Stock Strategy – Singapore - UOB Kay Hian 2018-07-13: A More Challenging Landscape To Navigate

Strategy - Singapore - UOB Kay Hian Research 2018-07-13: A More Challenging Landscape To Navigate

Singapore Stock Strategy 2018 Stock Recommendations ASCENDAS REAL ESTATE INV TRUST SGX:A17U CAPITALAND COMMERCIAL TRUST SGX:C61U CDL HOSPITALITY TRUSTS SGX:J85 CITY DEVELOPMENTS LIMITED SGX:C09 DBS GROUP HOLDINGS LTD SGX:D05 OVERSEA-CHINESE BANKING CORP SGX:O39 SINGAPORE POST LIMITED SGX:S08 SINGTEL SGX:Z74 SINGAPORE TECH ENGINEERING LTD SGX:S63 CSE GLOBAL LTD SGX:544 TIANJIN ZHONG XIN PHARM GROUP SGX:T14 SUNNINGDALE TECH LTD SGX:BHQ

Strategy - Singapore - A More Challenging Landscape To Navigate

We have re-worked our FSSTI target to reflect a more uncertain external environment and a higher risk-free rate.
Our latest FSSTI target of 3,450 implies a 6% upside and a stock-picking approach for the rest of 2018.

WHAT’S NEW

Heightening trade war tensions and rising rates.

We have reviewed our year-end FSSTI target as a result of the escalating trade tensions and the change in expectations of four hikes in FED funds rate in 2018 rather than three. Hence, we adjust our risk-free rate assumption for Singapore and highlight a sensitivity analysis on sectors/stocks that would be negatively impacted.

ACTION

Lowering year-end target.

In our earlier report dated 1 June, we urged investors to tread carefully after the market run-up but we had under-estimated the extent of the sharp pull-back in FSSTI due to the escalating trade tensions (see report: 2H18 Market Strategy Singapore: Treading Carefully After Market Run).
In addition, interest rates expectations have also been adjusted upward to four hikes rather than three in 2018 after the latest June FOMC. As a result, we reduce our year-end FSSTI target to 3,450 (from 3,720), which is based on a blended 15% discount to long-term mean PE and mean P/B.

Corporate earnings growth still robust.

We forecast market EPS growth at 8.6% y-o-y in 2018 and 9.5% y-o-y in 2019. On our estimates, 2018 earnings growth will be driven by the banks before broadening out to other sectors such as plantations and shipyards in 2019. However, we see possible downside risk in 2019 earnings from developers as a result of the recent property cooling measures.
As for the banks, we see limited impact on loans growth from the recent property cooling measures as the recent demand recovery in residential properties was relatively short-lived and homes purchased for investment accounted for just 27% of the new housing loan limit granted in 4Q17, as past cooling measures had already moderated investment demand.

Sector/stocks impacted by rising rates.

Given the expectations that the FED will hike rates four times this year, our base-case risk-free rate (RFR) assumption is raised from 2.5% to 2.75%. Sectors or stocks that could be negatively impacted are the S-REITs, banks, telecommunications and stocks that are valued on a DCF-basis. We will adjust our target prices once the upcoming 2Q18 results are announced.
We have done a sensitivity analysis to find out how various interest rate-sensitive stocks will react to a 25bp and 50bp rise in RFR.

Investment themes for the rest of the year.

More palatable after recent pull-back.

Since hitting the 12-month high of 3,615 in May 18, the FSSTI has pulled back by 10%. At the latest closing price, the FSSTI is trading at a FY18PE of 14.2x, which compares with its long-term mean of 15.0x. FY18F P/B of 1.28x also remains inexpensive, at a 18% discount to long-term mean.
Given reasonable valuation, we would look to accumulate our key picks on sharp pull-backs.

Andrew CHOW CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-07-13

SGX Stock Analyst Report BUY Maintain BUY 3.050 Same 3.050

BUY Maintain BUY 2.110 Same 2.110

BUY Maintain BUY 1.950 Same 1.950

BUY Maintain BUY 14.030 Same 14.030

BUY Maintain BUY 30.150 Same 30.150

BUY Maintain BUY 14.280 Same 14.280

BUY Maintain BUY 1.590 Same 1.590

BUY Maintain BUY 4.220 Same 4.220

BUY Maintain BUY 4.100 Same 4.100

BUY Maintain BUY 0.610 Same 0.610

BUY Maintain BUY 1.720 Same 1.720

BUY Maintain BUY 2.000 Same 2.000

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