Stock Strategy Singapore - Maybank Kim Eng 2018-07-09: Market Monitor ~ Sector Outlook and Preferences

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

Stock Market Monitor - Policy Potholes Surface

Sector outlook and preferences

  • We have made two changes to our sector outlook – we are now Neutral on developers (from Overweight) and Telecoms & Media (from Underweight). 
  • We upgraded our sector view on telecoms largely on the back of stock price declines of the three existing operators (Singtel, StarHub and M1) by 13-34% in the past year, which we believe has now adequately factored in new-entrant risks of the fourth operator.
  • Other sector weight recommendations are unchanged – we suggest overweighting financials, industrials (selectively), consumer & gaming and tech, and underweighting office REITs and retail REITs.

Our Singapore sector weightings

Financials Agricommodities Office REITs
Industrials Healthcare Retail REITs
Consumer & Gaming Industrial REITs
Technology Property developers
Telecoms & Media

Sector Summary Outlook Factors

  • Fossil fuel price strength should cushion CPO price downside. Palm oil-gasoil prices trading near parity, which could boost discretionary biodiesel demand. Valuations attractive after recent de-rating.
  • CPO price will be under pressure in the near term given seasonal peak production period from June and high CPO inventory levels.
  • Consumer confidence improved significantly through 2H17 with strong economic growth.
  • Retail sales index (ex-motor) turned around in 2017 at +1.8% from the -2.6% prior year decline; YTD 2018 growth indicators encouraging.
  • Competitive intensity in retail and F&B remains high with on- line channels continuing to disrupt specific segments for the former.
  • Ongoing overseas expansion for most of the companies holds execution risk.
  • Positive read through from better Macau VIP performance for Singapore VIP volumes.
  • Recovering MYR/SGD exchange could be positive for mass market share gain for Resorts World Sentosa.
  • Competition from the region remains stiff and new casinos (e.g. Cambodia) may divert VIP business, albeit temporarily.
  • Broader recovery in mass market, more meaningful for margins, still to be seen.
  • Expected system loan growth of c9-10% but there could be modest downside to this from housing loans slowdown, NIM expansion from higher lending yields and NII growth driven by a fast growing wealth management sector in Asia Pacific.
  • Risk of rate increases being on a much steeper path than expected could de-rail loan growth expectations. Higher credit costs if the credit cycle changes.
  • Secular industry growth from a number of factors like ageing demographics and higher healthcare spend from a growing middle-class in the region. 
  • Underleveraged balance sheets allowing for M&A.
  • Rich valuations relative to 3Y history. High level of competition in Singapore. Execution and market risk from greenfield hospital expansion in new geographies and M&A. This analyst research report is shared at SGinvestors.io.
  • Global passenger traffic and fleet growth fuelling a recovery in aviation services. Increasing penetration of retail e-commerce in APAC driving smart warehousing and logistics demand. The worst is probably over for provisions and write-downs in the O&M sector.
  • Legacy airlines face overcapacity issues and heavy reliance on long haul. Maintenance cycles are longer for the new generation longer range aircraft.
  • O&M order growth likely to struggle from overcapacity issues in the near term regardless of oil price rise.
Property Developers
  • Balance sheets of most developers have significant capacity to reinvest for growth after the SG market digests the new tightening measures. Some developers very diversified outside SG and real impact to earnings from recent policy measures will be small.
  • Home price recover of the past three quarters stymied by policy intervention – this could be an overhang on stocks for next 3-4 quarters. Occupier market gradually recovering but still weak.
  • High land prices to likely weigh on developer margins and profitability of new projects.
Industrial REITs
  • Industrial sector demand-supply fundamentals improving evidenced by rising occupancies and stable/positive rental reversions. Acquisitions / consolidation a potential theme with the larger REITs having clear mandates and substantial debt headroom.
  • Sharper-than-expected rise in interest rates will impact earnings (0.4-5% downside to FY19-20 DPUs on further 50bps increase over base-case assumptions).
Office REITs
  • On a recovery path with the market nearing the tail end of a supply glut; rents have only just started to pick up in 3Q17. But valuations are not compelling with yields and spreads over governments bond yields at historically low levels and sector P/BV at 0.95x.
  • Flat to slightly negative reversions likely in the near term as market rents are currently hovering around the same levels as expiring rents.
Retail REITs
  • Cyclical macro factors of improvements in consumer sentiment and the job market and growth in GDP and tourism are positive.
  • Near term demand from new-to-market international brands, discount retailers and F&B should be firm.
  • The structural threat from growing e-commerce weighing on requirements for retail space is the single largest negative facing the sector. This analyst research report is shared at SGinvestors.io.
  • Enterprise and government sector driven growth has been a bright spot in an otherwise uninspiring growth outlook, weighed by rising competition in consumer wireless although stock prices now seem to be adequately factoring in the risks.
  • Risk of an exacerbation in consumer wireless competition exists with new entrant TPG yet to enter the market in late 2018.
  • M1 most exposed to a potential tariff war.
  • Attractive secular growth prospects for the EMS companies from a combination of new and existing customers and involvement in early growth stage products.
  • Stock prices for most companies have done extremely well in the past 18 months and growth expectations are high, which leaves room for market disappointment / de-rating in the near term.
  • Customers have reportedly turned more cautious on volumes amid the risks of a US-China trade war.

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