Monthly Strategy (November 2018) - DBS Research 2018-11-02: Emerging From Red October

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SINGTEL (SGX:Z74) SINGAPORE TECH ENGINEERING LTD (SGX:S63) SHENG SIONG GROUP LTD (SGX:OV8) KOUFU GROUP LIMITED (SGX:VL6) NETLINK NBN TRUST (SGX:CJLU)

Monthly Strategy (November 2018) - Emerging From Red October

• STI year-end target lowered to 3200 from 3550. 
• Defensive names remain in favour – SingTel, Starhub, Netlink Trust, ST Engineering, Koufu, Sheng Siong. 
• Five large cap stocks trading near/at a 5-year valuation trough - Thai Beverage, Genting Singapore, Starhub, UOL, City Developments. 

November Market Outlook

Telco and SREITs outperform on risk-off mode

• Singapore market fell 239pts (-7.3%) in Oct, weighed down by trade war worries, rising interest rates and correction in the US stock market.
  • Telecom stocks outperformed, supported by the pre-conditional voluntary offer of Starhub (SGX:CC3)’s cost cutting measures and anticipation that SingTel (SGX:Z74)’s earnings have seen the worst.
  • SREITs outperformed as investors seek safety of yields in an uncertain cyclical growth environment.
  • Property stocks underperformed after the government announced more measures.
  • O&G stocks underperformed on weak earnings and a correction in oil price.

Key Events in November 2018

• US-China trade war likely to return to focus after the 6 Nov US mid-term elections as the Democratic party is unlikely to win enough seats to secure a two-thirds supermajority needed to halt an escalation of trade tariffs.
• FED is expected to keep rates on hold at 2.25% on 8 Nov; the next hike expected in December.
• Mike Pence will represent the US at the 6th US-ASEAN summit where he is expected to unveil new measures and programs for the Indo-Pacific region.
  • ASEAN benefits from trade diversion due to the US-China trade war.
  • Potential beneficiary is Venture Corp as bulk of its manufacturing facilities are in Malaysia.
• Donald-Xi meeting at the G20 summit will be the first since the mid-term election.
  • Significance: US may announce further tariffs to include all Chinese imports (additional US$257billion) if nothing constructive materialises from the meeting.

SGD weakness likely to continue into 2019

• Our currency strategist sees continued USD strength in the months ahead as the FED continues to normalise monetary stance.
• FED funds rate seen rising at a rate of 25 basis points per quarter till end-2019.
• USD-SGD to rise to 1.40 by year-end and 1.44 by mid-2019 before easing off to 1.42 by end 2019.
• Continued weakness in the SGD is a potential headwind for Singapore equity market.

Year-end target lowered to 3200 from 3550

• Lowered 2018 year-end target to 3200 (previous: 3550) pegged to 12x (-1SD) FY19F PE amid uncertainties over impact of the US-China trade war and rising interest rates environment.
• Bear-case scenario assuming US imposes 25% tariffs on all Chinese imports is 2800 pegged to 10.49x (-2SD) FY19F PE ⇒ bank stocks a possible drag
• Near-term, valuations have sunk to an attractive level ⇒ At week’s low of 2955, the Singapore market trades below 11.25x (-1.5SD) 12-month forward PE
• Positive divergence observed on the McClellan Oscillator, a measure of short-term market breadth ⇒ Hints of an impending near-term low.
• November bounce is possible after the October slaughter, capped at 3130.

Strategy

Defensive names remain in favour amid cautious undertone. 

• We expect defensive stocks to continue their relative outperformance in the current slowing growth and rising interest rates environment. Growth uncertainties are likely to continue with the ongoing US-China trade war. Meanwhile, the FED is expected to hike the FED funds rate by 25bps before year end to 2.25% with more to come next year.
• Telco stocks (SingTel (SGX:Z74) and Starhub (SGX:CC3)) and utilities (e.g. Netlink Trust (SGX:CJLU)) have outperformed the broad market thus far since July-18, a sign that investors’ focus had turned to the ‘early contraction’ cycle outperformers.
• Consumer staples such as Sheng Siong (SGX:OV8) and Koufu (SGX:VL6) as well as defensive name ST Engineering (SGX:S63) should also remain in favour.

Five large cap stocks that have fallen close to/at a 5-year valuation trough.

• Stock prices have generally fallen across the board with the market downturn in recent months. We look at large cap stocks that have fallen to -2SD of their valuation peg (PB, PE or EV/EBITDA) over a 5-year period. The significance of this is that in the near-term, price action for these stocks tends to be more resilient to negative news as concerns are ‘priced in’ and are candidates for a trade should the stock market rebound from its current oversold level. 
• Beyond the short term though, the risk is that any change to parameters of the valuation peg will alter the trough valuation level (e.g. P/E will rise at an unchanged stock price as earnings fall).
• Thai Beverage (SGX:Y92), Genting Singapore (SGX:G13), Starhub (SGX:CC3), UOL (SGX:U14) and City Developments (SGX:C09) are five stocks that appear on our radar.

Kee Yan YEO CMT DBS Group Research | https://www.dbsvickers.com/ 2018-11-02

SGX Stock Analyst Report BUY MAINTAIN BUY 3.640 SAME 3.640

BUY MAINTAIN BUY 4.300 SAME 4.300

BUY MAINTAIN BUY 1.240 SAME 1.240

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BUY MAINTAIN BUY 0.870 SAME 0.870