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Market Commentary

US stocks slip after weak jobs data

• US equities and government bonds wavered on Friday after a weaker than expected US jobs data raised concerns over a rocky recovery for the world’s largest economy. The US government’s monthly non-farm payrolls report showed employers hired 194,000 new workers in September, widely missing expectations for 500,000 new jobs. However, other elements of the jobs report showed signs of labour market strength that would encourage the Federal Reserve to produce a timetable for tapering next month.

• While bonds initially saw a bit of buying, pushing yields down, the 10-year Treasury closed the week with a yield of 1.6%, its highest since June, defying what appeared to be bad news and a sign that the Fed was expected to press ahead with its tapering plans.

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• The Dow finished Friday down 0.03%, while the S&P 500 fell 0.2% and the Nasdaq declined 0.5%. For the week, the Dow Jones Industrial Average gained 1.2% while the S&P 500 rose 0.8%, and the Nasdaq Composite squeezed out a 0.1% advance. Energy stocks ploughed higher on Friday as West Texas Intermediate crude futures, the US oil benchmark, crossed US$80 per barrel on Friday for the first time since November 2014. WTI crude settled at US$79.35. Investors should brace for more volatility ahead as surging global energy prices could drive up inflation, erode profit margins and pressure consumer spending. Headline US price rises have topped 5% for three consecutive months.

• Asian shares fared well, as China reopened higher, surging more than 1% as investors returned from the Golden Week holiday. Hong Kong shares rose 0.6%, led by tech and financial stocks amid easing political tensions between China and the United States, and tracking previous night gains on Wall Street. Singapore stocks too rose 0.4%, basked in the positive global sentiment.

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• Energy prices and inflation to expected to remain in the spotlight for markets. While the global economy, including the US, remains on track to expand at an above-trend pace into 2022, the combination of higher rates and elevated inflation means that distribution of outcomes across markets has widened. Investors will need to adopt a selective approach across both fixed income and equities to navigate such market conditions.

Half of China’s top developers crossed Beijing’s ‘red lines’

• Almost half of China’s 30 biggest developers were in breach of at least one of Beijing’s recently introduced rules on property sector leverage, according to a Financial Times analysis of the latest available data. In August last year, the Chinese government unveiled the “three red lines”, which aim to constrain property developers’ debt according to three balance sheet metrics: the ratio of liabilities to assets; net debt to equity; and cash to short-term borrowings. The FT analysis, based on data from Beike Research, part of Chinese property group KE Holdings, showed that among the 30 developers, 14 had breached at least one red line as of June 14. These companies accounted for the majority of the 30 developers’ sales last year. The findings come as Chinese group Evergrande, the world’s most indebted developer, teeters on the edge of default after missing an interest payment last month.

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Singapore Press Holdings Ltd (SPH SP) – Recovery in continuing operations

• Shareholders have given approval to transfer the media business to a not-for-profit company limited by guarantee at the recent EGM on 10th September.
• FY2021 PBT of continuing operations excluding fair value changes rose 62.8% to SGD258.4mn. Media business (discontinued operations) continued to see losses of SGD38.7mn in FY2021.
• Final dividend of 3 cents/share was declared, bringing total dividend for FY21 to 6 cents/share.
• Next steps include an EGM to be scheduled to seek approval for the privatization offer by Keppel Corp (expected around middle November), SPH will eventually delist and privatise under this plan.

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Shareholders have given approval to transfer the media business to a not for profit company limited by guarantee at the recent EGM on 10th September

As a result, results of the media segment were classified under discontinued operation for FY ending August 2021 with prior year restated to facilitate comparison.

Continuing operations of the group comprise of businesses of the retail and commercial, PBSA and others segments.

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FY21 results for continuing operations

PBT of SGD325mn recovered from prior year’s loss of SGD73.3mn. Excluding fair value changes, PBT of continuing operations grew 62.8% yoy to SGD258.4mn, with improved performance from PBSA, retail & commercial and an expanded portfolio. Operating profit of SGD206.7mn rebounded 69.8% from a year ago, with contributions from all segments.

In terms of segments, retail and commercial segment’s FY21 profit was SGD185mn (vs FY20’s SGD140.2mn, gaining 31.9%) driven by lower tenant rental relief, recovery in tenant sales and full year contribution from Westfield Marion (acquired by SPH REIT in Dec 2019). PBSA’s FY21 profit of SGD37.1mn grew 371.8% from a year ago (before fair value changes). In the others segment, FY21 profit of SGD44.3mn grew 599.1% yoy driven by aged care which saw improved contribution from Japan nursing homes portfolio, as well as increased dividend income from treasury investments, divestment gains from online classified business and fair value gains on freehold bungalows.

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FY21 discontinued operations (Media)

FY21 loss for this segment was SGD128.3mn (vs SGD12mn loss in FY20), which included media restructuring loss of SGD115.3mn and operating loss of SGD13mn. In FY22, losses arising from added contribution of SGD80mn cash, SPH REIT units and SPH ordinary shares of about SGD115.5m is expected to be recognized upon the transfer of the business to the CLG (limited by guarantee). The completion of the transfer of media business is targeted for December 2021, with restructuring already started since operationalization of SPH Media since 1st October this year.

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Key operational updates include include: SPH acquired another two PBSA assets and is in the process of acquiring an aged care asset and a piece of land in Chikusei, Japan (transaction to complete middle October 2021). PBSA achieved 97% of the target revenue for the new UK academic year 21/22 as of 1st October 2021 with additional bookings expected in October 21 and January 2022.

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Balance sheet remained resilient wi th gearing ratio at 28.9% despite media restructuring costs costs, while cash balance was healthy at SGD744mn as of 31 August.

Next steps include an EGM to be scheduled to approve the privatization offer by Keppel Corp (expected around middle November), pending clearance of the composite document by SGX.

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Recap of Keppel Corp’s privatization offer

SPH shareholders to receive total proposed consideration of SGD2.099/share, which comprises of cash SGD0.668, 0.596 Keppel REIT units and 0.782 SPHREIT units per SPH share. SPH will eventually delist and privatise under this plan.

Our prior comments on the privatization offer

Deal looks fair in providing a balanced outcome for value unlocking for shareholders while avoiding a situation where prime assets may be cherry-picked. The proposal implies a 39.9% premium to the stock’s closing price of SGD1.5/sh prior to the company’s 30th March strategic review announced, or a 11.6% premium to the last close on 30th July. Deal completion of the proposed transaction is expected to be completed December 2021.

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ESG updates

SPH is rated A for its ESG track record, which pegs the company above the global sector median rating and reflects the firm’s strong governance structure (majority independent board, separate CEO and Chairman roles which support management oversight) and efforts on sustainable sourcing initiatives relative to peers (raw material sourcing). Our fair value is based on sum of parts valuation and has incorporated some positive expectations of potential value unlocking initiatives as the company executes on its strategic transformation plan. On other positives observed, the company has adopted best industry practices in outlining the scope of control over access of personal data, including amendments and deletion of records and has in place various initiatives to address increasingly stringent regulations on the topic of data security. There is also evidence of a formal anonymous whistleblower system with legal protection, which contributes to the firm’s overall governance rating. HOLD. (Research Team)