Singapore Strategy - CIMB Research 2017-11-16: 3Q17 More Misses; 2018 Sneak Peek ~ All Is Well

Singapore Strategy - CIMB Research 2017-11-16: 3Q17 More Misses; 2018 Sneak Peek: All Is Well Singapore Stock Picks 2018 AEM HOLDINGS LTD AWX.SI MEMTECH INTERNATIONAL LTD BOL.SI SUNNINGDALE TECH LTD BHQ.SI YONGNAM HOLDINGS LIMITED AXB.SI MM2 ASIA LTD. 1B0.SI

Singapore Strategy - 3Q17 More Misses; 2018 Sneak Peek: All Is Well

  • Despite more misses than beats in 3Q17, earnings upgrades continued for the sixth consecutive quarter, led by banks, gaming and tech.
  • We now expect aggregate earnings to grow by 8% in FY18-FY19F, much better than our original expectations of 2-5% at the start of 2017.
  • 2018 could be the year of “all is well” as fundamentals are improving on firmer footing globally and in Singapore.
  • We turn bullish on Capital Goods and Banks on stronger expectations of orders and broad earnings growth. Other OW sectors are tech, property and gaming.
  • Alpha picks: Keppel Corp, Venture Corp, UOL, Genting Singapore, Sembcorp Marine (new), AEM, Memtech, Yongnam (new) Sunningdale (new).

3Q17 Review : Misses are not new shocks, beats are better quality 

  • We are not concerned about the 3Q17 misses as they were not new shocks, such as weak operating leverage in Capital Goods. Plantations missed on lower ASPs and downstream competition. 
  • We are excited about the “quality” beats, led by Venture Corp, Genting Singapore and Keppel Corp, on topline growth, margin expansion, leaner operations and structural benefits from past years’ investments. SIA’s passenger business has surprised positively for two consecutive quarters (though yields fell). These are signs that the economy is improving. 

All is well in 2018F 

  • We think the fundamentals are firmer leading into 2018F with ‘cleaner’ and ‘leaner’ Singapore corporates. Having seen sustained higher interest rates and oil prices over the past 12 months, we are now comfortable with the cyclicals. 
  • Our bottom-up end-CY18F FSSTI target nudges up to 3,600, based on 15x (+0.5 s.d. of mean) and backed by 8% CY18F EPS growth. Earnings upside could come from gaming, tech, and capital goods. 
  • Our private bank economist maintains his GDP of 3.5% for 2017F and 3.6% for 2018F.

Upgrade capital goods to Overweight from Neutral 

  • Our upgrade is not premised on resurgence of drilling rig orders as global oversupply is still not fully absorbed. Rather, Singapore yards have been climbing the gas value chain and gunning for sizeable production structure contracts, encroaching on Koreans’ territory. 
  • Higher oil prices and long-drawn negotiations with Sete Brasil to re-activate work could happen in 2018, and spur interest in the sector. In the past two rig upcycles (2004- 08 and 2009-11), Singapore yards’ valuations rose > 200%. We are near trough now.

Upgrade banks to Overweight from Neutral 

  • Despite the YTD run-up, we think there is still room to play the banks sector in 2018F, rotating among the three, based on actualisation of earnings expectations. The statistics are positive – stronger loan growth spurred by property take-up and broader economy. 
  • A stronger US$ could aid the transmission of higher Fed Fund rates. Adoption of FRS 109 could accelerate the clean-up of oil & gas asset quality, a.k.a. lower credit costs from FY18F. 
  • Banks are well-capitalised and there is scope for higher payouts..

Alpha picks for 1H 2018F 

If the world is well, Singapore is well 

  • Singapore will do well when the world does well. If the latest monthly global purchasing managers' index (PMI) is of any guide, the global economy started 4Q 2017 on a strong footing. 
  • According to the IHS Markit PMI surveys, which track changes in actual business metrics from one month to the next, global output rose at the joint-fastest rate for just over two-and-a-half years. The survey data showed the upturn becoming more broad-based among the world's developed economies, while also featuring increased investment spending. 
  • IHS Markit added that the underlying business sentiment has also improved, with the PMI’s sister Business Outlook Survey showing global optimism at its highest for over three years, amid expectations of stronger sales in 2018. 
  • For export- oriented Asia, and especially Singapore, these "soft" data are supportive of "hard" data growth in the coming months, in terms of industrial output and exports growth. An example of a strong "hard" data is Singapore’s container throughput growth of 16.7% yoy in Oct 2017, the strongest annual growth since Feb 2010.
  • Our private bank economist maintains his GDP forecasts of 3.5% for 2017 and 3.6% for 2018. We believe the current growth is likely to be sustained into 1Q18F, driven by manufacturing and broadening growth across sectors (property/logistics/finance). This could set the stage for a tweak in the Monetary Authority of Singapore's (MAS) policy towards a modest appreciation of the Singapore dollar to contain inflation expectations in Apr 2018.

Other sector calls for 2018F 

  • We started the year 2017 with property, tech, consumer and gaming as Overweights. Tech and gaming remain Conviction Overweight after a rather impressive 3Q17. We think there is still room to trade property as we ride out the cycle of RNAV reflation in 2018, hence we maintain Overweight on property. We are Neutral on REITS as the sector has done well YTD, outperforming FSSTI by 16%, and we see limited upside for the large caps.
  • We would avoid sectors that are unable to cope with cheap innovation or disruptions. Telco remains the clear Underweight with earnings downside risk beyond 2018F as the competition landscape gets stiffer with the entrance of mobile virtual network operators (MVNOs) and fourth telco TPG. 
  • We also keep Transport as an Underweight, largely pending how ComfortDelgro is able to fan off unending competition from private car hires. We do not rule out the possibility of private car hires extending their aggressive competition in its high- margin markets such as China. Meanwhile, its UK bus business is going through a structural decline as the country braces Brexit. Rates for contract renewals may be on a downward trend too, in our view. We are more positive on SIA given the recent two quarters of strong performance. SATS is an expensive long-term play hoping to ramp up its overseas volume as domestic growth stagnates.
  • We group Singapore Post and SPH in the camp of stocks that are in need of major transformation to cope with disruption. 
  • Our Neutral call on consumer remains as we expect Sheng Siong to see earnings decline in FY18F due to its reduced store count. Dairy Farm’s recent interim results were also a downer, with flat yoy sales and marginally lower profits. Smaller cap names such as Best World have also started to see slower growth momentum, potentially hitting a plateau. Thai Bev's restructuring is taking longer-than-expected to complete. 
  • We are Neutral on healthcare as hospitals enter into the gestation phase for their overseas operations. 
  • Finally, we are Neutral on commodities as we expect softer CPO prices in 2018F. Wilmar is becoming a consumer play more than commodities, in our view.

LIM Siew Khee CFA CIMB Research | http://research.itradecimb.com/ 2017-11-16
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