Singapore Strategy - RHB Invest 2016-03-08: Sector Review (Part 1 of 2)

Singapore Strategy - RHB Invest 2016-03-08: Sector Review (Part 1 of 2)

Singapore Strategy - Sector Review 

Banks – Fundamentals Sound But Asset Quality Risk Rising | OVERWEIGHT 

  • SG Banks’ 4Q15 results were broadly in line with ours and consensus expectations. Sector core net profit grew 8% YoY in 2015 lifted mainly by better net interest margins (NIM), improved fee income (mainly from wealth management businesses, loans and cards-related fees), healthy net gains from trading and investment securities and well controlled operating expenses. 
  • Credit cost was stable at 24bps as impairment charges rose by a modest 6% YoY despite the 23% YoY increase in gross non-performing loans. As a result, loan loss coverage (LLC) declined to 130.8% from a high of 152.5% in Dec 2014. 
  • DBS Group (DBS SP, BUY, TP: SGD16.70) and OCBC (OCBC SP, BUY, TP: SGD9.60) delivered earnings growth of 11-12% YoY for 2015 but UOB (UOB SP, NEUTRAL, TP: 19.10) saw its core net profit dip 1% YoY. It is also positive to note that DBS and OCBC have improved their capital positions with their fully loaded common equity tier-1 (CET1) up 50bps YoY to 12.4% and 120bps YoY to 11.8%, respectively. 
  • Asset quality, a key area of concern, remained manageable in Dec 2015. Gross nonperforming loans (NPLs) increased 23% YoY, lifting NPL ratio from 0.88% in Dec 2014 to 1.06%. Banks expressed confidence NPL ratios would peak below levels seen during the Global Financial Crisis (2009: 2.37%). 
- Singapore Research  

Consumer and Healthcare Sector – Weak As Expected | OVERWEIGHT 

  • Results continue to follow a weak trend in 4Q15, due to a combination of sluggish consumption, persistently high operating costs and depreciation of regional currencies against the SGD/USD. 
  • Furthermore, we believe many companies have taken the opportunity to kitchen-sink expenses in FY15, resulting in very poor numbers. In particular, even a defensive business like Sheng Siong, registered negative SSSG of 1.7% in 4Q15, highlighting the weak consumption trend. 
  • We expect revenue trends to remain challenging in 2016, but bottomline declines are likely to have bottomed out. This is as companies adjust to the weaker regional currencies and control their costs to reflect the environment. 
- James Koh 

Oil and Gas Sector – It’s Coming Back | OVERWEIGHT 

  • The oil & gas sector has been massively oversold. 
  • Blue chips like Keppel and Sembcorp Industries were saw 20-30% discounts to book value at their recent lows, and on singledigit P/Es. Smaller companies' stocks went to 0.5x P/BV or lower. 
  • The oil price has since rebounded from a low of USD27.88/barrel (bbl) for Brent crude oil to the USD37/bbl range today. We believe that a bottom has been found. 
  • Major world producers are now coordinating production freezes, which is a small but important step to controlling world supply. With supply growth checked, high-cost producers and/or high-decline-rate producers like oil sands and shale oil respectively would become a drag on non-OPEC supply. Meanwhile, demand growth is still positive at about 1.2% per year, though somewhat slower than the 1.7% seen in 2015. 
  • Overall, the physical oil market should return to a balanced market by 1Q17. Oil prices would move ahead of the physicals market. We expect oil prices to rebound towards the USD50/bbl range by 4Q16, lending further momentum to the sector recovery which we are already witnessing. 
- Lee Yue Jer 

Plantation – Indonesian CPO Prices Suffer From Export Tax Levy Impact | OVERWEIGHT 

  • The 4Q15 reporting season saw two of the three results report earnings below expectations, with one surprising on the upside. The two companies with results that came in below expectations include First Resources (FR SP, BUY, TP: SGD2.35) and Bumitama Agri (BAL SP, BUY, TP: SGD1.10). The stock that reported results above expectations was Golden Agri Resources (GGR SP, BUY, TP: SGD0.47)
  • We maintain our recommendations on all the stocks. The common factor in this quarter amongst the plantation companies was the lower-than-expected CPO prices recorded, given the higher-than-expected impact of the export tax levy implemented since July 2015. FFB production patterns were different for each company, depending on their estate locations. 
  • For companies with a larger percentage of estates in Kalimantan like Golden Agri and Bumitama, we saw a recovery in FFB production in 4Q, with both recording QoQ and YoY improvements. For companies with a larger percentage of estates in Sumatra like First Resources, we saw a QoQ decline in FFB production, due to the one year lag impact of the dryness felt in Sumatra in 2H14. All companies have yet again revised down their FFB growth guidance for 2016 to reflect a flat or negative growth, on the back of the 1-year lagged impact of El Nino. 
  • The other trend we saw was higher refining margins for those with refineries, as they benefited from the export tax levy advantage over pure planters. 
  • Going forward, we expect to see productivity decline significantly in 1H16, given the El Nino impact, although we expect this to be offset by higher CPO prices. We understand that the export tax levy discount of USD50/tonne has narrowed since the beginning of the year, due to shortage of supply. 
  • Our Top Pick for the Singapore plantations space is still First Resources, while we like Golden Agri as a big-cap option. 
  • Overall, we maintain our OVERWEIGHT rating on the Singapore plantation sector. 
- Singapore Research  

Property – Favourable Risks-Rewards | OVERWEIGHT 

  • The reported profitability of developers for the latest season was generally quite resilient as a whole, and in some cases, even exceeded expectations. For instance, City Developments (CDL) reported a robust set of 4Q numbers as its profit was boosted by the second profit participation securities (PPS) platform involving the monetisation of Manulife Centre, Central Mall (office tower) and 7&9 Tampines Grande. UOL Group’s profit numbers were also respectable if one were to strip off the exceptional gain from the sale of its land at Jalan Conlay, Kuala Lumpur, in 2014. Ho Bee’s net profit was boosted by large revaluation gains on its investment property portfolio in the past two years, with SGD282m booked in 2014 and SGD186m in 2015. Stripping out the revaluation gains, its core rental income stream for year grew by 31% to SGD130m. Again, a very robust showing. Oxley Holdings reported a creditable 150% increase in its six months profit to December 2015, supported by a strong pre-sales of SGD3.2bn across its local and overseas projects Developers which are reliant on residential development sales for the bulk of their income generally reported softer earnings, no surprise given the tepid residential market in Singapore over the past two years. 
  • Most of the strong pre-sales numbers chalked up during the boom years of 2012-2013 had already been recognised in earlier years. Most developers had foresaw that the Singapore residential market would be challenging for a while on the back on the slew of cooling measures and total debt servicing ratio (TDSR) that the government had introduced and sustained high land prices. 
  • Many had strong balance sheets due to good profits made during the boom years, and had recycled their capital into overseas markets or build up their recurring income base by acquiring investment properties locally and overseas. So the impact of a weak local residential market had not been as pronounced as one would expect. 
  • We see a trend of developers diversifying into overseas markets. Besides the traditional markets such as UK, Australia and China, some are venturing into emerging markets such as Cambodia and Myanmar, or developed markets such as Netherlands and Japan. Oxley Holdings is one of the first to move into overseas markets in a big way, back in 2013 when it saw the headwinds facing the Singapore residential sector. Today, it is reaping the fruits with successful project launches in the UK and Cambodia, with the contributions starting to roll in over the next few years. 
  • Going forward, we expect the local residential market to remain challenging on the back of subdued investment demand and constrained liquidity due to the cooling measures. Also, the supply pipeline remains high especially in the suburban segments. 
  • We expect more price incentives as developers seek to clear their existing stock. Notwithstanding this, we think the developers’ stock prices had priced in a lot of bad news, and prospects for selected players are actually quite bright. 
  • Our Top Picks in the sector are: City Developments (CIT SP, BUY, TP: SGD9.22), Ho Bee Land (HOBEE SP, BUY, TP: SGD2.60) and Oxley (OHL SP, BUY, TP: SGD0.91)
- Goh Han Peng 

Ong Kian Lin RHB Invest | Singapore Research RHB Invest | http://www.rhbinvest.com.sg/ 2016-03-08
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