Stock Strategy Singapore - Maybank Kim Eng 2018-07-09: Market Monitor ~ Policy Potholes Surface

Stock Strategy Singapore - Maybank Kim Eng 2018-07-09: Market Monitor ~ Policy Potholes Surface Singapore Stock Market Property Cooling Measures Straits Times Index Target

Stock Market Monitor - Policy Potholes Surface

And just like that - it’s raining again!

  • After a few quarters of broadly improving operating dynamics across most sectors, the market has been hit by one of the key wild-card risk factors that we highlighted earlier, ie, sooner-and greater-than-expected tightening measures for the property market.
  • We downgrade our sector weighting for developers and revise our top-picks list by removing developers with a concentration in Singapore’s residential market and who have premium valuations.

It felt like a sucker punch

  • With a buoyant en-bloc market and c9.1% increase in home prices in the past year, we believed (as did the street, in our view) that some tightening measures were likely in 2019. 
  • So not only is the timing of the new measures early in the recovery cycle a surprise, but also the degree. This begs the question whether regulators now foresee greater economic uncertainly and headwinds from global macro and trade war-related factors versus a few months ago. This analyst research report is shared at SGinvestors.io.
  • The new measures are designed to temper investment demand (est. at around half of total) with higher ABSD requirements and LTV limits for buyers. But, on the flipside, it should also moderate future supply shocks by cooling new unit creation through the introduction of a new non-remittable ABSD for developers.
  • The near-term impact on the sector should be threefold:
    1. lower margins as developers are likely to cut prices to clear stock;
    2. a slower new launch pipeline; and
    3. lower P/RNAV multiples that the market will attribute to the stocks in light of lower growth prospects.
  • See report: Singapore Property - Let the Dust Settle; Downgrade to NEUTRAL dated 06-Jul-2018 for further details.

Taking the fizz out of the property market

Housing Loan Growth – The Other Tail Risk

  • From a market-earnings-outlook standpoint, apart from the direct impact of potentially lower profits from the developers due to the new tightening measures, we expect the loan growth outlook for FY18E-20E would also be affected from a slowdown in housing loans. 
  • Our current FY18 forecasts assume housing loans account for c23-28% of total loans and advances for the three banks. While we have not adjusted our profit estimates for banks, our sensitivity analysis assuming housing loans have zero growth in FY18 (vs our assumption of 7.5-9.9%) reported net profit for banks would drop c2-2.3% from our base-case estimates.
  • We believe the actual impact could be slightly higher as working capital loans for the construction and general manufacturing sector (for property related products) for instance would also likely be affected. That said the unknown wild cards lie in the competitive behaviour of the banks and whether they try and offset slower housing loan growth through pricing adjustments in a rising interest rate environment. This analyst research report is shared at SGinvestors.io.
  • The profit growth outlook of our coverage universe post various revisions to developers’ forecasts have dropped by 130-240bps to 17% and 9.4% for FY1 and FY2 respectively (note that consensus forecasts for FSSTI recurring profit growth stand at 17.7%/8.6% for 2018/2019).

Valuations Moderate, But Catalysts Waning

  • The FSSTI has performed poorly this year, down 6% YTD, weighed down by recent ASEAN and Emerging Markets jitters, concerns of a tech sector de-rating and risks of the trade war escalating. 
  • Index valuations looking quite undemanding with 12M trailing P/E of 10.2x vs the 10–year average of 12.4x. But the latest property tightening effectively kills one of the catalysts that we were initially looking for to drive a moderate recovery in the latter part of the year (which is now likely to contribute to prolonging the current weakness in the market).
  • However, in an ASEAN context we believe the market is still relatively attractive in the current macro environment given its characteristics of a geographically diversified profit base (40%+ of profits derived from overseas markets), a stable currency, low gearing and fairly resilient dividend yield.

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Neel Sinha Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2018-07-09
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