Singapore Stock Strategy - UOB Kay Hian 2018-06-28: Assessing Risk Premium In Volatile Times

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Singapore Stock Market Oversold Stocks OVERSEA-CHINESE BANKING CORP SGX:O39 DBS GROUP HOLDINGS LTD SGX:D05 KEPPEL CORPORATION LIMITED SGX:BN4 WING TAI HLDGS LTD SGX:W05

Singapore Stock Strategy - Assessing Risk Premium In Volatile Times

• After the recent market correction, we assess what the market has priced in and highlight our key picks.
• We see select buying opportunities.

WHAT’S NEW

Pull-back could offer select opportunities.

• The FSSTI has retraced close to 10% from its recent high of 3,615 in early-May, broadly in line with our call to tread cautiously for 2H18 after the strong outperformance in 1H18.
• Amplifying the volatility, has been external noise over the US/China trade spat as well as rising interest rates. This report highlights our latest views on the market in terms of what has been priced in and our key picks after the recent market rout.

ACTION

FSSTI has retraced close to 10% from ytd peak on external noise and rising rates.

• Since hitting a ytd high of 3,615 on 2 May, the FSSTI has retraced 10% to 3,255.
• Market risk premium (MRP) from 2 May till 27 Jun 18 implies a 81bp rise in MRP to 5.17% during this period. In our view, the rise was due to a shift in interest rate hike expectations since the Federal Open Market Committee (FOMC) meeting on 13 June and external concerns over the US/China trade spat, which would have implications on global growth.
• While there is justification for a 25bp hike in MRP due to signals from members of the FOMC that there could be 4 rate hikes in 2018 rather than 3, we think the residual rise in MRP would be to partially price in the trade spats between the US and China. The latest MRP of 5.17% is above the long-term mean of 5.0% since 2005.

Oversold stocks on a risk premium basis.

• We have extended our analysis of the MRP to stocks to find stocks that could have been oversold.
• Based on our estimates, stocks that look oversold include OCBC, DBS, Keppel Corp and Wing Tai. These stocks have seen a rise in risk premium to 0.97-1.79% compared to the broader market’s risk premium increase of 0.81% which we think is overdone. In our view, fundamentals for banks are largely intact, notwithstanding the rising risk that global growth could be dampened by weaker global trade.
• We had lowered our target prices for DBS and OCBC to reflect this and maintain our BUY ratings. See report: Banking Stocks Singapore - Outlook For Firmer Rates Intact; Trade Conflicts Exacerbate Volatility (DBS : Target Price S$30.15; OCBC : Target Price : $14.28)
• Keppel Corp is our preferred proxy for the gradual recovery in oil prices given its strong balance sheet. The property division accounts for close to 70% of our S$9.00 valuation for Keppel. At the current price, Keppel’s O&M segment (S$0.58 bvps at 1.0x 2019 P/B) is valued a zero.
• We remain constructive on prospects for developers and we see Wing Tai’s 15% ytd (and 5% decline since 2 May 18) decline as unjustified.

VIX could be elevated given external noise.

• Despite the recent decline in the VIX to 16.9 from the recent peak of 37.3 in early-February (mean of 19.3 since 1990), we see the potential for VIX to trade above mean in the event of further escalation in rhetoric over the trade spat or other geo-political concerns. These issues are likely to be protracted and could provide tactical trading opportunities for patient investors.
• Ranking the stocks within our universe, we see value in Singtel, City Development, CCT, OCBC, Keppel Corp and Wing Tai. All these stocks have corrected more than 15% from the 52-week high.

Focus on fundamentals and look beyond the noise.

• Beyond the near-term market volatility and external noise, we are constructive on the FSSTI after the recent pull-back. This is on the back of a pick-up in earnings growth and current valuations are inexpensive. 
• Investors should look beyond the noise and consider 2H18 investment themes such as:
  1. Reflation picks – CityDev, Wing Tai and Chip Eng Seng.
  2. Mature growth plays – Keppel, CityDev, CD REIT and SMG.
  3. Unloved stocks at attractive valuations – Sunningdale, SingPost, CSE and Tianjin.
  4. Stocks with potential earnings upside – DBS and CD REIT.

Maintain year-end target for FSSTI.

• We maintain our year-end FSSTI target of 3,720, which is based on an equal blend of the long-term mean P/B and PE.

Jonathan Koh CFA UOB Kay Hian | https://research.uobkayhian.com/ 2018-06-28

SGX Stock Analyst Report BUY Maintain BUY 14.280 Same 14.280

BUY Maintain BUY 30.150 Same 30.150

BUY Maintain BUY 9.000 Same 9.000

BUY Maintain BUY 2.780 Same 2.780