Stock Strategy Singapore - CGS-CIMB 2018-05-24: Hunger Games ~ 1Q18 Earnings Wrap


Stock Strategy Singapore - Hunger Games ~ 1Q18 Earnings Wrap

  •  EPS trimmed in 1Q18 but little risk that it will widen for FY18.
  •  Overweight on banks, property, capital goods, gaming; upgrade consumer. 
  •  Tech downgrade to Neutral; healthcare joins telcos as Underweight.

More misses, but good quality beats

  • The three sectors that had most misses were capital goods, property developers and small-cap technology. 
    • Capital goods continued to be plagued by weak operating leverage, but we believe positive positive sentiment buoyed by high oil prices and order wins will continue to keep investors interested in the sector.
    • The disappointing performance of property developers were largely due to timing of project recognition which led to lower residential margins (City Developments), and higher amortisation and depreciation from consolidation of acquisitions (UOL's consolidation of UIC). 
    • Misses in the small cap technology space were due to fluctuation in forex (Sunningdale), revenue decline (UMS) and high expenses from acquisitions (AEM).
  • Conversely, we saw good quality beats by the banks as DBS and UOB affirmed the trend of improving net interest margins (NIM) and lower credit costs. Singapore Airlines's profit outperformance was due to better-than-expected yields at mainline and Scoot.

Market EPS forecasts trimmed after four good quarters

  • In 1Q18, our analysts started to trim their EPS forecasts (-0.7% for CY18F and - 0.3% for CY19F). Excluding banks and transport companies, earnings forecasts were cut across sectors, led by telcos on lower mobile revenue, and technology stocks on fluctuating US$.
  • Our bottomed-up FSSTI target now stands at 3,738 based on 14x CY19F P/E vs. 7% EPS growth.

CY18F earnings firm, but CY19F uncertain

  • Going into 2H18, we believe the risk of earnings slash may be low in CY18F, but uncertain for CY19F. The current troubles in Argentina, Turkey and Venezuela, trade war noises, Trump-Kim Summit jitters, spike in energy prices, sharp rebound in the US dollar and US interest rate are not signs of an impending systemic emerging market crisis that could trigger the next global recession. 
  • However, we do think growth in the emerging markets as well as overall global growth are set to be slower this year. The weaker-than-expected preliminary Eurozone and Japanese manufacturing PMI data for May suggest that the 1Q18 economic weaknesses in Europe may extend into 2Q, and therefore the European Central Bank and Bank of Japan may have to start worrying about new downside risks. 
  • In the US, IHS Markit’s PMI surveys show accelerating economic growth. Here in Asia, the macro report card is mixed. Taken together, global growth is not as synchronised as in 2017, but global growth, though set to slow, is still strong, levelling off rather than decelerating sharply from the end-2017 high. 
  • In Apr, the International Monetary Fund (IMF) said global growth had become “broader and stronger”, and forecasted global growth of 3.9% for 2018F vs. 2017’s 3.7%. Therefore, for trade-dependent Singapore, there are still growth opportunities from the slower global growth scenario, with trade war remaining the biggest risk.

Sector Preferences

Maintain OVERWEIGHT: banks, property, capital goods

  • We are in line with Bloomberg consensus to stay Overweight on banks (higher interests rates), capital goods (high oil price), property (replacement demand locally fuelled by enbloc purchase and higher residential prices) sectors.

Downgrade Technology to NEUTRAL, upgrade Consumer to OVERWEIGHT

  • We believe the technology sector is heading into a slower earnings growth phase in 2018-19F after the super profits seen in 2017. In addition, trade war overhang and single customer risk (more common in the small cap space) may be blown up to cloud share price performance. 
  • On the other hand, we upgrade the consumer sector from Neutral to Overweight, led by our recent upgrade in Thai Beverage, as well as steady growth from Sheng Shiong with more new stores in the pipeline. 
  • Gaming remains an Overweight sector and a proxy to consumer spending and tourism play in Singapore.

Upgrade Transport to NEUTRAL

  • We upgrade Transport to Neutral on the back of an easing competition landscape for ComfortDelGro and higher yield expected for SIA. However, we still see downside risks for SATS' share price if its deal with Turkish Airlines is delayed. The Turkish lira sell-off could also stall negotiations of contract terms, in our view.

Healthcare joins Telco as UNDERWEIGHT

  • Despite the sector's underperformance, telco stocks have not reached screaming Buy levels. We are likely to see clarity in the competition landscape towards end-2018F/2019F with the entry of TPG. 
  • As for healthcare stocks, from a country strategy perspective, we see no reason to own any in the near term as the healthcare groups are grappling with the gestation costs of their new hospitals and face the potential of further delays in the commencement of their new hospitals overseas. We find it hard to justify the demanding valuations ( > 30x 12M forward P/E for Raffles Medical Group) vs. negative earnings growth.

LIM Siew Khee CGS-CIMB | Singapore Research Team CGS-CIMB | 2018-05-24
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