Singapore Strategy (Stock Picks in 1H18) - UOB Kay Hian 2017-11-09: Stretching Valuations On Rising Growth

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Singapore Stocks To Buy 2018 OVERSEA-CHINESE BANKING CORP O39.SI KEPPEL CORPORATION LIMITED BN4.SI SEMBCORP INDUSTRIES LTD U96.SI CAPITALAND LIMITED C31.SI FRASERS HOSPITALITY TRUST ACV.SI Singapore Stock Picks 2018

Singapore Strategy - Stretching Valuations On Rising Growth

• Our 2018 FSSTI target of 3,530 has the potential to stretch to 3,730 should corporate earnings pleasantly surprise. 
• Meanwhile, we see selective themes for 2018, including multi-year growth stocks, reflation picks, quality laggards and stocks with earnings surprises/specific catalysts.

WHAT’S NEW

• We have just issued our 1H18 Strategy for Singapore. This report focuses on the key highlights and investment themes for 1H18.

ACTION

2018 year-end FSSTI target range of 3,530. 

• This is based on an equal weighting of the long-term (LT) mean PE and a 10% discount to LT P/B. 
• With corporate earnings bottoming out in 2017 and expected to continue rising in 2018, we remove the 10% discount on mean PE but keep the discount to P/B as the FSSTI’s ROE of 8.4% is expected to be below its trend of 11.0%. 
• Based on previous trough-to-peak cycles, we think the FSSTI could continue rising till Jul 18 on the caveat that earnings are delivered and there are no external shocks.

Expect FSSTI earnings to rise 6.4% in 2018. 

• We forecast 2018 market EPS growth of 6.4%, boosted by growth in sectors such as banks, telecommunications (Singtel), manufacturing and shipyards. 
• In our view, sectors with earnings upside include banks, developers and selected exporters such as Venture.

Property multiplier. 

• The recent en-bloc sales and return in property buying sentiment could provide an additional boost to the economy. 
• In addition to rising loans growth as property transactions pick up, we think the wealth effect and consumption boost is meaningful and would further supplement the pick-up in external growth. 
• Infrastructure spending could also enjoy a boost in 2018 as public infrastructure spending could rise from S$18.3b in 2017 to S$30.0b by 2020.

Investment themes to consider for 1H18. 

• Investment themes that we favour for 2018 include:
  1. companies with multi-year growth drivers,
  2. reflation picks,
  3. quality laggards, and
  4. stocks with earnings upside.

Stock picks in 1H18 portfolio. 

• In the large-cap space, we like OCBC, Keppel Corp, Sembcorp Industries, CapitaLand, Frasers Hospitality Trust, CapitaLand Commercial Trust , Ascendas REIT, SATS, SingTel, Venture and Wing Tai. 
• Mid-cap gems include Cityneon, GL Limited and Banyan Tree. 
• SELL SPH and top-slice CapitaLand Mall Trust.

Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2017-11-09

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