Singapore Market Focus - DBS Research 2017-11-06: Strategy ~ Broader-based Recovery

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SEMBCORP INDUSTRIES LTD U96.SI SEMBCORP MARINE LTD S51.SI PACC OFFSHORE SVCS HLDG LTD. U6C.SI CDL HOSPITALITY TRUSTS J85.SI MAPLETREE GREATER CHINACOMM TR RW0U.SI

Singapore Market Focus - Strategy ~ Broader-based Recovery

• Economic recovery broadens to include services, marine offshore engineering, construction.
• OCBC and UOB - Improving NIM, strong loan growth and stabilized NPLs.
• O&M stocks remain in favour – Sembcorp Marine, Sembcorp Industries and PACC Offshore Services Holdings (POSH).
• Turned selective on S-REITs - CDLHT, MAGIC, MLT.

Banks underpinned by improving NIM, strong loan growth and stabilised NPLs 

• Bank stocks should continue to find interest with the combination of improving NIM, strong loan growth and stabilising NPLs going forward. We expect any consolidation during the upcoming traditional year-end lull to be relatively shallow.
• Our interest rate strategist sees 3M SIBOR rising 102bps to 2.15% (current 1.125%) by end-2018 and higher still to 2.65% by end-2019. Every 25-bp increase in rates translates to an approximately 3-bp increase in NIM (ceteris paribus), that could lift banks’ earnings by 2%. Meanwhile, loans growth remains strong with the latest September figure coming in at 6.2% y-o-y, improving from August’s reading of 5.1%.
• We lifted OCBC’s TP to $13.50 (prev. $12.80) on the back of improving NIM, positive loan growth guidance and stabilised asset quality issues. We also lifted UOB’s TP to $27.5 (prev. 26.9) on the back of strong top-line growth with improved NIM and strong loan growth while asset quality woes should end going forward.

O&M stocks remain in favour 

• Our positive stance on O&M stocks over the past one month turned out well as the sector outperformed on optimism about the rig market recovery and the rally in oil price to YTD highs.
• Heading into 2018, interest in Singapore yards SembCorp Marine and SembCorp Industries should be sustained by the improving backdrop for oil price. OPEC is likely to announce an extension of its current production cut for the remainder of 2018 at the OPEC meeting on 30 November. This, coupled with inventory draw-downs and the uptick in rig transactions, should continue to underpin O&M stocks. The potential rationalisation among the three Singapore yards is another catalyst that can trigger a further revival in interest.
• In the OSV segment, POSH will be a survivor that is poised to ride the upswing. It has no bonds outstanding, undrawn bank lines and strong parentage with high ownership of c.82% by majority shareholder Kuok (Singapore) Ltd, which makes it a potential privatization candidate. We also see positive earnings momentum in 2H17/1H18.

Turned selective on S-REITs 

• S-REITs’ yield spread has tightened given the strong 16.5% yo-y YTD rise in the FTSE ST REITs Index and the recent recovery in the MAS 10-year yield, off YTD low of 1.94% to the current 2.14%. 
• With the 5.8% FY18F dividend yield for SREITs and the MAS 10-year yield expected to head to 2.55% by end-2018, the yield spread for S-REITs could tighten further to 3.25%, which is below the average yield spread of 4.2% in the post-GFC years from 2010 to date. We thus adopt a selective stance for S-REITs. 
• Our picks are CDL HT, MAGIC and Mapletree Logistics Trust. 
• Avoid S-REITs whose total return (i.e. target return + yield) is less than 7%. These are Parkway REIT, Soilbuild Business Space REIT, OUE Commercial REIT, Mapletree Industrial Trust, Cache Logistics Trust and IREIT Global.

Yeo Kee Yan CMT DBS Vickers | http://www.dbsvickers.com/ 2017-11-06

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