name the tenant, but the Straits Times said this tenant is Cyxtera.

MINT added that the tenant contributed about 3.2% of monthly gross rental income as at end-March.

In response, Maybank maintained its “Hold’’ recommendation on MINT. “We view the announcement negatively, especially for a “growth” sector like data centre. That said, MINT has a diversified portfolio and tenant base and should be able to mitigate the impact. We lower forecasts and our DDM-based TP (dividend discount model-based target price) by 6% to S$2.30’’. MINT ended the week at S$2.18.

On Monday, Digital Core Reit confirmed that Cyxtera was its second-largest tenant but said the bankruptcy will have minimal impact on earnings. It warned that its distribution per unit (DPU) could be reduced by about US$0.02 if the annual revenue from Cyxtera were to be completely eliminated. Digital Core’s FY2022 DPU stood at US$0.0398.

According to the Reit’s manager, Cyxtera represents about US$16.3m or 22.4% of the Reit’s annual rental revenue.

DBS Bank said in a report that the financial health of Cyxtera had weighed heavily on the prices of Keppel DC Reit, MIT and Digital Core Reit, adding that the confirmation of the bankruptcy should provide some clarity for investors.

Morningstar Investment Adviser Singapore’s equity analyst Xavier Lee was quoted in the Straits Times saying the outlook for data centres remains bright, as “technological trends such as artificial intelligence and cloud computing continue to drive strong demand for data centres’’.

He was also quoted saying that the two data centre Reits under his coverage, MINT and Keppel DC Reit, are fairly valued. Morningstar’s fair value for MINT is S$2.41 and S$1.92 for Keppel DC Reit. MINT closed at S$2.18 and Keppel DC Reit at S$2.04 on Friday.

Analysts from Citi Research, UOB Kay Hian and DBS Group Research have each maintained their “buy” rating for Digital Core Reit but with lower target prices.

However, with the exception of DBS, which kept its target price unchanged at 90 US cents (S$1.22), Citi Research’s Brandon Lee has reduced his target price to 67 US cents from 82 US cents previously. UOB Kay Hian’s Jonathan Koh also lowered his target price 67 US cents from 78 US cents before.

Digital Core Reit finished the week at 48 US cents.

Cash offer for Challenger raised from S$0.56 to S$0.60 per share

Majority shareholders of consumer electronics retailer Challenger Technologies have raised their voluntary unconditional cash offer for the company to S$0.60 cents per share to take it private.

The offeror, Digitech Holding, said it would raise the cash offer by 7.1 per cent, or S$0.04 per share from the original offer price of S$0.56 that it proposed on May 30.

Digitech Holding, which is the bid vehicle of a consortium formed by Challenger’s majority shareholders that collectively hold around 54.4 per cent of the company’s shares, said it does not intend to revise the final offer consideration. It noted that the highest closing price of the shares in the five-year period prior to May 29 was S$0.61.

Quarz requisitioned an EGM to replace Sabana Reit’s manager

Activist investor Quarz Capital requisitioned an extraordinary general meeting (EGM) to remove the manager of Sabana Industrial Real Estate Investment Trust in favour of an internal manager.

Quarz requested for the board of Sabana Reit to convene an EGM to pass two resolutions.

The first is to remove Sabana Real Estate Investment Management as manager of Sabana Reit as soon as practicable.

The second resolution seeks to effect the internalisation of the Reit management function by incorporating a subsidiary wholly owned by the trustee and appointing such a subsidiary to act as the manager of Sabana Reit.

Quarz said that internalisation of the manager would bring benefits to unitholders by providing cost savings once the external manager is removed.

It estimates that there would be cost savings of around S$7.3 million of fees and net profit “which unitholders currently pay to the external manager and its shareholder, ESR Group”.

Quarz added: “The removal of the external manager will also likely eliminate all other fees such as performance, acquisition, divestment, lease and property management fees which need to be paid by unitholders to the external manager.”

“While an internal manager works to increase the DPU and unit price (for) unitholders, an external manager tends to serve the interests of its owner, namely the sponsor, by increasing its profitability where possible,” Quarz said.

Golden Energy’s shareholders vote in favour of delisting and GEMS distribution

Golden Energy and Resources (GEAR) shareholders on Friday voted in favour of a delisting and a distribution in-specie of its 62.5% stake in Indonesian-listed thermal coal subsidiary Golden Energy Mines or GEMS.

Shareholders controlling 507.9 million shares, and representing 99.89 per cent of the vote, said “yes” to the delisting, while 99.91 per cent voted for the proposed distribution of GEMS shares.

The S$0.973 cents all-cash exit offer comprises S$0.181 plus an additional S$0.792 representing the in-specie distribution of 1.3936 shares in GEMS.

However, those opting for Gems shares-plus-cash will have to settle for S$0.964 in total value.

The offeror is Dian Swastatika Sentosa (DSS), which abstained from the voting process. DSS, a vehicle of the controlling Widjaja family, who own conglomerate Sinar Mas Group, holds 2.04 billion Gear shares, or 77.49 per cent interest in the company.

Despite having secured the votes, the distribution will take place only when certain conditions are met, such as obtaining court approval for capital reduction, as well as regulatory approval for the distribution.

If these conditions are not satisfied, the proposed distribution will not go through, GEAR said in a statement following the vote. The court hearing date for the exit and distribution offer has been set for Tuesday at 10am.

How Wall St fared – the S&P 500 is back in bull territory

The S&P 500’s longest bear market since the 1940s has come to an end. The benchmark index closed up 0.6% to 4,294 on Thursday and at 4,298 on Friday, pushing it back into bull territory with a 20% advance from its October low. The rally has been powered, in large part, because of a handful of companies posting outsized gains, like Big Tech, Tesla and AI darling Nvidia.

The S&P 500 had been in bear market territory for a total of 248 trading days, which is the longest run since the cycle that finished on May 15, 1948 (which lasted 484 days).

Investing with Insight: Watch this Week’s Technical Outlook

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