Trends From 2Q18 - CGS-CIMB Research 2018-08-17: Singapore Market Strategy ~ Buckle Up


Singapore Strategy - Buckle Up

  • There is no hiding place in this fragile environment. We think the theme for the Singapore market defines itself by elimination, i.e. who is cheap and less bad.
  • We find ourselves leaning towards more large-cap picks with
    1. valuation/dividend support, and
    2. quality profit growth/ ROE re-rating.
  • Our current picks are: AREIT, CDLHT, Comfort Delgro, Genting Singapore, Keppel Corp, MAGIC, Sheng Siong, Sembcorp Industries, ST Engineering and UOB.
  • Relatively safer small caps are: CSE Global, HMI, mm2 and Riverstone.
  • FSSTI is not expensive at -1 s.d. of mean at 12.3x CY19 P/E (+4% yoy EPS growth). Our FSSTI target is 3,380 (13x CY19F P/E), 0.5 s.d. of mean, pricing in uncertainty.

Prefer large caps in fragile environment

  • Although the bear market does not seem to be upon us (generally visible earnings growth for CY18), the noises of trade war and contagion risks for emerging markets can change conditions quickly. 
  • The recent unimpressive Singapore 2Q18 earnings season does little to lift the spirit. For the rest of 2018, our preference is skewed towards the large caps that are either cheap, less bad or offer firm dividends.

Trends seen in 2Q18

  • Trends we have seen in the last three months –
    1. capital goods sector delivered fewer misses after 2 years;
    2. underlying business environment in Singapore is firm as banks thrive on low credit costs;
    3. weak equity market posted drag on banks’ wealth management fee;
    4. some developers/ REITS are seeing dampened overseas growth;
    5. consumer plays are hit by high SG&A to fend off competition; and
    6. corporates are generally cautious on trade war but still sanguine on near-term outlook.

~ SGinvestors.io ~ Where SG investors share

No “worst is over” yet for Thai Bev and SingPost

  • In our previous strategy report (24 May 2018, Singapore Stock Strategy - 1Q18 Earnings Wrap ~ Hunger games ), we picked three stocks (Singapore Press Holdings, Thai Beverage and Singapore Post) that could outperform based on
    1. positive newsflow,
    2. earnings growth and
    3. 12-month underperformance.
  • Only one came through – Singapore Press Holdings (SPH) (Rating: ADD, Target Price: S$2.88) as recent 3QFY18 core earnings grew 5% y-o-y and 74% q-o-q, boosted by contribution from aged care and education while media earnings decline moderated. However, the worst was not over yet for Thai Beverage (Rating: ADD, Target Price: S$0.88) as earnings were marred by weak alcohol consumption patterns in Thailand as the rural economy is still cautious on spending.
  • Meanwhile, SG&A was inevitably high to fend off competition. For Singapore Post (Rating: HOLD, Target Price S$1.27), operating environment remained challenging with thin margins from logistics and longer gestation for e-commerce.

Unimpressive quarter

  • Aside from the above, earnings fell short yet again this results season with beat- to-miss ratio staying low at 0.4x. The most notable misses were DBS Group (lower wealth management and trading income) and Sembcorp Marine (wider-than-expected losses due to one-off loss from the completion of semi-sub, West Rigel sale). 
  • Although Singapore Airlines’ results were in line with our expectations, share price took a beating as its 1QFY19 earnings declined 8% y-o-y due to weaker performance across all the passenger airlines, affected by higher fuel costs and lower yields.
  • On the flip side, excluding ST Engineering (as the miss was due to early redemption of bonds), we consider capital goods had a decent quarter as the sector delivered more beats than misses for the first time since 2015, implying bottoming downside risks as expectations have been ‘very low’. 
  • Yangzijiang Shipbuilding trumped the most with a record quarterly revenue by expediting delivery of vessels. Venture Corp’s beat came from cost savings, value creation and a lower tax rate. UOB and OCBC benefited from lower credit costs.

Analysts are more conservative on FY19F

  • Almost all sectors’ earnings forecasts for FY19F were cut during the quarter as we took a more conservative stance. 
  • Key sectors that saw earnings cuts were banks (lower loan growth expectations and wealth management fee) and telco (more intense competition and weaker regional currencies). With this, our FY19F earnings growth tapers to a mere +4% y-o-y, treading on thin ice for more potential downside, in our view.

Sector preference

  • There is no hiding place in this fragile environment. We think the theme for the Singapore market defines itself by elimination, i.e. who is cheap and less bad. 
  • We find ourselves leaning towards more large-cap picks with
    1. valuation / dividend support and
    2. quality profit growth / ROE re-rating.

More dividend stocks in our picks; upgrade REITS to Overweight 

  • As the earnings visibility for FY19F fades, we believe investors should temper expectations and load up some stocks with earnings certainty or which trade at deep discounts. 
  • We add more dividend stocks and upgrade REITs from Neutral to Overweight. We think rising interest rates for REITS are already priced in; hence, steady DPU growth and high yields could do well for the sector.

Other Overweight  sectors: banks, capital goods, consumer/gaming and transport (new)

  • We remain Overweight on banks (valuations not expensive, backed by higher dividends), capital goods (high oil prices, improving ROE, cheap valuations), and consumer/gaming (earnings growth/cheap valuations). 
  • Transport is our new Overweight after our recent upgrade on ComfortDelgro.

Neutral: property, tech/manufacturing and commodities

  • Property is downgraded to a Neutral from Overweight. We are less inclined to Underweight the sector as the share price plunge post cooling measures could have reflected the lacklustre market ahead. 
  • Commodities and Tech remain as Neutral with direct implication from the trade war.

Underweight: telco and healthcare

  • Despite our recent upgrade on StarHub, we remain Underweight on telco and would reassess the worthiness for upgrade after the fourth telco’s entry. 
  • As for healthcare, valuations are still expensive above mean (c.26x forward P/E) with currency risk (IHH Healthcare) and gestation uncertainty (Raffles Medical Group).

On market

Singapore is not expensive at -1 s.d. of mean

  • From a market valuation perspective, Singapore is not expensive as FSSTI trades at 12.3x CY19 P/E (+4% y-o-y EPS growth) or -1 s.d. of 12.1x mean. We think this has already priced in elements of uncertainty. Assuming a zero-growth environment in FY19F (more earnings cuts ahead), we think FSSTI could trade down to 3,061 (based on 12x forward P/E) or -6% from current levels. 
  • Our revised FSSTI target is at 3,380, derived from 13x CY19F P/E (or -0.5 s.d. of mean).

Singapore growth tapers but better prepared for adversity

  • In line with corporate core earnings growth path (+9% y-o-y), our economist’s annual GDP forecast of 3.2% in 2018 remains intact and within the official MTI forecast range of 2.5% to 3.5%. 
  • Although growth tapers in 2019 (GDP forecast at 2.8%), we think Singapore corporates today are slightly more prepared for adversity with
    1. efficient cost controls by way of automation (banks) and cost optimisation (yards and manufacturing sectors),
    2. stronger balance sheets across large corporates and SMEs as banks hardly have any stress on asset quality, and
    3. little risk of an excessive property bubble with hefty cooling measures imposed.

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LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-08-17
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