Retail Market Monitor

Broker Name: UOB Kay Hian

Date: Tuesday, 12 November 2024

Overview of US Market

US stocks experienced a positive shift on Monday, driven by gains in the consumer discretionary, financials, and industrials sectors. The Dow Jones concluded the session up by 0.69%, the S&P 500 inched up by 0.10%, and the NASDAQ Composite saw a marginal rise of 0.09%. A total of 1,571 stocks advanced on the NYSE compared to 1,206 that declined, with 71 remaining unchanged. On the Nasdaq, 2,467 stocks advanced, 1,801 declined, and 128 ended unchanged.

Singapore Airlines (SIA SP)

1HFY25: Earnings Miss Expectations Due to Higher Costs

Singapore Airlines (SIA) reported a 2QFY25 headline net profit of S\$290 million, reflecting a 59% year-on-year decrease and a 36% quarter-on-quarter decline, missing the guided range of S\$360 million to S\$460 million. The miss was primarily attributed to slightly higher-than-expected operating costs. Despite robust passenger travel and cargo demand, SIA’s core profitability is expected to moderate due to pressure on passenger and cargo yields from increased capacity supply. The speed of Air India’s turnaround remains a crucial factor for SIA’s performance.

2Q/1HFY25 Results

Revenue for 1HFY25 rose by 3.7% year-on-year to S\$9.50 billion, driven by modest increases in passenger flown revenue (1.6%), cargo and mail revenue (4.0%), and engineering and other services (31.7%). However, non-fuel operating expenses increased by 12.1% year-on-year to S\$5.97 billion, while fuel costs surged by 19.6% to S\$2.73 billion. Consequently, the operating profit for the period fell by 48.8% to S\$796 million, and the core net profit dropped by 41% to S\$669 million.

Management’s Outlook

Management anticipates robust demand for air travel in 2HFY25 but acknowledges a competitive operating landscape. Air freight demand is expected to remain healthy, supported by year-end peak seasonality. Despite the challenges, SIA remains well-positioned to navigate the industry’s uncertainties.

Financial Projections

Looking ahead, SIA’s revenue is expected to reach S\$19.44 billion in FY25, with an EBITDA of S\$4.15 billion. However, operating profit is projected to decline to S\$1.78 billion, and net profit is anticipated at S\$2.72 billion, including an extraordinary gain from the Air India-Vistara merger. The core net profit is forecasted to be S\$1.54 billion.

Key Risks

Potential risks include a weaker-than-expected macroeconomic environment, tariff hikes affecting air cargo demand, and faster-than-expected competition growth.

Valuation and Recommendation

Maintaining a SELL rating, the target price for SIA has been slightly lowered to S\$5.72, based on a 1.09x FY26F P/B ratio, reflecting SIA’s long-term historical mean.

UMS Integration (UMSH SP)

3Q24: Earnings Below Expectations Due to Slow Ramp-up of New Customer

UMS Integration’s 3Q24 earnings were disappointing, with a net profit of S\$10 million, down 32% year-on-year but up 12% quarter-on-quarter. This result fell short of expectations, with 9M24 earnings meeting only 69% of the full-year estimate. The weak performance was attributed to slower-than-expected ramp-up of the new customer and broader semiconductor market challenges.

3Q24 Results

UMS’s 3Q24 revenue declined by 9% year-on-year to S\$64.9 million, primarily due to a 13% drop in semiconductor sales. Despite an 18% quarter-on-quarter revenue increase, the gross profit margin decreased slightly to 51.6%. The interim dividend was reduced by 20% year-on-year to 1.0 S cent per share.

Outlook and Financial Projections

Global semiconductor equipment spending is projected to grow significantly, driven by the demand for AI chips and regionalisation of semiconductor fabs. UMS has expanded its production capacity with a new facility in Penang, positioning itself to benefit from the semiconductor sector’s rebound.

Valuation and Recommendation

Upgrading the recommendation to HOLD, the target price is set at S\$0.95, based on a PE multiple of 15x 2025F EPS, reflecting improved earnings quality from new customer contributions.

Seatrium (STM SP)

Keep On Keeping On

Seatrium’s 3Q24 business update indicated steady execution of its projects, with significant milestones achieved in the TenneT High Voltage Direct Current project and the Sofia offshore wind farm. The company secured a US\$400 million LOI for a Heavy Lift Vessel project from Japan’s Penta-Ocean, with potential contract award in 1Q25.

3Q24 Highlights and Outlook

Seatrium’s net orderbook stood at S\$24.4 billion as of end-3Q24. The company expects positive cash flow impacts in 2H24 from project milestones. The completion of two low-margin legacy contracts by year-end is anticipated, potentially leading to improved profitability.

Financial Projections

Seatrium’s revenue is projected to increase to S\$8.34 billion in 2024, with an EBITDA of S\$657 million and a net profit of S\$105 million. The company’s strong position in the offshore marine and renewable energy sectors is expected to drive future growth.

Valuation and Recommendation

Maintaining a BUY rating, the target price is set at S\$2.80, based on a P/B multiple of 1.4x applied to the 2025 book value. This reflects Seatrium’s competitive global position and potential re-rating upon the removal of the MAS/CAD investigation overhang.

China Property Sector

Channel Checks and Observations of Shanghai Primary Market

In late-September, Shanghai relaxed its purchase restrictions, leading to a significant increase in October transactions for both new and second-hand homes. Our investigation of six buildings in the outer ring revealed significant variations in sales, influenced by factors such as pricing, transportation, and supporting facilities.

Market Insights

October saw a strong rebound in Shanghai property transactions, driven by pent-up demand following the relaxation of purchase restrictions. Primary home transaction volume increased by 32% year-on-year, while secondary home transactions surged by 66% year-on-year.

Key Observations

• Dahua’s project sold out quickly due to its lower prices compared to surrounding secondary homes and its strategic location near an industrial park.
• Projects like Poly/CSC faced challenges in destocking despite offering discounts, highlighting the importance of attractive pricing for buyers.

Outlook and Policy Implications

The sustainability of the new-home sales recovery depends on effective implementation of destocking policies. Market sentiment remains cautious, with buyers favoring secondary homes due to fewer restrictions. The Minister of Finance has indicated ongoing efforts to support the destocking programme through special bonds.

Valuation and Recommendation

Maintaining a MARKET WEIGHT rating on China’s property sector, CR Land and Longfor are identified as top picks, based on their strategic positioning and market potential.