Singapore Market Focus - DBS Research 2017-08-23: Patchy Recovery


Singapore Market Focus - Patchy Recovery

  • 2Q17 results season : FY18F earnings cut 0.7%, positive revisions only for property and technology.
  • STI - 3Q high seen at 3355 on PE valuation cap and macro uncertainties; downside to 3200, base case 3100 if correction extends.
  • Yield stocks outperformed - MAGIC, FCT & Manulife REIT.
  • Property stocks underpinned by enbloc newsflow.
  • Top slice UOB.

Mixed Outcome To 2Q17 Results Season 

  • The 2Q17 results season that just ended saw 22% (previously 29% in 1Q17) of companies under our coverage reporting earnings that were above expectations. At the same time, 18% (little change from 19% in 4Q16) reported earnings that were below expectations.
  • Venture Corp, Hi-P and Sunningdale Tech reported better-than-expected earnings on the back of a cyclical recovery in the technology sector. 
  • In the property sector, Capitaland and Perennial Real Estate benefited from higher revaluation gains while Frasers Centrepoint Limited’s earnings was also underpinned by higher recognition from completion of development properties.
  • Meanwhile, the industrials sector saw the highest percentage of earnings disappointments. SingPost’s results was affected by competition and a weak operating environment. Quarterly net profit for SIA Engineering came in slightly below expectations on higher staff costs. 
  • ST Engineering’s earnings was affected by cost provisions at the US shipbuilding operations, and softer-than-expected margins at Aerospace and Electronics segments. The stock has been downgraded to HOLD and we have also removed it from our Model Portfolio as it had gained 18.8% since inclusion from November 2016.

Earnings Revision Trend Not Echoing Strong Headline GDP Figure 

  • The 2Q17 results season ended with a modest downward adjustment to earnings for stocks under our coverage. There was no change to FY17F earnings while that for FY18F was lowered by 0.7%. The earnings revision trend failed to turn up after two consecutive quarters. This despite the strong headline 2.9% y-o-y 2Q GDP growth. 
  • The 2Q results season shows that the economic recovery has benefited only selective segments of the economy such as property and technology. With the headline y-o-y GDP growth likely to moderate from 4Q17, it remains to be seen if the earnings revision trend is able to turn positive.

STI - Mid to High Single Digit EPS Growth 

  • For stocks under our coverage, we forecast an EPS growth of 13.9% for 2017F and 6.1% for 2018F. 
  • Our STI EPS growth forecast remains in the mid-to-high single digit at 9.8% (consensus 7%) for 2017F and 5.6% (consensus 7.9%) for 2018F.

STI Likely Seen Its 3Q High At 3355.

  • The August correction that we warned about (refer to monthly Singapore Strategy Report dated 3 August) has panned out. In line with our view, STI’s rally stalled at the 3355 resistance level with a pullback to 3250.
  • The 3250 level coincides with the 14.02x (+0.25SD) 12- month forward PE level. While we see temporary support at that level and a minor technical bounce is possible in the immediate term, we doubt that the benchmark index can once again resume its YTD climb to head for a higher high anytime soon. Here’s why: 
    1. Unattractive PE valuation and lack of positive earnings revisions – The overall net earnings forecast has been cut for two consecutive quarters. At the recent high of 3355, STI was already trading at a “rich” valuation at 14.41 (+0.5SD) 12-mth forward PE. That level is now above the 14.41 (+0.5SD) 12-mth forward PE with the latest modest downward revision to earnings.
    2. Trump’s controversy – His remarks regarding a racist rally in Virginia and the subsequent disbanding of two business advisory panels has further rattled investor confidence about his ability to deliver his election promises on tax cuts and infrastructure spending.
      According to Bloomberg, rumours surfaced last week that Gary Cohn, whom had been leading Trump’s efforts on tax reform, would resign as head of the national economic council. There were also unconfirmed newswire reports that Trump will not move forward with a planned advisory council on Infrastructure.
    3. Central banks’ policy meetings – Investors are also unlikely to take up aggressive positive bets on stocks ahead of the FED and ECB policy meetings next month.
      In Europe, the ECB is expected to make a decision on whether to extend or wind-down asset purchases in 2018 at its policy meeting on 7 September. We expect the FED to hold rates steady at the 19-20 September FOMC meeting but may announce the commencement of its balance sheet reduction.
    4. The STI looks to have started a consolidation phase between 3200 and 3355. We believe that its high of 3355 achieved on 27 July is the high for 3Q. Near-term technical bounces are likely capped at 3325 or even as low as the 3275 resistance level. Next support level is at 3200. Should the current correction extend longer, base support is at 3100.

Yield Stocks Should Outperform 

  • We believe that yield stocks should continue to be underpinned as bond yields stay suppressed and consensus expectation for another rate hike this year has fallen.
  • The US 10-year treasury yield has been contained around the 2.25% level for several months as headline inflation remains muted. US CPI retreated from a high of 2.74% y-o-y in February to 1.73% y-o-y in July. Investor’s confidence about Trump’s ability to deliver his election promises on tax cuts and infrastructure spending has also taken a beating. The consensus expectation for the next rate hike has shifted back to March 2018 (source: Bloomberg Finance L.P.).
  • In Singapore, the MAS 10-year yield has been suppressed around the 2.10% (ytd high 2.55, ytd low 1.97) level since May. The current yield spread of 4% could continue to lend support to the SREIT sector (sector yield: 6.1%). 
  • Large cap SREITs with more than 6% yield and 10% total return (target return + yield) are Mapletree Greater China Commercial Trust, Mapletree Industrial Trust and Mapletree Logistics Trust. Small cap SREITs with more than 6% yield and 15% total return would be Frasers Commercial Trust, Frasers Hospitality Trust, Manulife REIT, Starhill Global REIT and CDL Hospitality Trust.

Improving Residential Market Sentiment Underpins Property Stocks On Pullback 

  • The residential property sector sentiment continues to be underpinned by enbloc newsflow. The latest being Tampines Court that received an offer for S$970 million. Two other developments in the West area, Park West Condo and Normanton Park, will be put up for sale. The asking price for Park West is expected to be S$750 million while Normanton Park is slated to be launched at S$800 million.
  • Six other collective sale transactions valued at S$2.1 billion in total have already been done so far this year. These are Serangoon Ville, The Albracca, One Tree Hill Gardens, Goh & Goh Building, Rio Casa and Eunosville. The figure surpassed the three deals worth S$1billion for whole of last year. 
  • Singapore residential property stocks have retreated from their early August highs, in line with the equity market pullback. While profit taking is expected given their strong YTD run up, we believe that residential property stocks should outperform the STI given the improving physical market sentiment. Our property analyst expects Singapore residential property prices to rise by 6-10% over the next two years as volumes approach 5-year peaks.
  • Shares of City Developments rallied to a high of S$12.10 before correcting, in line with our expectation (refer to Singapore Monthly Strategy dated 3 Aug 2017). The table below looks at the large cap property stocks as well as their support levels for entry opportunities should the consolidation trend continue.

Bank Stocks In Consolidation 

  • We think lacklustre performance in index heavyweight bank stocks should lead to further consolidation for the STI in 3Q17. Singapore bank stocks have performed well YTD on optimism of loan growth recovery and in anticipation of higher net interest margin (NIM) as interest rates eventually rise. While the former is true as bank loans and advances recovered from -2.7% y-o-y back in June last year to +7.6% y-o-y for July 2107, consensus expectation for the next US rate hike has back paddled to March 2018 (source: Bloomberg).
  • 2Q17 results for banks were mixed. While our banking analyst raised OCBC’s earnings by 2-8% across FY17-19F on higher non-interest income prospects, she cuts UOB’s earnings by 2-5% across FY17-19F on muted loans growth and new NPL uptick. The overall sector earnings were lowered by 1.4% for FY17F and revised up 1.5% for FY18F.
  • We advocated ‘top slicing’ UOB earlier this month, rightfully so as the stock has fallen 4% from its S$24.60 high. Continue to do so on any minor bounce towards near-term resistance at S$24.00. A further pullback towards S$22.85 is possible.

Yeo Kee Yan CMT DBS Vickers | http://www.dbsvickers.com/ 2017-08-23
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.260 Same 2.260
BUY Maintain BUY 1.070 Same 1.070
BUY Maintain BUY 1.250 Same 1.250
BUY Maintain BUY 2.350 Same 2.350
BUY Maintain BUY 8.730 Same 8.730