October Armistice - DBS Research 2018-09-24: Market Strategy


Monthly Strategy -  October Armistice 


Palm oil stocks enter seasonal ‘sweet spot’

  • Over the past 10 years, CPO price tends to peak in the month of March, bottom out in October followed by 2-3 months of price recovery. The October-December rise coincides with the low production cycle starting in November and ahead of Christmas and the New Year when demand typically rises.
  • Seasonal factors aside, the recent move by Indonesia that requires railways and electrical generators to use fuel blended with 20% palm biodiesel (B20 biofuel) from 1 September should help to absorb excess stockpiles and underpin CPO price.
  • CPO stocks exhibit similar seasonal patterns - an October low followed by a price recovery during the November-December period. Seasonal factors aside, CPO stocks First Resources, Wilmar International and Golden Agri could also benefit from a 6.9% rise in the USD/IDR exchange rate since June as these companies report earnings in USD while a substantial portion of their cost is in Rupiah. Our picks are First Resources and Wilmar International.

~ SGinvestors.io ~ Where SG investors share

Trade war beneficiaries

  • Trade diversion and cost reduction due to currency exposure are the 2 silver linings of the current US-China trade war for certain companies.
  • As the US is not imposing a blanket tariff on all countries, US importers who find it too expensive to source from China could switch their procurement sources to other Asian countries such as Malaysia, Thailand or Vietnam. Examples are Venture Corp and Riverstone.
  • Emerging market (EM) currencies have also taken a beating in recent months as US tariffs have fuelled trade uncertainties. For example, the Indonesian Rupiah has weakened by 6.9% against the USD since the beginning June while Malaysia’s Ringgit fell nearly 3.8% over the same period. Companies that report revenue in USD and with costs (e.g. wages, production facilities) in EM currencies stand to gain from the USD strength. Examples are First Resources and Wilmar International and to a lesser extent Riverstone.
  • On the other hand, weak EM currencies are negative for companies with revenue exposure in those countries (e.g. IHH Healthcare’s exposure to Turkish Lira).

Benefits from weak EM currency exposure
First Resources Revenue in USD, cost in Rupiah - Rupiah lower by 6.9% vs USD since beginning June.
Wilmar International Revenue in USD, cost in Rupiah - Rupiah lower by 6.9% vs USD since beginning June.
Riverstone Revenue mostly in USD, cost in Ringgit, Baht and RMB - Ringgit lower by 3.8% vs USD since beginning June, THB is weaker by a lesser 1%.
Benefits from trade diversion
Venture Corp Factories in Malaysia
Riverstone Factories in Malaysia and Thailand

Potential humps and bumps in the upcoming 3Q results season

  • The 3Q results season is approaching. We look at some companies that could potentially surprise on the upside as well as to the downside.

Potential Upside Surprise
Singapore Airlines Sequential earnings should improve as higher fares and surcharges could offset rising fuel costs, and yields improve 1-2% per annum going forward.
ComfortDelgro Results should improve on a sequential basis on the back of stabilisation of taxi fleet contraction, minor increase in fleet, the first seen since Dec 2016, and less intense competitive pressure since the exit of Uber.
Mapletree North Asia Commercial Trust Rental reversions from its main retail mall should accelerate (from a low base effect) on the back of an improving retail sales outlook in HK. Festival walk contributes close to 55% of topline, upside could come from the strengthening HK/SGD exchange rate.
Hi-P Sequential earnings improvement expected as 3Q is its traditional peak period
Riverstone Could benefit from trade diversion as clients shift production away from China to Thailand and Malaysia, where Riverstone’s plants are mainly based. Also, beneficiary of stronger USD vs MYR – 90% of gloves are priced in USD.
Potential Downside Surprise
CapitaLand Possible impact from weak RMB against SGD with 40% of EBIT from China.
SingTel ~25% of group earnings from Telkomsel Indonesia, ~25% from Optus Australia, ~10% from AIS Thailand and ~5% from Globe Philippines. Every 10% depreciation in IDR, AUD, THB, PHP will have 2.5%, 2.5%, 1% and 0.5% adverse impact on earnings.
CapitaLand Retail China Trust Possible impact from weak RMB against SGD with 100% of income from China, pays dividend in SGD.
Frasers Logistics & Industrial Trust Possible impact from weak AUD against SGD with 60% of income from Australia.
Frasers Property Ltd Possible impact from weak AUD against SGD with 40% of EBIT from Australia
IHH Healthcare Possible impact from weak Turkish Lira that contributes about one-third of the group’s revenue in 1QFY18.
Perennial Real Estate Holdings Possible impact from weak RMB against SGD with 60% of EBIT from China.
SingPost Complete turnaround for eCommerce segment may be further out in time. Execution risks remains as management recalibrates both logistics and eCommerce segments. International postal mail growth slowdown.

Kee Yan YEO CMT DBS Group Research | Janice CHUA DBS Research | https://www.dbsvickers.com/ 2018-09-24
SGX Stock Analyst Report BUY Maintain BUY 2.000 Same 2.000
BUY Maintain BUY 3.610 Same 3.610
BUY Maintain BUY 12.400 Same 12.400
BUY Maintain BUY 22.900 Same 22.900