Market Strategy
Singapore Stock Top Picks
CAPITALAND LIMITED
C31.SI
FRASERS LOGISTICS & IND TRUST
BUOU.SI
VENTURE CORPORATION LIMITED
V03.SI
OVERSEA-CHINESE BANKING CORP
O39.SI
ASCENDAS REAL ESTATE INV TRUST
A17U.SI
Singapore Strategy 1Q17 Report Card - Upward
- After two years of earnings disappointments, we are seeing nascent signs of an earnings recovery, with market EPS raised after 1Q17.
- However, we are selective after the FSSTI’s outperformance, and are buying laggards and inexpensive blue chips.
WHAT’S NEW
45% in line but larger misses from the usual suspects.
- 1Q17’s reporting season to date saw 45% of the results in line (4Q16: 43%) but the number of beats declined to 26% in 1Q17 (4Q16: 32%).
- As for earnings misses, 29% of earnings missed expectations during the latest reporting season vs 26% in 4Q16. Unsurprisingly, the number of the disappointments came primarily from shipyards and oil services.
ACTION
More importantly, market earnings forecasts were raised.
- Despite what appears to be another lacklustre reporting season, a key highlight is that in 1Q17, market EPS was revised upwards rather than downwards. As an indication, our FY17 market EPS growth forecast post 1Q17 was 7.9% yoy (5.6% yoy previously). The main reason behind our EPS upgrade was we have upgraded banks’ core 2017F EPS growth to 7.1% yoy from - 0.1% prior to 1Q17 results. For the market, we have also raised turnover growth from 2.9% yoy in 4Q16 to 4.4% yoy in 1Q17. Sectors that enjoyed upward turnover revision include banks, healthcare and technology.
Banks: The stars of 1Q17.
- All three banks reported better-than-expected results. A key message in 1Q17 is that the worst in terms of NPL formation from the O&G sector appears to be over. NPL ratio improved by 1bp to 1.44% for DBS and 1.25% for OCBC.
- Specific provisions dropped 55% qoq for DBS and 54% qoq for OCBC. DBS achieved NIM expansion of 3bp to 1.74%, benefitting from higher SIBOR and SOR. In addition, fee income growth was also back to double-digits, with DBS and OCBC growing fee income by 15.9% and 28.6% respectively. The recovery in wealth management was an important growth driver. Fees from wealth management increased 26% at DBS and 70% at OCBC.
- Following the results, we have raised our forecasts for DBS’ 2017-18F net profit by 7-8% to reflect strong growth in fees and moderation in NPL formation and credit costs.
- As for OCBC, our 2017-18 net profit forecasts were raised by 13.0% and 8.2% respectively due to a decline in specific provisions. Maintain BUY on DBS and OCBC.
Property: Developers mixed; S-REITs within expectations.
- CapitaLand exceeded our estimates due to recognition of gains from the sale of 45 units at the Nassim while City Dev disappointed due to its languishing hospitality division and rental property (asset divestment).
- We downgraded City Dev to HOLD as a result of its strong share price performance and our favoured developer is CapitaLand.
- As expected, S-REITs’ results were largely in line, with the exception of MINT, whose results were above expectations due to lower-than-expected property expenses and borrowings costs. In terms of rental reversions, office rentals continued to see downward pressure whereas business parks rental held up well.
- Retail rental reversion was negative for CMT but FCT outperformed by keeping reversions positive at 4.1%. Our key picks for S-REITs are FLT, CCT and AREIT.
Shipyards: Misses galore but eyes on M&A.
- Keppel Corp missed our and market estimates by a large margin as core net profit plunged 50% yoy to S$104m. This was only 12% of our prior full-year estimate of S$868m. The large deviance was largely attributed to the O&M division, which barely broke even at S$95,000 for 1Q17.
- Sembcorp Marine SMM reported a core net loss of S$7.3m, also below expectations. The loss was attributed to the impact of costs incurred for a floater project, recorded within costs of goods sold that reduced gross profit margin from 8.8% to 2.6%.
- Sembcorp Industries SCI’s 1Q17 results were below expectations due to SMM’s core losses but utilities were in line. Investors were more focused on SCI’s CEO Neil McGregor’s strategic review of the group as part of his on-boarding process as new CEO. All options will be considered and we see this as a prelude to a potential M&A or restructuring.
- Within the shipyard sector, our preferred exposure is SCI for which we have a BUY and SOTP target price of S$3.66.
Notable results: Venture, Wilmar and SingPost.
- Venture’s strong run continued into 1Q17 with results that exceeded our and market expectations. Revenue grew 34% yoy and pre-tax margin improved 0.4ppt yoy to 7.1%. We remain bullish and raise our 2017- 19 net profit forecasts by 10-13%. Maintain BUY for Venture with a higher PE-based target price of S$13.60 (previously S$12.40).
- Wilmar’s 1Q17 core net profit of US$313m was above expectations on stronger-than-expected soybean crushed volume and margins as well as better associates’ performance. A pleasant surprise was management’s plan to restructure its China operations with the possibility of a separate listing. We are positive on this and upgraded Wilmar to BUY with a higher SOTP-based target of S$4.40.
- SingPost’s 4QFY17 results were below expectations on losses from TradeGlobal and elevated transformation costs. While we like its long-term outlook, near-term prospects are unlikely to be exciting as management needs to drive synergies and volume on its network. Maintain HOLD for SingPost and target price of S$1.37. Entry price is S$1.25.
Stay selective after the FSSTI’s outperformance.
- We are selective on the FSSTI after its 12% rise ytd. We continue to favour reasonably-priced stocks with visible earnings outlooks and reasonable yields.
- Our key picks are OCBC, Venture, CapitaLand, FLT, AREIT, SCI and CCT.
- SELLs include SIA Engineering and SPH.
- Investors with an appetite for mid-caps and looking for alphas could consider CAO, KPTT and Citic Envirotech.
Andrew ChowCFA
UOB Kay Hian
|
Singapore Research
UOB Kay Hian
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http://research.uobkayhian.com/
2017-05-17
UOB Kay Hian
SGX Stock
Analyst Report
4.300
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