Singapore Market Focus - DBS Research 2017-06-16: Facing Moderating Growth

Singapore Market Focus - DBS Vickers 2017-06-16: Facing Moderating Growth Singapore Stock Market STI Component Stocks CAPITALAND MALL TRUST C38U.SI THAI BEVERAGE PUBLIC CO LTD Y92.SI SINGAPORE TECH ENGINEERING LTD S63.SI HUTCHISON PORT HOLDINGS TRUST NS8U.SI

Singapore Market Focus - Facing Moderating Growth

  • Exercise to evaluate focus shift for large caps with GDP growth moderating; STI turning sideways.
  • STI Component Stocks Picks – CapitaLand Mall Trust, Thai Bev, ST Eng.
  • Stocks with limited/no upside, or pullback risk - UOB, OCBC, GLP, Ascendas REIT and UOL.
  • HPH Trust an exception – Chart shows upturn, first upside US$0.47 with support at US$0.42.

STI turning sideways 

  • We maintain our view for STI 3274 as a near-term cap. The trend is turning sideways from 3185 to 3275.
  • In the event the 3185 fails, weakness to 3130 is seen before the correction ends. A year-end objective of 3350 remains possible.
  • Against this backdrop, we ran an exercise to access the STI component stocks taking into account target return, recommendation and technical situation.

YTD growth is moderating 

  • Our Singapore economist observes growing signs that the manufacturing rally could be coming to an end. 
  • PMI readings in the US, China and Singapore, and recent NODX figures have all fallen in the latest April data set. The electronics cluster has remained fairly resilient. Even so, a high base comparison in 4Q16 means headline growth will dip towards the end of the year. 
  • Meanwhile, the services sector is experiencing a two-speed recovery with financial and trade-related services expected to improve while recovery should be weaker for domestic services clusters such as retail and F&B.
  • Singapore’s growth outlook remains sanguine though with GDP growth seen at 2.8% this year and 2.5% in 2018.

Little impact from latest FED rate hike 

  • We see little impact from the latest FED rate hike on the local bourse as the move was well anticipated. The USDSGD rose a modest 0.6% to 1.384, rebounding off the lowest level in 8 months. The 3M SIBOR was barely changed at 0.99455%.
  • The FED’s guidance for one more hike this year and 3 more in 2018 was also within consensus view. 
  • Our economist continues to expect a faster pace at one hike per quarter till mid-2019.

Limited near-term upside for STI, Singapore downgrades to Neutral 

  • The Singapore market has done well YTD with STI rising nearly 13%. Yet, it has underperformed the MSCI Asia Ex-Japan Index. 
  • The Singapore market currently trades at 14.02x (+0.25SD) FY17F/FY18F PE. 
  • We maintain our view that while the STI can head for 3350, pegged to 14.02x (+0.25SD) FY18F PE by yearend, we think that the recent high of 3274 should continue to provide a near-term cap. 
  • The near-term trend looks to be sideways from 3185 to 3275 but should the lower band fail, we see weakness to 3130. 
  • Given the sanguine growth outlook, any decline down to 3130 is seen as the ‘worst-case’ correction.
  • Our regional strategist has also downgraded Singapore to Neutral from Overweight (See Report: Asia Equity Strategy - Calculating The Risks).

Evaluating possible focus shift in large caps 

  • Banks and property stocks led the Singapore market’s rally YTD. With STI’s trend likely to turn sideways (from up) with a very slightly upward bias in the weeks/months ahead, we look at where attention could possibly shift to.
  • We use 3 parameters to guide us in this exercise – target return, recommendation and technical situation (i.e. overbought or oversold, refer to comments in the table below). We have ‘colour coded’ these 3 criteria with Green for “Preferred”, Yellow for “Neutral” and Red for “Avoid”. We also look at the YTD relative performance with the STI to help us assess whether the stock may be over or under owned.
  • We draw the following observations and possible actions from this simple exercise: 
    1. CapitaLand Mall Trust is a preferred pick. We have a BUY recommendation on the stock with a 12% return. It is moderately oversold currently with the weekly stochastics at 23. The stock underperformed STI by 12% YTD, which suggests that it is under-owned currently. The current yield is 5.7%.
    2. ComfortDelgro, Wilmar and SPH are oversold rebound trades. While we have HOLD recommendations on all 3, they are technically oversold and offer more than 5% upside to our TP.
    3. Watch for possible interest uptick in Thai Bev and ST Engineering. We have BUY recommendations on these stocks with at least 10% upside. These stocks are technically neutral and underperformed/traded in line with the STI YTD, which suggest that they are still under or fairly owned currently. The conditions look conducive for a revival of interest in these stocks. ST Engineering is included in our Model Portfolio picks.
    4. Avoid UOB, OCBC, Ascendas REIT and GLP. These stocks are overbought and offer little or no upside to our TP.  They have also outperformed STI YTD, which suggests that they are well owned currently.
    5. UOL shares look well owned given its strong YTD relative outperformance. The stock is susceptible to near-term profit taking as it is technically overbought. Beyond the near-term pullback risk, the stock offers upside to TP in excess of 10%.
    6. We make an exception with HPH Trust in this exercise. The stock is moderately overbought by definition, trading above our fundamental TP and has a HOLD recommendation. But we observed that the stock’s downtrend since mid-2014 from a high of US$0.75 has lost its negative momentum. The 15-day, 65-day and 200-day exponential moving averages have converged and the stock has just turned up above all 3 averages. HPH Trust's share price action has just exhibited an upturn. We peg pullback support at US$0.42 with initial upside to US$0.47 (23.6% upward retracement). If the price recovery extends beyond this, the next level is US$0.52 (38.2% upward retracement). Positive technical view invalid if price falls back to US$0.41.

Yeo Kee Yan CMT DBS Vickers | http://www.dbsvickers.com/ 2017-06-16
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.170 Same 2.170
BUY Maintain BUY 1.090 Same 1.090
BUY Maintain BUY 4.120 Same 4.120
HOLD Maintain HOLD 0.420 Same 0.420