Singapore Strategy - CIMB Research 2018-03-05: Earnings Bubbling ~ 4Q17 Results Review

Singapore Stock Market 4Q17 Earnings Review Sector Outlook

Singapore Strategy - Earnings Bubbling

The 4Q17 results of Singapore corporates were not impressive, with underachievers outnumbering those that beat expectations 15 to 7. This shows that corporates are still grappling with costs and kitchen-sinking. However, overall EPS still held up, mainly led by banks and manufacturing sectors.
Order book upgrade in capital goods also added meat to forward EPS expectations; we see risks of disappointment by mid-18 if orders do not trickle in.
Our bottom-up target for FSSTI now stands at 3,705, based on 14.2x 2018F P/E (+0.5 10-year mean) vs. 10% y-o-y EPS growth for 2018F.

4Q17 was not an impressive quarter. Windfall dividend by DBS GROUP HOLDINGS LTD (D05.SI) was the most ‘exciting’ event over the two months of earnings reporting.
Hype over corporate actions between SEMBCORP INDUSTRIES LTD (U96.SI) and SEMBCORP MARINE LTD (S51.SI) kept interests strong within the capital goods sector until the earnings misses.

The ratio of disappointments vs. earnings beat was 15:7. Noteworthy earnings setback came from the three telcos grappling with high costs, while the three large caps in capital goods (KEPPEL CORPORATION LIMITED (BN4.SI), SEMBCORP MARINE LTD (S51.SI), and SEMBCORP INDUSTRIES LTD (U96.SI)) took turns to clean up their books with more impairments.
THAI BEVERAGE PUBLIC CO LTD (Y92.SI) disappointed due to higher selling expenses and the blues of mourning in Thailand for its late King.
CITY DEVELOPMENTS LIMITED (C09.SI)'s miss was more from a high base effect and impairment losses on PPE and investment properties.
Small-cap tech/ manufacturing names such as CEI LIMITED (AVV.SI) and SUNNINGDALE TECH LTD (BHQ.SI) missed expectations due to forex and lower margins.
The most notable beat was BEST WORLD INTERNATIONAL LTD (5ER.SI), which made a comeback with improved sales from China as Chinese export agents pre-stocked ahead of Chinese New Year. We upgraded the stock from Hold to ADD on the back of the long-awaited conversion of its direct selling model in China to an export model by 1H18F.
SIA ENGINEERING CO LTD (S59.SI)’s beat was more one-off related from a JV’s performance that may not recur in subsequent quarters.

Banks have cleaned up their oil & gas loan book with FRS 109. Higher NII and fees, and benign credit costs are tailwinds for all three banks. We are OW on banks as they seem most defensive, trading at mean of CY18F 1.35x P/BV with 11.3% ROE.
All three telcos disappointed in 4Q17 on higher-than-expected costs and weak associate contribution. Earnings outlook is still grim given the impending entry of a fourth telco. Valuations are also not screamingly attractive at 16x CY19F P/E vs. 10-year average of 15x.

The REITs' results were largely in line except for CDL HOSPITALITY TRUSTS (J85.SI) which beat estimates on higher RevPar in Singapore (first improvement in five years), supporting our expectation of 5% yoy rise in RevPAR in FY18F. CDL HOSPITALITY TRUSTS (J85.SI), MAPLETREE LOGISTICS TRUST (M44U.SI) (share price weakness) and CAPITALAND COMMERCIAL TRUST (C61U.SI) (proxy for office recovery) are our preferred picks among the REITS.
Our OW call on developers remains on the premise of replacement housing for enbloc buyers and nascent recovery in residential prices and land bank restocking. CITY DEVELOPMENTS LIMITED (C09.SI) and UOL GROUP LIMITED (U14.SI) are our top picks.

More kitchen-sinking provisions were made across the yards after KEPPEL CORPORATION LIMITED (BN4.SI) stomached the S$618m global settlement of Brazilian penalty. Weak operating leverage is apparent among the Singapore yards due to the cumulative effects of anaemic orders over the past two years.
SINGAPORE TECH ENGINEERING LTD (S63.SI) appears to be the least risky for now on the back of the return of the engine repair cycle.
We prefer SEMBCORP MARINE LTD (S51.SI) over KEPPEL CORPORATION LIMITED (BN4.SI) given the recent share price weakness. At current price, it is trading at 1.6x CY18F P/BV, below its 20-year average of 2.5x.

CREATIVE TECHNOLOGY LTD (C76.SI)’s (Non-rated) unveiling of its latest Super X-Fi technology created more buzz than the tech/manufacturing earnings.
Results were mixed with VENTURE CORPORATION LIMITED (V03.SI) living up to expectations from earnings to dividend while UMS HOLDINGS LIMITED (558.SI) and AEM HOLDINGS LTD (AWX.SI) outperformed on higher sales. VENTURE CORPORATION LIMITED (V03.SI) and AEM HOLDINGS LTD (AWX.SI) are our picks.
GENTING SINGAPORE PLC (G13.SI)'s in-line earnings disappointed the market after two sequential quarters of outperformance. We see a buying opportunity after its recent share price correction and see volume growth as a key re-rating catalyst.

Following the earnings upgrade, we now project y-o-y core profit growth of 10% for 2018F and 7% for 2019F. Our end-2018 FSSTI target now stands at 3,705 based on 14x CY18F P/E (+0.5 s.d. of 10-year mean).
We think analysts have generally penned in blue-sky expectations for 2018F and 2019F. While banks may not see much cuts, we see risks from capital goods and manufacturing if orders and sales expectations were overhyped.

Reviewing the YTD share price performance of the FSSTI stocks, it is telling that the names that had outperformed are those that had reinvented themselves – DBS GROUP HOLDINGS LTD (D05.SI) and VENTURE CORPORATION LIMITED (V03.SI), and they did not start the year with valuations that can be argued as cheap. We think valuations for these two stocks will continue to be at a premium.
Among the stocks that had fallen, we see trading opportunity for SATS LTD. (S58.SI) and GENTING SINGAPORE PLC (G13.SI).

LIM Siew Khee CIMB Research | CIMB Research Team CIMB Research | http://research.itradecimb.com/ 2018-03-05

CIMB Research SGX Stock Analyst Report ADD Maintain ADD 3.010 Same 3.010

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