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2H18 Market Strategy Singapore - UOB Kay Hian 2018-06-01: Investment Themes For The Rest Of 2018

2H18 Market Strategy - UOB Kay Hian 2018-06-01: Investment Themes For The Rest Of 2018 Singapore Stock Market Investment Themes 2018 CITY DEVELOPMENTS LIMITED SGX:C09 CHIP ENG SENG CORPORATION LTD SGX:C29 WING TAI HLDGS LTD SGX:W05 CAPITALAND LIMITED SGX:C31

2H18 Market Strategy - Investment Themes For The Rest Of 2018




Investment Themes For The Rest Of 2018

  • Investment themes investors can consider for the remainder of the year include - 


Reflationary picks.

  • After a solid performance in 2017, developers have been a relative laggard in 2018 on fears of rising interest rates and perceived lack of catalysts. Currently, developers are trading at an average discount of 15.8% to RNAV. While the URA price index indicates that ytd home price index has risen 3.9%, anecdotally we believe that physical property prices have risen 10% or more in selected locations.
  • Looking ahead, we see the potential for property companies’ RNAV to rise by up to 10- 15% and for a re-rating of developers in 2H18 as consensus gradually increases their estimates. It is also worthy to note that during property market upcycles, developers could also trade at a premium to RNAV (+1SD or 5% premium in 2007) but this is clearly not our base-case scenario, though we do not fully discount this. Currently, our target prices for large caps such as City Developments (CityDev) are pegged at parity to RNAV whereas the target prices for mid-cap stocks are based on a 20-30% discount to RNAV or sum-of-the-parts.
  • Our key picks for reflation include CityDev, Chip Eng Seng (CES) and Wing Tai Holdings (Wing Tai). CapitaLand is also on our BUY list but is less preferred to CityDev given the former’s lower exposure to Singapore’s residential property segment.




Mature growth picks.

  • Excluding events such as the Asian Financial Crisis (AFC in 1998) and Global Financial Crisis (GFC in 2008), our analysis of peak quarterly GDP growth over the past 30 years highlights several interesting findings. Following the peak GDP growth, sectors that tend to outperform over the next six months include developers, S-REITs, healthcare and shipyards. Conversely, sectors that tend to underperform six months after GDP growth peaks are telecommunications, banks and aviation.
  • Stocks that we favour in view of these findings are CityDev, Keppel Corp (Keppel), CDL Hospitality Trusts (CD REIT), Singapore Medical Group (SMG) and Raffles Medical Group (RMG). Aggressive investors may also consider Sembcorp Marine (SMM), which is a purer play on shipyards despite our HOLD rating. 
  • Investors may want to trade selectively on banks and the telecommunications sector. While the fundamental outlook for banks remains positive, the sector is a “crowded trade” whereas the medium-term outlook for telecommunications is tough given heightening domestic competition. On this basis, we like Singapore Telecommuncations (SingTel), which is geographically diversified and has committed to a DPS of 17.5 S cents/share for FY19 and FY20 (year to March).




Unloved stocks with attractive valuations.

  • Within this segment, we favour stocks such as Singapore Post (SingPost) and Raffles Medical Group (RMG). 
  • These two stocks are trading at an attractive discount to our target prices but for the latter, investors looking for near-term earnings growth are unlikely to favour RMG. This is due to expected upfront costs incurred for its new hospital in Chongqing (opening 4Q18) and its Shanghai hospital in 2H19. However, we think that longer-term investors will be rewarded with its capacity expansion and solid execution track record.
  • As for SingPost, the group is past its intensive capital expenditure period and is expected to enjoy strong free cash flows in the coming years. The group is a beneficiary of rising e-commerce transactions and investors buying in at current levels are getting exposure at a lower average price of SingPost’s strategic partner Alibaba’s S$1.52/share.
  • Last but not least, investors could also consider Sunningdale Tech (Sunningdale), which has retraced more than 40% from its 52-week high due to weak 1Q18 results. We think the selling is overdone and at current levels, its FY18F P/B of 0.7x and FY18F dividend yield of 5.4% look attractive.




Stocks with potential earnings surprises.

  • In terms of sectors, we see possible upside in banks and selected S-REITs. Earnings downside could be seen in sectors such as telecommunications, shipyards and selected healthcare companies such as Raffles Medical Group (RMG) and Health Management International (HMI). Singapore Airlines (SIA) could also be worth watching out for, particularly as possible further upside in yields as forward bookings has risen 48% y-o-y and SIA is guiding for 8% capacity growth for FY19.
  • Banks could see upside surprises from continued NIM expansion if the interest rate increases in the US are higher than expected. CD REIT could benefit from higher-than- expected RevPar from higher room rates and occupancies. We would also be watching CapitaCom Trust (CCT) closely to see if rental rates could surprise on the upside.
  • As for downside surprises, telecommunications could see further downside pressure in 2H18 after the launch of new entrant TPG Telecom. Shipyards could still see disappointing earnings for the remainder of 2018 due to a combination of lower-than- expected property earnings (Keppel Corp) and recognition of losses from low-margin contracts secured in 2016-17 (Sembcorp Marine). Lastly, healthcare companies such as Raffles Medical Group and Health Management International could see some upfront losses from new hospital openings or M&As.
  • All things considered, our BUYs for positive earnings surprises are DBS, Singapore Airlines (SIA), CapitaCom Trust (CCT) and CDL Hospitality Trusts (CDREIT).
  • We would avoid M1 and StarHub, despite their underperformance ahead of the entry of TPG Telecom in Singapore.





 LIST OF STOCKS WITH EARNINGS UPSIDE/DOWNSIDE

Company Earnings upside / downside Remarks
Big Caps
CCT Upside Potentially higher than expected office rents.
CDREIT Upside Potentially higher than expected RevPAR, on higher room rates and occupancies.
CMT Downside Potentially lower than expected retail rents.
DBS Upside NIM expansion could be more significant if US hikes interest rates more rapidly than anticipated.
Keppel Corp Downside Lower than expected property earnings.
M1 Downside Price competition could be worse than expected post launch of commercial services by new entrant TPG Telecom.
OCBC Upside NIM expansion could be more significant if US hikes interest rates more rapidly than anticipated.
Raffles Medical Downside Potentially higher than expected start-up costs in Chongqing.
Sembcorp Ind Downside Larger than expected losses from SMM, lower earnings from India.
Sembcorp Marine Downside Larger than expected operating losses from low-margin contracts secured in 2016-17.
SPH Upside (low prob) Media earnings get larger than expected lift from property ad spend.
StarHub Downside Price competition could be worse than expected post launch of commercial services by new entrant TPG Telecom.
Venture Corp Downside Impact from IQOS is larger than presently expected. Growth from other segments comes in lower than forecasted.
Mid Caps
Banyan Tree Upside Better than expected operational performance.
China Aivation Oil Upside Better than expected oil prices.
Citic Envirotech Upside Faster execution of projects.
Frencken Upside Better than expected operational performance.
ISDN Upside Better than expected operational performance.
KPTT Upside Better than expected operational performance.
KSH Upside Faster execution of projects.
Tianjin ZhongXin Upside Better than expected operational performance.
Tuan Sing Upside Faster execution of projects.




Also Read:

Stock Strategy Singapore - Treading Carefully After Market Run

Stock Strategy Singapore - Stock Picks For The Rest Of 2018.





Andrew CHOW CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-06-01
SGX Stock Analyst Report BUY Maintain BUY 14.030 Same 14.030
BUY Maintain BUY 1.380 Same 1.380
BUY Maintain BUY 2.780 Same 2.780
BUY Maintain BUY 4.300 Same 4.300


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