Singapore Strategy - DBS Research 2016-02-23: Hitch hike the bounce

CAPITALAND LIMITED C31.SI CITY DEVELOPMENTS LIMITED C09.SI OSIM INTERNATIONAL LTD O23.SI INNOVALUES LIMITED 591.SI SHENG SIONG GROUP LTD OV8.SI

Singapore Strategy - Hitch hike the bounce

Valuation support and possible reversal of US$ trigger bear market rally  But market is not out of the woods yet
Trade the bounce on oversold stocks – OCBC, OSIM, SCI and Capitaland. Trim oil and gas stocks on rebound.
Stay safe with dividend plays– CD, STE, SIE, Sheng Siong, AREIT, MLT, Thai Bev. BUY Innovalues – new initiation.

Kitchen sinking, higher provisions, asset impairment charges were the key drags on 4Q earnings so far, leading to a splash of red ink, particularly in the oil and gas sector. Earnings disappointment is taking a toll on dividends.
Companies are conserving cash ahead of challenging times.
Blue chips which have cut dividends include Keppel Corp, SCI and SMM, HPH Trust and M1.
We shaved STI’s earnings growth estimate for 2016 from 6% to 3.4%, as volatility in cyclical sectors continues to pose challenges for 2016.

Bear market rally to provide temporary breather. A counter-trend rally from the recent low of 2530 is in the making, supported by
1. US rate hike expectations have back-pedalled, a March rate hike is unlikely and consensus thinks that the FED may even hold off rate hikes this year;
2. strength of US$ is less of a worry; our currency strategist has lowered his USDSGD forecast to 1.43 by year-end as rate hike expectations are lowered. A pullback in USDSGD is short-term positive for Singapore equities as funds outflow reverses;
3. possible ‘buy-inanticipation’ trade ahead of expectations that the ECB will dish out more stimulus at the next policy meeting on March 10;
4. the oversold market that has led to PB and PE valuations matching several major market troughs in the past.

While we are short-term positive, we believe that even in a ‘best case’ scenario, the magnitude of the current rise in the Singapore market is unlikely to stretch beyond the 2900 level for the STI over the next 2 months.
Global growth remains uncertain despite rounds of QEs with global interest rates near zero or even negative in the case of Japan and the Eurozone.
Closer home, Singapore faces the rising risk of a technical recession amid the challenging macro environment and weakness of our major trading partners.

We re-visited our bear case target prices; with downward revisions in banks, oil and gas and property companies.
We are buyers of bomb out stocks trading close to their bear TPs - SCI, OCBC, OSIM and Capitaland, but will trim oil and gas plays (SMM, Vard, Nam Cheong, Mermaid) on oil price rebound.
We continue to prefer companies that offer upside in terms of dividend yields in the current environment where economic growth is uncertain.
Our preferred yield picks : Comfort Delgro, Thai Bev, SIA Engineering, ST Engineering, Sheng Siong, Ascendas REIT and Mapletree Logistics Trust.
We initiated Innovalues(BUY, TP$1.01), demand growth for automotive sensors is supported by rising awareness and stricter regulatory standards on safety and emissions.

Janice CHUA DBS Vickers | YEO Kee Yan DBS Vickers | LING Lee Keng DBS Vickers | http://research.itradecimb.com/ 2015-12-17

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