SG-AM Notes: Economy, SPH, Fu Yu & Hiap Hoe (2 Nov 2005)
By Carmen Lee
Wed, 02 Nov 2005, 08:51:17 SGT
MARKETS
Following the US Federal Reserve’s indication of further “measured” hikes in interest rates, US stocks retreated – breaking the gains of the past two days. In addition, Dell’s disappointing forecast also dampened market sentiment when it reported 3Q sales of US$13.9b, lower than market expectation of US$14.1b to US$14.5b. The FOMC raised interest rate for the 12th time, up another quarter point to 4%. We expect the local interest rates environment to hold stable for the rest of the year and is expecting 3-month interbank rate to end the year at around 2.75%, up from the current level of 2.5% and late 2004 level of 1.44%.
The Dow Jones Industrial Average fell 33 points or 0.3% to 10,406.77 on Tuesday. The Standard & Poor’s 500 Index dropped 4 points or 0.4% to 1202.76. The Nasdaq Composite Index fell 6 points or 0.3% to 2114.05. According to a Bloomberg report, about two-thirds of the 379 S&P 500 companies that reported earnings so far have exceeded consensus numbers.
While the Singapore market was closed for the holiday, oil prices tumbled below US$60 per barrel. Crude oil for December delivery fell 2.4% on Monday, but regained 0.3% on Tuesday to close at US$59.95 per barrel on the New York Mercantile Exchange.
In Singapore, the market was closed for the Deepavali holiday on Tuesday and tomorrow is another holiday. With shortened trading days this week, volume on the local bourse fell to less than 700 million shares on Monday. Despite the decline in volume, the STI closed up 24 points on Monday and will kick off trading today at 2216.77. For today, we expect another quiet trading day on the local bourse. While lower oil price is mildly positive, this is likely to be mitigated by higher interest rates ahead. Together with Monday’s gains and a still fairly cautious trading environment, we expect some light profit taking this morning. (Carmen Lee)
FOCUS
Economy: Preliminary Singapore’s labour market data for 3Q05 released on Monday indicated that the headline seasonally adjusted jobless rate improved to 3.3% in 3Q05 from 3.4% in 2Q05. The outcome matched consensus median forecast but was slightly below our expectation of 3.2%. Nevertheless, the latest results indicate that the labour market continued to improve, as the jobless rate hit the lowest so far this year. All in, 28,700 jobs were added in the quarter, slower compared to the 31,700 jobs in 2Q05. As expected, the bulk of the new jobs was in services sector (about 64%), followed by manufacturing (28%). Construction sector also saw the third consecutive quarter of job addition, as the sector recovers from its slump. Retrenchment activity picked up slightly to 2,500 compared to 2,116 positions in 2Q05, contributed mainly by the manufacturing sector (1,700 positions retrenched vs. 1,250 in 2Q05). This is not surprising given the ongoing restructuring, especially in the electronics sector. Some high profile cases recently include Maxtor’s announcement in March of 5,500 job cuts and National Semiconductor’s announcement in early 3Q05 of the relocation of its plant, which affected 950 local staff.
Overall no major surprises in the report, which saw an expected slow dip in jobless rate despite firm job creation pace. This could partly be due to the “discouraged/encouraged worker” effect where those who had given up looking for jobs returned to the job market as prospects improve. This can be seen from the labour force participation rate, which had declined from the peak of 68.6% in 1999/2000 to 64.2% in 2003/04 as the market worsened. Unless there are large scale job creation programs, the headline jobless rate is unlikely to drop sharply in the near term. As such we look for the unemployment to stabilize to around 3.2% by end-2005. (Suan Teck Kin)
Singapore Press Holdings (SPH): Recent weakness in Singapore Press Holdings’ (SPH) share price is unjustified, as the stock tumbled along with the benchmark Straits Times Index (STI). The decline appears to be out of step with the favourable operating environment given the recent strong 3Q05 macro data and SPH’s cyclical nature. The group recently reported a set of in-line FY05 results and one key feature was the drive to keep costs under control despite higher energy prices. The completion of the restructuring of the broadcast business and the cessation of Streats means a return to SPH’s dominance in the print media business and will help refocus the growth in its core operations. Based on our sum of the parts valuation, we reiterate SPH’s target price at $5.15, with core operations valued at $4.28 and non-core assets valued at 86 cents. Based on potential price increase of 14% and in view of the current price weakness, we are upgrading our recommendation on SPH to a BUY from a HOLD. (Suan Teck Kin)
For more information on the above, visit www.qian2yu.com for detailed report.
Fu Yu: Despite a 2.2% YoY rise in sales to S$114.6m in 3Q05, Fu Yu reported a shocking 70.4% tumble in net income to S$4.6m. While sales were in line with our forecast, bottomline was way below our estimate of S$10.5m. During the quarter, Fu Yu was affected by pricing pressure, higher raw material costs, some relocation expenses as well as a higher effective tax rate. On a sequential basis, sales rose 20.4% from S$95.2m in 2Q05 while net income dropped 20.6%. Despite an improvement in gross margin to 18.3% in 3Q05, from 16.8% a quarter ago, net margin collapsed to 4.0% from 6.1% in 2Q05, reflecting the higher operating and income tax expenses. In view of the much worse than expected results, we have slashed our earnings in excess of 30% for FY05Fand FY06F. Despite this steep revision, we believe FY06 should still be a recovery year for Fu Yu. The group spent most of this year managing both its old and new facilities in Malaysia. With the relocation fully completed, we believe the group’s operating expenses (as % of sales) should be lower going forward. In addition, with its expanded capacity, Fu Yu is now able to receive more orders from its existing customers and to commence work for some new customers. While Fu Yu’s share price has corrected severely and currently trades below its NTA of S$0.54, we see no term catalysts for the stock. Furthermore, we reckon Fu Yu has to post a few quarters of decent results in order to regain investors’ confidence, especially after disappointing for four straight quarters. In the meantime, we value Fu Yu at S$0.46 (from S$0.52) based on its FY06 earnings and 10x PER. Maintain HOLD. (Bryan Yeong)
For more information on the above, visit www.qian2yu.com for detailed report.
Hiap Hoe: Hiap Hoe Ltd announced on Monday evening that it had sold its strata units in its investment property at Minbu road (off Balestier Road) in an enbloc sale. Hiap Hoe’s attributable consideration is S$8.6m, and as this is above its book value, it will book in an exceptional gain of S$3.9m upon completion of the sale. We have accordingly adjusted our FY06 earnings forecast from S$2.15m to S$6.05m and our RNAV from S$0.063 to S$0.066 per share. We maintain our HOLD rating. (Winston Liew)
RECENT REPORTS
27 Oct 2005: SG Industrial Production – Impressive gain in September
27 Oct 2005: Creative Tech – Not a Merry Christmas
27 Oct 2005: Huan Hsin – In line 3Q05 results
27 Oct 2005: STATS – Positive outlook but valuations not cheap
28 Oct 2005: Starhub – The star shines
28 Oct 2005: Unisteel – Solid as steel
28 Oct 2005: MMI – HDD momentum still intact
31 Oct 2005: DBS – Better interest income and loan growth
31 Oct 2005: UOB – Earnings were above expectation
31 Oct 2005: SMRT – Riding on higher waves
31 Oct 2005: Suntec REIT – Highest yield REIT
31 Oct 2005: Delong – FY06 likely a tough year for China steel makers
