Positioning For The Rest Of 2H15
- Ahead of a potential general election in 2H15, rising rates and external uncertainties, we highlight our key stock picks to navigate the heightened volatility.
- We favour DBS, SingTel, SATS, SCI, CCT, Silverlake and First Resources.
- Our SELLs include StarHub, SIAEC and IHH.
WHAT’S NEW
Strategy update.
- We reassess our 2H15 Singapore strategy in view of the recent market volatility as well as news that the electoral boundaries panel was formed in May 15, which could pave the way for an early general election (GE) in 2H15.
- During the last two GEs, the electoral boundaries committee took 4 months to prepare the report and in GE2011’s case, Parliament was dissolved circa 2 months after the release of the report.
ACTION
Potential general election in 2H15?
- The recent revelation that the electoral boundaries panel was formed in May 15 could pave the way for an early general election in 2H15. During the last two GEs, the electoral boundaries committee took four months to prepare the report and in GE2011’s case, Parliament was dissolved circa two months after the release of the report by the panel.
Implications from GE.
- The potential early GE is in line with our expectations as outlined in our strategy report in early-June as we expect sentiment to be buoyant after the SG50 celebrations. Whilst we do not believe the GE will have a significant direct impact on the markets, we see potential implications on several sectors including property developers, land transport and telecommunications sector.
Watch out for selective easing in property cooling measures in 1H16.
- We see the potential for selective easing of property cooling measures in 1H16 as physical property prices have retreated by 6-9%. However, we do not expect prudent measures such as total debt servicing ratio (TDSR) to be changed.
- In our view, deeply valued developers such as CapitaLand and Wing Tai look compelling despite the lack of any near-term catalysts.
- We have a BUY rating with a target price of S$4.08 for CapitaLand and S$2.50 for Wing Tai.
Telecommunications – all eyes on potential fourth mobile operator.
- The Infocomm Development Authority’s (IDA) pro-consumer stance was a negative surprise. The amount of spectrum set aside for the potential fourth mobile player is more than we had expected and the reserve price S$40m is also lower than expected.
- This could pave the way for the entry of a fourth mobile operator and we would avoid StarHub and MI, both which are on our SELL list.
- Within the telecommunications sector, we like Singtel due to its diversification and decent dividend yield.
Land transport – potential negative surprises on repair and maintenance.
- The massive service disruption on both the North-South and East-West MRT lines for about three hours on 7 July was possibly the worst MRT breakdown Singapore has experienced.
- We expect challenges ahead for SMRT as upward pressure on operating costs intensify, given that staff costs, repair and maintenance and other operating expenses are likely to increase on its ageing train network, tightened regulatory standards and heightened operational demands.
- We like ComfortDelGro for sector exposure given its diversified earnings, strong cash flow and solid management track record.
Beware of reversal of yield compression as rates rise.
- Stocks which are trading significantly lower than historical spread over risk-free rates include StarHub and ComfortDelGro. On this basis, these two stocks could have the most downside risk on reversion to mean spread but we note that CD could raise its payout significantly (currently 54%) and the market is also pricing in the possibility of a special dividend in FY16F.
- Conversely, stocks that are trading above mean spread over risk-free would benefit on mean reversion and these include Singtel, SATS and SPH.
Yield an important part of total market return.
- Despite concerns over potential reversal of yield compression, we think selected yield stocks will remain in favour. This is because our study shows high dividend yield stocks accounted for circa 18% of total market return over the last decade in Singapore.
- Hence, even with an expected rise in interest rates, investors should maintain selected high dividend stocks in their portfolio for steady returns. Also, yield stocks with solid growth prospects will also be better positioned to mitigate rising rates.
- Risk adverse investors could opt for dividend stocks that are less correlated with interest rates such as Singtel and SATS, which are our top dividend yield picks.
- Another low beta but safe alternative is SPH, but our entry level is S$4.00.
FSSTI’s volatility has jumped.
- The volatility indicator is a good measure of risk or fear in the markets and typically coincides with important lows in equity markets. The FSSTI’s volatility index has been trending up and the 10-day volatility indicator for the FSSTI has started rising above 1SD. This could be due to a combination of external volatility (primarily from China and Greece) as well as the limited earnings visibility, particularly after a lacklustre 1Q15 reporting season.
- Stocks that have retreated significantly on a YTD basis include CCT, Suntec and Genting SP.
Stay selective to outperform.
- We remain selective given external uncertainties and limited earnings visibility in 2015.
- Using an average of long-term P/B and PE valuation, we have a year-end target of 3,660 (after imputing a 10% discount).
- Should the market impose a higher discount of 15-20%, our year end FSSTI would decline to 3,250-3,460.
- Our key picks include DBS, CapitaLand, CCT, Singtel, SembCorp Industries, Ezion, First Resources, SATS, Wing Tai and Silverlake.
- Key SELLs include IHH, SIA Engineering and StarHub.
(Andrew Chow, CFA)
Source: http://research.uobkayhian.com/
