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Singapore Strategy - CIMB Research 2016-08-16: 2H16 Sector Outlook

Singapore Strategy - CIMB Research 2016-08-16: Sector Outlook Market Strategy Sector Ratings

Singapore Strategy - Sector Outlook

  • Overall sector preference: 
    • Overweight REITs, property; 
    • Underweight cyclicals, and banks.



FINANCIALS – Underweight


2H16 trend

  • We expect NIM to see further contraction in 2H16 as the 3-month SIBOR and SOR continue on a downtrend. Interbank yields have also come off as the central banks embarks on rate cuts, which could further exacerbate the narrowing customer loan spreads. We think UOB could be relatively sheltered from downside in NIM, as it has already taken the largest hit (UOB: -10bp, OCBC: -7bp, DBS: +2bp) in 2Q; it has made targeted efforts to lower cost of funds since Jun, while there is room to improve liquidity management. DBS has guided for a 3-5 bps NIM downside in 2H, while OCBC’s NIM outlook remains weak as it intends to hold on to excess liquidity.
  • We think the banks are still at an early stage of the NPL cycle, and asset quality is bound to worsen. We remain concerned with the banks’ exposure to the upstream oil & gas sector (DBS: S$6bn, OCBC: S$5.7bn, UOB: S$4bn), especially if the oil price remains low and E&P spending does not return. We think the NPL ratio for the sector could go up to 40% if industry conditions remain weak (DBS: 3-6%, OCBC: 15%, UOB: c.12%). DBS could be the first to take a hit as it is the sole principal banker to Vallianz and Ausgroup, which could have difficulty repaying their bonds due in 4Q16. OCBC’s and UOB’s exposures have bond repayments due further out in 2017-18. Other areas of concern include China onshore loans, commodities, and Indonesia. We expect new NPA formation to accelerate and provision charges to rise.

What would make us turn positive?

  • Oil & gas worries remain the key overhang for the banking sector. We only see concerns easing if the oil price makes a meaningful and sustained recovery, which would spur E&P spending and lead to contract wins for the offshore support services firms.
  • While other central banks are embarking on rate cuts, the Fed is the only one looking at a rate hike. If the US economy performs better than expected and the frequency and quantum of Fed rate hikes exceed expectations, it could have positive implications for the banks’ NIM. The 3-month SIBOR has historically had a close correlation with the Fed funds rate.
  • We think it is still too early to bottom fish at 0.95x P/BV as we expect ROEs to decline to 8-9% in 2017 on higher provisions for oil & gas. We would only look to enter if further asset quality concerns drive valuations down to 0.8-0.9x P/BV.



PROPERTY DEVELOEPRS – Overweight


2H16 trend

  • Slower Singapore residential and hotel revenues are expected in 2H but the slack could be offset by growing overseas income. Rental income should remain relatively steady. Singapore home sales to be sustained at 8k-9k p.a.
  • We expect weakening Singapore residential earnings as we move into the third year of slower volume sales, while hotel revenue should decelerate on the back of lower corporate travel and weak economic growth.
  • We expect more overseas contributions, especially from China, Australia and UK, as recognition of completed development projects picks up pace.
  • Rental income from the investment property portfolio should remain relatively stable, and capital values should be maintained.

When do we turn negative?

  • Developers’ valuations are attractive at a 40% discount to RNAV, which is close to the -1s.d. discount to mean and we think negative newsflows are in the price. If valuations trade up to c. 30%, we may switch out of the sector, given the lack of clear catalysts. In addition, the market has factored in the low possibility of policy removal and geo-political events like Brexit; tail-end events such as an interest rate hike in 2H16 could be a de-rating catalyst.



REITS – Overweight


2H16 trend

  • Overall, we expect S-REITs to remain stable. As with 1H16, we expect inorganic contributions to mask softer organic performance. Also, we project that healthcare REITs and REITs with overseas exposure to continue deliver. We could hear of some acquisitions by the industrial REITs in 2H16.
  • Industrials have replaced office as our most preferred sub-sector. Looking ahead, we believe that the sector is best poised to navigate past the headwinds as it has been diversifying towards higher value-added businesses. That said, we have also observed a contrast in fortunes between the small caps and mid- big caps. The small-caps could do even worse in 2H16 due to ongoing conversion of single-tenanted buildings to multi-tenanted buildings.
  • Our second order of preference is retail as we think that the sub-sector will remain resilient, as proven by its track record. In the interim, however, the likes of CT and FCT will have to cope with income slippage from AEIs. Additionally, while shopper footfalls and tenant sales have been mixed, we expect the retail REITs to push for positive, albeit slight, rental reversions.
  • Office REITs are expected to hit the hardest in 2H16-1H17, following which Marina One (1.88m sq ft), Duo (570k sq ft) and Guoco Tower (890k sq ft) are expected to be completed. The mitigating factor is that office REITs have minimal lease expiries for renewal in 2H16, following a proactive tenant retention approach. YTD, Grade A office market rents have declined 8.7% to S$9.50psf; and we expect a similar or even accelerated pace of decline vs. 1H16. We also project the vacancy rate to rise sharply from 5% to slightly over 10% in the next 6-9 months
  • Barring another bad month, we expect 2H16 to be slightly better than 1H16 for the hospitality REITs. That said, we do not foresee the competitive hotel landscape to ease anytime soon. Our base-case scenario is for the sector to bottom in 2017 and recover from 2018 and onwards.

When do we turn negative?

  • The sector is trading at its mean of 6.3% dividend yield and 1x P/BV. Weighing the top-down hunt for yield against bottom-up lacklustre fundamentals, we believe that current valuations are not excessive. We could turn to a more price-taking mode if the sector trades 0.5 s.d. above its mean.
  • An interest rate hike in 2H16 could be a de-rating catalyst, given that the REITs have priced in a “lower-for-longer” rate outlook. Also, a sharp deterioration of the physical market could imply DPU cuts and devaluation losses.



CAPITAL GOODS – Underweight


2H16 trend

  • There is no light at the end of the tunnel yet among the rig-builders and oil services players. Although oil prices have rallied more than 60% since Jan 16, the oil services sector is still suffering the consequences of the lower price i.e. lower capex trend. With oil prices going sideways at low levels, it may not be time to bargain hunt in the sector. In fact, we think default risk among the small caps will continue to be in the spotlight as the market awaits the next Swiber in the making- Ausgroup. 
  • The shares of small caps could take another beating (albeit at a lower quantum since Swiber), if Ausgroup is wound up by the bondholders, or any other names (the likes of KrisEnergy) indicating alarming default risks. If oil prices plunge below US$40/bbl by end-2016, impairment risk is high as companies could be forced to lower future cashflows expected on 

When do we turn positive?

  • If oil prices are sustained above US$50/bbl for at least a quarter, we believe the sentiment to spend could come back. In 2Q16, there have been more enquiries for quotes, but no major contracts were awarded. We believe oil majors could be sourcing for new quotes to either price the market downwards to position for a recovery.



TELCOS - Neutral


2H16 trend

  • Mobile revenue growth will likely remain flattish to slightly declining due to continued decline in Voice roaming, IDD and SMS usage. The pay-TV business will also see more pressure coming from alternative over-the-top (OTT) video streaming platforms (e.g. NetFlix, Viu). Broadband revenues should continue to grow as subs upgrade to higher-speed plans, but we do not expect much subs growth as the market is already mature and continues to remain competitive. 1H16 results have been in-line to slightly below expectations and we expect the same trend into 2H16, with no major earnings disappointments.
  • All focus will be on 1 Sep 2016, which is the deadline for any potential new mobile entrant to submit their applications to bid in the New Entrant Spectrum Auction (scheduled for early-Oct). If there are no new entrants, Singapore telcos will likely see a further re-rating, as analysts are expected to raise their earnings forecasts and target prices. Expectations will also build on the potential for some of the Singapore telcos to pay special dividends, as their balance sheets have been de-leveraged over the past two years to build up a war chest in preparation for the potential entry of a fourth mobile operator.

When will telcos be too expensive?

  • Singapore telcos are trading at FY17 EV/OpFCF of 16.1x, which is at a 15% premium to the average of c.14x for ASEAN Telcos. Nevertheless, this is supported by their higher-than-average dividend yields of 4.8-5.0% in FY16-18 (ASEAN average: 3.8-4.1%).
  • Our DCF-based target prices in the scenario where there is no fourth mobile operator are: SingTel - S$4.60, StarHub - S$4.20, and M1 – S$3.20.
  • De-rating/re-rating catalysts: Entry of fourth mobile operator/industry stays status quo with three players.



TRANSPORT – Neutral


2H16 trend

  • The outlook for airline yields has not been positive, with SIA mainline’s yields falling yoy for 14 consecutive months. The yields for the April to June 2016 quarter are the lowest on record for the past six years. While part of the reason may be due to low oil prices, there is an unmistakable increase in competition, from Middle East carriers on European routes, from Taiwanese and Japanese carriers on US routes, and from Chinese carriers on Australian routes. Premium travel demand has been relatively weak, while even economy class demand has weakened of late. Even with lower fares, SIA mainline is seeing lower passenger load factors in economy class, suggesting that global capacity additions are exceeding demand growth. As a result, the savings from cheaper fuel are being passed back to consumers.
  • The guidance from SIA is that these unfavourable conditions are not likely to improve in the foreseeable future; we share SIA’s outlook, and so does Cathay Pacific at its recent analyst briefing. Separately, the air freight market is also seeing an extended period of yield weakness due to poor demand and excess capacity in the market for both air and sea freight services.
  • As for airport services SATS, we expect a stronger showing from Japan to continue while Changi volume should remain steady. Margin pressure in Singapore could be lifted if government grants are dished out on its automation incentives. 
  • Land transport- 2H16 earnings outlook is expected to be stable for ComfortDelGro (it is no longer relevant for SMRT as we expect the company to be successfully taken private by Temasek). We are looking to high single-digit growth in group operating profit, on the back of higher contributions from the Singapore public bus business post its transition to the government contracting model (GCM, effective from 1 Sep), partly offset by lower overseas bus contributions, due to adverse FX translation (yoy weaker GBP, A$ and Rmb). Taxi profit is expected to be stable, though growth could be more difficult going forward due to competition from Uber & Grab. Rail operating profit will stay subdued in 2H16, due to the start-up costs related to preparation of the Downtown Line (DTL) stage III (expected to commence operations in 1H17).

When do we switch our calls?

  • A couple of conditions could encourage us to change our Hold rating on SIA. The most important is a general acceleration in global GDP growth and an improvement in global trade and business conditions, which have historically tied in very well with increased business travel and better ticket pricing. Many of SIA’s business-class passengers come from the banking and oil and gas industries; if these two industries see a more robust business environment, activity levels will increase and so will demand for SIA’s flights.
  • SATS is an Add now and it is priced for perfection (peak valuation of 22x CY17 P/E) because of low-risk earnings growth of 6% plus search for yield play in the Singapore market. We would consider to take profit if flights/passenger growth from Changi starts to slow down or weakening trend of ASP for unit services handled.
  • Currently, we have a Hold on ComfortDelGro (CD) for its potentially higher dividends (est. 3.6-4% in FY16-18F). We will consider upgrading ComfortDelGro under the following scenarios:
    1. the share price falls to a more attractive level and there is no perception of increasing risk for its taxi business;
    2. we perceive a higher chance that Singapore public bus and rail EBIT margins will outperform our current projections (8.5% and 5% respectively from FY17 onwards); and/ or
    3. CD executes a major earnings-accretive overseas M&A (we have yet to factor in potential overseas M&As in our model due to lack of visibility).



PLANTATIONS - Underweight


2H16 trend

  • Three out of four plantation companies under our coverage in Singapore posted weaker-than-expected 2Q earnings as the El Nino-induced drought in the previous year led to a sharp yoy decline in 2Q production. As a result, plantation companies under our coverage have reduced their output growth guidance by 5-15% pts across the board. 
  • Going forward, we expect lower CPO prices due to the seasonally-higher production season. The higher production could potentially make up 55-60% of the full-year output. More tax credit could also be recognised due to the tax revaluation exercise

When do we turn positive?

  • A sustained recovery in CPO prices which more than offsets cost increases;
  • Higher production from the plantation companies;
  • Stronger push to raise biodiesel consumption by the Indonesian government; and
  • Valuations price in the risk of weaker earnings for FY16.



CONSUMER - Neutral


2H16 trend

  • A buyer’s market: The slowdown in overall consumption has led to retailers commanding better bargaining power over suppliers. In 2Q, we saw gross margins improve across our coverage of retailers (Courts, DFI, and SSG) as suppliers offered higher rebates to spur demand. The weak end-demand has also resulted in some retailers being able to negotiate with landlords for lower rents. However, staff costs remain high and execution is key. Overly aggressive expansion in prior years still has DFI reeling. On balance, we see more bright spots among retailers than suppliers/producers.
  • Currencies: In addition to weak consumption demand, corporates face the additional whammy of weak regional currencies. The impact of weaker currencies is twofold: 
    1. corporates selling to ASEAN customers in S$/US$ had to lower prices to sufficiently discount for the lower purchasing power of its customers, and 
    2. corporates selling in local currency in ASEAN faced weaker earnings upon translation. 
  • The positive is that the negative yoy impact from currencies should be less of a factor in 2H16 given that currencies seeing their steepest depreciations in 2Q/3Q15 and have somewhat stabilised since.

When will switch our calls? 

  • Credit costs: End consumer demand needs to improve but same-store-sales- growth trends remain weak. We think topline trends will need to improve before we see a re-rating.
  • Valuations arguably reflect the bleak outlook as some companies (Super, DFI, Courts) trade below or near their historical -1s.d. levels. The reality is the sales environment is still weak, but the positive is cost pressures are now less demanding. We think a scenario of deteriorating margins will be a big negative

HEALTHCARE - Neutral


2H16 trend

  • Medical tourism: 2015 was an especially challenging year for medical tourism in Singapore, particularly given the reliance on Indonesia where a weak rupiah and economy did not help. However, we are starting to see some positive trends as Indonesian patients are returning after delaying elective procedures. Singapore hospitals are also seeing increased volumes from non-traditional markets of Indochina. That said, we do not expect a big revival, and the bright spots are selective in nature.
  • Cost pressures from expansion plans: The aggressive pipeline of new hospitals have already started to gnaw at margins. We expect this to continue into 2H with RFMD likely to feel a bigger pinch due to its smaller base relative to IHH’s much bigger base.

When will switch our calls? 

  • Stocks across the region are trading at rich valuations (+1 s.d.), having expanded on the back of 
    1. aggressive expansion plans, and 
    2. M&A (especially among the small/mid-cap healthcare players). 
    However, the majority of expansion plans will likely only result in earnings contribution in 2017 at the earliest, and we have yet to see earnings match up with valuations. We believe this remains the biggest risk and think valuations will de-rate upon continued earnings disappointment.



GAMING – Overweight


2H16 trend

  • Gaming: We expect GENS to see a better 2H, given: 
    1. the worst of the bad debt charges appears to be over, and expected to remain flat in the S$50m- 60m per quarter range; 
    2. recent cost efficiency initiatives could yield cost savings of S$30m per annum; 
    3. potential mean reversion of rolling win rate after an especially bad 2Q (1.7% vs. historical average of 2.8%); and 
    4. efforts to drive mass and premium mass visitation from Indonesia, Thailand and China could yield results in the quarters ahead.

When will we turn negative?

  • We would turn more cautious if: 
    1. recent efforts to drive mass and premium mass visitation at Resorts World Sentosa (RWS) do not translate into higher GGR; 
    2. Resorts World Jeju (RWJ) is not granted a casino license; and 
    3. excess cash is not deployed into new, attractive investment opportunities or returned to shareholders.




LIM Siew Khee CIMB Securities | Singapore Research Team CIMB Securities | http://research.itradecimb.com/ 2016-08-16
CIMB Securities SGX Stock Analyst Report


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