Singapore Market Focus - DBS Research 2018-01-05: January Awakening

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Singapore Stock Market Outlook SINGAPORE TECH ENGINEERING LTD S63.SI CITYNEON HOLDINGS LIMITED 5HJ.SI VENTURE CORPORATION LIMITED V03.SI GENTING SINGAPORE PLC G13.SI MM2 ASIA LTD. 1B0.SI

Singapore Market Focus - January Awakening

• Positive buildup to 4Q results season.
• STI year-end base case objective 3688, bull case 3800.
• SIBOR’s jump positive for OCBC and UOB.
• Beneficiaries of US corporate tax cut – ST Engineering, Cityneon, Venture Corp.
• Interest uptick for service sector - Genting Singapore, mm2 Asia, Cityneon, OCBC & UOB.

JANUARY MARKET OUTLOOK

Looking back at December 

• The Straits Times Index ended the last month of 2017 down 0.9% to 3402 as trading activity quietened amid the traditional year-end lull period with most investors turning to the sidelines. The average daily value of shares traded dipped to just S$0.951bn for December, lower by 2.5% compared to the same period in 2016 and down 17% from the daily average for 2017. 
• For the year, the STI was up 18%.
• S-REITs outperformed, rising 2.7% as the MAS 10-yr yield fell 10bps to 2.02% while financials nudged by 0.5% higher. 
• On the other hand, the consumer goods sector was dragged down by weakness in Thai Beverage as the stock reacted to news that its unit Vietnam Beverage has won the bid for a 53.6% stake in Vietnam's largest brewer Sabeco. Weakness in Yangzijiang shares dragged the industrials sector lower as the stock succumbed to profit taking following its strong performance in 2017.

FED expected to hold funds rate at 1.5% this month 

• The year starts off on relatively quiet with the ECB monetary policy meeting on 25 January followed by a 2-day FOMC meeting at the end of the month. The FED is widely expected to keep rates unchanged at this meeting. 
• DBS Research sees three rate hikes this year that will lift the FED funds rate to 2.25% by end-2018.

Positive buildup to 4Q results season 

• January marks the start of the 4Q17 results season that spans through February. The upcoming results season should build upon 3Q’s positive turn in earnings revision trend. Expectations are high after the latest data release showed Singapore’s 4Q GDP rose at a seasonally adjusted annualised rate of 2.8% q-o- q, better than consensus estimates for a 1.6% increase.
  • The services sector that makes up two-thirds of the economy grew 3% y-o-y and was up a strong 7.5% q-o-q as wholesale, retail, transportation and storage sub-sectors strengthened. 
  • The manufacturing sector expanded 6.2% y-o-y but moderated on a q-o-q basis, down 11.5%. Sector growth was supported by the electronics and precision engineering clusters that offset output declines in the biomedical manufacturing and transport engineering clusters. 
  • The construction sector continued to lag, shrinking by 8.5% y-o-y to continue a 7.7% decline in the previous quarter.

Broader-based recovery led by services sector 

• Singapore’s 4Q GDP flash estimates reinforce our view that the improvement in the real economy should broaden steadily from the manufacturing to the services sector. 
• Taking the lead, the services sector grew 7.5% q-o-q, accelerating from the 3.4% q- o-q growth in 3Q. This is significant as the services sector accounts for two-thirds of GDP and almost 70% of employment. 
• Even the beleaguered construction sector should benefit from large-scale public-sector projects such as the 21.5- km North-South Corridor, Thomson East-Coast line, Changi Airport Terminal 5, the Tuas Megaport and the High-Speed Rail link.

STI year-end base case objective 3688, bull case 3800 

• STI starts the New Year at 3402, near 13.89x (+0.25SD) 12-mth forward PE. The first two trading days alone saw a 60-pt uplift on the back of the better-than-expected 4Q GDP flash estimates.
• We peg a January upside at 3500 or just slightly above that is near 14.27x (+0.5SD) 12-mth forward PE. Support at 3420 that coincides with the 15-day exponential moving average and 13.89x (+0.25SD) 12-mth forward PE should hold up on market pullback.
• We think investors may turn to the further unfolding of the 4Q results season in February before seeking the impetus for the STI to punch convincingly above 3500.
• Our base-case STI year-end objective is 3688 pegged to 13.89x (+0.25SD) FY19F PE. We do not rule out a re-rating catalyst pushing up STI’s target valuation to 3800, pegged to +0.5SD at 14.3x on FY19 earnings.

STRATEGY 

SIBOR’s jump positive for banks 

• Singapore’s 3M SIBOR jumped 25bps to 1.501% while the 12M SIBOR jumped 29bps to 1.73% over the past one week. While the latest rise may be partly due to seasonal factors, it also points to upward pressure on SGD interest rates as the US FED continues its normalising policy in 2018 with three rate hikes. DBS Bank’s interest rates strategist sees 3M SIBOR rising to 2.15% by end-2018.
• The latest rise in the SIBOR should continue to underpin local banks. Our sensitivity analysis indicates that every 25-bp rise in SIBOR would raise sector average NIM by 3bps (UOB:+1bps; OCBC: +3bps) leading to an average 2% (UOB: +1%; OCBC: +2%) increase in earnings. Our preferred pick is OCBC (Target Price raised to S$14.00. See report: OCBC Bank - DBS Research 2018-01-04: Good Gets Better) for
  1. its ability to maintain lower-than-peer credit cost trends
  2. it serves as a better wealth management play, and
  3. possible earnings surprises from its insurance business in a rising interest rate environment. 
• We have also raised Target Price for UOB to S$29.50. (See report: UOB - DBS Research 2018-01-04: Stronger For Longer)

Little FDI diversion risk, beneficiaries of US corporate tax cut 

• The US congress recently gave the final approval for sweeping tax reforms that included a corporate tax cut to 21% from 35%. Our Chief Economist says any risk of diverting investments from the rest of the world back to the US due to the tax cut poses a bigger risk for Europe and Latin America rather than Asia. This is because the factors of production that are Asia-oriented, especially those related to the electronics supply chain, are very unlikely to move back to the US. The labour cost advantages, economies of scale, and the component ecosystem is well engrained in Asia, with little risk of FDI diversion back to the US.
• As Singapore does not have a tax treaty with the US, the tax cut benefits Singapore companies with operations in the US. For stocks under our coverage, such companies are ST Engineering (24% revenue exposure), Cityneon (10-15% revenue exposure) and Venture Corp.

At your service! 

• The latest 4Q GDP estimates have reinforced our view that the improvement in Singapore’s real economy is broadening steadily from the manufacturing to the services sector. Among the three major sectors, services is the only one that registered positive growth on a y-o-y and q-o-q basis. Growth strengthened further to 7.5% q-o-q, up from 3.4% q-o-q in 3Q. On a y-o-y basis, growth was up 3%. 
• Meanwhile, after a solid 3Q, growth in the manufacturing sector moderated in 4Q, down 11.5% q- o-q. The construction sector stayed in contraction territory.
• Against this backdrop, we see interest uptick for services sub-segments such as consumer, financial, transportation, retail and storage.

YEO Kee Yan CMT DBS Vickers | Janice CHUA DBS Vickers | http://www.dbsvickers.com/ 2018-01-05

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