Singapore Monthly Strategy - DBS Research 2016-08-01: Hitting the Ceiling ~ Strategy

Singapore Monthly Strategy - DBS Research 2016-08-01: Hitting the Ceiling ~ Strategy Market Strategy

Singapore Monthly Strategy - Hitting the Ceiling ~ Strategy

  • Take profit on banks (UOB & OCBC), be picky on S-REITs (MLT, MINT & CDLHT) and stick close to yields (M1, ARA, Sheng Siong and ST Eng).

Take profit on banks

  • Index heavyweight bank stocks are likely to be a key drag on the STI given their downbeat outlook and risk of NPL increase especially from exposure to the O&G sector. O&G exposure for OCBC stood at 6% of total loans.
  • At the same time, the sharp drop in Jun16 loan growth points to more risks ahead. The latest June loan growth figure surprised on the downside with a reading of -2.7% y-o-y, which is the sharpest monthly decline since Dec99. Our Singapore economist warns this can have significant implications on growth and household balance sheet.
  • Our analyst has cut earnings estimates for OCBC’s FY16-18F by 6-10% and lowered the TP to $8.40 (from $9.40). A re-test of the BREXIT low for OCBC shares will see price falling towards $8.30 support. If the stock price falls below this level subsequently, the decline can extend further to $7.85 based on Fibonacci projection.
  • Likewise, the FY16-18F earnings estimates for UOB are lowered by 7-11% and TP cut to $17.70 (from $18.80). A re- test of BREXIT low for UOB shares will see price falling towards the $17.60 support. If the stock price falls below $17.55 subsequently, the decline can extend further to $16.75.
  • The vulnerability to profit taking is not limited to bank stocks. The table below shows the index component stocks under our coverage with a HOLD or FULLY VALUED rating that trades either close to or above our fundamental TPs.

Pare down exposure on S-REITs

  • S-REITs have done well in the post BREXIT environment as investors expect central banks to keep rates ‘lower for longer’. However, the 2Q results season has shown that fundamentals remain weak with most S-REITs reporting a drop or flattish distribution growth.
  • Volatility to the S-REIT sector might return as the odds for a FED rate hike this year moved higher over the past month to a 42% chance. Fortunately, a limit to any significant downside in S-REITs' prices is the still wider than average yield spreads of 4.5% owing to still rock-bottom government bond yields.
  • With the S-REIT index already up c.7% from the start of the year, we say it is time to be more cautious and pick stocks with 
    1. sustained growth in distributions, and 
    2. ability for accretive acquisition. 
    Our picks are Mapletree Logistics Trust, Mapletree Industrial Trust and CDL Hospitality Trust.
  • At the same time, we are cautious on S-REITs with a HOLD rating and less than 10% total return.

Stick to Yield

  • We maintain our preference for yield picks in the current low interest rate and uncertain growth outlook environment. 
  • Our picks are M1, ARA Asset Management, Sheng Siong and ST Engineering. Venture Corp is no longer in our list as the stock has risen to our fundamental TP.

Janice CHUA DBS Vickers | YEO Kee Yan CMT DBS Vickers | 2016-08-01