Strategy Singapore - UOB Kay Hian 2016-11-21: Positioning In A Growth-challenged Year

Singapore Strategy

Strategy Singapore - Positioning In A Growth-challenged Year

We are hopeful that corporate earnings would recover in 2017, but cognisant of growth headwinds.
Our 2017 year-end FSSTI target is 3,000 and we would position defensively on elevated volatility and an uncertain macro outlook.

We have just issued our 1H17 Strategy for Singapore. This report focuses on the key highlights and investment themes.

We see another challenging year ahead, with 2017 GDP growth ranging slightly higher than 2016’s 1-2%, which is a reflection of weak global demand as well as structural issues.
The external environment remains mixed and volatility is likely to remain elevated, pointing to a buy on weakness and stock-picking strategy, yet again. Based on a 15% discount to long-term mean P/B and PE, we have a 2017 year-end target of 3,000, pointing to a modest 5.7% upside. Earnings disappointments could see the FSSTI range coming down to 2,870-2,900.

After two consecutive years of earnings recession, we forecast 2017 EPS to recover 7.7% yoy, led by plantation, aviation and telecommunications. However, there remains downside risks to our and consensus estimates on muted growth outlook, regulatory changes and disruption from technology.
In our view, top-line remains under downward pressure and costs are stubbornly high.

Given the lacklustre recovery and moderate valuations, we are selective on blue chips, favouring laggards with earnings visibility and dividend yield.
In this bucket, we like OCBC, Singtel and ComfortDelGro. These stocks are projected to offer a 2017 dividend yield of 3.8-5.4% and valuations are reasonable. Venture also looks compelling as its gradual shift towards new growth areas has also resulted in sustainable margin improvements with a dividend yield of more than 5%.

Investment themes that could drive outperformance include:
1. new economy beneficiaries,
2. scalable companies,
3. earnings visibility and yield, and
4. stock-specific catalysts.

Large-cap BUYs include OVERSEA-CHINESE BANKING CORP, SINGTEL, VENTURE CORPORATION LIMITED, CAPITALAND LIMITED , FRASERS LOGISTICS & IND TRUST, RAFFLES MEDICAL GROUP LTD, SINGAPORE TECH ENGINEERING LTD, CAPITALAND COMMERCIAL TRUST, SEMBCORP INDUSTRIES LTD, and ASCENDAS REAL ESTATE INV TRUST.
Mid-cap gems include KEPPEL TELE & TRAN, CHINA AVIATION OIL(S) CORP LTD, UNITED ENGINEERS LTD ORD and DUTY FREE INTERNATIONAL LIMITED.
SELL SIA ENGINEERING CO LTD, STARHUB LTD and M1 LIMITED.
Switch out of SATS LTD into SINGAPORE TECH ENGINEERING LTD.

Andrew Chow CFA UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-21