Singapore Market Monitor - Maybank Kim Eng 2017-09-26: Drafting On Cyclical Tailwinds

Singapore Market Monitor - Maybank Kim Eng 2017-09-26: Drafting On Cyclical Tailwinds Singapore Stock Market Outlook Straits Times Index Forecast Stock Market Cyclical Sector Singapore Stock Top Picks

Singapore Market Monitor - Drafting On Cyclical Tailwinds


What a difference three quarters make 

  • The strength in macro data continues to surprise on the upside and there are indications that the tech-related manufacturing recovery is spreading to other sectors. 
  • Quarter-end Jun earnings were better than we expected both on quantum and quality factors. Our 12-month market outlook is incrementally more positive and we believe index levels and valuations could hold further headroom. 
  • We Overweight cyclical sectors, banks, property and gaming, and highlight our top sector picks.


Macro powering ahead 

  • Buoyed by the global tech sector growth, 2H17 took off on the same strong note that 1H17 ended on with industrial production surging 49% in Jul with semiconductors leading the way. 
  • Electronics and semiconductor production reached record highs in Jul, while the Singapore PMI hit a six-year high in Aug
  • MKE’s Singapore economist notes that the export momentum leaves scope for growth to surprise beyond the government’s 2-3% GDP growth forecast for 2017.


Earnings coat-tailing the macro upswing 

  • The core profit growth turnaround witnessed in the quarter-end Mar (after four quarters of decline) was sustained in the quarter-end Jun.
  • Core net profits for MKE’s coverage universe grew a solid 11% YoY on average, accelerating from the 4% level a quarter ago; moreover the quality of growth improved in our view, coming off the back of 3% revenue and 11% EBITDA growth YoY. FSSTI component profits grew 8% YoY (18% for FSSTI ex-Jardine group companies). 
  • FSSTI consensus core profit growth estimates are at 12.4% and 8.3% for 2017 and 2018 respectively, c40-110bps higher than a quarter ago. 
  • Our 12-month forward Straits Times Index target derived from an equal weight outcome of three approaches is 3,134 (from 3,180), which may hold upside as the makings of an earnings upgrade cycle is underway.


Three keys risks to our view 

  • The key downside risks to our moderately positive market outlook are external growth and/or trade headwinds derailing industrial production growth, potential portfolio funds outflows from ASEAN to North Asia and new property market tightening measures. 
  • On the flipside, upside risks are a better neighbourhood in ASEAN where growth has been a mixed bag and consumption relatively weak, and a faster-than-expected recovery in the O&M sector.




Macro has improved YTD 2017 

  • 1H17 saw two sequential upgrades to MKE’s GDP growth forecast for 2017 due to stronger-than-expected industrial production (IP), driven by the electronics sector.
  • Jul and Aug data points indicate IP (driven by semiconductors) has kicked off 2H17 with a bang and could potentially provide some upside to our economic growth outlook.
  • Other segments of IP are gradually turning around too.
  • We expect the IP strength to translate to a broader recovery in services as well.
  • Tourism and export data points have been incrementally positive.
  • Unemployment, while still at elevated levels relative to the five-year history, has been stable in the past few months, likely from the worst for the O&M sector being behind.
  • Liquidity conditions remain easy and with growth coming at the higher end of MAS’ expected range, we anticipate a slight tightening to monetary policy during 2H17 from the current Neutral stance.




Earnings turnaround of prior quarter sustained 


Core profit (MKE coverage) grew for the second consecutive quarter 

  • Quarter-end Jun’17 core profits up 11% YoY on the back of revenue and EBITDA growth, which accelerated sequentially.
  • EBITDA margin (ex-financials and property) stable QoQ and expanded c140bps YoY, driven by consumer & agri.
  • Profit growth was strongest for consumer & agri, followed by property, then healthcare.
  • Industrials still down YoY from across-the-board weakness in O&M and other factors – only SATS and SIA posted growth.
  • Around 50% of results were in-line with MKE expectations, and the ratio of Beats vs. Misses was somewhat even for both MKE and the Street.

Core profit for FSSTI basket (ex-Jardines) up strongly 


Cyclical profit recovery forecast for 2017 & 2018 

  • FSSTI consensus core profit growth estimate at 12.4% and 8.3% for 2017 and 2018 (revised up from 12% and 7.6% a quarter ago).
  • FSSTI 12M forward EPS expectations appear relatively conservative compared to the 2013-2016 period MKE coverage universe core profit growth forecast at c13% and 9% for 2017 and 2018, slightly higher than consensus, likely due to a higher proportion of non-index and SMID stocks covered.


Index valuations may hold some headroom 


Trailing valuations at a discount to long-term mean 

  • FSSTI 12M trailing P/E of 11.1x at c15% and c9% below respective 5- and 10-year mean.
  • FSSTI 12M trailing P/BV of 1.2x at c9% and c17% below respective 5- and 10-year mean (that said, note index composition has changed over this period with a number of Hong Kong-listed companies with lower P/BV valuations) ROE expected to grow 40-50bps to c10% levels for 2017 and 2018.

Cheaper than rest of ASEAN, albeit with lower growth 

  • While FSSTI YTD performance in local currency terms is in the middle of the pack in ASEAN, it has been the best performing in USD terms, up c19%.
  • FSSTI has the lowest prospective P/E for 2017 and 2018 amongst the ASEAN markets, although growth is lower too – that said we believe earnings are witnessing an upgrade cycle.
  • FSSTI has the highest dividend yield in ASEAN (in a relatively stable and potentially appreciating currency).

Base-case 12M FSSTI target of 3,134 

  • Our base-case FSSTI target is 3,134, which is a small 1.4% cut from prior 3,1,80 estimate.
  • Our base-case is derived from an equal weighted outcome of three approaches. 
    • Approach #1 assumes consensus earnings growth at 5Y trailing PE mean on 2018 EPS forecast. 
    • Approach #2 assumes MKE bottom-up TP of covered stocks and consensus TP for non-covered stocks. 
    • Approach #3 assumes the yield gap to be maintained at between forward index earnings and 12M bank deposit rates under a 40bps rate increase scenario by end-2018.
  • Our bull and bear-case FSSTI targets are based on a 1sd P/E multiple spread around our base-case target.







Neel Sinha Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-09-26



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