Singapore Market Monitor - Maybank Kim Eng 2017-11-28: 2018 Sector Preferences

Singapore Market Monitor - Maybank Kim Eng 2017-11-28: 2018 Sector Preferences Singapore Stock Market 2018 Sector Outlook

Singapore Market Monitor - Sector Preferences 

We continue to be broadly POSITIVE on cyclicals 

  • We remain broadly POSITIVE on cyclical sectors in Singapore due to the following factors: 
    • The economy continues to benefit from the global tech sector investment rebound and we expect the manufacturing performance witnessed YTD 2017 to spread to a services sector recovery in 2018.
    • The earnings growth turnaround for our coverage universe (and the FSSTI component basket as well) in 1Q17 has since gained momentum with evidence of an upgrade cycle panning out with incremental upward revisions to consensus expectations during 2Q17 and 3Q17.
    • On the key sector specifics, domestic property sector fundamentals have been progressively improving since the calibrated policy easing witnessed late Mar 2017. Tailwinds are expected to sustain for another 3-4 quarters at least while O&M write-down risks appear to be past their peak with related impact to the financial sector subsiding.

Sector Summary Outlook

Sector Suggested
Positives Negatives
Financials Neutral PE and PB valuations either in-line or cheap relative to 10Y term history; beneficiary of expected rising interest rates; more lending opportunities from recovery in economic growth and Singapore property market Tail risk of rising NPA and provisions if economic outlook turns lacklustre 
Telecoms Negative Cheap valuation relative to 3Y history but increasingly expensive when viewed on 3Y forecast. Enterprise and ICT revenues providing the only positive revenue growth driver with corporates’ digitalization efforts and government’s Smart Nation initiatives We expect margin depression despite TPG’s entry only next year as telcos move to ringfence subscribers on two-year contracts. Cashflow to worsen on spectrum costs
Industrials Positive Worst is probably over for O&M sector but order book recovery likely to be slow. Segments of aviation services like MRO relatively resilient while ground handling and catering to grow with strong Asian air traffic growth Many legacy airlines face overcapacity issues and heavy reliance on long haul. Transit traffic hubs under threat from airlines revamping fleets with longer range aircraft. O&M likely to struggle from overcapacity regardless of moderate oil price rise
Positive Improving sentiments in the residential market. Calibrated loosening of measures by the government should provide market stability and support home prices  Occupier market remains weak. High land prices to weigh on profitability 
REITs (Office) Neutral Office REITs are attractive as they are trading at significant discount to underlying asset values Negative reversions near term as market rents are still below expiring rents. Rising rates may diminish attractiveness of the asset class
Positive Industrial sector fundamentals should bottom out in 2017 as supply peaks and manufacturing growth momentum accelerates Not all are equal - some carry higher rent reversion risk /lower WALEs. Rising rates may diminish attractiveness of the asset class 
Negative Output recovery in 2H17 has fallen short and hence CPO prices holding up well Post El Nino 2H17 output recovery has likely merely
been deferred to 2018, aided by good rainfall in the region. Hence CPO price outlook in 2018 is subdued compared to 2017. Weather remains the constant wild card in the sector along with risks from
competing annual crop output.
Gaming Neutral Industry VIP volume ought to recover while rebate rates ought to fall going forward, expanding EBITDA margins Industry mass market GGR ceased contracting YoY but still not growing YoY. Mass market GGR growth more meaningful than VIP GGR growth due to the former's higher margins 
Healthcare Negative Secular industry growth from a number of factors. Underleveraged balance sheets allowing for M&A Rich valuations relative to 3Y history. Growing M&A related execution risk 

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