1H19 Outlook - UOB Kay Hian 2018-11-07: Value Emerging; But Let The Dust Settle

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1H19 Outlook - Value Emerging; But Let The Dust Settle

  • Value is gradually emerging after the FSSTI’s ytd pull-back of 8%, notwithstanding the downward revision in consensus earnings. We have a 2019 year-end target of 3,450 for the FSSTI (based on a blended 10% discount to long-term mean of PE and P/B).
  • We would accumulate on pull-backs given external drags from rising interest rates, potential earnings downgrades and external risks. 
  • 1H19 themes:
    1. solid blue-chip anchors,
    2. dividends from cash machines,
    3. potential M&A plays, and
    4. refuge in consumer stocks.

Market Outlook

Selected value emerging after 8% ytd pull-back.

  • We see selective value after the FSSTI’s 8% ytd pull-back in 2018. After the retreat, the FSSTI is trading at a 12% discount to its long-term mean PE of 15.0x. 
  • On a P/B basis, the discount is even more pronounced as the current FSSTI P/B of 1.17x is at a 24% discount to the long-term mean P/B of 1.55x.

Concerns from rising rates amid external uncertainties.

  • The rising rate environment, if gradual and accompanied by solid economic growth, is not necessarily bad for equity markets. However, the current growth environment is murkier given trade tensions, geopolitical risks and high oil prices.
  • In the case of the FSSTI, there was no direct correlation between equity markets and rising rates. More important, in our view, is the growth outlook as well as corporate earnings.

Consensus earnings for 2019 could be mixed given rising rates and trade tensions.

  • This bears a close watch as consensus estimates for 2018 have been trimmed 2% since Jun 18. Currently, consensus forecasts 2019 earnings growth at 7.6% but we see possible downside after 3Q18 results.

Deceleration in Singapore’s 2019 GDP growth outlook.

  • UOB GEMR forecasts Singapore’s 2019 GDP growth at 2.8% y-o-y, compared with 3.4% in 2018 and 3.6% in 2017. Other than a high-base effect, we attribute the deceleration to issues such as rising interest rates and a less conducive environment for global trade.
  • 3Q18 GDP grew 2.6% y-o-y, which was lower from 1H18 (1Q18: 4.6% y-o-y, 2Q18: 4.1% y-o-y).

Resilient global growth but eyes on interest rates and geopolitical risks.

  • The IMF recently moderated its global GDP growth outlook to 3.7% y-o-y for 2018/2019 (from 3.9% each), citing trade tensions between the US and China, weaker performances by Eurozone countries and rising rates that could pressure emerging markets with capital outflows (eg Argentina, Brazil, Turkey, South Africa, Indonesia and Mexico).

FSSTI looks inexpensive compared with regional peers.

  • Ytd, Singapore has had a lacklustre performance, declining 8%. 
  • Selected ASEAN peers such as Thailand, Malaysia and Indonesia have outperformed the FSSTI, given Singapore’s open economy and reliance on trade, which has been hampered by heightened trade tensions between the US and China.

FSSTI valuation looks reasonable compared with regional peers’.

  • On a PE basis, the FSSTI’s consensus current PE of 12.6x looks reasonable at a 10% discount to Asia ex- Japan’s PE valuation of 14.0x.
  • On a P/B basis, the discount is even more attractive as the FSSTI’s current P/B of 1.08x is at a 35% discount to the regional average of 1.66x. Nevertheless, the discount is warranted given the FSSTI’s lower ROE of 9.6% compared with the regional average of 12.5%.
  • On a more positive note, the FSSTI’s average 2018 dividend yield of 4.2% is attractive compared with the region’s average dividend yield of 3.0%. This is not surprising given the slew of high dividend yield stocks in sectors such as S-REITs and telecommunications, and even banks are offering decent dividend yields of over 3%. With this, together with a firm Singapore dollar outlook, we think the FSSTI will remain on the radar of yield seekers.

Downside risk to earnings outlook in 2019.

  • Consensus is forecasting 7.6% y-o-y earnings growth in 2019, which is higher than our estimate of 6.0%. However, consensus forecast has been trending down since Jun 18 (-2%) and we see potential downside risks in 2018 and 2019, particularly in 2019 when the full impact of higher interest rates, oil prices and the weaker trade outlook dampens global growth.

Investment Themes To Kick Off 2019

  • Investment themes to kick off 2019 include:

a) Solid blue-chip anchors.

  • With a host of external uncertainties and rising interest rates, we think investors’ initial preference should be for solid blue chips to anchor their portfolios. This could preferably include stocks that offer decent dividend yields and earnings visibility and management. In our view, stocks in this category are DBS Group (SGX:D05), OCBC Bank (SGX:O39), SingTel (SGX:Z74), SATS (SGX:S58) and ST Engineering (SGX:S63).
  • Though developers are trading at a deep 41% discount to RNAV, we see limited positive catalyst as we foresee a challenging operating environment for developers, particularly those that are saddled with high-cost landbank. In addition, regulatory risks remain elevated, in our view.

b) Dividends from cash machines.

c) M&A plays.

  • After the privatisation of Wheelock Properties, we think investors may be on the lookout for potential M&A stocks, particularly those that are deep in value or those that may undertake accretive M&As. In our view, stocks that could enjoy M&A interest include Ho Bee Land (SGX:H13) and Sunningdale Tech (SGX:BHQ).

d) Refuge in consumer stocks.

  • Investors with lower risk tolerance could also consider the consumer sector. Stocks we favour include Thai Beverage (SGX:Y92) and Japfa (SGX:UD2). The former is a value play after its 29% ytd decline while Japfa offers arbitrage opportunity as its stub value (excluding its stake in Japfa Comfeed) is at 2x for its non-Japfa Comfeed earnings. We have a target price of S$0.98 for Japfa, which was raised after it reported solid 3Q18 results.
  • Another consumer stock to consider which has bombed out is Genting Singapore (SGX:G13).

Valuation – Below Fair Value But No Rush To Charge In

  • The FSSTI has declined 8% ytd and is currently trading at 2019F PE of 13.2x, or at a 12% discount to its long-term mean PE of 15.0x. While this suggests that PE valuations are not expensive, we think the 10% discount is appropriate as a cushion for potential downside risk in earnings next year given the external uncertainties due to Singapore’s open economy.
  • On a P/B basis, 2019F P/B of 1.17x is at a deeper discount of 24% to the long-term mean P/B of 1.55x, but a discount is justified given the FSSTI’s sub-trend ROE of 9.1% in 2019 compared with its long-term mean of 11.5%.
  • Comparing the FSSTI’s performance vs ASEAN peers’, the Singapore market appears to be in the mid range, underperforming markets such as Thailand, Malaysia and Indonesia but outperforming laggard such as the Philippines.

Andrew Chow CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2018-11-07
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