Singapore Stocks Monthly Strategy - DBS Research 2018-02-05: Expanding On Mid-recovery Outperformers


Singapore Monthly Strategy - Expanding On Mid-recovery Outperformers

  • February events - Budget 2018, results season has little room for disappointment.
  • STI corrects off 3600, near-term support 3450-3480.
  • Interest on mid-economic expansion outperformers to expand – O&G, basic materials, commodities, consumer.
  • Small-Mid Caps interest should improve - Roxy Pacific, Frasers Commercial Trust, POSH, Breadtalk, HRNetGroup.

Looking back at January 

February Key Events 

  • Powell takes over from Yellen as FED Chair – No change in three rate hikes forecast, market debating if four is possible. 
  • Singapore 2018 budget (19 February) 
    • Focus on mid-term, restructuring policies over counter-cyclical measures.
    • Possible measures to strengthen Industry Transformation Programme, Automation Support Package, support internationalisation, help start-ups.
    • Possible tax increases for GST, property, wealth, betting, tobacco, liquor and vehicle import duty.
    • Click to read our Singapore economist's thoughts on the upcoming budget.

STI corrects on inflation worry, near-term support 3480 

  • February started with global equity markets sell-off on inflation & rate hike worries, US bond yields ↑2.84%.
  • New FED Chairman Jerome Powell likely to maintain Yellen’s policy for gradual rate increase and balance sheet reduction January’s high of 3611 at 14.8x (+0.75SD) 12-mth fwd PE near-term unsustainable, above year-end target valuation peg of 14.4x (+0.5SD) FY19F PE. 
  • Near-term resistance 3600, pullback support at 3480, temporary undershoot support 3450 peg to 13.89x (+0.25SD) 12-mth fwd PE. 
  • Base-case year-end objective 3688, optimistic case 3800. 


  • At January’s high of 3611, STI traded at 14.8x (+0.75SD) 12-mth forward PE and the 8-week RSI reached a high of 79. STI looks technically overbought and forward PE valuation stretched in the near term. While a decline from 3600 is panning out and the upward momentum should taper from January’s 165pt/month climb that is clearly unsustainable, we see opportunities on market pullback.
  • Singapore’s economic recovery remains intact and is broadening to the services sector. Even the beleaguered construction sector is expected to see increased activities this year. 
  • As the recovery progresses, we believe that rotation is an important strategy going forward. The first is sector, next is market cap.

Mid-recovery plays O&G and construction sectors outperforming since 4Q17 

  • If you recall seeing the table (sector outperformers at various stages of economic recovery) before and are wondering why we are showing it again, that is because it has worked, and we believe that it will continue to do so. Its first appeared on 13 October last year in the Singapore Market Focus report titled “Jacking Up Gains” where we took a positive stance on the O&G sector as we rightfully anticipated an interest shift from the early to the mid-economic recovery outperformers. Indeed, the O&G sector has been the top performing sector since, higher by 20% to outperform STI’s 6.6% rise over the same period. 
  • We had also highlighted the construction sector as a mid-expansion phase outperformer that also outperformed. For example, construction stocks under our coverage, e.g. Chip Eng Seng rose 19% over the same period.

Spotlight on mid-economic expansion outperformers to continue 

  • Even as the spotlight on O&G and construction sectors is likely to continue, interest in the rest of the mid-recovery outperformers that are the basic materials and commodities sectors should gradually start to pick up. Stocks under our coverage are Midas and Olam.
  • With the broadening of Singapore’s recovery from the manufacturing to services sector and as regional consumer sentiment improves, we continue to take a positive view on consumer stocks. Our picks for large caps are Thai Beverage and Genting Singapore. For small caps, our picks are Breadtalk and Cityneon.
  • Finally, we also like industrial sector laggards Singapore Post and SIA Engineering. We upgraded Singapore Post to BUY (see report: Singapore Post - Delivering A New Phase) as we think its postal segment's margin decline may have bottomed out, eCommerce segment's turnaround in place that offsets pressures at logistics segment. We also upgraded SIA Engineering to BUY (see report: SIA Engineering - Singapore Airshow May Bring Some Cheer) with stronger JV earnings, new revenue driver in 2019 with GE engine facility and possible S$14.1mil one-off gain in 4QFY18.   

SMC interest should improve 

  • The upturn in the Singapore market that started from beginning October last year was led mainly by blue chips (e.g. banks DBS, OCBC, UOB, property stock City Dev, yards Keppel Corp, SembCorp Industries and consumer services Genting Singapore).
  • The FTSE ST mid-cap Index performed nearly as well as the STI while the FTSE ST Small Cap Index lagged. Going forward, as the fierce January upward momentum for the blue chips STI tapers off, some of the flows should turn towards small caps.
  • Roxy Pacific is our small-cap pick in the property space. Roxy, being one of the earliest to land bank in the current market cycle, has six freehold residential developments in Singapore that will be ready for launch in 2018, two of which will be launched within 1Q18. The Navian, a 48-unit freehold development that was launched in October last year, is nearly 50% sold.
  • Frasers Commercial Trust (FCOT) is our small-cap pick among S-REITs. FCOT’s current c.2% yield spread to other large-cap office REITs is too wide considering the average yield spread is 0.8% and the Farnborough Business Park acquisition allays concern that FCOT is ex-growth.
  • Our positive stance on PACC Offshore Services Holdings (POSH) since 4Q last year has clearly paid off. We continue to see POSH as a name to ride the offshore service sector upturn. In the near term, we see a stronger quarter in 4Q17 as the POSH Arcadia gets a full quarter of utilisation, and more of the Middle East offshore support vessels (OSVs) are deployed.
  • POSH has no bonds outstanding, is cash-generative with positive OCF in 9M17, and remains a privatisation candidate with Kuok (Singapore) Ltd as its majority shareholder (81.89% ownership).
  • We like Breadtalk in the F&B consumer service space. Its core business continues to deliver growth while the sale of AXA Tower is a potential catalyst that could pay around 4.5 Singapore cents (Scts) in special dividends.
  • Finally, in the industrials support service space, we think HRNetGroup is poised to ride on the labour market recovery. It holds a dominant market share in Singapore. Going by the uptick in growth in Singapore’s service sector that contributes a majority 70% of workforce, we believe the labour market has bottomed.

*DBS's Market Update Published on 6-Feb-2018*

STI’s downswing to 3355 is an opportunity

  • Yesterday’s low of 3355 represented 13.6x (average) 12-mth forward PE and was just 20 points above the 200-day exponential moving average key support.
  • Only 3 times (including now) in the past 14 months that STI has fallen near/to the 200-day EMA; it recovered the past 2 times. 
  • Only 3 times (including now) in the past 12 months that STI fell to 13.6x (average) 12-month forward PE; it recovered the past 2 times. 
  • Base building, a more gradual recovery from here; no change to year-end objective of 3688, optimistic 3800. 
  • Near-term resistance 3450, 3520.

Kee Yan YEO CMT DBS Vickers | Janice CHUA DBS Vickers | http://www.dbsvickers.com/ 2018-02-05
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 0.690 Same 0.690
BUY Maintain BUY 1.710 Same 1.710
BUY Maintain BUY 0.410 Same 0.410
BUY Maintain BUY 2.010 Same 2.010
BUY Maintain BUY 0.960 Same 0.960