Singapore Monthly Strategy - DBS Research 2017-10-03: STI 3400 Decision Time

Singapore Monthly Strategy - DBS Vickers 2017-10-03: STI 3400 Decision Time Singapore Stock Market Outlook Straits Times Index forecast Stocks To Buy OVERSEA-CHINESE BANKING CORP O39.SI GENTING SINGAPORE PLC G13.SI IFAST CORPORATION LTD. AIY.SI SUNNINGDALE TECH LTD BHQ.SI THAI BEVERAGE PUBLIC CO LTD Y92.SI

Singapore Monthly Strategy - STI 3400 Decision Time

Looking back at September 

  • The benchmark Straits Times Index (STI) fell 57pts or 1.9% m-o-m in September, weighed down by the ongoing rhetoric between North Korea and the US as well as a more hawkish FED at the September FOMC meeting. 
  • The pullback was in line with our view for a dip to the 3210 near-term technical support for the STI. 
  • The FED kept alive the possibility of a 3rd third rate hike this year and will start to unwind its US$4.5trillion balance sheet from October. Prior to this, consensus had expected the next rate hike to occur only in the second quarter of next year. As a result, bond yields and the USD rebounded while Asia and emerging market equities retreated.
  • The O&G sector outperformed with the FTSE ST O&G index up 2.4% led by Keppel Corp and Sembcorp Marine. The sector benefited from signs of a rig market recovery and 12% rally in Brent crude to hit a fresh year-to-date (YTD) high of USD59 per barrel. The consumer services sector fared the worst, dragged down by ComfortDelgro on worries about losing its taxi drivers to competitors.

October Market Outlook 

MAS to maintain neutral stance 

  • The semi-annual monetary policy meeting will be held no later than 13 Oct. Our Singapore economist believes that MAS will maintain a zero rate appreciation for SGD Nominal Effective Exchange Rate (NEER) with benign domestic inflationary pressure and soft labour market. Singapore’s August CPI tracked a tame 0.4% y-o-y rise, which is a dip from the previous month and consensus expectation for +0.6% y-o-y. 
  • Meanwhile, the labour market still faces transitional and structural constraints.

North Asian markets consolidating ahead of 19th NCCP meeting 

  • The semi-decennial National Congress of the Communist Party of China (NCCP) meeting will be held from 18-24 October. We expect Chinese President Xi JinPing will want to ensure stability to strengthen his position. The HK/China equity markets are consolidating ahead of the October meeting. 
  • Our regional strategist says the pullback is an opportunity to accumulate as the outlook for HK market remains strong for the rest of the year. Meanwhile, our HK/China economist expects OBOR projects to accelerate after the NCCP meeting.

3Q17 results season crucial for STI 3400 year-end target 

  • Pay attention to the 3Q results season because we think it will be a big determining factor on whether the STI can indeed head towards our anticipated year-end objective of 3400.
  • A recap that the overall net earnings revision trend YTD had been negative to neutral as Singapore’s economic recovery benefited mainly specific sectors such as banks, property and manufacturing. The 1Q17 results season suffered a 2.9% and 1.5% earnings cut for FY17F and FY18F respectively. The 2Q17 earnings season saw a milder 0.7% cut to FY18F earnings while that for FY17F was unchanged.
  • The Singapore market currently trades at slightly above 13.64x (average) 12-mth forward PE. Our year-end objective of 3400 is now pegged to 14.41x (+0.5SD) FY18F PE. At this valuation peg, we do not think the Singapore market can stomach another round of earnings cut without seriously denting the odds of a year-end rally to 3400. An upturn to the earnings revision trend will be most welcome.
  • The good news is that Singapore’s economic recovery is turning more broad-based, expanding to the services and construction sectors even as signs of growth moderation appears to be emerging. 
  • In addition, the upcoming results season enjoys a ‘low-base’ effect as last year’s 3Q was the trough in Singapore’s GDP. We keep our fingers cross that the upcoming results season will be benign. We provide ideas on what stocks to position into for the results season in the next section.


Stocks to position ahead of 3Q results 

  • Position into stocks that fit the following criteria:
    1. Upward earnings revision during 2Q results season
    2. Buy recommendation and
    3. at least 10% upside to Target Price. 
    These are OCBC, Genting Singapore and iFAST.
    • OCBC’s earnings are underpinned by higher non-interest income prospects particularly for wealth management and insurance segments. 
    • iFAST is reaping the fruits of labour, on its consistent efforts to broaden the range and depth of its investment products and services in the last few years. 
    • For Genting Singapore, with bad debts under control, the focus is on selectively growing its VIP business.
  • Looking into the 3Q crystal ball, stocks which are expected to post strong quarterly results are : Hi-P, Thai Bev and Sunningdale.
    • Hi-P continues to ride on strong growth momentum on robust demand for smartphones and computer peripherals IOT). 
    • Thai Bev’s 3Q will benefit from trade loading ahead of the increase in excise duties in Thailand from early September.
    • Sunningdale’s order growth and margin expansion are key earnings drivers while M&A could drive re-rating of share price. The recent inaugural interim dividend of 2.5 Sct sent a positive signal. 2H will be seasonally stronger, ahead of pre-year end orders.

SREITs checked by rebound in risk-free rate 

  • Bond yields rebounded from YTD lows following the FED’s more hawkish stance at the September FOMC meeting. The FED kept alive the possibility of a third rate hike this year and said it will start to unwind its US$4.5trillion balance sheet from October. 
  • The MAS 10-year bond yield rebounded 25bps from September’s low of 1.95% up to 2.20%. While we do not expect the momentum of the sharp recovery to sustain, it is very likely September was an important inflexion point. Technically, we see the MAS 10-year yield holding up above 2.05% going forward. Our interest rates strategist sees it heading to 2.3% by mid-2018.
  • Against this backdrop, investors should become more selective towards SREITs. Our picks are 

Yeo Kee Yan CMT DBS Vickers | Janice Chua DBS Vickers | http://www.dbsvickers.com/ 2017-10-03
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 12.800 Same 12.800
BUY Maintain BUY 1.450 Same 1.450
BUY Maintain BUY 1.260 Same 1.260
BUY Maintain BUY 2.700 Same 2.700
BUY Maintain BUY 1.070 Same 1.070