Singapore Strategy - CIMB Research 2017-05-30: Uneven Hopes

Singapore Stock Market Strategy Straits Times Index Target

Singapore Strategy - Uneven Hopes

We are seeing decent upgrades on forward earnings for the first time since 2Q14, implying that the fundamentals may not be as bad as the market initially expected.
2017 GDP growth is on track to reach the higher end of our 2.5-3.0% range if volume remains strong for manufacturing and sea cargo.

For 2H17, we prefer growth and sentiment plays:
1. manufacturing/tech,
2. consumer,
3. gaming, and
4. property developers.
Factoring in the latest EPS upgrades, our target for the FSSTI, based on 14x CY18 P/E (mean), is now 3,248pts.

The worst could be over for Singapore after two consecutive years of earnings contraction, where FSSTI core EPS fell 6.3% in FY15 and 8.1% in FY16.
Looking at the earnings revision trend in the past three months, we have made upgrades to the current (+0.4%) and forward year (+1.7%) for stocks under our coverage for the first time since 2Q14, led by banks and gaming.
We are getting a bit more comfortable knowing that underlying fundamentals may not be as bad as we had expected. The 1Q17 earnings beat/miss ratio would have been better if not for some one-off provisions and the exodus of small-cap oil & gas companies.
We now project 6.3% and 6.9% core EPS growth for FY17F and FY18F, respectively, better than our post-3Q16 projections of 2% and 5% in Nov 16.

Earnings for banks are turning more defensive; NIM is expanding with the Fed’s commitment to a rate hike.
We see the likelihood of upgrades to our banks’ earnings, led by lower credit cost from FY18F onwards. The pivotal question is whether ROEs can grow above 11% in FY17-18F or must one buy ahead into 2019 to re-rate valuations to the historical mean of 1.3x P/BV.
Our earnings estimates for Venture Corp are below consensus by about 5-7% for FY17-19F on more conservative growth rate assumptions. We see upside risk if volume growth remains strong in 2Q17. Interest in the sector should be further supported by seasonally-stronger 2H results.
If market share and top line growth can be sustained in 2Q17, we expect to see more earnings upgrade for consumer/gaming.

There are still some headwinds and possible pockets of earnings cuts for the transport sector for reasons that are well known: poor yield for SIA and stiff competition from Uber/Grab for ComfortDelGro.
We have recently downgraded SIA (from Hold to UW) and ComfortDelgro (from Add to Hold). We see risks for capital goods as there has not been much luck in sizeable orders among the yards.

Singapore's 1Q17 GDP expanded 2.7% yoy, slower than 4Q16’s 2.9% yoy but stronger than the government’s preliminary estimate of 2.5% growth and in line with consensus forecast.
On a quarterly basis, the 1Q GDP fell an annualised 1.3% after robust 12.3% growth in 4Q16 and by a lower margin than the government’s preliminary estimate of a 1.9% decline. This was due mainly to an upward revision in manufacturing growth of 8.0% yoy or -1.5% annualised qoq vs. initial estimate of -6.6% qoq or +6.6% yoy.
While the 4Q16 and 1Q17 growth figures suggest Singapore is on track to reach the higher end of the government’s "1% to 3%" growth for the full year, the city-state continues to experience uneven growth.
Some industries have benefited from improved external demand, mainly selected tech manufacturing and transport/storage companies (primarily sea cargo). However, the broader service-producing industries remained weak, pressuring domestic demand.
Household demand and business investment stayed soft and private consumption expenditure contracted for the second straight quarter in 1Q17, a first for a non-recessionary period since detailed GDP data collection started in 1976.

GDP growth is likely to reach the higher end of the 2.5-3% range if volume remains strong for manufacturing and sea cargo. The key challenge for Singapore is achieving a broad-based recovery. Household demand and business investment are still weak while private consumption expenditure contracted for the second straight quarter in 1Q17.
Upside to 2017 growth will be dependent on a broadening in growth drivers. MAS is likely to maintain the SGD NEER on the current stance in the upcoming Oct policy meeting.

We prefer to milk growth and sentiment plays in 2H17. Manufacturing/Information Technology sector is going through earnings upcycle trend on rising global demand and strong order backlog.
Seasonally stronger 2H could re-rate consumer names like Dairy Farm and Thai Bev.
These stocks are currently trading below their historical average. Positive sentiment such as dissipating supply, potential price recovery from 2018F and strong take-up of new launches will keep interest strong among property developers and selected REITS.

We swallowed the reality pill and upgraded banks from Underweight to Neutral after the strong 1Q17. The pivotal question is whether ROEs can surpass 11% in FY17-18F or must one buy ahead into 2019. Stiff competition will continue to pressure SIA and ComfortDelGro while SATS’s ability to deliver double-digit earnings growth is in question.
We downgrade the transport sector from Neutral to Underweight. We remain Neutral on capital goods, healthcare sector and commodities and Underweight on telcos.

YTD, Singapore has outperformed the region, driven by fund flows and laggard plays.
Given the EPS upgrade, our FSSTI target now stands at 3,248pts, based on 14x CY18F P/E (mean).
On a P/BV basis, Singapore looks cheap. If the banks have more tricks up their sleeves (sale of investment property), ROE for the market could be driven up durably.
However, on a P/E basis, Singapore looks fairly priced.

LIM Siew Khee CIMB Research | Singapore Research Team CIMB Research | http://research.itradecimb.com/ 2017-05-30

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