Singapore Strategy - CIMB Research 2016-03-02: 4Q catchphrase ~ impairment

Singapore Strategy - CIMB Research 2016-03-02: 4Q catchphrase: impairment OVERSEA-CHINESE BANKING CORP O39.SI  SINGAPORE AIRLINES LTD C6L.SI  THAI BEVERAGE PUBLIC CO LTD Y92.SI 

Singapore Strategy - 4Q catchphrase: impairment 

  • Reflecting subdued expectations, 4Q15 beat-to-miss ratio was 1.7x i.e. positive. But our FSSTI EPS was cut 3.2%, as the quantum of negative surprises was big. 
  • 4Q catchphrase is “impairment”, appearing repeatedly in industrials and property. 
  • Environment is still tough but the recent selldown has thrown up bargains. We like banks, property and REITs. Super and Sarine are non-Index names we highlight. 

Banks and telco 

  • Asset quality concerns dominated the 4Q discussions for banks, as oil & gas names faced greater cash flow strain. DBS allayed concerns stating its oil & gas loans were extended at 50% loan-to-value ratio. UOB raised its specific allowance guidance to 35-40bp. We are Overweight on banks as current valuations of below 1x FY16 P/BV reflect overblown asset quality concerns. It would take 200bp provisioning to wipe out earnings in a year and impair book values. We like OCBC the most. 
  •  saw associates’ contribution strengthen in 4Q, while Starhub was hit by higher costs. We are Neutral on telcos as valuations are not cheap versus other sectors. 

Property & REITs 

  • Across the REITs, the healthcare and overseas office/retail segments did better in 4Q, while hospitality and industrial showed increasing signs of a slowdown. Our top picks for REIT previously were CMT, MAGIC, CCT. We now replace CMT with KDCREIT as CMT has done very well in FY15. 
  • “Impairment” was the buzzword for developers. Most had yoy earnings decline in 4Q due to the lack of development profits to book. UOL replaces CAPL among our top picks (previously CIT, CAPL), given its higher development sales in recent years and likely resilient earnings. Wing Tai remains least preferred due to future QC issues. 

Conglomerates, industrials, transport 

  • Impairments popped up for both yards in 4Q, as they took hits for Sete Brasil and other rigs. The yards’ book values are shrinking and net gearing (0.5-0.8x) is rising. Names like Ezion are making provisions for receivables. The sector’s key focus is to survive this period. We prefer STE that has other divisions pulling their weight. 
  • One of the few bright lights of 4Q was SIA. The benefits of lower fuel costs are showing. Scoot and SilkAir are doing well. SIA remains our top pick in transport. 

Gaming, healthcare, consumer, plantations 

  • GENS showed signs of recovery, as its gaming volumes and bad debt stabilised and 4Q earnings missed purely due to poor win rates. Luck factors tend to mean-revert. 
  • IHH remains a preferred pick, as rising revenue intensity offset slower volumes in 4Q. 
  • Consumer is showing signs of turnaround, with Super’s 4Q results as a highlight. Our top pick, Thai Beverage, did well in 4Q due to huge uptick in domestic beer sales. 

Conviction ideas 

Highlighted companies 

OCBC ADD, TP S$10.01, S$8.10 close 

  • Banks are cheap and asset quality concerns are overblown, in our view. OCBC is our top pick for its joint-lowest NPL ratios, despite booking oil and gas NPLs in 3Q. 
  • OCBC also has the highest provision coverage to unsecured NPLs. 

Singapore Airlines ADD, TP S$13.00, S$11.50 close 

  • SIA is a late beneficiary of low oil price. In addition to lower fuel costs, other initiatives such as the launching of premium economy and fuel-efficient new planes will contribute to positive earnings surprise potential. 

Thai Beverage ADD, TP S$0.83, S$0.74 close 

  • Thai Beverage delivered strong execution for beer in 4Q and is creating a second division to generate cash flow to fund its fierce fight in the non-alcoholic segment and M&As to expand earnings contribution from outside of Thailand.

Kenneth NG CFA CIMB Securities | http://research.itradecimb.com/ 2016-03-02
CIMB Securities SGX Stock Analyst Report ADD Maintain ADD 10.01 Same 10.01
ADD Maintain ADD 13.00 Same 13.00
ADD Maintain ADD 0.83 Same 0.83