Singapore Strategy - CIMB Research 2016-11-17: Belt tightening

Singapore Strategy - CIMB Research 2016-11-17: Belt tightening Market Strategy

Singapore Strategy - Belt tightening

  • Cost-cutting was the dominant factor that caused most of the earnings outperformance in 3Q16. Qoq beat/miss ratio improved to 0.7x from 0.29x in 2Q16.
  • SIA and SMM were the major misses while the notable outperformers were Genting and small caps consumers – Auric Pacific and Best World.
  • 3Q16 EPS cuts were less brutal (c.3%) vs. 2Q16 (c.7%). We believe EPS cuts could have bottomed across sectors except capital goods, for impairment.

Cost down mode, can we do more?

  • Banking, gaming, capital goods and transport saw the largest cost cutting measures implemented, by way of salary reduction, staff redundancy (mainly foreigners), automation/digitalisation and disposal of unprofitable operations.

Banks and telcos

  • EPS cuts among the banks have tapered off as bad news on NPLs on oil & gas is clearer and formation of NPAs is at a slower pace. 4Q16 SPs may still remain elevated as most of the oil & gas companies request to restructure their debts against written-down collaterals. We keep our UW on banks with DBS as our preferred name for its diversified loan and fee income growth, efforts to rationalize costs and chunky oil & gas exposure provided for. OCBC is our top short on the least topline growth and potential for higher NPLs in oil & gas.
  • Singapore telcos are struggling with topline growth and competition. We like Singtel for its emerging markets exposure via associates, cushioning Singapore and Optus.

Property & REITS

  • Developers booked in more overseas projects. Singapore home sales trends are stable with good take-up rates in suburban projects. A notable event was the record bid for Central Boulevard site by IOI Properties at S$1,689 psf ppr. The bidding price indicates a mid-term recovery in office leasing market. However, for now, we still expect rents to retrace by 5% in 2017 as new supply kicks in. Property is an OW on valuation (c. 42% discount to RNAV). UOL is our top pick.
  • REITS we like are CCT, MCT and MINT with clarity in growth path.

Capital goods & transport

  • KEP, SMM and SCI were hurt by impairment and we see potential for more in 4Q16 on mothballing capacity and marked to market WIP. 
  • Small caps are still struggling with weak operating leverage and tight cashflows. The contagion risks of belly-up incidents ahead have subsided after Swissco joined the JM bandwagon, and Vallianz and KrisEnergy secured aid from Rawabi and Keppel. The sector is still in need of a surge in E&P activities. We like STE on EPS recovery and strong balance sheet.
  • SIA had the biggest EPS cut in 3Q16 (c.30%) as it has lost its past glory given the unfavourable dynamics of competitiveness and load factor. SATS could be a better alternative to air traffic movement in Asian hubs – Singapore, Japan and HK. We upgraded Comfort Delgro on stable profits, and fare cut and weak GPB are priced in.

Gaming, healthcare, consumer, plantations

  • We removed GENS from our country top-pick list after its earnings beat on cost efficiency. We upgraded Dairy Farm from Hold to Add as the worst could be over on sustained recovery in the food segment after the painful rationalisation of stores to improve productivity. In contrast, Raffles Medical’s profitability was dragged down by cost pressure from new expansion projects.
  • Plantations are benefitting from tax credits. We upgraded Wilmar on improved operating environment for the oilseeds crushing business in China and better 4Q16.

Find growth to find performance

  • Large-cap top picks are STE, THBEV, CD, UOL, VMS, CCT, MCT, MINT, and FR. 
  • Our small-cap conviction names are AP, BEST and CITN.

LIM Siew Khee CIMB Research | 2016-11-17
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