Singapore Market Focus - DBS Research 2018-02-14: Opportunity, Not Calamity


Singapore Market Focus - Opportunity, Not Calamity

STI’s downswing to 3,350 an opportunity. 

  • We expect the correction to halt at 3,330-3,350, which coincides with 13.6x (ave) 12-mth fwd PE and 200-day exponential moving average (EMA) key support. We expect ‘base building’ and a more gradual recovery from here; and, are not changing our base-case year-end objective of 3,688 and our ‘optimistic’ objective of 3,800.
  • US 10Y Treasury yield rally 75% completed. We have revised up our US 10-yr yield forecast to 3% for 2018F and 3.1% for 2019F.
  • Still, trend US inflation is not likely to deviate much from 2%.
  • Technically, we think the US 10Y Treasury yield rally is threequarters completed. There is, at most, a 20bps upside - to 3.05% - but we expect a correction to 2.78%, which will lend support to equities. 


  • We believe the recent correction is a healthy pull-back, allowing the market to take a breather and base a build before the next uptrend. We are looking for indicators from the current full-year results season to support the bull. Thus far, FY17 earnings has come in mixed, showing an 8% y-o-y drop in 4Q. However, earnings revisions have been positive, with a +1% for FY18 forecasts vs -2% for FY17. As it stands, our earnings growth for FY18 is 11% vs 9.9% for FY17, an accelerating trend.
  • Property and REITs bore the brunt of the recent correction – declining down 6.9%-8.9% - as these are more vulnerable to concerns over interest-rate hikes. Conversely, banks are the most resilient, down only 1.2%, as they are beneficiaries of the rising SIBOR, with the improvement in net interest margin evidenced in 4Q results likely to be sustained.

  • We continue to favour banks, which offer the highest earnings growth of 21.5%, with the upside from rising NIM now turning into reality, and supported by sustainable loan growth, vibrant fee-based income, and lower provisions. The sector offers potential for dividend upside, and our top pick is OCBC (Rating: BUY, Target Price $14.00). 
    • OCBC's key differentiating factor lies in its insurance business, which gives it a more holistic wealth management platform. We expect possible earnings surprises from its insurance business in a rising interest-rate environment. Visible improvement in asset quality, contrary to stabilisation, could be an added re-rating catalyst.
    • UOB (Rating: BUY, Target Price $29.50) has the largest proportion of property-related loans versus peers, positioning it to ride the recovery in the property market. We expect an uplift from lower credit costs with IFRS9/SFRS109 implementation.
  • We have also upgraded Singapore Airlines (SIA) to buy; Target Price at $12.00 offers upside of 13%. SIA’s share price has slid 7.7% off a recent high of S$11.50 and is now trading at just 0.9x P/B. SIA should benefit from strong travel demand, thanks to the synchronised global economic recovery, which should keep load factors firm and improve passenger yields. Meanwhile, the cargo business should also remain fairly strong as trade conditions remain buoyant. Our target price is based on 1x FY19 P/B as we see ROE recovering from less than 3% in FY17 to 6% by FYE Mar ’20. With full-year earnings poised to more than double from a low base in three months’ time (S$784m vs S$360m), we see room for SIA to raise its dividend payout to Scts40 from Scts20 a year ago, which implies a dividend yield of 3.8%. This would be equivalent to a payout ratio of 60%, compared to payout ratios of 65%-70% over the last three financial years. This dividend should also be sustainable, given the improving earnings outlook, and also helps firm up ROE.
  • Our Oil and Gas team remain positive that the recovery in oil prices is intact, maintaining our Brent crude oil price forecasts of US$60-65/bbl this year. We believe capex growth will be supported down the value chain, as long as oil prices stabilise around US$60-65/bbl. The overall demand-supply situation should be favourable in 2018, with global economic growth trends looking promising, inventory levels down worldwide, and OPEC production relatively stable over the last one year. We believe a plateauing in US shale productivity and a reversal of the trend of US shale breakeven prices will help put a higher floor to oil prices at around US$55/bbl for Brent. The recent selldown in equities presents an opportunity to accumulate stocks in this sector. Our top picks are Keppel Corp and Sembcorp Marine.
    • Keppel Corp (Rating: BUY, Target Price S$10.20) a safer bet, upside to dividend in FY19. We believe the market has overlooked Keppel’s undervalued property segment, at 30-40% discount to RNAV vs peer CapitaLand’s 20%, notwithstanding Keppel’s huge historical landbank of 6.5m sqm held at a low cost. O&M order wins are expected to triple this year to S$3bn, buoyed by sustained oil prices above US$60/bbl. Keppel’s decent dividend yield of 3% (or c.22 Scts/share based on 40% payout ratio) also lends support to its share price. In addition, the market is also hopeful of a special dividend to market the company’s 50th anniversary this year. Assuming 60% payout ratio, that could translate into an additional 11 Scts, or 1.4% yield, for the dividend payout in FY19.
    • Sembcorp Marine (Rating: BUY, Target Price S$3.10). SMM is the best proxy to ride the O&M recovery, thanks to its strong order win pipeline. However, we believe market has built in much expectation of a possibility of privatisation, pricing in~40-50 Scts on the speculation, in our view. There is also market talk that SMM could be redeveloping its huge 87-hectare Admiralty Yard into a waterfront township. Our back-of-envelope calculation shows that the redevelopment of the site could potentially add S$0.64-S$1 to SMM’s fair value.

Seven STI component stocks to bargain-hunt after the fall 

Kee Yan YEO CMT DBS Vickers | Janice CHUA DBS Vickers | http://www.dbsvickers.com/ 2018-02-14
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 4.500 Same 4.500
BUY Maintain BUY 1.820 Same 1.820
BUY Maintain BUY 4.300 Same 4.300
BUY Maintain BUY 4.350 Same 4.350
BUY Maintain BUY 1.510 Same 1.510