Singapore Market Monitor - Maybank Kim Eng 2017-11-28: Shifting Up A Gear

Singapore Market Monitor - Maybank Kim Eng 2017-11-28: Shifting Up A Gear Singapore Stock Market Outlook FSSTI Target

Singapore Market Monitor - Shifting Up A Gear

Earnings recovery was sustained in q/e Sep 2017 

  • A third consecutive quarter of core profit growth will go a long way in reinforcing sustainability of the somewhat tentative turnaround seen two quarters ago. 
  • Revenue, EBITDA and core profit of MKE’s stocks universe grew 4%, 14% and 7% YoY, respectively. 
  • The macro data continues deliver on our growth outlook while earnings expectations are inching up as well. 
  • We maintain a preference for cyclicals and are POSITIVE on property and industrials. Most of our top stock ideas are from these sectors.

Expectation upgrades coming through 

  • The Street’s profit growth expectation for 2018 is going through an upgrade cycle in our view with the consensus outlook for FSSTI rising c200bps to the 10% level over the past couple of months (in contrast, there was minimal adjustment post the q/e Mar 2017 and q/e June 2017 reporting periods). 
  • Our core profit growth estimates for 2017/2018/2019 currently stand at 13%/9%/7%, respectively.

Taking stock of sectors – +VE property, industrials 

  • We remain broadly biased to cyclicals on top-down factors of a positive macro growth outlook and profit growth expectation improvements plus bottom-up sector factors for the property rebound to be sustained for another 3-4 quarters and an inflection point in the outlook for industrials. 
  • We are POSITIVE on property developers, industrial REITs and industrials. We are NEUTRAL on financials, office REITs and gaming (more due to recent price action than change to sector fundamentals) and NEGATIVE on telecoms and agri-commodities.

Macro ticking along nicely 

  • MKE’s economics team forecasts 3.4% GDP growth in 2017 moderating to 2.5% in 2018 with industrial production growth slowing from high base effects kicking in while services starts contributing to a greater proportion of overall growth as the manufacturing-led recovery broadens to domestic sectors. Notably the construction sector looks poised for a rebound in 2018 with the en bloc activity in the past couple of quarters.
  • On other fronts the most recent data points on tourist arrivals, unemployment and wages have been incrementally positive too.

Key risks to our outlook 

  • Key downside risks to our outlook for the current rally to extend through 2018 are external growth and/or trade headwinds that derail industrial production and the tech capex up-cycle, potential measures to cool the property market amid rebounding physical prices and en bloc activity and material portfolio fund outflows from ASEAN to North Asia. 
  • On the flip-side, upside risks to our view lie mainly with an earlier or stronger than expected recovery for O&M sector and knock-on effect of any improvement in a what has been a relatively lackluster consumption environment this year in some of Singapore’s neighbouring countries.

Earnings turnaround sustained in q/e Sep 2017 

A good quarter building on the recovery of the prior two 

  • The revenues, EBITDA and core profit of MKE’s stocks universe grew 4%, 14% and 7% YoY, respectively in the q/e Sep 2017.
  • Among the stocks with a market cap in excess of USD1b, those with the top revenue, EBITDA and core profit growth for the quarter were concentrated in the property, REITs, consumer and gaming sectors (GUOL SP, UOL SP, MCT SP, MINT SP, CAPL SP, CIT SP, BAL SP and GENS SP). In addition, SIA SP saw a doubling of profits.
  • EBITDA margins ex-property and financials expanded c220bps YoY to 28.4% for q/e Sep 2017, driven by industrials (as O&M inventory writedowns tapered from 2016 levels and margins were better YoY), consumer and gaming sectors.
  • Around 78% of the results were in line with our expectations (70% for the Street) and the ratio of beats versus misses was somewhat even. We had more forecast upgrades than downgrades post the reporting season. We also had three ratings upgrades and, notably, no rating downgrades (a first over the past year).
  • Incremental upgrades to expectations from the street - FSSTI consensus core profit growth forecast for 2017 and 2018 at 12% and 10% respectively (vs. 12% and 8% expectations a quarter ago). MKE coverage growth profit outlook for 2017-2019 at 13%, 9% and 7% respectively.

FSSTI ex-Jardines’ core profit growth slower than MKE basket 

  • Core profit for FSSTI components ex-Jardines’ (as a number of the Jardine Group companies announce results only semi-annually) grew 2% YoY for q/e Sep 2017, much slower than MKE coverage basket at 7% YoY.
  • The declines in core profit in a few index components that we do not cover like Hutchison Ports Holdings (HPHT SP; NR), and agri commodities companies Golden Agri Resources (GGR SP; NR) and Wilmar (WIL SP; NR) were key reasons for this.

Street expectations for 2018 earnings growth has moved up QoQ 

  • Consensus core profit outlook for FSSTI in 2018 saw growth expectations move up by almost 200bps to 10% levels over the past couple of months.
  • In contrast, expectations were relatively unchanged after the q/e March reporting season and inched up only marginally post the q/e June.
  • Meanwhile MKE coverage core profit growth estimates for 2017/2018/2019 stand at 13%, 9% and 7% respectively.
  • In our view the key downside risk to earnings could be external events derailing trade growth or affecting the tech capex upcycle while the key upside risk would be an earlier and/or better than expected rebound in the O&M sector. O&M players are still struggling to build order books with non-drilling solutions to compensate for the weak demand for drilling equipment.

Despite rerating, FSSTI could hold further upside 

  • FSSTI has been amongst the best performing ASEAN markets YTD 2017, up 19% in local currency terms and 28% in USD terms (its USD performance the second best in ASEAN after Vietnam). But despite this strong performance, index valuations relative to its trailing long-term multiples still appear reasonable.
    • FSSTI 12M trailing P/E of 11.2x at 15% and 10% below respective 5 and 10 year mean multiples, while its 12M trailing P/BV of 1.26x at 4% and 11% below respective 5 and 10 year mean (for P/BV we do note that FSSTI composition has gradually changed over the past decade with a greater proportion of overseas companies with structurally lower long term P/BV valuations now a part of the index).
    • Consensus ROE expected to expand further by c40-50bps to c10% levels for 2017 and 2018.
    • In an ASEAN markets context, FSSTI has the lowest prospective P/E for 2017 and 2018 (albeit with lower growth) and amongst the highest dividend yields, along with Malaysia).
    • An additional plus factor for FSSTI total returns and dividend yield for USD-based investors would be expectation for a relatively stable and potentially appreciating SGD in 2018.

FSSTI end-2018 target scenarios 

  • Our end-2018 base case FSSTI target estimate is 3,497 derived from equal weighting of:
    • top-down estimate at +1sd 5Y trailing mean P/E of 14.4x on 2018 consensus EPS; and
    • bottom-up target based on MKE TP for covered stocks and consensus TP for non-covered stocks. 
  • We have adjusted our methodology for base case index target scenarios from our prior reports; in the past we also included a third component (in an equal weighted approach as well) by incorporating a target index multiple, assuming the gap between earnings yield and deposit rates would be maintained over the 12M forward outlook, which we have since dropped seeing weak historical correlations.
  • As the macro and earnings recovery has been central to YTD-2017 index performance, we build positive and negative scenarios around our base case for sensitivity to earnings surprises or disappointments.
  • Our positive scenario assumes a 5% earnings surprise will sustain trailing index P/E at the current +1sd premium, while a 5% earnings disappointment will result in the index P/E de-rating back to its 5-year mean of 13.2x.
  • Under our scenario assumptions, the positive and negative outcomes around the base case are somewhat asymmetric. The approaches yield an end-2018 index level of 3,185 to 3,672.

The macro outlook is nicely ticking along 

  • To recap, MKE’s economics team made three upgrades in the early part of the year to Singapore’s 2017 GDP growth outlook (1.8% => 2.5% => 3% => 3.4%) ahead of the street, as well as MAS guidance, which have both crept up since. MKE growth upgrades were driven in a large part by stronger than expected industrial production (IP) helped by the electronics sector, particularly semiconductors.
  • Our economist’s view that other segments of IP would also gradually turn around in 2H17 has been panning out as well. In the most recently released manufacturing data for Oct 2017, IP continued to surge to hit another record level, up 14.5% YoY while IP ex-biomedical rose 25.8% YoY. However, following double-digit IP growth for the past five successive months, the growth rate is expected to moderate from Nov 2017 onwards as the high base effects for semiconductors start to kick in.
  • MKE expected GDP growth to come in at 3.4% for 2017 and moderate to 2.5% in 2018 with services contributing to a greater proportion to overall growth as the manufacturing / exports-led recovery broadens to domestic sectors.
  • Additionally, after property tightening measures saw a key inflection point in late 1Q17 with calibrated easing, the sector has been buoyant with a lot of en bloc activities raising the likelihood for construction to recover in 2018 after the weak 2017 performance. 
  • On other fronts, the most recent data points on tourism, unemployment and wages have been incrementally positive as well.

Neel Sinha Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-11-28