Singapore Strategy - DBS Research 2016-06-14: Bumpy road up

Singapore Strategy - DBS Research 2016-06-14: Bumpy road up

Singapore Strategy - Bumpy road up

  • Firmer oil prices and slower FED rate hikes spur confidence.
  • BREXIT uncertainties weigh on sentiment.
  • Prepare for bumpy ride, but cheap valuations and safe haven status maintain buying momentum.
  • Four themes to ride this cycle: 
    1. Growth at reasonable pricing; 
    2. Sustainable yields; 
    3. Catching the travel bug; 
    4. Survival of the fittest

Spurring confidence. 

  • Hopes of green shoots in economic growth, a less painful FED rate hike cycle and increasing expectations of firmer oil prices in the second half of the year set the stage for a volatile but potentially rewarding ride. Fed rate hike expectations have back paddled, following the much weaker-than-expected non-farm payrolls in May of 38k, the lowest in nearly six years. 
  • DBS expects two rate hikes this year, to lift the FED funds rate to 1% by the end of the year. Consensus expects just 1 hike.

Shadow of BREXIT referendum. 

  • Although a BREXIT, if it happens, will trigger a negative reaction in equity markets, it should be short-lived. 
  • With the STI hovering at 11.2x, close to the low of 10.8x PE multiple during the Euro crisis, much of the bad news is already in the price. Investors will be looking at central banks to play a crucial role in ensuring the stability of financial markets and stem any potential panic. 
  • The FED will likely push the timeline for rate hikes further in the event of a BREXIT. 
  • Companies with earnings exposure to the British Pound are ComfortDelgro, City Developments, Ascott Residence Trust, Sembcorp Industries, and CDL Hospitality Trusts
  • We expect support at 2630 if BREXIT happens, or a rebound to 2900 on a relief rally if UK chooses to stay. Our year-end target for the STI is 3000, pegged to 12.1x FY17F earnings

Four themes to ride the cycle.

Catch the travel bug. 

  • Bottoming signals are emerging for Singapore tourism, driven by strong recovery in Chinese and Indonesian arrivals. Coupled with lesser pressure from new room supply ahead, we expect tourist arrivals to grow by 5% this year, arresting the decline in Revpar. 
  • TOP picks are CDL Hospitality Trust, OUE Hospitality Trust and Singapore Airlines.

Growth at reasonable pricing. 

  • Small caps are the brighter spots, with earnings growing at 22% vs 4% for big caps this year. 
  • Our preferred picks are small caps in niche segments - mm2 Asia, Cityneon Holdings, Jumbo Group and Japfa Ltd.

Sustainable yields. 

  • Singapore remains an attractive haven for dividend yield plays, backed by an attractive payout ratio of 55% and dividend yield of 4%. 
  • We like M1, Sheng Siong Group, ARA Asset Management and ST Engineering.

Survival of the fittest. 

  • When the going gets tough, the tough gets going. We seek companies with a solid strategy, good management and track record to overcome ongoing challenges to emerge stronger for the next cycle - Ezion Holdings, Sheng Siong, ST Engineering, Sembcorp Industries, Singapore Airlines, Yangzijiang, and SATS.

Janice CHUA DBS Vickers | YEO Kee Yan DBS Vickers | LING Lee Keng DBS Vickers | http://www.dbsvickers.com/ 2016-06-14