OCBC Investment Research Market Pulse: In-Depth Analysis of Leading Companies – November 5th, 2024

OUE REIT (OUEREIT SP) – Stronger Foundation for Stable Growth

OUE REIT is strategically positioned with high-quality assets in prime locations, making it resilient even in a slowing growth environment. The REIT operates four Grade A office buildings in Singapore’s Central Business Districts (CBD), two luxurious five-star hotels, and a retail mall in Orchard Road. Nearly half of its portfolio is allocated to office properties, with the remaining split between retail and hospitality.

Despite the current moderation in sector growth in Singapore, OUE REIT’s strategic locations allow it to maintain strong occupancy rates and mild rental growth. As of 3Q24, its office properties achieved a 95.4% occupancy rate, Mandarin Gallery stood at 95.3%, and the hospitality segment reported a Revenue Per Available Room (RevPAR) of SGD296.

Rebranding to reflect its diverse focus, OUE REIT has made significant strides under CEO Mr. Han Khim Siew. The REIT improved its capital structure, increasing unsecured debt from 30.9% in 2021 to 87% today, and achieved an investment-grade (IG) credit rating of “BBB-” from S&P Global in 2023. In September 2024, it successfully issued a 7-year IG green note, oversubscribed by 3.2 times, with 70% allocated to institutional investors at a competitive interest rate of 3.9%.

Based on the dividend discount model (DDM) methodology, we derive a fair value (FV) estimate of SGD 0.340 for OUE REIT, reflecting an implied price-to-book (P/B) ratio of 0.49x. We forecast distribution yields of 6.7% for FY24 and 6.9% for FY25. Given its substantial discount to NAV and attractive yield, we anticipate a positive rerating as the Federal Reserve continues its rate cut trajectory.

ESG Efforts

OUE REIT has made notable progress in ESG initiatives, with 55.3% of its net lettable area green leased and approximately 96% of its portfolio green certified. It received a four-star rating in the 2024 Global Real Estate Sustainability Benchmark (GRESB) assessment, up from three stars in 2023. The REIT’s board comprises a majority of independent directors, enhancing oversight and governance.

Equinix, Inc. (EQIX US) – Strong Business Momentum

Equinix continues to exhibit strong business momentum, with 3Q24 and 9M24 diluted adjusted funds from operations per share (AFFOPS) growing by 10% and 9% year-on-year (YoY) to USD9.05 and USD27.12, respectively. The FY24 AFFOPS guidance has been raised to USD34.81-USD35.22, translating to a growth of 9-10% on a normalized and constant currency basis.

Equinix reported 3Q24 revenue of USD2.20 billion, a 7% YoY increase, marking its 87th consecutive quarter of revenue growth. Adjusted EBITDA grew by 12% YoY to USD1,036 million, driven by strong pricing trends, high deal conversion rates, record gross bookings, and robust improvement in billable cabinets. Looking ahead, Equinix expects FY24 revenue to be between USD8.748 billion and USD8.788 billion, with AFFOPS guidance raised slightly due to positive FX assumptions and lower net interest expenses.

Equinix’s strong balance sheet supports its growth ambitions, with a net leverage ratio of 3.5x, a weighted average debt maturity of 7.0 years, and 96% of its debt fixed. The company issued over USD750 million in green bonds in September, culminating in total green bond issuances of USD5.6 billion.

ESG Efforts

Equinix maintains a strong ESG rating, excelling in Carbon Emissions, Privacy & Data Security, and Governance. The company aims to achieve 100% renewable energy coverage by 2030, with 96% coverage in 2023. Investments in high-returning efficiency projects and improvements in Power Usage Effectiveness (PUE) underscore its commitment to sustainability.

Apple Inc. (AAPL US) – Healthy Momentum in Apple Intelligence but Uncertainty in China’s Demand Remains

Apple reported encouraging 4QFY24 results, with revenue of ~USD94.9 billion, up ~6% YoY, and operating profit increasing by ~10% YoY to ~USD29.6 billion. Earnings per share (EPS) decreased by ~34% YoY to USD0.97, but excluding a one-time charge related to the European General Court’s State Aid decision, EPS would have been USD1.64, up ~12% YoY. Products revenue grew by ~4% YoY to ~USD70 billion, driven by iPhone, iPad, and Mac sales, while services revenue hit an all-time high of ~USD25 billion, up ~12% YoY.

Apple recently launched its first set of Apple Intelligence features, including system-wide writing tools, a more conversational Siri, an intelligent Photos app, and enhanced notification summaries. Additional features, including powerful writing tools and ChatGPT integration, are expected in December.

However, Apple’s revenue from China fell by ~0.3% YoY to ~USD15 billion, indicating persistent weakness in consumer demand. Given the significant contribution of China to Apple’s total revenue, a slow recovery in Chinese demand could impact overall sales. Factoring in uncertainties around the US election and potential Chinese stimulus measures, we maintain our hold rating and fair value of USD228.

ESG Efforts

Apple’s ESG rating remained unchanged in December 2023. The company faces risks related to outsourced production and labor conditions but excels in managing end-of-life electronics recycling, with 20% of materials sourced from recycled sources in 2022. Apple adheres to industry-leading data protection principles but faces ongoing concerns around data security and surveillance.

Amazon.com Inc. (AMZN US) – AWS and International Segment Achieve Robust Operating Income

Amazon’s 3Q24 results showed outperformance, with overall revenue increasing by 11% YoY to ~USD158.9 billion and operating income growing by ~56% YoY to ~USD17.4 billion. Earnings per share (EPS) jumped to USD1.43 (~52% YoY). The North America segment reported revenue of ~USD95.5 billion (~9% YoY) and operating income of ~USD5.7 billion (~31% YoY). The International segment generated ~USD35.9 billion in revenue (~12% YoY) and ~USD1.3 billion in operating income, marking a significant turnaround from past operating losses.

AWS revenue grew by ~19% YoY to ~USD27.5 billion, with an operating profit margin of ~38%, making it the largest profit contributor at 60%. AWS continues to see strong demand for AI-enabling digital infrastructure, growing its AI business at a triple-digit YoY percentage.

Amazon remains focused on cost reduction and faster delivery times, with substantial capital expenditure expected to support AWS and AI service demand. Management has guided for ~USD75 billion in capital investment for 2024, with year-to-date spending at ~USD51.9 billion. We maintain our buy rating and fair value of USD235.

ESG Efforts

Amazon’s ESG rating was downgraded in August 2023 due to high exposure to supply chain labor standards and governance practices. However, Amazon leads in greenhouse gas (GHG) emission-reduction efforts, conducting carbon footprint assessments and implementing energy-efficiency measures across its logistics network and stores.

Wilmar International (WIL SP) – Weak Results as Operations in China Stayed Weak

Wilmar reported 3Q24 revenue of USD17.7 billion, a marginal increase of 0.4% YoY, while net profit fell by 19.0% YoY to USD254.4 million. Despite strong contributions from tropical oils, oleochemicals, shipping, and crushing, the overall performance was dampened by reduced contributions from its China operations and sugar division. The Food Products segment saw a 4.5% YoY increase in sales volume, while the Feed and Industrial Products segment grew by 9.8% YoY in sales volume. However, lower commodity prices kept overall revenue relatively flat.

For 9M24, Wilmar’s revenue and net profit fell by 3.0% and 3.6% YoY to USD48.7 billion and USD834.0 million, respectively. Management remains cautiously optimistic about 4Q24, expecting improvements in palm production and refining margins for tropical oils, and positive soybean crushing margins.

We lower our EPS estimates by 14-19% for FY24-FY25 and reduce our fair value estimate from SGD3.81 to SGD3.54, citing the need for time to recover, particularly in China. Wilmar could benefit from the implementation of the B40 biodiesel mandate in Indonesia in 2025 and reduced financing costs due to potential interest rate cuts.

ESG Efforts

Wilmar was upgraded in September 2023, driven by a reduction in carbon intensity and improved board practices. In 2022, Wilmar’s carbon intensity of ~202 mt CO2e/USD million sales was lower than the industry average. Wilmar’s board is majority independent, enhancing oversight of management. The company also has strong water-risk mitigation strategies and formal grievance channels to promote amicable relations with local communities.

China Strategy: What to Expect from the NPC Session?

The highly anticipated National People’s Congress (NPC) standing committee meeting, held on November 4-8, has triggered widespread speculation about a potential CNY10 trillion fiscal package. This package may include CNY6 trillion in government bonds for local government debt resolution and CNY4 trillion in local government special bonds for idle land purchases and housing inventory destocking. Additionally, a CNY1 trillion special central government bond for state-owned bank recapitalization is anticipated.

The market eagerly awaits details on the fiscal stimulus, including the time horizon and implementation of local government debt resolution. Market expectations have built up over the past month, making it challenging to exceed expectations. One potential surprise could be a focus on domestic consumption, which the Ministry of Finance did not emphasize.

If former President Donald Trump wins the US presidential election, China may step up fiscal stimulus measures to counteract potential tariffs on Chinese products. The Central Economic Work Conference (CEWC) in December will be a key event to assess the impact and set policy tone for the next year.

As valuations of Hong Kong and China equities have normalized, focus will return to fundamentals while assessing the potential impact of fiscal stimulus and the US election. We reiterate our barbell strategy, focusing on large-cap, index-heavy internet and platform companies, and quality yield stocks to cushion market volatility.