Singapore Market Strategy - DBS Research 2017-07-03: (3) Turning Defensive

Singapore Market Strategy - DBS Vickers 2017-07-03: Turning Defensive Singapore Market Strategy Investment Theme 2H17 Sector Earnings Forecast

Singapore Market Strategy - Turning Defensive



Continue From... Singapore Market Strategy - DBS Research 2017-07-03: (2) 3Q17 Market Outlook


Is earnings growth sustainable? 

  • With the STI hovering in a tight range in 2Q, the market has been seeking fresh catalysts for rerating.
  • We were hopeful of further upward earnings momentum, but disappointment in earnings came early, after the 1Q17 results. We examine the upside and downside earnings potential of each major sector, appended below. 
  • Only our Property and REITS analysts are expecting more upside in earnings, and asset revaluation vs downside risks for all other sectors. This could mean that our projected earnings growth of STI stocks at 9.1% may not be achieved this year, while growth for 2018F is a slower 6.4%. This is in line with our economist’s view that come 4Q17, we may see a sharper slowdown.


Earnings Upside vs Downside 


REITs – upside 

  1. In general, we see upside risks to earnings for SREITs, as expectations are already depressed as concerns for the cyclical sectors (industrial, office and hotel) are known and discussed over the past two years.
  2. For the hospitality REITs and industrial REITs sectors, upside to earnings will arise from potential acquisitions. For the office REITs sector, while we see upside risks from the potential earlier than expected recovery in office rents, this is balanced against loss of income from asset sales/redevelopments.
  3. Given the weak retail environment there is potential for negative rental reversions that may present downside risks to earnings of retail SREITs.

Developers – upside 

  1. Strong sales volume driven by renewed sentiment seen in 1H17 (hence, liquidation of unsold / new inventories) could drive profits in the medium-term as sales are converted into earnings.
  2. The ability to replenish developers’ landbank via increased GLS sites, enbloc or M&As could present opportunities for developers to continue to ride and benefit from a potential sustainable positive sentiment and sales volumes.
  3. While the government remains cautious to prevent potential ‘overheating’ in the market, we believe the government will continue to monitor and manage the property market, implying a bottoming with potential recovery on sustainable recovery in volumes and prices 

Rigbuilders - Downside 

  1. Weakened oil price sentiment in 2Q, hit by slow rebalancing, could defer sector recovery 
  2. Slow order flow and delivery push backs could slow revenue recognition further 
  3. Benign jackup recovery does not help with Sembcorp Marine and Keppel Corp’s plan to sell its completed rigs (not delivered due to clients’ inability to pay), deferring a key upside catalyst to earnings 

Oil Services – Earnings downside 

  1. YTD-2017, oil price recovery and trend of oil majors increasing their capex budgets has lagged our expectations; thus utilisation rates and day rates for offshore support vessels (OSVs) are stuck near the bottom and chances of earnings recovery for OSV operators in the next few quarters look dim 
  2. As the tepid industry conditions linger on, chances of asset impairments and balance sheet stress will increase further 
  3. Order flows for OSV shipyards have been virtually non-existent over the last two years; deferrals and cancellations of existing orderbook cannot be ruled out 

Consumer – marginal earnings downside 

  1. While consumer sentiment across the region has improved, the pace of recovery has not fully translated into earnings.
  2. Prices of soft commodities has moderated but benefits will be delayed and seen possibly in FY18, while 2H17 will still be impacted by higher costs 

Telecom Services – Earnings downside 

  1. Mobile segment is facing competition ahead of TPG’s entry in the mobile space.
  2. Fixed broadband under pressure for StarHub as more subscribers migrate to lower-margin fibre Broadband in the absence of adoption grants.
  3. Pay TV subscriber base of StarHub is also declining as people switch to cheaper alternatives 

Transportation Services – Earnings downside for SIA, upside for HPH Trust 

  1. Yields continue to be under pressure from stiff competition in Asia, especially from Middle East carriers, which could further impact the profitability of Singapore Airlines 
  2. Higher oil prices would also increase costs for airlines 
  3. Hutchison Port Trust (HPH Trust)’s throughput growth for first 4 months is tracking above expectations especially in Hong Kong, and there could be earnings upside if this sustains 

Singapore banks – Downside 

  1. NIM disappointment from slower than expected pass through of SIBOR/SOR following Fed rate hikes because of SGD’s relative strength to USD (high probability), but this could be partially offset by stronger than expected loan growth (banks are guiding for mid-single digits; based on trends so far and if it sustains, banks could deliver up to 7-8% loan growth) 
  2. Higher than expected provisions (low probability) 
  3. Wealth management income trends does not hold from 1Q17 levels (high probability) 


As growth moderates, the market may face headwinds moving into 2H. 

  • We expect higher volatility, as investors keep a watchful eye on Fed’s next move and currency swings.
  • Expecting more downside risks in earnings, Singapore equities lack catalysts for further re-rating. Coupled with potentially more risks in the horizon, we turn more defensive for 3Q.
  • 1H saw the outperformance of cyclicals, led by banks, property, and technology. We would advocate rotating into sectors which are less owned, with lesser downside risks to earnings, and preferably supported by yield. 
  • We put forward four investment themes for outperformance: 
    1. Defensive + Yield 
    2. Alpha picks, 
    3. Rebound in oil prices, and 
    4. M&A plays.








Janice Chua DBS Vickers | Yeo Kee Yan CMT DBS Vickers | Lee Keng LING DBS Vickers | http://www.dbsvickers.com/ 2017-07-03



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