Singapore Market Focus - DBS Research 2017-07-26: Spotlight Turns Towards Rig Builders

Singapore Market Focus - DBS Vickers 2017-07-27: Spotlight Turns Towards Rig Builders Singapore Stock Market Outlook Straits Times Index Target KEPPEL CORPORATION LIMITED BN4.SI SEMBCORP MARINE LTD S51.SI SEMBCORP INDUSTRIES LTD U96.SI UOL GROUP LIMITED U14.SI CITY DEVELOPMENTS LIMITED C09.SI

Singapore Market Focus - Spotlight Turns Towards Rig Builders

  • Interest rotation to rig builders – Positive on SembCorp Industries, SembCorp Marine and Keppel Corp.
  • Property stocks still underpinned by improving sentiment – Picks UOL and City Dev.
  • Banks results – Watch NIM, loans growth and NPL.
  • STI resistance c.3350, formidable at 3400, pullback support 3255.

What has Happened? 

Banks and property stocks powered latest blue chip rally 

  • The benchmark Straits Times Index blew past the 3275 short-term resistance level and breached the 3300 level over the past 1-2 weeks. The rally that began on 12 July was ignited by three factors: 
    1. news of a buyout offer that lifted the large-cap property stocks, 
    2. uptick in the 3M SIBOR that underpinned the index heavyweight bank stocks, and 
    3. decline in the USDSGD rate on more dovish comments by the Fed on scepticism about Trump’s ability to push forth his pro-growth policies.

What Should You Do Next? 

Stay calm and don’t panic if you missed out on the latest rally 

  • The benchmark Straits Times Index (STI) has risen above our earlier expected upside cap of 3275. The current rise has encountered resistance around our year-end objective of 3350 pending the outcome of the current earnings season. 
  • The Singapore market now trades at 14.41x (+0.5SD) 12-mth forward PE. The 3400 level coincides with our current bottom-up STI objective that is a key and formidable resistance.
  • We expect some interest rotation from the leading sectors such as banks, properties and technologies to industrials and capital goods (e.g. rig builders) as the economic recovery shifts from early towards mid-expansion. 
  • We are positive on the three rig builders SembCorp Industries, SembCorp Marine and Keppel Corp. Among the sector YTD sector leaders, we think property stocks should continue to trend higher given the still improving sector sentiment notably in the residential segment. Our picks are UOL and City Developments. 
  • For bank stocks UOB and OCBC that currently trades above their respective target prices, investors await their quarterly results releases this week to establish their next directional move.
(See the latest target prices we've compiled @ OCBC Bank Target Price, UOB Target Price)

Straits Times Index faces short-term resistance around 3350, pullback support 3255 

  • The 130-pt rally over the past one week lifted STI close to the 14.41x (+0.5SD) 12-mth forward PE level currently at 3350. With 2Q17 earnings season having just started and the earnings revision trend turning down in the previous 1Q results season, we expect the rally to stall around our year-end objective of 3350 pending the outcome of the current earnings season. 
  • We see near-term pullback support around 3255.

Interest uptick among rig builders 

  • Financials, consumer discretionary and the technology sectors typically outperform during the early expansion phase of an economic recovery. This has held true YTD as banking, property (an example of consumer discretionary) and technology stocks have outperformed the broader market. These leading sectors are already ‘well-owned’. 
  • As the economic recovery progresses from early towards mid-expansion, interest should rotate to other sectors such as the industrials and capital goods.

Interest in rig builders, a classification of capital goods, should see an uptick riding on the improving demand-supply situation for oil.

Rig builders’ technical outlook – Any post-results reactionary pullback is an opportunity 

  • Technically, all three rig builders look to have ended their intermediate correction that stretched from March till June.
  • Shares of Keppel Corp dipped briefly to an intra-day low of $6.42 on 21 July after reporting quarterly results but have since recovered. The brief pullback to $6.42 coincided with the 15-day exponential and technical support.
  • We see similar support emerging should the shares of SembCorp Marine and SembCorp Industries experience a similar reaction.
  • SembCorp Marine’s support is at $1.69 to $1.72 while that for SembCorp Industries is at $3.23. There is also support at a lower level of $3.18 but this looks less likely to be tested. SembCorp Industries reports results on 27 July while SembCorp Marine reports on 3 August.

Awaiting results release for banks 

  • A third of the STI component stocks have risen beyond our fundamental TP including the index heavyweight bank stocks.
  • Shares of both OCBC and UOB currently trade above ours and the Bloomberg consensus 12-mth TP of $10.85 and $23.40 respectively. Bank stocks encountered a bout of profit taking last Thursday that led to a pullback in the STI off the 3330 level.
  • Banks are scheduled to release quarterly results this week (OCBC on 27 July, UOB on 28 July). Investors will likely keep a close watch on their NIM, loans growth and NPL figures to ascertain their next directional move.

Between banks and properties, we prefer the latter 

  • Both banks and property stocks have been the Straits Times Index component outperformers YTD
  • Between these two sectors, we believe property stocks are more likely to continue with their rising trend given the still improving sector sentiment. The robust demand at new launches as well as the string of en-bloc sales YTD continue to bode well for the residential segment. 
  • Our picks are UOL and City Developments.

Yeo Kee Yan CMT DBS Vickers | http://www.dbsvickers.com/ 2017-07-27
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