US interest rate worries continue to haunt the local market

Date: February 27, 2023

  • The STI fell for 4 out of 5 days, losing 1.4% at 3,282.3.
  • US interest rate fears continued to haunt the market.
  • Wall St stocks and bonds tumbled after Friday’s release of inflation data
  • Probability of a 50-points rate hike in March now 27%
  • Keppel traded ex-Sembmarine distribution.
  • UOB reported 13% rise in Q4 net profit to S$1.2b.
  • OCBC reported 34% rise in Q4 net profit to S$1.3b.
  • SATS announced S$798.8m rights issue
  • Boustead revised its offer for Boustead Projects from 90 cents to 95 cents per share
  • Singapore’s factory output fell 2.7% year-on-year in January

The STI fell 4 out of 5 days on US rate worries

The Straits Times Index fell for four of the five trading days last week as traders continued to exhibit nervousness over the direction of US interest rates. Wall Street too, came under pressure with traders focusing first on the minutes of the January Federal Open Markets Committee (FOMC) meeting which when they were released on Wednesday, then on Friday’s core personal consumption expenditure data for January.

Although the FOMC’s minutes suggested that a peak may be near, or at least that the pace of rate hikes will start to slow, Friday’s data was higher than expected, sending Wall St stocks diving.

Here, banks and Keppel Corp were in focus – the former because of earnings reported by UOB and the latter because of a large fall suffered when it traded ex-distribution of Sembcorp Marine shares.

At the end of a soft week for local stocks, the STI recorded a net loss of 46 points or 1.4% at 3,282.3. Average daily volume amounted to S$1.1b versus S$1.04b the week before.

How Wall Street fared

Stocks fell sharply Tuesday as worries about the Federal Reserve’s next rate increase piled up and retailers offered disappointing forecasts, though there was a mild rebound as the week progressed.

Minutes from the Jan FOMC on Wed did help as they provided further clarity on the endgame for interest-rate hikes. Several officials saw a slowdown in the federal-funds rate as inflation cools.

Many participants observed that a further slowing would “better allow them to assess the economy’s progress toward the Committee’s goals of maximum employment and price stability,” the release read.

On Friday however, came news that the core personal consumption expenditure prices index rose 4.7% year over year in January, above economists’ expectations of 4.3% and December’s revised level of 4.6%, a sign that higher prices are entrenched and the Fed will have to be more aggressive on monetary policy.

“Despite nearly 500bps of Fed rate increases over the past year, recent data suggest that economic momentum is firm and inflation more persistent,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank “Such an outcome was nearly inconceivable a year ago.”

US stocks and bonds fell, probability of 50-points rate hike in March edged up

The Dow fell 3% over the week, while the S&P 500 slipped 2.7% and the Nasdaq Composite tumbled 3.3%.

Bond yields on the 10-year Treasury note rose slightly Friday, yielding 3.94%. The yield has risen for five straight weeks, its longest winning streak since October. The two-year yield, which better correlates with short-term interest-rate expectations, was up at 4.8% Friday. In a rising rates environment, bond prices typically fall, while yields rise.

According to the CME FedWatch tool, the probability of 25 basis points rate hike at the 22 March FOMC is now 73% with the market now placing a 27% chance versus 18% the previous week that the hike will be 50 basis points.

Keppel traded ex-Sembmarine distribution

On Thursday, Keppel Corp traded ex-distribution of Sembcorp Marine (Sembmarine) shares. This means that from 9am on Thursday onwards, those buying Keppel’s shares will not be entitled to the distribution in specie of 19.1 Sembmarine shares per Keppel share.

Based on Sembmarine’s Wednesday’s closing price of 13.4 cents and Keppel’s closing price of $7.34, this means that Keppel’s shares should have fallen by about S$2.56 on Thursday to S$4.78.

However, they actually closed at S$5.40 on Thursday, a net loss of S$1.94 or 26.4% that came with 29.1m traded. In other words, despite the sharp loss, Keppel’s shares actually closed higher than they should have.

The merger of Keppel Offshore & Marine (Keppel O&M) with Sembmarine sees Keppel receiving 54 per cent or 36.8 billion Sembmarine shares with a total implied value of about $4.5 billion.

Keppel will distribute in specie 49 per cent of these shares, or approximately 19.1 Sembmarine shares for every Keppel share held, to its stockholders.

This exercise has an implied value of approximately S$4.1 billion.

In a statement issued on Wednesday night, Keppel reassured shareholders that the dilution from the difference between the $S3.4 billion in gain and S$4.1 billion in distribution would be a minimal 28 cents a share to Keppel’s net tangible asset.

On Friday, Keppel closed at S$5.53 and Sembmarine at S$0.128.

UOB reported 13% rise in Q4 net profit to S$1.2b

UOB on Thursday reported a 13% rise in net profit for the quarter ended 31 Dec 2022 to S$1.2b, which was within expectations and declared a 75 cents dividend for the period to be paid on 12 May.

Earnings for the full year rose 12 per cent to S$4.6 billion, or 18 per cent to S$4.8 billion after factoring out the acquisition of Citigroup’s consumer businesses in Thailand and November that was completed in Nov 2022. It expects to complete the deal for Citigroup’s consumer units in Indonesia and Vietnam in 2023. UOB is paying S$4.915 billion for the franchise across the four markets.

UOB’s shares plunged S$1.37 or 4.4% on Thursday to S$29.62 on volume of 8.1m. On Friday, they rebounded S$0.23 to finish at S$29.85 on volume of 5.2m.

OCBC reported 34% rise in Q4 profit to S$1.3b

On Friday, OCBC reported a 34% increase in Q4 net profit to S$1.3b and declared a final dividend of S$0.40 per share, bringing the total for the year to S$0.68.

Net profit for the full year grew 18% to a record S$5.7b. It expects net interest margin for 2023 to be around 2.1%.

OCBC’s shares added S$0.03 at S$12.67 on volume of 7.5m on Friday.

SATS announced S$798.8m rights issue

Airport ground handling agent and inflight caterer SATS on Wednesday announced a 323-for-1,000 renounceable underwritten rights issue to raised S$798.8m that will be used to fund its purchase of Paris-based cargo firm Worldwide Flight Services.

The rights price will be S$2.20 per share versus SATS’ closing share price of S$2.75 on Tuesday. The rights price is a 16% discount to the theoretical ex-rights price of S$2.62.

The group’s largest shareholder, Temasek, will subscribe for its pro rata entitlement of 39.68% of the issue, whilst SATS directors who are also shareholders have said they will subscribe for their entitlements.

SATS’ shares initially came under pressure after the announcement, dropping to a low of S$2.63 on Wednesday. However, they ended the week at S$2.82.

Boustead revised its offer for Boustead Projects

Boustead Singapore on Wednesday announced it will raise the offer price to take its mainboard-listed real estate subsidiary Boustead Projects private to a final price of 95 cents per share from 90 cents previously.

In a letter on Feb 16, the Securities Investors Association of Singapore or SIAS had called on Boustead Singapore to raise its offer for its subsidiary, saying the discount to net asset value (NAV) is “simply too large to ignore”.

At 90 cents per share, the original offer price valued Boustead Projects at 71.1 per cent of its last reported net asset value of S$1.265 per share as at Sept 30, 2022. The revised offer price will now represent 75.1 per cent of Boustead Projects’ last reported NAV.

Singapore’s factory output contracted for fourth straight month in Jan

Industrial production in January fell 2.7% year-on-year in January, the fourth consecutive month of contraction. January’s performance was the worst start to the year since 2012 according to OCBC chief economist Selena Ling who was quoted in the Business Times.

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