Date: August 10, 2021
- Keppel’s S$3.4b offer to privatise SPH was main local development;
- Banks reported solid earnings, restored dividends;
- Sembcorp Industries in the black for 1H but is cautious about 2H;
- Concerns over spread of Delta variant held market back;
- Concerns over US economy’s health early in the week also capped advances as bond yields fluctuate;
- Those concerns eased on Friday after strong July jobs report;
- Goldman Sachs raised S&P target to 4700 by year end.
Together with the latest earnings announcements by the three banks, Keppel’s offer to take Singapore Press Holdings private was among the biggest local corporate developments last week, whilst externally, two market-moving factors were at work – first, mounting fears over the spread of the Delta variant of coronavirus kept Asian stocks under pressure, and second, signs that the US’s economic recovery may not be as strong as first thought.
The net result was a week where the Straits Times Index appeared well-supported by the banks but unable to mount a serious challenge on the 3,200 level because of concerns cited above. At the end of the five trading days, the index stood at 3,177.18, 11 points or 0.3% higher than the previous week.
Keppel offered to take SPH private
Keppel’s offer which was tabled on Monday values SPH at S$3.4b. If successful, SPH will be delisted and become a wholly-owned subsidiary of Keppel. Under the offer, for each SPH share owned, shareholders will receive S$0.668 in cash, 0.596 unit of Keppel Reit and 0.782 unit of SPH Reit.
This adds up to S$2.099 per SPH share based on prices at the time, which was an 11.6% premium to SPH’s closing share price of S$1.88 just before the deal was announced. Shareholders will also receive a final dividend for FY2021 if one is declared.
The deal is contingent on SPH shareholders granting approval for an earlier proposal to hive off the company’s media business into a not-for-profit unit. An extraordinary general meeting will be convened within the next few months.
On Tuesday, the market bid SPH’s shares up S$0.04 or 2.1% to S$1.92 on volume of 52.3m, whilst Keppel’s shares ended S$0.07 or 5.8% lower at S$5.45 with 8.5m traded. On Wednesday however, Keppel’s shares bounced S$0.13 or 2.4% at S$5.58 though they ended the week at S$5.44. SPH closed Friday at S$1.90.
Most analysts judged the deal to be fair. For example, Business Times reported UOB Kay Hian analyst Lucas Teng recommending shareholders accept the offer, saying the price could be marginally higher, but not by much. As for Keppel shareholders, the deal was described as being value-accretive.
Earnings and dividend announcements by the banks provided support
On Wednesday, UOB and OCBC were the first banks to report their interim results – the former recorded a 43% rise in 2Q net profit to just over S$1b and an interim dividend of S$0.60, whilst the latter announced a 59% jump in Q2 net profit to S$1.16b and a S$0.25 dividend per share.
UOB’s payout ratio is 50% of profit whilst OCBC’s is 42%. MAS in July lifted the cap on dividends that can be paid by the banks.
Maybank Kim Eng maintained its “buy’’ on UOB and OCBC, deriving target prices of S$29.34 and S$14.30 respectively, both based on dividend discount models. UOB and OCBC ended the week at S$26.63 and S$12.42 respectively.
On Thursday, DBS reported a 37% rise in 2Q net profit to S$1.07b and declared a quarterly dividend of S$0.33 per share, bringing its first-half dividend to S$0.51 per share. On Friday, DBS’s shares jumped S$0.20 to S$31 on volume of 4.5m.
Sembcorp Industries in the black for first half but is cautious about the second
Sembcorp Industries (SCI) on Friday reported a net profit of S$46m for the six months ended 30 June 2021 compared to a net loss of S$42m a year ago but warned that the second half may not be as positive.
At the earnings briefing, chief executive Wong Kim Yin said the first half has seasonally been better as its UK operations tend to do well during winter. Also, the company has planned shutdowns for plants in Singapore, Myanmar and India for maintenance works.
SCI’s first half turnover was S$3.3b, up 26% from last year’s S$2.6b. Interim dividend per share is S$0.02 to be paid on 24 Aug.
Worries over Delta variant
Observers report that the fast-spreading Delta variant virus’s impact on the global economy is worrying markets. China for example, last week tightened travel restrictions in a number of regions following outbreaks of the variant whilst JP Morgan strategists in a note on Monday said: “The Delta variant still represents the most immediate threat to the outlook’’.
Worries over US economy eased after Friday’s jobs report
In the US, the Institute for Supply Management’s manufacturing survey read 59.5 for July, solidly in expansion territory, though missing the estimated 60.9 and below the previous month’s reading of 60.6.
On Wednesday, the ADP announced that US private-sector hiring for July was 330,000, way below the expected 653,000. It further suggested that this was because of “bottlenecks in hiring’’ caused by the Delta variant. Bond prices rose and stocks slid after the news.
However on Friday, stocks rose to new all-time highs and bonds fell after it was announced that US employers added 943,000 nonfarm payrolls in July, above consensus expectations for an increase of 863,000. May and June hiring totals were both adjusted upward, while the unemployment rate dropped to 5.4% from 5.7%.
Bond yields first fell then rebounded
On Monday the 10-year Treasury yield, which often rises and falls with expectations about economic growth and inflation, dropped to as low as 1.15% from 1.23%. On Friday however, after release of the jobs report, it jumped up 7 basis points to 1.288%. Yields rise when prices fall.
Goldman Sachs raised S&P 500 target
Goldman Sachs last week raised its target for the S&P 500, saying that strong corporate earnings and stubbornly low bond yields are the reason why it set a year-end target of 4700 for the index. On Friday, the S&P closed at a new high of 4,436.52.
