Contrasting performance of Equities and Crude OilThe second half of this year has seen the Nasdaq 100 Index $NASDAQ(.IXIC)$ climb 6.8%. On the flip side, crude oil $Light Crude Oil - main 2208(CLmain)$ has crashed 23.1% and provide fuel for the broad-based rally in equities. With almost a fifth retracement from the peak, crude oil prices could have reached a temporary bottom. Yesterday EIA reported a significant drop of oil inventory amounting to 7.056 million barrels compared to expectations of 0.275 million barrels. This could result in some support for oil prices.A bottom for crude oil prices will imply a trough in inflation.On the flip side, Nasdaq is no longer cheap. It is trading at 24.7x P/E, near the 1-year mean. With a 6.8% sharp rally since end of May, it could reach a temporary top.
Debt-laden club needs a white knightElon Musk jokingly tweeted that he is “buying Manchester United”$Manchester United PLC(MANU)$ . This tweet led me to recall my comparative analysis on Man Utd when I met the management of German club Borussia Dortmund in 2015. Back then, Man Utd only had a net gearing of 0.5x, with a loss of $11m for FY2015.Now, its situation has deteriorated. Net gearing has ballooned to 2.4x, with $500.3m net debt. Losses has steepened to $32.9m, despite a 25% increase in revenue from FY2015 to FY2021. Man Utd has also been dreadful in the player transfer market. It was so appalling that former Man Utd captain Gary Neville described the club as “a graveyard for footballers”. Out of the 33 player signings in the past 10 years, only 2 players were given a positive rating. And these signings cost a whopping $1.5billionin transfer fees. Their playing form hasbeen terrible. They lost their first two Premier League games against unfancied opposition, putting them at the bottom of the Premier League. It was their worst start in the past three decades.In short, Man Utd is past its glory days. Man Utd is currently trading at an expensive 23.6x EV/EBITDA, near its peak of 27.0x last year. The pricey valuation coupled with its excessive leverage will turn off most investors. But all is not lost. In 1999, I remember that Man Utd spectacularly came from behind to win the Champions League final. The fans were passionate and continued to cheer for the team in the dying minutes. They did not give up.Similarly, nothing is impossible. Passion could still drive a white knight to buy out Man Utd and restructure the club. At the time of writing, there are news that British billionaire Sir Jim Ratcliffe could be interested in buying out Man Utd.It ain't over till the fat lady sings.
Key Highlights: Home Depot, Cisco, Walmart, Lowe's, Target
Fed minutes from the prior month indicated that the Fed would continue interest rates hikes until inflation comes down substantially. While there was no guidance, market is expecting a 50bps increase in the upcoming September FOMC meeting. Moreover, advanced estimates for US retail and food sales for July were almost flat sequentially. This resulted in overnight correction of major US indices with $S&P 500(.SPX)$ down -0.7% and $NASDAQ(.IXIC)$ falling -1.3%.United Kingdom’s inflation saw a surge with CPI up 10.1% in July to a 40 year high with food prices and energy prices a key contributor to the rising prices. Europe has been the epicenter of an energy crisis given the ongoing geopolitical tensions that saw a reduction in natural gas flows through the Nord Stream 1 pipelines. European equities also saw weakness with $DEKA E STOXX50(0MPR.UK)$ 50 falling by -1.3%.Below are $Home Depot(HD)$ ,$Lowe's(LOW)$ ,$Wal-Mart(WMT)$ ,$Cisco(CSCO)$ ,$Target(TGT)$ 's 6 months performances.$Home Depot(HD)$ recorded its strongest quarterly sales in 2Q.Growth was better than expected on resilient repair and remodeling demand, bucking the slowdown in housing turnover amid rising mortgage rates. Same store sales growth impressed, growing 5.8% due to rising prices while margins also impressed despite rising cost pressures. Despite the inflationary issues and slower macroeconomic environment, no down trading has been observed from the latest quarter, as both professional and DIY segment sales still saw growth. $Lowe's(LOW)$, a home improvement retailer that is relatively more focused on the DIY segment, also alleviated fears of homeowners sharply delaying their improvement plans.$Cisco(CSCO)$ supply challenges have finally eased with less advanced chip capacity for enterprise networking easing. Revenue guidance is back to low single digit range of 2%-4% for 1Q and 4%-6% for FY2023. This also signals that the demand for chips have started to falter for the chip sector, especially seen in the consumer-focused products such as personal computer and graphic processing units. Backlog for Cisco continue to remain at record highs mainly due to the previous supply issues, which provide visibility in the fiscal year ahead.$Wal-Mart(WMT)$ ’s Q2 results showed a pivoting of consumer spending away from discretionary products to more of groceries and necessities, as inflationary pressures continue to hit households. It saw weakness in apparel and electronics product sales as inventory levels surged. $Target(TGT)$ , another big-box retailer, missed same store sales guidance, and saw profits falling by 90% in 2Q22 given its focus on discretionary products. Despite price reductions, Target continued to face inventory issues from consumers curtailing discretionary items.
$Olam Group(VC2.SI)$ transforming to serve a changing world.Source from The Business Time1. Corporate Profile of Olam InternationalOlam is a leading food and agri-business operating across the value chain in more than 60 countries, supplying food, ingredients and fibres to more than 20,900 customers worldwide.Listed in Singapore, Olam currently ranks among the top 30 largest primary listed companies in Singapore in market capitalization.2. Reorganisation to deliver valueIn 2020, Olam announced a transformational plan to split the company into three operating groups to maximise Olam’s long-term value on a sustained basis. The three groups are ofi (Olam Food Ingredients), Olam Agri (Olam Global Agri) and the remaining businesses of Olam Group.At end of 2021, Olam Group had completed the first three steps of the reorgansiation plan and separation of the entities to allow each operating group to focus on developing its own markets, resources and build long term value for the business.Plan to list food ingredient unit ofi has been delayed from its planned initial public offering in Q2 2022 due to the unstable market conditions from the ongoing conflict in Ukraine. Olam is confident of listing ofi on the London Stock Exchange with a concurrent listing in Singapore and a demerger from the group in the near future.3.Olam Group’s Financial Highlight H1 2022Olam Group saw a strong EBIT growth and improved in operational PATMI. EBTI grew by 25% with strong contribution from Olam Agri which grew its EBIT by 49.4%. ofi delivered EBIT of S$265.0 million despite high inflationary costs. Operating PATMI was up 8.2% to S$472.5 million despite higher interest costs and tax provisions.The Board of Directors declared interim dividends of 4.0 cents per share.4.Olam Group Business outlook and prospectsThe significant demand growth rate seen in H2 2021 has slowed down in H1 2022 after the geopolitical crisis and pandemic lockdowns in China. ofi expects improved margins and EBIT in H2 2022. Olam Agri also expects to deliver better year on year performance in 2022.Olam Group will continue to focus on managing its working capital and costs during this period due to high commodity price and rising interest rate environment.The group will remain cautiously optimistic about its prospects for the remaining of the year, despite the global supply chain issue and intends to go ahead with the ofi IPO when the market conditions improves.
Dispose Hulu and focus on Disney+Activist Fund Manager, Third Point, sent a letter to Walt Disney $Walt Disney(DIS)$ , pushing for major changes to the company. One key recommendation is for Disney to accelerate the acquisition of 33% stake in Hulu from Comcast.This could be a wrong move.Hulu is a legacy issue. And has become a strategic mistake.In 2019, Disney became the majority owner of Hulu with the acquisition of Fox. It also agreed to acquire the remaining 33% stake from Comcast at a minimum valuation of $27.5 billion by January 2024. This agreement was inked in 2019 when Disney do not have any viable streaming TV products.Now, Disney has its main streaming TV service via Disney+. It is flourishing at 152.1m subscribers, compared to 45.6m subscribers for Hulu. It also has a global reach where else Hulu is only available in the US.Hence, Hulu is no longer critical to Disney.Rather than trying to build two streaming service, it is better for Disney to sell Hulu to Comcast and focus on Disney+.The sale of Hulu will put Disney in a stronger financial position to compete with Netflix $Netflix(NFLX)$. Disney can use the sales proceeds to pay down debt and increase content spending. Some content spending can be used to procure popular content from Hulu. The remaining spending could be used to produce original dramas that will draw subscribers away from Netflix.Comcast may be open to such strategic deals. Its streaming service, Peacock, is a second-rate streaming company with subpar content. Even Comcast is trying to boost the content by removing popular shows such as “Saturday Night Live” and “The Voice” from Hulu and placing it in Peacock. So, there are economic benefits for merging Hulu and Peacock into one streaming service.Disney is currently trading at 32.9x forward P/E, close to 1 standard deviation below mean. In contrast, Netflix is trading at 23.3x forward P/E. Disney deservedly trades at a lower P/E because of its theme park exposure. However, its shares could enjoy a P/E re-rating if it disposes Hulu and focus its streaming business on Disney+.
Market risk on momentum is back with inflation expectations starting to peak, US Consumer Price Index (CPI) for July came in softer at 8.5%, Producer Price Index (PPI) also showed a decrease by 0.5% MoM. This is in line with our expectations that inflation will began to ease in the 2H22 which also implies more policy maneuverability of the Fed in the upcoming FOMC meetings. This helped to drive a sharp reversal in risk assets with Nasdaq recovering by 12.4% and S&P also gaining 9.3% over the last month.While the absolute inflation print still looks high and some would argue that we are in a bear market rally, a more docile inflation expectation and investors remaining cash up on the sidelines after year-to-date drawdown could mean that equity markets volatilities could ease further.Oil price is one that is being watched closely, having been trending downwards to $93.8/barrel, below year-highs, and could be moving towards surplus levels soon in the current quarter according to OPEC. This could bring about further alleviation to inflation expectations.$Booking Holdings(BKNG)$ results showed the tourism sector normalizing with room nights surpassing pre-pandemic levels in 2Q22.Rooms nights surged by 56% YoY and gross bookings were above expectations during the quarter. This was despite the fears that inflation and geopolitical risks would curtail discretionary travel demand. Alternative accommodation, a sector where $Airbnb, Inc.(ABNB)$ operates, is one that Booking is also actively seeking to compete in, with 6.6m listings available on Booking.com.$Sea Ltd(SE)$ is expected to report on 16 August key concerns centering on foreign currency exchange with a strengthening dollar. E-commerce revenue, while still a pillar of sales growth for the company, will be a segment keenly watched, especially with a challenging YoY comparable and potential headwind from inflationary impacts faced regionally. Ecommerce’s path to profitability is a balancing game of expansion of new geographies versus improving unit economics of others. Gaming is expected to continue to be dragged by Free Fire’s ban in India and a shift in consumer trends post pandemic. $Sanofi SA(SNY)$ , $GlaxoSmithKline PLC(GSK)$ and $Haleon(HLN)$continue to decline on pressures of a potential personal-injury litigation of the heartburn drug Zantac that is alleged to cause cancer. $Pfizer(PFE)$ which marketed Zantac for a limited period (but has stopped for more than 15 years) also saw weakness in its share price for being implicated. While uncertainty of the litigation settlements stands, the aggregated financial impact could potentially run into the tens of billions.
Raising prices could backfireWith 221.1m subscribers, Disney$Walt Disney(DIS)$ has overtaken Netflix$Netflix(NFLX)$ , to be the new King of streaming TV.But, Disney wants to milk its large subscriber base by increasing prices. Disney+’s ad-free subscription will be raised to $10.99 per month. The old $7.99 pricing will now be laden with commercials.This move could backfire.Its leadership position is not secure. Disney’s total subscriber base is only a mere 300k more than Netflix. Furthermore, if you strip out ESPN+ and Hulu, it only has 152.1m subscribers in Disney+, a pale comparison to 220.7m subscribers in Netflix.Hence, Disney should play the long game: Kill off its competition before raising price Its competitors are down but not out. Netflix has been losing subscribers. It reported a loss of 1million subscribers last month.Shares of Netflix has also performed poorly, with a 59% YTD decline.Disney should take advantageof Netflix’s weak position and focus on leapfrogging past Netflix. It is better to keep its pricing affordable and improve its content offering. Also, raising prices in a tough economic environment could be detrimental to its subscriber base.Market is rewarding Disney’s growth in subscriber base. Shares of Disney rose 4.7% after its positive results announcement. But, the move was bittersweet as there was a pullback 4.5% from its high. This could be a sign that raising prices now is not ideal.
Tiger Singapore Weekly Focus: THAI BEVERAGE PUBLIC (Y92.SI)
$THAI BEVERAGE PUBLIC CO LTD(Y92.SI)$Unlocking Shareholder Value with Beer Business Spin-off US entered into a technical recession after reporting a fall in its GDP by 0.9% in the second quarter, the second straight decline and a strong recession signal. GDPis the broadest measure of the economy and encompasses the total goods and services produced by a country during the period.The International Monetary Fund (IMF) projected the economic growth of the Asia-pacific to decelerate to 4.2%, 0.7% points less than its forecast in April.You may interested in:Tiger Singapore Weekly Focus: JAPAN FOODS'Outlook Corporate Profile of $THAI BEVERAGE PUBLIC CO LTD(Y92.SI)$ ThaiBev is Southeast Asia’s Leading beverage producers and distributors and the largest in Thailand. The company has expanded beyond Thailand in 2012 with its acquisition of Fraser and Neave Limited, a well-established conglomerate with a portfolio of highly recognised beverage brands. It further strengthened its regional presence by acquiring stakes in the Grand Royal Group, the largest whisky player in Myanmar and in Saigon Beer-Alcohol-Beverage Corporation, a leading beer producer inVietnam. This makes ThaiBev the largest beer player by volume in Southeast Asia.ThaiBev’s Business comprises four segments – spirits, beers, non-alcoholic beverages, and food. The group operates 19 distilleries, 3 breweries and 21 non-alcoholic beverage facilities. The group is present in over 90 counties, including five production facilities in Scotland, two production facilities in Myanmar and one distillery in China which produces the famous Yulinquan Chinese spirit.BeerCo IPOIn May, ThaiBev announced it is resuming the proposed spin-off and listing of its brewery unit BeerCo on the Singapore Exchange which have twice been deferred due to uncertain market conditions due to Covid-19 pandemic.Shares of ThaiBev saw higher volume trading following news that the company might not proceed with the spin-off of BeerCo. Responding to the report, ThaiBev will continue to assess the current market conditions and remain committed to the proposed transaction of a public offering of up to 20% of BeerCo’s ordinary shares.Rationale of a proposed Spin-Off ListingFirstly, the significant growth potential in the beer business can be better developed by a dedicated board of directors and management team whose focused solely on growing the beer business.Secondly, the group can use part of the proceeds generate from the spin-off to pay off interest-bearing debt. Reduction its overall debt position will strengthen the group finances.The relative contribution of the Spin-off Business to the ThaiBev Group’s gross profit, EBITDA and Profit After Tax in FY2020 is 29%, 29% and 30% respectively.The following table summarises the relative contribution of BeerCo Business to the ThaiBev Group.ThaiBev Group’s Financial PerformanceFor second quarter ended 31st March 2022, ThaiBev saw a 10.7% increase in total sales revenue from Baht 59,463m to Bhat 65,826m. There is an increase in all business segments led by beer business of 20.3%, non-alcoholic beverages business of 8.5%, food business of 41.6% and spirits business of 0.2%.The group gross profits rose 9%, an increase from Baht 17,969m to Baht 19,581m. The beer segment saw an increase in gross profit of 22.7%.A successful listing of BeerCo later in the year can potentially unlock value for ThaiBev’s shareholders.
Aug 1st - Tiger Market Watch: Apple, Amazon, Enphase
Key Market HighlightsUS reported that real GDP contracted -0.9% in the second quarter according to advance estimates by Bureau of Economic Analysis, amid overall policy tightening to address the rising inflationary risk. GDP came in slower than expectations as economists anticipated for a +0.4% growth.Fears of a technical recession, defined by two quarters of consecutive negative growth, was realized after the second straight quarter of declines following the first quarter -1.6% fall.The US markets rallied after the announcement, on hopes that slower growth may result in an easing or even U-turn in Fed tightening policy. The momentum of stronger than estimated earnings season help drive one week recovery on $NASDAQ(.IXIC)$ to 5.2% and S&P to 4.1% respectively.Performance Table (Total Return %)Apple $Apple(AAPL)$ results marginally beat EPS estimate by 3.1% despite supply chain concerns from China. Total revenue was up +2% yoy in line with consensus estimates; iPhone sales came in better than expected mitigating the disappointment in Mac, iPad and wearables. iPhone units came in at 48.4m, which was ahead of estimates dispelling concerns of a slowdown. Market share gains from Android towards more premium products have been one of the reasons of continued momentum. Apple continue to drive strong user growth via its ecosystem of over 1.8b installed base and its higher margin services revenue grew 12% during the quarter. Apple has continued to buyback share to the tune of around 4% of market cap which adds to overall return to shareholders.Source: chargedretail.co.uk$Amazon.com(AMZN)$2Q results was above estimates with revenue up 7% yoy to $121b. AWS was a key driver of growth, up 32% while advertising segment also up 18%. Moreover, AWS backlog saw an increase by 65%. Operating income came in at $3.3b on the back of a 2.7% operating margin; this is impressive given the cost reduction of its fulfillment costs. Amazon’s stake in EV manufacturer Rivian decline in value that resulted in Amazon recording a net loss of $2b. Amazon guides an acceleration for 3rd quarter revenue of $125b to $130b, or +13% to +17% growth and operating oncome in the range of $0 to $3.5b. Amazon stock have recently did a 20 for 1 split in June, making it more accessible to retail investors.Biden administration also unveiled aggressive solar development initiatives as a mean to reduce rising energy costs and boost employment. The government aims to triple domestic solar manufacturing capacity by 2024, growing capacity from 7.5 gigawatts to 22.5 gigawatts. Furthermore, the Democrats is working to pass the Inflation Reduction Act that is expected to further add $369b into energy security and fighting climate change. This is expected to further benefit solar companies with the influx of investments. US solar related companies such as $Enphase Energy(ENPH)$ , $SolarEdge(SEDG)$ ,$First Solar(FSLR)$, $Sunrun(RUN)$ have all been outperforming markets as they stand to benefit from the favorable policy backdrop amid rising energy costs.VIX Index
Jul 28 - Tiger Market Watch: Microsoft, Google, Meta
Key Market Highlights US markets rallied overnight with the Nasdaq up +4.1% and S&P up +2.6%. Investors rotated back into risk, amid the Federal Reserve’s 75 bps point rate hike in its July FOMC meeting, to 2.5% on the upper bound. This was better than the worst-case scenario of 100 bps that was feared considering the last inflation print. The Fed signaled confidence that it can engineer a soft landing of controlling inflation without triggering a recession. US earnings season was largely better than expected especially for some of the large cap technology names such as Microsoft and Alphabet.Fed Fund Rate Upper Bound (%) Microsoft $Microsoft(MSFT)$ guided for optimistic forecastwithrevenue and operating income in the double digits in the coming fiscal year FY23 which allayed concerns of a growth slowdown. 4Q22 results was marginally below estimates due to foreign exchange, the weak PC market and a slow down for Azure during the quarter. This is an indication of the overall moderation of spending due to the overall macroeconomic trends. That said, Azure continues to be the key growth diver for Intelligent Cloud segment and for the company with a 46% yoy growth powered by secular drivers. Alphabet $Alphabet(GOOG)$ bucked the trend against other advertising focused companies, with an impressive 13% yoy growth in revenue during the 2Q22 despite the higher comparable. Core search advertising revenue continued to be healthy, especially driven by the travel and retail sector’s resumption. Although some sequential slow down had been observed in YouTube to +5% growth as well as the cloud segment that was below expectations despite still maintaining +36% growth. Profitability on an operating margin level fell to 27.9% mainly due to higher headcount growth of 21% yoy. The quarter showed the resilience of Google’s search advertising model which has been more immune to the challenges from Apple’s iOS privacy changes which prevents ad targeting.Meta $Meta Platforms, Inc.(META)$ results demonstrated further cyclical slowdown of digital advertising with further sequential declines in the upcoming quarter. During the 2Q22, revenue had already slowed to -1% negative growth, dragged by negative growth in its key markets such as US, Canada, and Europe. Operating profits were also dragged by the reality labs, its investments into the metaverse, which recorded losses of $2.8b for the quarter. Meta’s growth has been challenged by macroeconomic challenges, Apple’s iOS changes as well as competition from a structural migration of younger users to newer platforms such as TikTok.Performance Table (Total Return %)