Singapore Strategy 2016 - DBS Research 2015-12-17: Ride the hike

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CAPITALAND LIMITED C31.SI  CITY DEVELOPMENTS LIMITED C09.SI  EZION HOLDINGS LIMITED 5ME.SI  VENTURE CORPORATION LIMITED V03.SI  SHENG SIONG GROUP LTD OV8.SI 

Singapore Strategy - Ride the hike 

• Lift off in interest rates, currency volatility, oil prices, changes in domestic policies and restructuring initiatives will be key drivers for 2016 
• Overweight Transport, a beneficiary of low oil prices and Property developers, which are trading at distressed valuations with upside catalyst from potential policy relaxation 
• We pick smart nation proxies, beneficiaries of domestic policy changes and companies in value unlocking mode, generating upside in dividend payout 
• Stock picks: Capitaland, City Devt, Ezion, Frasers Centrepoint Ltd, Japfa, Mapletree Greater China, ST Engineering, Sheng Siong, Thai Bev and Venture Corp 

5 key drivers in 2016. 

• The pace of rate hikes vs economic recovery will drive volatility. Beyond the initial knee jerk reaction, history has shown that the first 1-3 months could be negative for equities once the Fed starts its rate hike cycle, but would improve as the economic recovery gathers momentum. 
• Currency took a hit in 2015, and will be less of a worry as 2016 progresses if Asian growth recovers. 
• The oil price, at a seven year low, is close to the bottom, and offers rebound opportunities although recovery is still some way off. 
• Potential changes in domestic policies offer upside catalysts in Land Transport, Property while a fourth player in the Telecoms sector, if successful, will impact incumbents. 
• Restructuring and M&A opportunities will gather momentum; the market is trading at only 1.2x Price-to-Book. 

Inexpensive valuation, pricing in nascent growth. 

• The shadow of higher interest rates, more earnings disappointments during the upcoming 4QFY15 results season and uncertain growth outlook next year could be a near-term drag for equities. 
• The consolation is that after the dismal YTD decline of more than 17%, STI’s valuation is inexpensive. At 2800, STI trades at 11.46x (-1.5SD) FY16F PE vs EPS growth of 5.9%. 
• We expect a trading range of 2650-3100 over the next 6 months. Look for opportunity to buy in 1Q16 on further weakness. 
• We see weakness in 1QCY16, throwing up opportunities to accumulate for a tradable rally because: 
  1.  market valuation is inexpensive, 
  2.  history shows the inflexion point for the negative stock market reaction after the initial US rate hike is within a 3- month period, and 
  3.  the period from mid-March till end-April is traditionally positive for equities as investors position ahead of stocks going ex-dividend. 

Smart nation proxies and companies in value unlocking mode: 

• Despite low oil prices, Ezion is a valuation trade to ride on any oil price rebound, which we believe is near its bottom. 
• Prefer Property developers (Capitaland, Frasers Centerpoint Ltd, City Devt) to REITS (selective on companies with resilient earnings and growth – Mapletree Greater China (MAGIC)). 
• We pick smart nation proxies (ST Engineering) and companies in value unlocking mode generating upside in dividend payout. Venture is backed by an attractive dividend yield and strengthening US$; Thai Bev and Sheng Siong offer steadily growing cash flows. Japfa’s valuation is bombed out while earnings are poised for recovery.

Janice CHUA DBS Vickers | YEO Kee Yan DBS Vickers | LING Lee Keng DBS Vickers | http://www.dbsvickers.com/ 2015-12-17

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