4Q16 Report Card - UOB Kay Hian 2017-03-02: A Pick-up In Beats

4Q16 Report Card - A Pick-up In Beats

4Q16 results saw a pick-up in results that exceeded expectations. However, market 2017 earnings were reduced again, with cuts in banks, shipyards and telcos.
We remain selective on the FSSTI, buying laggards and solid blue chips together with some quality and inexpensive mid caps.

4Q16 results saw a higher number of results that exceeded expectations; 32% in 4Q16 compared with 11% in 3Q16.
On the other hand, 26% of the results disappointed in 4Q16, which is little changed compared with 25% in 3Q16.

Still in cutting mode. As expected, market earnings continued to trend down.
Our latest 2017 market EPS growth post 4Q16 is 5.6% yoy, which is lower than the 7.8% yoy before the 4Q16 reporting season.
Sectors that had earnings downgrade include banks, shipyards and telcos.

Both DBS’ and OCBC’s 4Q16 results were slightly below due to higher specific provisions for oil & gas.
DBS’ loans grew 3.9% qoq, underpinned by regional corporate loans and gains in market share for Singapore housing loans. NIM contracted 6bp qoq to 1.71%. Deposits expanded S$23b or 7.1% qoq, driven mainly by US dollar-denominated fixed deposits.
On OCBC, we expect its credit costs to taper off in 2018 and normalise in 2019. OCBC’s loan growth rebounded by 5.5% qoq in 4Q16 after suffering weak demand and a contraction in trade loans in 1H16. Organic loan growth was at 2% qoq in constant currency terms - excluding impact from the acquisition of Barclays’ wealth management business. NIM edged up 1bp qoq to 1.63%.

StarHub’s 4Q16 results were below expectations due to a combination of higher handset subsidies, less grants from NGNBN and a one-off provision for restructuring. As a result, the group reduced its dividend guidance from 5 S cents to 4 S cents/quarter for 2017. We maintain BUY but with a lower DCF-based target of S$3.22 (previously S$3.55).
Singtel continued to deliver, with 3QFY17 results in line with expectations. The Singapore consumer business saw growth in broadband and pay-TV, as well as cost containment. For its regional mobile associates, Telkomsel’s mobile subscribers expanded 14% yoy while data revenue grew 28% yoy. The IPO of NetLink Trust could provide special dividends of up to 17.5 S cents/share and has to be completed by Apr 18.

Both City Dev and CapitaLand exceeded our estimates.
City Dev’s results came in ahead of expectations (7%) due to higher-than-expected earnings contribution from development property in China. However, we downgraded City Dev to HOLD as a result of its strong share price performance.
CapitaLand’s FY16 results exceeded our estimates by 15% on higher contributions from China residential projects and shopping malls. Stripping out exceptionals, 4Q16 operating PATMI grew 16.0% yoy due to a stronger operating performance.
As expected, most S-REITs’ results were in line, with the exception of CDREIT, whose results were above expectations due to better-than-expected performances in New Zealand and Japan. However, domestic RevPAR saw continued weakness on waning corporate demand. HOLD but with a higher target price of S$1.47 (previously S$1.41).
Our key picks in S-REITs are FLT, CCT and A-REIT.

Keppel Corp exceeded our estimates, with a surprise mainly from an expansion in O&M operating margin and higher-than-expected property earnings. This is despite a S$227m impairment on its O&M unit.
As for SCI, core earnings were above our expectations. Utilities’ earnings remained robust, helped by one-offs from China and the UK. India’s loss was largely due to start-up losses from its second power plant SGPL, and was a disappointment. Marine earnings swung back into the black for the quarter and SMM’s results were in line.

Venture’s 4Q16 results were above expectations. Revenue grew 23.1% yoy while gross margin improved 1.7ppt yoy to 23.1%. The slight disappointment was that its final DPS was unchanged at 50 S cents/share. We remain BUYers but have raised our PE-based TP to S$12.40 (from S$11.00 previously).
Hock Lian Seng’s FY16 core earnings were in line, but what surprised us pleasantly was its special dividend of 10.0 S cents/share. Together with a final DPS, the total DPS is 12.5 S cents, which imply a dividend yield of more than 20%. Reiterate BUY and target price of S$0.69, based on 7.6x ex-net cash 2017F PE (including special dividends) with a 2016 dividend yield of over 20%.

We remain selective on FSSTI as earnings continued to be downgraded.
However, downside could be limited as valuations are undemanding. We continue to favour laggard solid stocks with visible earnings and reasonable yield.
Our key picks are OCBC, SingTel, Venture, CapitaLand, FLT, A-REIT, SCI and CCT.
SELLs include SIA Engineering and Wilmar. Investors should also switch out of SATS into STE after the outperformance of SATS.
Investors with appetite for mid caps could consider CAO, Hock Lian Seng and ISOTeam.

Andrew Chow CFA UOB Kay Hian | Singapore Research UOB Kay Hian | http://research.uobkayhian.com/ 2017-03-02