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SI Research: Following The Big Boys

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Institutional investors are organizations that manage large pools of money – including mutual funds, pension funds, banks, insurance companies or hedge funds – and unlike retail investors, they are the ones which have the financial muscles and positions often large enough to dictate the direction of the markets. As William O’Neil, founder of Investor’s Business Daily and author of best-seller “How to Make Money in Stocks” wrote in his book, “It takes big demand to push up prices, and by far the biggest source of demand for stocks is institutional investors. These large investors account for the lion’s share of each day’s market activity.” Hence, savvy investors regularly look at the funds flow of institutional investors, or often referred to as the “smart money”, for an indication of how the market is likely to move. Likewise, it is probably not such a good idea to stand in their ways should institutions are looking to sell.

After sinking for more than 17.9 percent in the second half of year 2018, Straits Times Index has since staged a recovery in the first quarter of this year to stand firm above 3,300 at 3,315.42 as at 8 April 2019. In spite of this, institutional investors appeared to be selling into the recent strength. According to the institutional fund flow monthly tracker published by the Singapore Exchange, institutional investors net sold $59 million of shares in February 2019 after net purchasing $70.7 million in January 2019, and this was followed by a net sales of $204.9 million in March 2019. We took a peek at which counters the institutions are liquidating from their portfolios to see if we are able to gain any insights from there.

bigboys

The Banks

In the last quarter, the financial sector was the top net sell sector by the institutions which saw the largest funds outflow. Oversea-Chinese Banking Corporation (OCBC) had cumulative total sales of $250.8 million worth of stocks while net sales of United Overseas Bank (UOB) and DBS Group Holdings (DBS) stood at $219.8 million and $82.4 million respectively.

In terms of financial performances, all the three local banks achieved remarkable results last financial year driven by strong loan growth and a rise in net interest margin. OCBC’s FY18 net profit hit a record $4.5 billion on the back of total income at a new high of $9.7 billion while FY18 total income and net earnings for UOB also rose to new highs of $9.1 billion and $4 billion respectively. Last but not least, net profit of DBS for FY18 jumped 28.1 percent to a record $5.6 billion as total income climbed to $13.2 billion.

However one should not regard this healthy momentum as the norm going forward. Amidst a weakening economic outlook that is becoming more uncertain, US Federal Reserve has paused its pace of rate hikes by projecting no further increment for the rest of this year. We foresee that this could likely put pressure on the banks’ loan growth and net interest margin in the near-term.

Furthermore as at 8 April 2019, DBS was currently trading at a price-to-book ratio of 1.4 times while the ratios for both OCBC and UOB were at 1.2 times. Given that the valuations for the banks were not exactly cheap following the recent rally, we expect to see some selling pressure after they had distributed their dividends in May 2019.

StarHub

StarHub saw net sales totaling $71.9 million worth of its shares by institutions in the last quarter. This did not come as a surprise, as the group’s financial performances have been deteriorating of late amid intensifying competition in the telecommunication sector.

StarHub turned in a disappointing 26.7 percent decline in net profit for FY18 at $200.5 million as revenue dipped 2 percent to $2.4 billion. The shrinking revenue was attributable to contracting sales from the group’s mobile, pay-tv and sales of equipment segments, and the worst may still not be over as the fourth mobile operator TPG will be commencing its commercial launch in the second half of this year.

Shareholders of StarHub were already not very pleased when the group slashed its dividends from $0.20 a share to $0.16 in FY17. Moreover management went on to announce that from FY19 onwards, the group intends to adopt a new variable dividend policy by cutting the payout to at least $0.09 a year, and any payment above that which is in line with the group’s policy of paying out at least 80 percent of net profit as dividends would be done so in the last quarter. To say the least, investors’ confidence in StarHub as being a stable income distributor had clearly being eroded.

Genting Singapore

Genting Singapore (Genting) is yet another counter that was heavily sold down by institutional investors with net sales of $46.5 million worth of shares in the last three months. The group had delivered much success recovering from the challenges a few years back arising from its slowing VIP business. FY18 net profit grew 10.2 percent to $755.4 million underpinned by a 6.1 percent rise in revenue to $2.5 billion. The encouraging results were driven by improved performances in both the group’s gaming and non-gaming segments.

In a recent government statement, Singapore revealed that it will be granting Genting with the exclusive license for the operation of casino in Singapore until 2030. In return Genting will need to commit to invest around $4.5 billion for the development of additional tourism attractions in Resorts World Sentosa. This comprehensive investment, slated to start from 2020 and completed in 2025, will comprise around 164,000 square meters of new attractions, two new hotels as well as a new driverless transport system. Management has indicated that it plans to fund this new development by internal funds and borrowings.

The capital expenditure required for the new investment is likely to put a strain on Genting’s balance sheet, possibly even causing it to drift from its current net cash status into a net debt position in the coming years. Furthermore with effect from March 2022, both integrated resorts will have to pay a higher casino tax rates under a tiered structure. This will be accompanied by higher casino entry levy for locals at $150 a day which might affect Genting’s mass market segment negatively. Hence, we foresee that the tax increases and new government measures would weigh on Genting’s short-term earnings before its long-term potential could be realised.

All eyes are also on Genting’s bid for the rights to operate an integrated resort in Japan. Should the group succeed in securing the opportunity as per widely anticipated, this would mean the requirement for more resources to be allocated to the construction of the resorts in the initial few years before any material profits could be harvested upon completion. On the other hand should the deal fail to materialise, this could come in a really rude shock leading to a nasty sell-off of the company’s shares. Either way, shareholders of Genting should not be expecting a smooth-sailing journey ahead.

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