Strategy - UOB Kay Hian 2016-11-17: 3Q16 Report Card ~ No Major Surprises

Strategy - UOB Kay Hian 2016-11-17: 3Q16 Report Card ~ No Major Surprises ASCENDAS REAL ESTATE INV TRUST A17U.SI

Strategy - 3Q16 Report Card ~ No Major Surprises

  • 3Q16 results were mainly in line. 
  • Market earnings forecasts for 2017 were reduced slightly, with cuts seen for banks, developers and S-REITs. 
  • We remain cautious on the FSSTI and would selectively buy on pull-backs.


No major surprises in 3Q16. 

  • 64% of the stocks under our coverage reported earnings that were in line (vs 48% in 2Q16). As for results that were below expectations, 25% companies disappointed, but this was an improvement from 2Q16 where 37% of the results were below expectations. 
  • Unsurprisingly, the disappointments were primarily from the oil services, shipyards and telecommunications sector.


Modest cuts to 2017 EPS forecasts. 

  • A positive observation is that the pace of earnings reduction has slowed. After the 3Q16 reporting season, our cut to EPS has been relatively limited, with a reduction in 2017 core market EPS growth forecast from 7.8% yoy to 7.7% yoy. 
  • Sectors that endured earnings downgrades include banking, property development and S-REIT sectors. Conversely, sectors that enjoyed earnings upgrades post the 3Q16 results include plantations and aviation.

Banks – Above expectations with manageable deterioration in asset quality. 

  • Both DBS and OCBC released results that were above our estimates. 
  • DBS reported a 3Q16 net profit of S$1,071m (+0.5% yoy), ahead of our forecast of S$993m on strong growth in fees, robust net trading income, improved cost efficiency and PPoP expanding 19.3% yoy. 
  • OCBC surprised positively due to robust contribution from life insurance and net trading income. The deterioration in asset quality was mild as the impact from new NPLs was offset by upgrades for loans which were conservatively recognised as NPLs last year. 
  • Until the dust settles on the uncertainties over the bank’s exposure to the O&G sector, we continue to prefer OCBC, which is trading at 1.05x P/B, close to -2SD to mean P/B.

Telcos – Only Singtel delivered. 

  • The sector turned in a mixed 3Q16 results as only SingTel came in within expectations. 
  • Higher contributions from SingTel’s regional mobile associates (Telkomsel and Bharti) and reduced losses from Digital Life compensated for lower contributions from consumer businesses in Australia. Singtel is our only BUY in the sector. 
  • Both StarHub and M1 underperformed our expectations, particularly M1 which experienced a sharp 7.7% yoy fall in post-paid ARPU to S$56.50. As a result of the weak results for StarHub and M1, we have cut our target prices by 8% and 12% respectively

S-REITs – Broadly in line; eye on major trends. 

  • Other than Suntec, most S-REITs’ results were in line. 
  • Suntec REIT’s results came in slightly below our expectation on lower contribution from Suntec City as retail and commercial rents continued to ease. 
  • Overall, office REITs performed better than expected, while retail and industrial REIT performance deteriorated. 
  • Office REITs managed to eke out positive rent reversions despite the 18.4% drop in the spot rentals from 1Q15's peak of S$11.40psf pm. There are nascent signs of office rental stabilisation with the rate of decline slowing. 
  • Retail rents continued to be under pressure with negative rental reversions seen across more malls. 
  • Weakness in the industrial space is emerging with factory, logistics and hi-tech segments seeing weakness in rents. Business parks remain the bright spot due to limited forward supply. 
  • Hospitality REITs continued to see weakness on waning corporate demand and renovation disruption. 
  • Our key picks for exposure include Frasers Logistics Trust, A-REIT and CCT.

Aviation – Mixed bag; switch from SATS to STE. 

  • SATS' 2QFY17 results were in line, but there was a pleasant surprise as the group raised interim dividend to 6 S cents (1HFY16: 5 cents). 
  • Excluding exceptionals, STE’s results were in line. 
  • On the other hand, SIA’s 2QFY17 net profit was slightly better than expected on lower cargo losses. Key positives were lower associate losses, lower cargo losses, as well as the sequential decline in fuel hedging levels. Meanwhile, SIA continued to warn of weak global economic conditions and indicated that cargo yields will likely remain under pressure.

Other notable results - The good (Genting SP) and the not so good (SingPost).

  • GENS’ 3Q16 results beat our expectation, underpinned by luck factor and better margins on cost rationalisation. While gaming volume remains uninspiring, lower provisions and sustained cost efficiency will support earnings. GENS pleasantly surprised by declaring a 1.5 S cents DPS and plans to pay out a final dividend. 
  • On the other hand, SPOST’s 1HFY17 underlying net profit fell 19% yoy on elevated transformation costs. Although we are optimistic on SPOST’s long-term prospects, the recent share price outperformance since our upgrade appears to have discounted the recent positives, including Alibaba’s recent investments. Thus, we downgraded SPOST to HOLD with a revised SOTP target price of S$1.76.

Selective on the market. 

  • We remain selective on the FSSTI as: 
    1. earnings outlook continues to be challenging, 
    2. valuations look reasonable, but 
    3. macro uncertainties prevail. 
  • Our key picks are OCBC, ST Eng, Singtel, Venture, CapitaLand, FLT, A-REIT and CCT. SELLs include StarHub, M1 and SIA Engineering
  • Investors should also switch out of SATS into STE after the outperformance of SATS.

M&A season. 

  • There were several notable privatisations in October and November, including that involving Innovalues, Super Group and ARA. Ytd, there have been more than 20 privatisations and de-listings. 
  • We believe investors could consider deep value stocks with M&A potential including United Engineers, KSH, Mermaid, GuocoLand and Wheelock.

Andrew Chow CFA UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-17