Singapore Strategy
DBS GROUP HOLDINGS LTD
D05.SI
SINGTEL
Z74.SI
CITY DEVELOPMENTS LIMITED
C09.SI
STRATEGY – SINGAPORE: 1Q16 Report Card – Forecasts Still Trending Down
- 1Q16 reporting season ended on a lacklustre note as 33% of companies miss expectations (4Q15: 24%) and with the remainder largely in line.
- Earnings estimates continue to trend down. We stay defensive and selective amid the uncertain outlook.
WHAT’S NEW
More disappointments as headwinds gather strength.
- The number of earnings misses rose in 1Q16 to 33% of companies in our universe (vs 24% in 4Q15).
- Only 8% of companies beat expectations vs 20% in 4Q15.
- There were no broad sectors that delivered earnings beat but rather selected stocks such as SingTel, DBS and GGR, which provided some earnings cheer.
ACTION
Looking at earnings declining in 2016 and a recovery in 2017.
- Following the lacklustre results season, we reduce our 2016 market EPS growth to -0.6% yoy (+3.2% yoy previously) due to downward revisions in sectors such as aviation, healthcare, oil services and property development.
- Nevertheless, we expect earnings to recover in 2017 on a low base in 2016.
- Sectors driving 2017 market EPS growth of 7.1% yoy include telecommunications, plantation, healthcare and land transport.
Banks: No major surprises, slight positive from DBS.
- DBS provided a slight cheer as 1Q16 earnings exceeded estimates on firm non-interest income from wealth management fees and net trading income.
- OCBC met expectations despite weakness in non-interest income from fee income and insurance. There was a mild deterioration in asset quality (NPLs rose 3.1% qoq for DBS and 9.4% qoq for OCBC).
- Nevertheless, all the banks are well capitalised and registered improvements in CET-1 CAR, which are comfortably above 12%.
Telcos: Mixed as all eyes on potential fourth mobile operator.
- SingTel exceeded expectations, with key growth drivers ahead expected to be Optus and its regional mobile associates. SingTel is our top pick with a DCF-based target price of S$4.38.
- M1 and StarHub registered in-line results but saw contraction in mobile revenue.
- We had recently downgraded the sector to UNDERWEIGHT as the domestic competitive landscape intensifies and with the potential introduction of a fourth mobile operator.
O&M/OSV: No hiding place.
- Keppel Corp was below expectations while SMM and SCI were broadly in line with our but below market estimates.
- Keppel’s disappointment came from lower-than-expected O&M revenue and losses from an associate.
- The oil services (OSV) segment performed poorly as utilisation and charter rates came under pressure. Hence, Pacific Radiance and Nam Cheong were both loss-making in 1Q16.
- We have also downgraded Ezion to HOLD as earnings are expected to remain weak in 2016 with earnings uncertainties from its windfarm project in China.
Other notable results: SIA and Wilmar disappointed but GENSP is off to a promising start.
- SIA’s 4QFY16 results were below expectations on higher cargo losses and a steep rise in maintenance costs. The 7% pax yield decline was also disappointing, which management attributed to the soft global economy and competitive pressures.
- Wilmar’s 1Q16 earnings were below expectations on lower-than-expected soybean crushing margins, associate contributions and one-off impairment. We reduce Wilmar’s earnings forecasts by up to 5% but maintain BUY.
- On a more positive note, Genting Singapore (GENSP) is off to a promising start in 2016, with VIP rolling chip volume recording its first qoq improvement since 2Q14 and 1Q16 gross gaming revenue market share of 46% was its highest since 4Q14.
Reasonable but not overly cheap valuations.
- The FSSTI is currently trading at 2016F PE of 13.9x and P/B of 1.15x.
- On a PE basis, the FSSTI is trading at a 10% discount to the long-term mean but we think a discount is warranted given the uncertain outlook ahead.
- Using a blended average P/B and PE and assuming a 20% discount to long-term mean as a fair discount, we estimate the market is pricing in a 0% to -3% EPS growth in 2016. However, we see the potential for more earnings downgrades and with the mixed external outlook, we would adopt a relatively defensive stance.
- In addition, the lack of positive catalysts could suggest a range-bound market for the remainder of 2016.
Stocks for action.
- Our key picks include SingTel, City Developments, DBS, SingPost, ComfortDelGro, ART and Keppel REIT.
- On our SELL list are SMM, SIA Engineering, StarHub and M1.
VALUATION
Andrew Chow CFA
UOB Kay Hian
|
Singapore Research Team
UOB Kay Hian
|
http://research.uobkayhian.com/
2016-05-17
