Singapore Strategy - UOB Kay Hian 2017-06-07: Nascent Earnings Recovery But Priced In

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Singapore Strategy 2H17 Investment Theme Singapore Stocks CITIC ENVIROTECH LTD. CEE.SI KEPPEL TELE & TRAN K11.SI CHINA AVIATION OIL(S) CORP LTD G92.SI HOTUNG INVESTMENT HLDGS LTD BLS.SI FRASERS LOGISTICS & IND TRUST BUOU.SI

Singapore Strategy - Nascent Earnings Recovery But Priced In

• Despite expectations of a recovery in corporate earnings, much of this has been priced in after the FSSTI’s ytd rise of 12%. 
• We have a year-end target of 3,250 for FSSTI and would buy on pull-backs, particularly on our key investment themes.

WHAT’S NEW

• This report focuses on the key highlights and investment themes for 2H17.

ACTION

2017 year-end FSSTI target range of 3,250. 

• Given firm non-oil domestic exports (NODX) – up till March – which suggests upside rather than downside to UOB’s GDP growth forecast, we see a narrowing of the FSSTI’s discount to its long-term PE and P/B valuations. 
• Assuming a discount of 10% would suggest a year-end FSSTI target of 3,250. We believe a discount is warranted as the FSSTI’s ROE of 9.9% remains below its 10-year mean of 11.1%.

Encouraging 1Q17 results point to earnings recovery in 2017. 

• After two consecutive years of earnings recession, we forecast 2017 EPS to recover 8.0% yoy and 2018 EPS to rise 5.2% yoy. However, unlike in previous years, lower downside risk in earnings outlook is expected on a better external outlook. 
• In 1Q17 earnings, banks provided a lot of comfort in terms of asset quality and selected NIM expansion.
• Exporters, particularly the likes of Venture and Memtech also provided solid upside surprises in 1Q17.

Investment themes to consider for 2H17. 

• Investment themes that we like for the rest of the year include: 
  1. companies with potential earnings surprises, 
  2. restructuring or M&A plays, 
  3. strong performing exporters, and 
  4. quality sector laggards.

Stocks for a lucrative 2H17 portfolio. 

• Large-cap BUYs include OCBC Bank, DBS Group, CapitaLand, Frasers Logistic Trust, CapitaLand Commercial Trust, Sembcorp Industries and Ascendas REIT. 
• Mid-cap gems include Citic Envirotech, Keppel T&T, China Aviation Oil and Hotung Investment. 
• SELL SIAEC and Singapore Press Holdings SPH. 
• Top-slice SATS.

Andrew Chow CFA UOB Kay Hian | Singapore Research UOB Kay Hian | http://research.uobkayhian.com/ 2017-06-07

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.100 Same 1.100

BUY Maintain BUY 2.510 Same 2.510

BUY Maintain BUY 2.260 Same 2.260

BUY Maintain BUY 3.380 Same 3.380

BUY Maintain BUY 1.110 Same 1.110