Singapore Market Focus - DBS Research 2017-05-23: Earnings Season Wraps Up

Singapore Stocks Market Straits Times Index P/E STI Support & Resistance

Singapore Market Focus - Earnings Season Wraps Up

Downward earnings revision trend resumes; -2.9% for FY17F earnings and -1.5% for FY18F.
Oil & Gas, commodities, consumer goods and services sectors suffered earnings cuts – Noble Group, SIA, Japfa and Ezion.
Technology and SREITs enjoyed earnings uplift - Ascott Residence Trust, CapitaLand Retail China Trust, CDL Hospitality Trusts, Venture Corp, UMS.

Recovery optimism factored in, STI’s near-term cap at 3250 and pullback to 3150.

The 1Q17 results season that just ended saw 29% (previously 16% in 4Q16) of companies under our coverage reporting earnings that were above expectations. At the same time, a lower 19% (previously 28% in 4Q16) reported earnings that came in below expectations.
The traditionally stable SREITs sector witnessed several trusts delivering better-than-expected DPUs. These were Ascendas REIT, CapitaLand Retail China Trust, CDL Hospitality Trusts, Frasers Logistics & Industrial Trust, Mapletree Greater China Commercial Trust, Manulife US Real Estate and OUE Hospitality Trust.
The industrials sector saw the highest percentage of earnings disappointments. Noble Group was a major drag as the company reported a core loss of USD125m for the quarter. We now forecast a net loss of USD347m for FY17F and USD21m for FY18F due to Noble’s inability to effectively hedge the price risk in its coal business, and still negative operating cash flows.
Within the industrials sector, results from Pan-United, Singapore Post and ST Engineering were also weaker-than-expected. Despite this, we maintain our positive outlook for ST Engineering and even raised our TP to S$4.12 (prev. S$3.80).
ST Engineering remains in our Model Portfolio. The company has guided for a strong 2Q17 that could see profit before tax rising at least 20% q-o-q. We think the Singapore defence contract secured in March this year could be worth around S$1bn. The order book currently stands at a record S$13.3bn.

The 1Q17 results season saw a resumption of the downward earnings revision trend for stocks under our coverage. FY17F earnings were revised down by 2.9% while FY18F earnings were cut by 1.5%. This is against earlier optimism that the earnings upward revision witnessed in 4Q16 results season could be sustainable given the better-than-expected economic data trend YTD.

The technology sector benefited from positive earnings uplift from Venture Corp and UMS.
SREITs sector enjoyed a modest upward revision to DPU estimates from Ascott Residence Trust, CapitaLand Retail China Trust and CDL Hospitality Trusts amongst others.

A closer examination reveals that the bulk of the earnings cuts came from the industrials sector because of one single stock, Noble Group, which had reported losses. Ex-Noble Group, there was a 1% cut to FY17F earnings and 0.6% cut for FY18F.
The O&G sector also suffered earnings cut through the likes of Ezion and PACC offshore as the operating environment remained weak.
The consumer services sector was dragged down by SIA whose quarterly numbers were hit by weak passenger yields and non-operating charges. Meanwhile, Japfa dragged down the consumer goods sector after it reported weaker-than-expected earnings due to lower contributions from Japfa Comfeed Indonesia and Animal Protein outside Indonesia.

For stocks under our coverage, we now forecast EPS growth of 12.5% for 2017F and 8.1% for 2018F.
Our STI EPS growth forecast is in the mid to high single digit at 9.4% (consensus 6%) for 2017F and 6.4% (consensus 7.2%) for 2018F.

Following the modest cut to FY17F and FY18F earnings post 1Q17 results season, we lower STI’s forward PE levels by c.21pts for FY17F and c.13pts for FY18F.
STI currently trades at just slightly below 14.02x (+0.25SD) blended FY17/18F PE, even as the earnings revision trend has turned negative again.
We maintain our view that the STI has priced in the YTD recovery optimism. While it is possible for the STI to head for 3350 by year-end, we keep our view for near-term resistance at 3250 with pullback support at 3150.

Yeo Kee Yan CMT DBS Vickers | http://www.dbsvickers.com/ 2017-05-25

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