Monthly Strategy (Cont') - DBS Research 2016-09-26: Yield names still in favour

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Monthly Strategy - Move aside Yellen, it’s the Donald-Hillary show next

• Yield names still in favour - ComfortDelGro, Sheng Siong, ST Engineering, Keppel REIT, AREIT and Frasers Logistics & Industrial Trust.
• Expect telco stocks M1 and Starhub to underperform.
• Crucial week for O&G stocks – Failure among oil producers to agree on production cut could spell weakness as oil surplus supply swells.

Yield names still in favour 

• Yield stocks and S-REITs sold off in the two weeks leading to the September FOMC meeting on profit taking and rate hike jitters, before recovering in the past two sessions after the FED left interest rates unchanged. For example, the FTSE ST REITs Index retreated as much as 3.7% from its September high of 777 to a low of 748 before ending at 759.
• We maintain our preference for yield stocks despite the September pullback for the following reasons: 
  • 1. December rate hike well anticipated – 
    • The probability for a December rate hike has risen to 58%.
    • Unless you have lost all communication with planet earth in recent months, it is probably one of the most anticipated events. With rates put on hold at the September meeting, the FED will raise rates at most once this year. This is benign news for yield and S-REITs.
  • 2. “Lower for longer” to stay – 
    • The median forecast of the FOMC “dot plot” shows that officials now forecast just two rate hikes next year compared to a forecast of three hikes back in June. The number of rate hikes this year is also reduced to one (previously two). That is a downward shift of 50bps in total or two fewer rate hikes forecast by end-2017.
  • 3. S-REITs' yield spreads of 4.5% remains attractive. 
    • Even after accounting for a further 50-bp hike in the benchmark MAS 10-year bond yields to 2.3% vs the current 1.8%, spreads remain wide at 4.0% (historical average 3.5%). We believe that investors should look within the office and hotel sectors where the outlook should stabilise.
• Our picks are ComfortDelgro, Sheng Siong, ST Engineering, Keppel REIT, AREIT and Frasers Logistics & Industrial Trust. 

Too early to bargain hunt telco stocks 

• Expect telco stocks to underperform. Our telco analyst says it is too early to bargain hunt shares of Starhub and M1 despite their recent price correction. This is because a new mobile player is almost certain with MyRepublic and TPG as the front runners. We project the new entrant to capture ~7% revenue share by 2022, translating to a decent 18%/11% Return on Investment (ROI) based on an investment of S$300m/SS$500m.
• Consequently, StarHub’s and M1’s mobile revenue is projected to drop 12% and 20% in 2022 versus 2015, leading to 12% and 25% earnings declines respectively.
• We have cut our FY18F/19F earnings for StarHub and M1 by 6%/16% and 3%/8%, leading to our revised TP of S$3.00 and S$2.15 respectively. 

Crucial week for O&G stocks as oil producers meet at Algiers 

• Keep a close watch on O&G stocks this week. Major oil producers meet for an informal meeting on September 26-28 at Algiers. Supply surplus is set to rise. If the Algiers meeting fails to bring about an agreement to cut production, oil price could fall, bringing down O&G stocks. Our O&G research team thinks any firm action at this week’s informal meeting is unlikely given the three OPEC members Libya, Nigeria and Iran are still planning to ramp up output.
• More than 800k bpd of additional crude is pouring into the global market this month from last as Russia pumps at an all-time high while Libya and Nigeria restore disrupted supplies, according to statements from their ministry officials.
• Libya’s output climbed to 390k bpd after a halt in fighting between rival armed factions, which is 50% higher than the monthly average for August estimated by Bloomberg. Nigeria has revived output to 1.75m bpd following a cease-fire deal with militants, this compares with 1.44m last month that is near the lowest in more than two decades, according to data compiled by Bloomberg. Meanwhile, Russia pushed output to a new record 11.09m bpd in September. All these imply a tripling of the supply surplus, estimated currently at about 400k bpd by the International Energy Agency.

Janice CHUA DBS Vickers | YEO Kee Yan CMT DBS Vickers | http://www.dbsvickers.com/ 2016-09-26