Singapore Strategy - UOB Kay Hian 2016-03-15: Back To Square One

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Singapore Strategy

Singapore Strategy - Back To Square One 

The recent bounce in the FSSTI has brought the market back to the early-16 levels. 

We highlight our preferred stocks that can navigate volatile markets and with better earnings visibility. 

WHAT’S NEW 

 Back to square one after the recent bounce. 

• The FSSTI has bounced 12.6% from its ytd low of 2,528. The FSSTI is down 1.2% on a ytd basis. This report highlights our latest views and how we would navigate the volatility, which we expect to remain elevated. 

ACTION 

 Where do we go from here? 

• Market expectations on global growth prospects, US interest rate hikes and Singapore consensus earnings have been reduced since the start of the year. 
• We have slashed our 2016 growth forecast to 0.1% yoy from 8.4% yoy previously, primarily due to the banks. 
• In view of weaker growth ahead and lack of earnings visibility, we would advocate positions in several areas including: 
  1. potential M&A stocks with sustainable yield, 
  2. deep-value stocks, 
  3. yield stocks including SREITs, and 
  4. companies with capacity driven growth. 

 M&A to remain in play? 

• Deeply undervalued stocks could be in vogue, with the latest privatisation offer for Osim. 
• In our view, several stocks with similar M&A potential, with an added attraction of compelling dividend yield, include Valuetronics and Innovalue. We have BUYs on these two stocks, with target prices of S$0.52 and S$1.06 based on PE and DCF methodology respectively. 

 Deep value plays – selected O&M, developers and mid-caps. 

• Our study indicates the shipyard/oil services sector is trading at deep value, even after the recent bounce. With a view that oil prices are likely to be higher in 1-2 years’ time, we see selective value in the sector. 
• For the large-caps, Keppel and SMM saw a lower trough in the current downturn vs 2009 (up to 15% lower). Compared with its average P/B since 2009, the three largecaps (Kep, SMM and SCI) are trading at an average 51% discount to its average P/B. We prefer Keppel (Target: S$6.50) over SMM (SELL, Target: S$0.61) given Keppel's strong balance sheet and cheaper valuations. Furthermore, we also expect further provisioning by SMM. The impact from Transocean's deferred delivery on Keppel is limited as we see a downside of 1-2% on Kep's 2016-18F net profits. 
• There is deeper value in small-cap oil services as current P/Bs are 15-51% below 2009 troughs. However, investors should remain relatively cautious as gearing levels have risen compared with 2009. We prefer companies with strong management, relative earnings and balance-sheet resilience. Our preferred pick is Ezion (BUY, Target: S$0.79). 
• In our view, other deep value stocks include City Developments, K-REIT and Valuetronics, all of which we have BUY calls on. 

 Lower rates for longer means yield will remain a core holding. 

• UOB Global Economics and Market Research forecasts a more gradual pace of Fed rate hike in 2016, forecasting two rates hikes (four previously) to bring the FFTR rate to 1.0% by end-16 (previously 1.5%). Against this background, we believe stock picking in S-REITs could yield handsome returns. 
• Our key picks include K-REIT for deep value and ART as well as MLT, both for diversification. Other than S-REITs, we also favour selected dividend plays such as SingTel and SingPost. 

 Capacity-driven growth. 

• Stocks that could offer stronger-than-market growth due to capacity expansion include Raffles Medical and Singapore O&G, on which we have BUYs with target prices of S$5.07 and S$0.96 respectively. 

 Limited upside; buy on pullbacks. 

• The FSSTI is currently trading at P/B of 1.16x (27% 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 the Asian Financial Crisis and Global Financial Crisis (P/B of 0.70x and 0.87x respectively). 
• Using a blended average P/B and PE and assuming a 10-20% discount to long-term mean as a fair valuation, we estimate a potential year-end fair value of 2,760-3,100 for the FSSTI. 
• Given the limited upside, we would advocate stock picking, defensive positions and would look to buy on weakness with a bias for yield stocks. 
• Our key picks include DBS, OCBC, SingTel, City Developments, K-REIT, SingPost, MLT, Bumitama and Raffles Medical. Mid-cap picks include Valuetronics, Innovalues and Ezion. We have SELLs on SMM, SIA Engineering and Nam Cheong.

 VALUATION TABLE 

Andrew Chow CFA UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-03-15