Singapore Strategy - DBS Research 2016-03-28: Rally hits resistance as STI turns sideways

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Monthly Strategy - Rally hits resistance as STI turns sideways 

• 2 key events for April - MAS monetary policy statement & FED meeting 
• STI rally hits resistance, to turn sideways from 2720-2920 
• Stay with dividend yield stocks - Thai Bev, Sheng Siong, SIA EC,ARA, FCL, MLT & Venture 
• Pare exposure to O&M stocks, banks – Keppel Corp, SembCorp Marine, Ezra, Vard and UOB 
• Singapore 2016 Budget unlikely to move the needle on STI 

Looking back at March 

• Short-covering and bargain hunting activities lifted the benchmark STI 179pts (6.7%) month-to-date and erased YTD decline after the ECB expanded monetary policy easing while the FED held interest rates steady and cut back rate hike forecast.
• The BOJ maintained its commitment to raise the monetary base by ¥80tril annually and added that if needed, additional easing steps will be taken to hit 2% inflation.
• The 3 banks DBS, OCBC and UOB as well as rig builder Keppel Corp were the top performers among STI component stocks.
• Sector wise, the FTST Oil & Gas Index was the top percentage performer, rising 16% as the recovery in oil price lifted rig builders and OSV stocks.

Budget 2016 – balanced and transformative but unlikely to move the needle for STI 

• Amid a challenging economic backdrop, the government has introduced a well-balanced and transformative budget.
• While the budget placed emphasis on addressing immediate concerns to help companies navigate the tough business environment, substantial efforts were made to promote medium-term economic transformation. SMEs are beneficiaries of shorter term measures, ranging from higher corporate income tax relief(up from 30% to 50%) and an SME Working Capital Loan scheme for loans up to S$300,000 per company.
• A SGD 4.5bn Industry Transformation Program (ITP) was introduced to promote innovation across industries, and push for firms to automate their business processes by funding up to 50% of project automation cost upon approval. Companies such as ST Engineering should benefit with capabilities to participate in Singapore’s vision to be a ‘smart nation’.
• Meanwhile, the government views that it is premature to remove or ease its property cooling measures, which is in line with our expectations.

Budget surplus....keeping its powder dry. 

• Despite a projected increase in expenditure by 7.3%, the government has forecasted a healthy surplus of SGD 3.45bn (or 0.8% of nominal GDP). This stems partly from a sharp rise in the Net Investment Returns Contribution (NIRC) arising from the additional contributions from Temasek, as well as a significant decline in the special transfers. With a planned surplus of SGD 3.45bn, the government is keeping its powder dry.
• Besides being able to introduce off-budget measures in the event that the economy dips into a recession, the surplus will also provide the current term of government with the fiscal flexibility in the coming financial years.

Outlook 

Key events this month – MAS monetary policy statement and FOMC meeting 

• The 2 events to watch in April are:
  1. MAS monetary policy statement (exact date unconfirmed) and
  2. outcome of the FOMC meeting on 26-27 April.
• The outcome of both events will affect the direction of the Singapore Dollar. This in turn influences the flow of funds into or away from risky assets including equities.
• The decline in the USDSGD from a high of 1.44 in January to as low as 1.35 recently helped fuel a flow of funds to Singapore equities.
• With inflation in Singapore likely to remain negative for most of 2016 and with downside risks to growth, our economist expects MAS to ease the exchange rate policy by shifting to a zero (from gradual) appreciation path for the Sing NEER policy band. If true, investors’ anticipation ahead of the event should result in a rebound in the USDSGD from its recent low of 1.35. This in turn could halt or reverse the funds inflow into Singapore equities.
• The outcome of the 2-day FOMC meeting on 26-27 April will be the other event to watch. Our economist sticks to his view for 3 rate hikes this year.
• Core CPI inflation is back at pre-crisis level and well above the Fed’s 2% target. We expect the FED to hike rates once in 2Q that will lift the FED funds rate to 0.75%. This should occur either at the April or June FOMC meeting.

Blue chips rally comes to a halt as recent rally lifts Singapore market to fair valuation 

• STI’s rally since mid-February has gained an equivalent of +1SD, from an attractive level of 10.55x (-2SD) 12-mth fwd PE at 2530 up towards a fair level of 12.09x (-1SD) 12-mth fwd PE at 2910. However, Singapore’s economic growth remains uncertain and local corporate earnings revision trend is still on a downward path.
• Our Singapore economist has lowered 2016 GDP growth forecast to 1.5% (previous 2.1%), that implies at least one quarter of GDP contraction. We see little justification for the recent rally in the Singapore market to continue beyond 2910 in the short term.
• Our view is for the STI’s recent rally to hit resistance around the 2910 level and shift to a range between 2720-2920 over the next few weeks. The upcoming blue chips ex-dividend dates should lend support to stocks at the 2720-2770 level in April.

Strategy 

Steady on dividend stocks 

• The FED’s decision to hold rates steady and cut the rate hike forecast for 2016 to 2 (previous 4) should underpin dividend stocks, which had underperformed cyclical stocks in the recent stock market rebound. 
• Our picks are Thai Beverage, Sheng Siong, SIA Engineering, ARA Asset Management, Frasers Centrepoint Ltd, Mapletree Logistics Trust and Venture Corp.

Pare exposure on O&M stocks 

• We advocate investors to capitalize on the recent rebound in the stock market and oil price to pare down exposure to the O&M sector. Sector uncertainty remains despite last month’s rebound in Brent crude to USD40pbl (from USD28pbl). 
• For rig builders, Moody’s recent downgrade on ratings of several key drillers could exacerbate their predicament by reducing access to debt capital and pushing some of them into financial distress. This could trigger another wave of rig deferment/cancellations, led by a credit crunch. 
• We top slice Keppel Corp and sell SembCorp Marine. 
• For Keppel Corp, our analyst is wary of potential provisions of up to S$200m for the higher risk non-Sete projects. We trimmed our FY16-17 PATMI by 1.5-2.8% in response to the further delay of Transocean units. For SembCorp Marine, additional provisions could be required if the operating environment deteriorates further, especially in Brazil, which accounts for 31% of SMM’s orderbook. 
• We also advocate top slicing Ezra and Vard Holdings following their recent share prices rebound. For Ezra, utilisation and day rates continued on their downward slide, with total fleet utilization at 67%, and AHTS vessels now earning US$1.10- 1.30/bhp (down from the US$1.80/bhp levels seen in 2014). Our analyst projects core net loss of around US$98m in FY16 and US$68m in FY17. For Vard, our analyst is bearish given the expected fall in revenues and lack of order wins amid the challenging industry conditions. While losses in FY16/17F may be lower than FY15, but we believe there is no big turnaround in sight for Vard in the near term. 
• Outside of the O&M sector, we look to take profit on large cap stocks that have risen to their fundamental target prices with the recent stock market rebound. UOB comes to light. Despite the share price recovery in recent weeks, we expect loan momentum to stay soft and NIM to remain flattish from here now that sentiment on further rate hikes has eased.

Changes for this month 

• We have removed Ascendas REIT and Frasers Centrepoint Trust from our picks due to limited upside to our target price. We have added Wilmar and ARA Asset Management. 
• Wilmar is a beneficiary of low soybean prices, Indonesia's export tax structure, biodiesel mandate and rising palm oil prices. Valuations for ARA Asset Management are attractive, with yield of c.4% to 5%. ARA has S$150m war chest, and is well positioned to capture opportunities that may arise in 2016.

Janice CHUA DBS Vickers | YEO Kee Yan DBS Vickers | LING Lee Keng DBS Vickers | http://www.dbsvickers.com/ 2016-03-28