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

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Singapore Strategy - Sector Review 

REITs – Retail REITs For The Win | UNDER REVIEW 

• We have been through the SREITs’ earnings season recently, with most (11 of 12) counters meeting our DPU forecasts. The only REIT that met slightly below our expectation was Mapletree Logistics Trust (MLT SP, NEUTRAL, TP: SGD0.89) as it faces persistent headwinds. 
• Challenges continue to persist in all subsectors (with an exception of retail and business parks). We expect office rents to decline up to 15% this year, as weak demand continue to persist in the current pessimistic business outlook. 
• Likewise, the uncertainty within the global economic climate has also impacted both the global and local tourism scene. 
• We advise investors to seek out for retail REITs such as Frasers Centrepoint Trust (FCT SP, BUY, TP: SGD2.22) and CapitaLand Mall Trust (CT SP, BUY TP: SGD2.29), given that resilient REITs are highly valuable, in view of the pessimistic global economic scene. 

- Ivan Looi

Transport - Positive Stories All Around | OVERWEIGHT 

• During the last quarter, all transport stocks under our coverage reported steady growth in earnings. 
• While reported earnings for most companies were in line with our expectations, SMRT Corp (MRT SP, BUY, TP: SGD1.61) positively surprised us by reporting a higher-than-estimated growth in quarterly earnings, largely aided by a strong return to profitability by its rail business. ComfortDelGro Corp (CD SP, BUY, TP: SGD3.60) and SMRT reported steady growth in bus and taxi profits aided by the rise in ridership and lower energy costs. 
• SATS (SATS SP, NEUTRAL, TP: SGD3.70) continued to report a steady improvement in its earnings aided by the turnaround in its Japanese operations. While SATS reported a sequential rise in margins through the three quarters of FY16 (Mar), we believe much of the positives from its ongoing business turnaround have already been priced in following 27.8% rise in its share price over last one year. 
• Singapore Shipping Corporation (SSCL SP, BUY, TP: SGD0.67) delivered strong earnings growth during the quarter supported by a niche business model with most of the revenue and costs fixed for its ship chartering business. We remain optimistic about SSCL’s growth based on its existing operations and believe its strong cash flow generation capability would ensure a balance sheet strength that can support further business expansion. 
• We expect ComfortDelGro, which is trading at 16.5x FY16F P/E to deliver c.30% profit growth aided by strong growth across all business segments in Singapore. Despite the weak earnings growth outlook, we expect SMRT’s stock to re-rate once the transition of its rail business to the new financing framework is announced. 
• Key downside risks for the sector include: 
  1. lower-than-estimated growth in ridership for domestic rail and bus businesses, 
  2. unfavourable forex movements leading to higher translation losses, 
  3. higher competition in the taxi business from private car hire apps like Uber/Grab, 
  4. lower-than-estimated margins for domestic bus business under the new Government Contract Model, and 
  5. sudden and sustained rise in oil prices leading to higher operating costs and lower margins. 

- Shekhar Jaiswal

Telecommunications - Competitive Risks | NEUTRAL 

• With the exception of StarHub (STH SP, NEUTRAL, TP: SGD4.06) which disappointed on a higher-than-expected opex and few provisions made in the December quarter, both Singtel (ST SP, NEUTRAL, TP: SGD3.70) and M1 (M1 SP, BUY, TP: SGD3.20) delivered FY15 results that were broadly in line. 
• Notwithstanding the typical 4Q seasonality, underlying mobile revenue momentum for the industry remains weak on a YoY basis, down 0.8% on structural roaming revenue pressure and voice cannibalisation (from the over-the-top (OTT) services) which more than offset the ARPU uplift from a bigger proportion of customers on 4G-tiered data plans (68% as at 4Q15). 
• Industry mobile service revenue growth decelerated to just 0.6% in 2015 (FY14: +2.1%)- the weakest since our records started. We observed the relatively stronger postpaid APRU dilution of 2-4% YoY in 4Q15 for Singtel and M1, which may be attributed to a higher take-up of SIMonly plans. Both StarHub and M1 continued to see their prepaid revenues crimped from lower usage and substitution to data alternatives for legacy services. 
• We expect revenue/EBITDA prospects of the sector to remain challenging going forward due to: 
  1. competition from a fourth entrant, 
  2. macro-related headwinds, and 
  3. the continued slippage in legacy revenues. 
• We do not expect divided upsides for the sector, given that the telcos are conserving cash for the upcoming spectrum auction in 3Q16 while capex intensity is likely to remain relatively high. 
• While M1 expects its performance to be stable in FY16, StarHub’s lower EBITDA margin guidance suggests that its FY16 earnings could see a further contraction this year. Post results, we lowered our estimates on M1 and StarHub, factoring in greater ARPU/margin dilution from heightened competitive risks while our forecast for Singtel has been maintained. 
• The announcement by the Infocomm Development Authority (IDA) on spectrum reserved for a new mobile network operator (MNO) does not come as a surprise as it has been widely anticipated by the market. We see execution risks for the new MNO given the onerous regulatory/rollout obligations as well as funding-related issues. We continue to believe that concerns over the threat posed by the new entrant have been overplayed. 
• We remain NEUTRAL on Singtel and StarHub and keep our BUY rating on M1. M1’s share price has slumped 35% over the past 12 months (relative to StarHub’s -20% and Singtel’s -9%) and underperformed the STI by 18% which we believe has priced-in the downside risks associated with the new entrant. 

- Singapore Research

Technology – Riding the strong USD | OVERWEIGHT 

• We are still OVERWEIGHT on the Singapore Technology sector, despite a slowdown in manufacturing in China and Malaysia as long as USD remains strong. This is due to the bottom-up approach that we have used for the companies under our coverage. Most of them have a ready pipeline for FY16, while others may have hit a bottom like Fuyu Corp (FUYU SP, BUY, TP: SGD0.29) and are in the midst of generating ample cash due to lower capex required. They have outperformed in 2015 as compared to other sectors and delivered results in line with our estimates. 
• We expect the trend to continue into 2016. 

- Jarick Seet

Utilities - Surf with the wave | OVERWEIGHT 

• We maintain our BUY call on the utilities sector. 
• China Everbright Water’s (CEWL SP, BUY, SGD0.82) FY15 results came in within our expectation while SIIC Environment Holdings’ (SIIC SP, BUY, SGD1.26) earnings were above our expectation. 
• 2016 is the first year of China’s 13th 5-Year Plan (FYP). We remain positive on the sector as one of the key agenda of the 13th FYP is to accelerate the opening up of the water industry. This would drive the number of transfer-operate-transfer (TOT) projects dished out by the Chinese municipal Governments as they transfer the operations of existing water treatment plants to state-owned enterprises (SOEs) and private players. In view of this upcoming trend, we favour bigger SOEs with a national-wide presence to smaller operators for their prevailing relationships with different local governments. 
• In addition, we think the industry would further consolidate in 2016, with bigger SOEs buying out other companies. Thus, the bulk of the capacity growth for CEWL and SIIC would still be derived from acquiring smaller operators. 
• We also expect China market volatility to be more benign this year. Thus we believe the average IRR for new acquisitions in the water treatment space would stabilise at about 8% in spite of the competitive environment. 

- Juliana Cai

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

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