Market Strategy Singapore - UOB Kay Hian 2018-08-17: 2Q18 Results Wrap-up – More Beats But Outlook Moderated

Strategy Singapore - UOB Kay Hian Research 2018-08-17: 2q18 Results Wrap-up – More Beats But Outlook Moderated CSE GLOBAL LTD SGX:544 SINGAPORE MEDICAL GROUP LTD SGX:5OT SINGTEL SGX:Z74 ASCENDAS REAL ESTATE INV TRUST SGX:A17U SATS LTD. SGX:S58

Strategy Singapore - 2q18 Results Wrap-up – More Beats But Outlook Moderated

  • 29% of the 2Q18 results exceeded our forecasts, compared to only 15% in 1Q18. However, our market EPS growth forecast has been trimmed to reflect weaker guidance and outlook, particularly from banks and telcos.
  • Remain selective on the FSSTI, which is trading at a slight 4% discount to mean valuations.


2Q18 delivered more beats.

  • 29% of the companies reporting their 2Q18 results exceeded our expectations compared to only 15% in 1Q18, marking one of the highest level of beats since 4Q16. 
  • 49% of the results were in line (vs 59% in 1Q18) whereas 22% were below expectations (vs 27% in 1Q18).
  • Sectors that shone include aviation and plantations, with the former continuing to perform well after exceeding our estimates in 1Q18.


Reducing market EPS to reflect weaker outlook.

  • Despite 2Q18 results exceeding our expectations, earnings outlooks have moderated due to concerns over weaker growth ahead as markets grapple with external issues such as the trade war, rising interest rates and volatile currencies, especially for emerging markets. As a result, we now expect market EPS to grow 6.3% y-o-y in 2018 (previously 8.6%) and 7.4% y-o-y in 2019 (previously 9.5% y-o-y). 
  • The cut is mainly due to banks (lower loan growth guidance) and telecommunications (particularly Singtel on lower contributions from Telkomsel and Bharti Airtel).

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Banks – Solid in 2Q18 but lower guidance ahead.

  • OCBC beat expectations but DBS was marginally below. DBS achieved NIM expansion of 11bp but OCBC was a laggard with a NIM expansion of only 2bp. However, we expect OCBC to play catch-up in 3Q18 as it re-prices its mortgage portfolio. There was also a moderation in growth for fees and commissions as risk reversion set in during the later half of 2Q18. (see also: DBS, OCBC & UOB Avg 22% 1HFY18 Net Profit Growth with Higher NIM)
  • After the analyst briefings, we cut DBS’ FY18-19F net profit forecasts by 1-3% and OCBC’s FY19 net profit forecast by 2% to reflect slower loan growth. We downgrade DBS to HOLD given limited upside and maintain OCBC at BUY with a target price of S$13.68/share. OCBC is our top pick in the sector given inexpensive valuations and possible dividend upside.

Aviation – Impressive showing by STE and SATS.

  • ST Engineering (STE), SATS and Singapore Airlines (SIA) delivered better-than-expected results. 
  • ST Engineering delivered an impressive 2Q18, underpinned by its electronics segment and a turnaround in the marine segment.
  • SATS impressed us with its earnings quality, with growth coming from China and cruise operations.
  • Singapore Airlines’ 1QFY19 also exceeded our estimates, driven by higher-than-expected cargo yield and a decline in aircraft leasing costs.
  • Lastly, SIA Engineering’s 1Q19 performance was in line, with strong JV and associate earnings compensating for its operating losses.
  • Our top sector picks include ST Engineering and SATS.

Telecommunications – Singtel’s 1QFY19 missed but M1 marginally beat.

  • Singtel’s 1QFY19 results were below our expectation on increased competition in Indonesia and India. Telkomsel saw contraction in revenue from voice and SMS while growth in data revenue slowed. Bharti Airtel suffered severe ARPU erosion due to competition from Reliance Jio. The only consolation is management’s guidance of a DPS of 17.5 S cents.
  • M1 posted marginally better-than-expected results as it added 34,000 post-paid mobile customers, boosted by Circles.Life’s launch of its S$0 Flexi Plan in May. Postpaid ARPU recovered 1.8% q-o-q due to seasonality and growth from data.
  • Maintain SELL on M1 with Singtel as our preferred sector pick.

Property – All about cooling measures, S-REITs in line.

  • Both CapitaLand’s and City Developments’ 2Q18 results were in line but all eyes were on management’s plans in view of Singapore’s cooling measures on residential properties.
  • City Developments has a residential launch pipeline of 2,600 units with 58% in the EC and mass market segments. Management also plans to build up recurring income of S$900m EBITDA in the next 10 years.
  • As for CapitaLand, its exposure to the Singapore residential segment is small and its focus is on building an AUM of S$100b by 2020.
  • S-REITs were in line, with the exception of Ascott Residence Trust (ART) and Frasers Hospitality. ART missed due to weaker performances from Malaysia, Vietnam and Spain while Frasers Hospitality was hit by weaker performances from Australia and Malaysia.
  • Our key picks in the property space include CapitaLand, CapitaLand Commercial Trust, CD REIT and A-REIT.

Shipyards – Long winter for O&M, pinning hopes elsewhere.

  • All three companies, Keppel Corp, Sembcorp Marine and Sembcorp Industries, missed expectations in 2Q18.
  • Keppel Corp disappointed due to net losses at O&M, absence of land sales from Tianjin Eco City as well as lower core profitability from property.
  • Sembcorp Marine suffered continued losses and is expected to breakeven only in 2019.
  • As for Sembcorp Industries, 2Q18 core earnings disappointed at the group level but was actually in line at the utilities level. Higher spot price exposure in 2H18 could see continued profitability for India.
  • All the O&M companies endured earnings cuts of up to 33% for FY18-20 after the results. Sembcorp Industries remains on our BUY list with a SOTP-based target price of S$3.41.

Notable results – Good and bad.

  • Wilmar reported its strongest 2Q results since 2011, with a solid performance from its tropical and oilseeds & grains division (due to better margins). Reiterate BUY with a target price of S$3.90.
  • Conversely, we downgrade SingPost to HOLD after the disappointing 1QFY19 results, which saw underlying profit fall 9% y-o-y, dragged by lower associate contributions (4PX) and higher taxes. We cut earnings forecasts by 12-14% for FY19-20 and our target price by 9% to S$1.45.

End-18 FSSTI target of 3,450.

Andrew Chow CFA UOB Kay Hian Research | Singapore Research UOB Kay Hian | https://research.uobkayhian.com/ 2018-08-17
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