Singapore Strategy - CIMB Research 2017-03-04: Hunt for laggards

Singapore Strategy - CIMB Research 2017-03-04: Hunt for laggards Singapore Market Strategy 4Q16 Results Summary

Singapore Strategy - Hunt for laggards

  • Property developers led the earnings beats in 4Q16 while small-cap O&M had the most misses. We are still trimming EPS but at a narrower spread of < 1%.
  • We advocate investors to take some profit from capital goods and banks as they are priced ahead of growth and orders.
  • We still see upside for earnings upgrades and valuation re-ratings from the tech/manufacturing sector and US$ plays.
  • We reshuffled some of our Alpha picks due to outperformance. Our big cap picks are FCL, STE, Venture, UOL and First Resources.
  • Small-cap picks are: CSE Global, UMS, Talkmed, Best World, Cityneon, Sunningdale and Valuetronics.

Property and consumer quality beats, misses are oil & gas related 

  • The earnings beats and miss ratio are on par at c.1x, led by property developers (Capitaland, CDL) from stronger China residential sales and consumers (ThaiBev, DFI) on good margin. Capital goods (STE, SMM) beats are from tax credits and forex gain.
  • Misses are from small O&M plays, in line with higher provisions in banks. EPS cuts momentum narrowed to < 1%. We expect higher core EPS growth of 5% for FY17 (2% prev post 3Q16 results), on higher banks NIMS and SIA Cargo. Volume.

Take some money off outperformers 

  • We were rightly bullish on property on valuations and laggard plays (UOL) and dollar strength/technology (Venture) but not so right in banks and half right in capital goods as outperformance was surprising. At 1.1x and 1.5x CY17 P/BV, banks (UW) and capital goods (Neutral) have traded ahead of growth and see opportunity to lock in some gains. 
  • Fundamentals are muted - flat NIMS, higher provisions for banks and high oil prices have not translated into orders. We would look for a re-entry point for property developers (OW). 

Tech/dollar plays still have meat, consumer and telco downgrade 

  • Valuations for the tech and manufacturing sector (OW) are not expensive at c.10-14x FY18 P/E vs. earnings growth of c.10% with potential upside for earnings upgrades if volumes are sustained, in our view. Our previous OW call on consumer turnaround stories panned out well but the sector now trades at c.21-23x FY18 P/E vs. single-digit earnings growth. We find it hard to justify its premium valuation and downgrade to Neutral. 
  • Telcos are an UW from Neutral as there could be turbulent earnings ahead. 

Any more laggards? 

  • The key to generate alpha in the remaining quarters could lie in hunting for laggards. 
  • We remove Dairy Farm on outperformance and replace it with FCL. We keep STE, Venture Corp, UOL and First Resources in the big-cap alpha list. 
  • Singpost is on our watch list for post impairment and new CEO. 
  • In small caps, we replace outperformers MMT, Auric Pacific, Dutech and CEI with CSE, Talkmed and UMS. 
  • We keep Best World, Cityneon, Sunningdale and Valuetronics on earnings growth potential and/or attractive valuations. 

Almost at the top end of our target FSSTI 

  • The FSSTI has risen by 7.6% YTD, trading at 14.6x CY17 P/E and 13.8x CY18 P/E vs. a 10-year mean of 14.3x. 
  • We think fund flows, bottoming earnings and M&A newsflows are key drivers for the rally in banks, capital goods and property sectors. 
  • With the latest earnings revision, our top-down index reading would be 3,195 (based on 14x on a CY18 market core EPS integer of 228). 
  • We struggle to see significant earnings upgrades in the next few quarters unless the oil price shoots up above US$70/bbl which would remove NPL risks in banks and heighten order momentum in capital goods. 

Also Read

LIM Siew Khee CIMB Research | 2017-03-04