Singapore Strategy - UOB Kay Hian 2015-11-20: 3Q15 Report Card ~ Lacking Beats

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DBS GROUP HOLDINGS LTD D05.SI  CITY DEVELOPMENTS LIMITED C09.SI  CAPITALAND COMMERCIAL TRUST C61U.SI  CAPITALAND LIMITED C31.SI 

STRATEGY ‒ SINGAPORE 3Q15 Report Card – Lacking Beats 

• The 3Q15 reporting season ended with only 13% of the results of stocks under our coverage exceeding expectations (15% in 2Q15) and others mainly in line. 
• Consensus and our estimates continue to suffer downward revisions. 
• Stay selective on a mixed macro outlook and earnings downside. 

WHAT’S NEW 

• Lack of positive surprises. 

• 3Q15 results ended on a lacklustre note. Only 13% of the results exceeded our expectations (15% in 2Q15). 
• On a more positive note, 30% of the results disappointed in 3Q15, better than the 39% registered in 2Q15 as more results were in line during 3Q15. 

ACTION 

• Consensus and our estimates continue to trend down. 

• We note that consensus estimates were reduced after 3Q15 as 2016F EPS growth by consensus is estimated at 5.5% compared to 7.3% before the results. 
• Similarly, we have reduced our 2016F EPS growth to 8.3% from 9.3%. 
• Sectors that saw 2016 EPS growth reductions include banks, aviation, oil services and property whereas upgrades were seen in plantation and SREITs. 

• Mild change in 2016 top-line growth and margins are stabilising. 

• We have reduced our 2015 top-line forecasts slightly but raise our 2016 turnover growth assumption to 6.1% (from 5.8% previously). A slight positive is that EBIT margins appear to be stabilising at 7.5-7.7% for 2015-17, which remains relatively unchanged after the 3Q15 results. 

• Banks – mixed showing. 

• Compared with market expectations, UOB (non-rated) exceeded expectations and DBS met expectations for their 3Q15 results. 
• OCBC’s results were slightly below expectations and it disappointed in asset quality, although the new NPLs from rescheduling of loans extended to Oil & Gas support services companies were not overdue. 
• DBS’ 3Q15 net interest income grew 13.2% yoy as it benefitted from a 3bp qoq expansion in NIM due to an improvement in cost of deposits. DBS’ loan growth was also stronger at 9% yoy, compared with 3.8% for OCBC and 3.6% for UOB. 
• Post the results, we have trimmed our FY16 forecasts by 3-6% (for DBS and OCBC) to assume lower loans growth and a rise in absolute NPL. 

• Telcos – ringing up the profits. 

• The sector delivered in-line to slightly above results. While SingTel’s and M1’s results were within our expectations, StarHub exceeded our expectations slightly. 
• StarHub’s revenue from post-paid mobile grew 3.5% yoy, which helped mitigate lower pre-paid mobile revenue. We maintain HOLD on StarHub and prefer SingTel and M1 for sector exposure. 
• A key focus remains the potential for a new fourth operator but we think the risk has abated as key contenders may have difficulties in raising funds. 

• Offshore & Marine – more earnings cut ahead. 

• With the exception of Triyards, Ezion and Keppel Corp (all in line), most of the other results were below expectations. 
• A notable disappointment was Sembcorp Marine (SMM) which saw 3Q15 net profit collapse 76% yoy. This was due to a reversal of profits previously recognised on five vessels due to non-payment by customers. The situation is likely to get worse with the latest news of the termination of contract by Marco Polo Drilling. 
• We slash our FY15-17 net profit forecasts by 21-35% but see more downside risk. 

• Property developers was mixed whereas S-REITs are in line. 

• CapitaLand came in within expectations but City Dev disappointed as key segments, property development and hospitality, suffered a softening in Singapore and the rest of Asia. Out of the 14 SREITs we cover, only two were below expectations and these were from the hospitality segment (ART and CDLH-T). 
• A key contributing factor was weak room rates (for both) and vacancy rates (for ART). For the sector strategy, we continue to prefer diversified, deeply-valued developers over REITs. Our top picks in the S-REITs space include Ascott REIT, CapitaLand Commercial Trust and Mapletree Logistics Trust as these stocks offer the best risk adjusted return potential within our coverage. 
• Regional yield spreads also remain the most attractive for Singapore REITs with up-cycle spreads indicating over 25% upside potential. 

• Other notable results; SATS shines whereas GENSP dim. 

• SATS impressed us with its 2QFY16 earnings which beat our expectations, amid better-than-expected cost control. Much of these cost savings will continue into the next few quarters and will be supplemented with revenue growth from TFK. 
• As a result, we raised FY16-17 forecasts by 8-10% and upgraded SATS to BUY. 
• Conversely, GENSP disappointed as its adjusted EBITDA came in 15% below our estimates due to an impairment on receivables. 
• Rolling chip volume for the VIP segment fell about 50% yoy and 20% qoq and the only bright spark was a normalised theoretical win rate, We have a lowered target price of S$0.97 for GENSP but maintain BUY. 

• Inexpensive valuations but earnings still trending down. 

• Following our earnings cut, the FSSTI’s 2016F PE of 12.7x is at a 18% discount to its 20-year mean of 15.5x. With macro outlook remaining uncertain and for potential pull-backs ahead of rising interest rates, we would buy on weakness and stay defensive. 
• On our BUY list are DBS, City Development, CapitaLand, CCT, ComfortDelGro, SingTel, SingPost, First Resources and SCI. 
• We reiterate SELL s on SIA Engineering, Nam Cheong and Sembcorp Marine.

Key Stocks Recommendation

Andrew Chow CFA UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2015-11-20

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