Singapore Strategy - UOB Kay Hian 2016-03-03: 4Q15 Report Card ~ Sharply Lower Growth Outlook

Singapore Strategy - UOB Kay Hian 2016-03-03: 4Q15 Report Card ~ Sharply Lower Growth Outlook Singapore Strategy CITY DEVELOPMENTS LIMITED SINGAPORE POST LIMITED KEPPEL REIT ASCOTT RESIDENCE TRUST DBS GROUP HOLDINGS LTD

STRATEGY – SINGAPORE: 4Q15 Report Card – Sharply Lower Growth Outlook 

  • A lacklustre 4Q15 reporting season - 24% of companies missed expectations (3Q15: 30%) and the rest primarily in line. 
  • We slash our earnings estimate for 2016. 
  • Stay selective amid the uncertain external outlook. 


• Fewer disappointments but weaker outlook ahead. 

  • 4Q15 reporting season ended with fewer companies reported results that were below expectations (24% vs 30% in 3Q15 and 39% in 2Q15). 
  • The percentage of beats rose to 20% in 4Q15 (3Q15: 13%, 2Q15: 15%) as sectors such as banks, aviation and land transport, delivered firm results. 
  • However, we believe the outlook is likely to be challenging, given the weak external outlook and investor concerns, such as banks’ asset quality and slower growth from China. 


• Slashing 2016 earnings. 

  • After the reporting season, we forecast market EPS growth of 0.4% yoy in 2016 (previously +8.9% yoy). 
  • The sharp cut is mainly attributable to the banking, oil services and property sectors. The biggest impact (after adjusting for market weighting) is in the banking sector, where we now assume core EPS to decline 20% yoy in 2016 (previously +2% yoy). This is to reflect higher credit cost in 2016 (68bp for OCBC and 73bp for DBS respectively) as asset quality deteriorates on oil & gas exposure as well as selected corporate loans in the region. 
  • Unsurprisingly, the oil services sector also suffered a deep cut in earnings forecast for 2016 (from +42% to -2%) as we build in lower charter rates and lower utilisation. 

• Banks: Good results but overhang on asset quality. 

  • OCBC exceeded expectations whereas DBS exceeded our estimate by a slight margin. Positives included resilient asset quality (unchanged NPL of 0.9% for both DBS and OCBC) as well as 4Q15 NIM expansion of 2-8bp across the three banks (6bp for DBS, 8bp for OCBC). 
  • Unsurprisingly, 4Q15 loan growth was generally anaemic at 2.4% yoy for DBS and 0.4% yoy for OCBC. 
  • Our top pick is OCBC followed by DBS on valuations (OCBC: 1.03x P/B, DBS: 0.90x P/B). 
  • In our view, banks’ share prices already reflected the deterioration in asset quality similar to the global financial crisis levels in 2008-09, which is not our base-case scenario. 

• Telcos: Mixed, all eyes on potential fourth mobile operator. 

  • The sector was a mixed bag in the latest results season. 
  • M1 exceeded, SingTel was within but StarHub was below our estimates. 
  • M1 surprised with a strong growth in post paid subscribers and continued growth in its broadband segment with corporate customers contributing to a higher ARPU. 
  • The biggest disappointment was StarHub, which net profit was 15% below our 4Q15 forecast due to a decline in mobile revenue and pay-TV subscriber base. 
  • A key focus remains the potential fourth mobile operator but we think the risk has abated as key contenders may have difficulties in raising funds. Our top pick remains SingTel. 

• Offshore & Marine/OSVs: Diversification benefits but more pain ahead. 

  • Keppel Corp’s 2015 earnings exceeded our estimate by 7% due to a strong showing by its property division whereas SMM slumped into the red for 2015 due to: 
    1. revenue reversal, 
    2. provisions, and 
    3. losses from its associate Cosco Shipyard. 
  • As for the oil services (OSVs), Triyard was the only company that reported in-line results. The others (Ezion, Pacific Radiance) were below expectations due to low utilisation rates and provisions. 
  • Going forward, we expect 2016 to remain a challenging year and we forecast more earnings cuts ahead. 
  • Our key picks include Keppel Corp and Ezion. 

• Other notable results. 

  • CapitaLand’s 2015 earnings came in higher than our estimate on its residential projects in China. 
  • Reiterate BUY but our top pick is City Developments (inline 2015 results) for its higher exposure to Singapore properties as we expect a potential recalibration of the property cooling measures in Singapore. 
  • SIA registered solid 3QFY16 results with qoq improvement in pax yield, which underscores the impact of lower fuel hedges and the resilience of front-end yields. 
  • ST Engineering’s 2015 results were marginally ahead of our estimate but we upgrade the stock to BUY, given its low downside risk and strong financials. 

• What is the market pricing in? 

  • The FSSTI is currently trading at 1.11x P/B (-30% discount to long-term mean), which is comparable to levels during SARS and 911 (P/B of 1.08x and 1.20x respectively) but still above that during the Asian financial crisis and the global financial crisis (P/B of 0.70x and 0.87x respectively). 
  • Using a blended average P/B and PE and assuming a 20% discount to long-term mean as a fair valuation, we estimate the market is pricing in a 0% to -3% EPS growth in 2016. Taking a more conservative assumption that the market should trade at -1SD to long-term mean (average P/B and PE valuation) and market EPS growth of 0% to -3% would suggest 2,580-2,600 for the FSSTI as a potential entry level for conservative investors. 
  • On our BUY list are DBS, City Development, K-REIT, ComfortDelGro, SingTel, SingPost, Raffles Medical and ART. 
  • Reiterate SELL on SMM and Nam Cheong.

Andrew Chow CFA UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-03-03
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