Singapore Strategy - CIMB Research 2016-08-16: Hunt for safe yields and short-term returns

Singapore Strategy - CIMB Research 2016-08-16: Hunt for safe yields and short-term returns UMS HOLDINGS LIMITED 558.SI  BEST WORLD INTERNATIONAL LTD 5ER.SI  CITYNEON HOLDINGS LIMITED 5HJ.SI  COURTS ASIA LIMITED RE2.SI 

Singapore Strategy - Hunt for safe yields and short-term returns

  • Not surprisingly, there were more earnings misses than beats in 2Q16. The biggest earnings downgrades were in the capital goods, commodities and gaming sectors.
  • In a safety bubble that is unlikely to burst in the near term, we highlight 12 non- REITs, high-yielding stocks that have passed our safety checks.
  • In an almost no-growth Singapore market, we think there are still glimpses of hope for investors to pocket a 10% return from now till end-16. Read on to find out more.
  • Overall sector preference: OW REITs, property; UW cyclicals, and banks.



2Q16 round up: more misses than beats


Weak corporate reporting trends maintained

  • More than three companies missed forecasts for every one that beat. The ratio of earnings beat vs. disappointment was 7 to 24, a trend that that we have seen in the 2Qs since 2014. 
  • Earnings cuts were especially brutal in the commodities sector due to poor production (Indofood Agri, Golden Agri) and unfavourable hedging (Wilmar). Genting Singapore was hit by lower gaming volumes and poor win rates. The drought in offshore & marine orders and high interests costs took their toll on SMM, KEP and EZI. SCI’s utilities defensiveness also succumbed to weak power prices in India.
  • The rare positives came from small-cap consumer names. Best World continued to surprise with strong sales momentum from Taiwan (launch of online store and opening of third lifestyle centre in Kaoshiung and China (export sales). Cityneon’s high-margin Avengers’ permanent set in Las Vegas and traveling sets skewed earnings and expectations. Courts Asia beats our forecast on a higher proportion of credit sales in Singapore, and higher margins from suppliers’ rebates. Dutech also saw sales growth and margin expansion from lower steel costs and the Rmb depreciation.

Earnings downgrade momentum has not bottomed

  • With the earnings cuts for the entire market in the past month, we are now expecting a -7% EPS growth for CY16 for the FSSTI. Although banks have seen some earnings downgrades to reflect higher NPL provisions, lower NIM and slower loan growth, we believe deteriorating asset quality in the oil & gas sector may yet surprise on the downside, resulting in more provisions in 2H16. Therefore, we are likely to see earnings cut further if NPL balloons.
  • Assuming another leg down in oil prices, capital goods could suffer more cuts from impairment. This could widen the -7% core EPS loss in CY16 and easily wipe out the meagre earnings growth (3% core EPS) of the FSSTI. As for commodities, we believe our earnings downgrades could have bottomed, for now.

Checking safety ratio for yield stocks

  • The weak showing in the 2Q16 results provides no impetus for us to stray from our safety bubble. We shall go with the flow and remain in the shelter of REITS and high-yielding stocks.
  • We stress test the sustainability of non-REITs yield stocks, ranking 1-5 (1 being the safest and 5 being the riskiest) assessing historical payout, earnings profile and balance sheet strength. We deem the yields in REITs to be safe on the back of predictability of income, and exclude the sector from the test.

Winning team: Strong certainty and above market average yield

  • Twelve stocks meet the safety and certainty criteria, with attractive yields of 4- 5%. 
  • These names are largely backed by an average 70+% dividend payout and strong recurring income, and they are UMS, CSE, FCL, Venture, Starhub, Silverlake, Innovalues, STE, OCBC, Talkmed, Singtel and DBS, in descending order of yield return.

Runner ups: Stocks with strong ranking but below average yield, or high yield with slight uncertainty

  • The next best categories are: 
    1. stocks that have a strong certainty ranking (ranked 1) but yields between 3-3.9%, and 
    2. stocks with yields above market average but with a slightly higher risk (ranked 2). 
  • These include SIA Engineering, UOB, Sheng Siong, SATS, Capitaland, GLP, Valuetronics, M, Ho Bee and Guocoland.

Yield with risks: Stocks with weak ranking

  • We would be wary of the final category of stocks, with a 3-5 ranking as they come with earnings risks, stretched working capital, and uncertainty in dividend policy. 
  • These stocks include Overseas Education, CWT, KEP, Courts Asia, Memtech, SPH and Singpost,


Crystal ball into the remaining months of 2016


10% may be good to have in a dire market

  • Making money is increasing hard in this weak growth market, but we think there are still glimpses of hope for investors to reap a 10% return in the near- term, backed by 
    1. yoy or hoh earnings growth, 
    2. the unfolding of catalysts and 
    3. cheaper valuations. 
  • These names are largely in the consumer (lifestyle) sector, including Bestworld (exponential growth in Taiwan), Cityneon (catalyst of 3rd IP), Courts (margin expansion), GENS (higher mass gaming volume).
  • The tech sector (Venture, UMS and Dutech) could also shine on a stronger 2H.
  • On the flip side, we would not bet on cyclicals that have hardly proven themselves in earnings delivery – Golden Agri, SMM, Ezion. OCBC could also see a further share price de-rating as it is deemed to be a safer choice in the recent NPL saga.



CIMB Top Picks for 2016


CIMB Top Picks for 2016





LIM Siew Khee CIMB Securities | Singapore Research Team CIMB Securities | http://research.itradecimb.com/ 2016-08-16
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