Monthly Strategy - DBS Research 2016-11-01: Pare down SREITs ahead of December FED meeting

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Monthly Strategy - Pare down SREITs ahead of December FED meeting

• SREITs prone to profit taking ahead of Dec’s FED meeting.
• Indofood Agri, Bumitama Agri and Japfa are 3 stocks with upside potential from earnings recovery/growth.

Pare down SREITs ahead of December FED meeting 

• Investors had sought shelter in SREITs for their yields during the course of the year amid a lack of growth themes given the uncertain economic outlook. Rightfully, we had selectively favoured SREITs that offered a combination of market liquidity, decent yields, clear growth drivers and upside potential to earnings from deploying their strong balance sheets.
• In the short-term however, SREITs will likely be lack lustre and may even underperform because 
  1. Likelihood of a December FED rate hike –While this is well anticipated (consensus sees 78% chance of a hike) , SREITs performance will be ‘restricted’ heading to the mid-December meeting 
  2. Risks year-end profit taking given strong YTD performance – Our SREITs’ analyst notes that results so far appear to be weaker across all sub-segments. SREITs face the risk of potential profit taking in the short-term given the strong YTD outperformance, and as we head to the December FED meeting.
• To identify SREITs that may be prone to profit taking, we sieve through those under our coverage that 
  1. have outperformed STI by at least 10% YTD and 
  2. with less than 7% upside to their fundamental TPs. 
• The names that emerged from the filter are CapitaLand Commercial Trust, Fraser Commercial Trust, Mapletree Commercial Trust, Mapletree Greater China Commercial Trust, Suntec REIT, Ascendas India Trust and Parkway Life.

3 stocks with recovery/growth potential 

• While the hunt for growth and recovery names had been mostly elusive given the ongoing corporate ‘earnings recession’ trend and uncertain economic outlook, there are bright spots to be found. CPO stocks Indofood Agri and Bumitama Agri as well as Japfa, an integrated dairy, animal protein and consumer food producer are 3 good examples.
• Our plantation analyst believes that lower forecast CPO prices (US$/MT) next year may well represent the bottom of the current cycle as inventories will begin to tighten by end of next year. Heightened probability of a La Nina event could provide upside risk to palm oil prices in the event that South American soybean harvests are adversely impacted in 1QCY17.
• Indofood Agri’s 3Q16 core net profit of Rp130bn was ahead of our expectations of between Rp112bn-120bn. Earnings were driven by higher crude palm oil (CPO) and palm kernel (PK) volumes and ASP as well as lumpy sugar/JV contribution. EPS growth forecast for Indofood Agri is 39% for FY17F and 56% for FY18F.
• We expect Bumitama Agri to announce 3Q16 earnings of between Rp203bn-216bn versus Rp106bn in 2Q16. EPS growth forecast for Bumitama Agri is 15% for FY17F and 27% for FY18F.
• Japfa’s 3Q16 core earnings of US$42m were well ahead of our expectations. The quarterly results were boosted by contribution from Japfa Comfeed on gains from sale of Australian cattle as well as a firm DOC/broiler ASP and stronger Rupiah. As a result, our analyst raised FY16F/17F earnings by 40%/32% and lifted TP to S$1.18

Janice CHUA DBS Vickers | Yeo Kee Yan CMT DBS Vickers | http://www.dbsvickers.com/ 2016-11-01

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