2019 H1 Stock Picks - UOB Kay Hian 2018-11-07: Singapore Market Strategy

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DBS GROUP HOLDINGS LTD (SGX:D05) SATS LTD. (SGX:S58) SINGAPORE TECH ENGINEERING LTD (SGX:S63) GENTING SINGAPORE LIMITED (SGX:G13) THAI BEVERAGE PUBLIC CO LTD (SGX:Y92)

2019 H1 Stock Picks - Singapore Market Strategy

2019 year-end target range of 3,450. 

• Our end-19 target of 3,450 is relatively conservative, based on a blended 10% discount to long-term mean of PE and P/B. Our PE target assumes an EPS growth of 6.0% in 2019.
• Should 2019 market EPS growth surprise on the downside of 0-2% rather than 6.0%, our 2019 year-end target would decline to a range of 3,350-3,390. The decline is relatively modest as PE has a 50% weighting on our FSSTI target. The remaining 50% is based on P/B, which will not fluctuate as much.
• With interest rates on the uptrend, this could temper the global growth outlook and selected interest rate-sensitive sectors. UOB GEMR expects the three-month SIBOR to end 2018 at 1.95% and to gradually rise to 2.50% by end-19. In our view, a gradual and predicted rise in interest rates along with resilient growth would not necessarily be negative for equity markets.
• Key is that the rise in interest rates is gradual and accompanied by growth. Inflation will also be closely watched.

Look for S-REITs with potential growth upside. 

• While interest rates are trending up, we are selectively positive on S-REITs as we think S-REITs could transition to growth stocks during periods of a pick-up in economic activities, translating to higher rental rates/cap rates compression.
• Currently, S-REITs are at a 3.70% spread over risk-free rate but during upcycles (2004-07), the spread over risk-free rate narrows to 2.75%. If this repeats, the potential upside for S-REITs is estimated at 18%. Though rising rates are clearly not positive for dividend yield stocks that are interest rate-sensitive, investors will need to consider the economic outlook and the specific property segment’s prospects.
• In our S-REIT universe, we forecast stocks such as Ascendas REIT (SGX:A17U), CDL Hospitality Trusts (SGX:J85) and Manulife US REIT (SGX:BTOU) to deliver steady DPU growth over 2018-20.

Blue-Chip Stock Top Picks for 1H19. 

• As valuations have closed in towards the mean, we balance our portfolio with blue chips that could deliver earnings with some upside potential or quality laggards with either strong dividend yields or specific catalysts. This is key in the event of any negative surprises, both from company-specific or macro developments.
• Our large-cap picks include:
  1. DBS Group (SGX:D05) – NIM expansion and high beta to a potential market recovery. Attractive dividends.
  2. SATS (SGX:S58) – Improving outlook helped by stronger gateway operations from Singapore due to the cruise business and its China food solutions arm.
  3. ST Engineering (SGX:S63) – Accretion from its recently-acquired Middle River Aircraft Systems (MRAS) will provide a platform for more stable revenue given the huge backlog.
  4. Genting Singapore (SGX:G13) – Strong growth in rolling chip volume (RCV) from its VIP segment and attractive valuations after its share price correction.
  5. Thai Beverage (SGX:Y92) – Pick-up in consumer confidence could translate to higher alcohol consumption. Longer-term benefits from an organisational restructuring to drive its newly-acquired businesses to gain synergy.
  6. SingTel (SGX:Z74)  – Optus will benefit from outages suffered by Telstra and management promise of 17.5 S cents DPS for two years, implying a dividend yield of at least 5%.
  7. CapitaLand (SGX:C31) – Lower exposure to Singapore residential property and trading at a deep discount to RNAV.
  8. CapitaLand Commercial Trust (SGX:C61U) – Improving prospects for Singapore office rental growth. Longer-term upside from re-development of Golden Shoe Car Park.
  9. Ascendas REIT (SGX:A17U) – Signs of stabilisation in Singapore’s industrial market and upside from eas acquisitions, especially in Europe.

Mid-Cap Stock Top Picks. 

• Our mid-cap picks for investors with higher risk tolerance include:
  1. Japfa (SGX:UD2) – The stock is deeply undervalued as its 52% stake in Japfa Comfeed accounts for about 90% of Japfa’s market capitalisation. On our estimates, the residual market capitalisation of Japfa (ex Japfa Comfeed) implies a valuation of 2x for its other businesses. The stock is an excellent proxy to rising protein consumption from the growing middle class and we see earnings on a strong turnaround from 2018 onwards.
  2. CSE Global (SGX:544) – The group is a beneficiary of rising oil prices. We see potential synergies from its new partner, Serba Dinamik, which could open up markets in Malaysia and the Middle East for CSE. Operating cash flow is expected to remain healthy and with a strong balance sheet, CSE is well positioned for accretive M&As should the opportunity arise. The stock also offers sustainable dividend yield of over 6%.
  3. Valuetronics Holdings (SGX:BN2) – We expect an improvement in earnings from the coming quarters on high utilisation rate from its consumer (CE) segment, and for the robust growth from the industrial commercial (ICE) segment to continue. Cash flow generation is strong and we estimate that net cash accounts for over 40% of Valuetronics’ market capitalisation. The stock’s FY19F ex-cash PE of 4x is attractive and its dividend yield of over 6% is compelling.

Sector Weighting. 

We OVERWEIGHT banks.

• Rising interest rates should benefit banks, particularly DBS Group (SGX:D05), which has a strong deposit franchise in Singapore. Asset quality remains good despite a moderated loans growth outlook after the latest property cooling measures and external concerns.

We OVERWEIGHT S-REITs but have a NEUTRAL call on developers.

• Prospects for developers are expected to be challenging, particularly for developers with high landbank costs. Also, the regulatory environment remains unfavourable as potential homebuyers may adopt a wait-and-see attitude in view of the expectations that residential property prices could decline. However, we are NEUTRAL on the sector after its decline since Jul 18 due to the cooling measures (hike in additional buyer stamp duty and lower loan-to-value limits).
• Our key pick for the developer segment is CapitaLand (SGX:C31), which has the least exposure to Singapore residential property ( < 10% of its RNAV).
• In the S-REIT space, we see a supply-led recovery and a demand pick-up in segments such as hospitality and office. We favour CapitaLand Commercial Trust (SGX:C61U) and Ascendas REIT (SGX:A17U).

We are neutral on shipyards and our top pick is Sembcorp Industries (SCI).

• O&M earnings recovery could be delayed to 2019-20 as shipyards work through orders that were secured in 2016-17 at lower margins. Sembcorp Industries (SGX:U96) is preferred given its diversified earnings from utilities and improving earnings from its India segment.

Aviation is also an OVERWEIGHT as a result of our BUY calls on STE and SATS.

• ST Engineering (SGX:S63) looks compelling given its strong cash flows, contract wins and accretive acquisition of MRAS.
• SATS (SGX:S58) is also on our BUY list on rising contributions from its gateway division and its China food solutions arm.

Sector	Weighting	Top Calls
Aviation	OVERWEIGHT	ST Engineering, SIAEC
Finance	OVERWEIGHT	DBS, OCBC
Healthcare	MARKET WEIGHT	HMI, Raffles Medical, SMG
Oil Services	UNDERWEIGHT	-
Plantation	MARKET WEIGHT	Wilmar, Bumitama
Property	MARKET WEIGHT	CapitaLand, Wing Tai
REITs	OVERWEIGHT	CapitaLand Commercial Trust, Ascendas REIT
Shipyard	MARKET WEIGHT	Sembcorp Industries
Technology	UNDERWEIGHT	Sunningdale, Valuetronics

Earnings Outlook – Solid Earnings In 2019 But Downward Risks Persist

• We forecast a market EPS growth of 6.0% y-o-y in 2019. Key drivers of growth include banks, plantation and shipyards (due to low-base effect). However, we see possible downside to 2019 estimates, particularly for sectors such as shipyards and developers.
• As for consensus estimates, we note that market consensus has been brought down 2% since Jun 18 after the 2Q18 reporting season. In table below, we highlight stocks that could have earnings with meaningful upside or downside over the next 6-12 months.

Company	Earnings Upside/ Downside	Remarks
CCT	Upside	Potentially higher-than-expected office signing rents.
CMT	Upside	Potentially higher-than-expected retail rents. Demand remains healthy (ie with key projects looking to complete next year, such as Jewel Changi Airport attaining close to 90% occupancy).
ComfortDelGro	Downside	Go-Jek's entry induces another round of competition that results in lower utilisation of taxi fleet. M&A delivers less earnings than expected.
CSE	Upside	As market fundamentals continue to evolve favourably for CSE’s infrastructure and O&G businesses, we believe there is greater scope for new order wins.
Raffles Medical	Downside	Potentially higher-than-expected start-up costs in Chongqing.
SATS	Downside	Potential weakness arising from slower meals/international traffic growth due to typhoon in Japan (subsidiary TFK Corporation).
Sembcorp Industries	Upside	India continues to outperform.
Sembcorp Marine	Downside	Business does not return to expected breakeven or profit.
SIA	Downside	Street has not fully factored in impairment writedown from Virgin Australia, but stock price has factored that in. Singapore Medical Upside Strong traction in new markets such as Vietnam.
SingPost	Downside	E-commerce turns out worse than expected. Recovery gets pushed out another year. Mail continues to slide, as international mail does not recover sufficiently to offset the decline.
Thai Beverage	Upside	Faster-than-expected turnaround of spirits and beer volume consumption.
Venture Corp	Upside	IQOS 3 production orders turn out better than we currently expect.

Risks/Issues

• Key risk factors that could negatively affect equity markets include:
  1. Unexpected slowdown in the US or unanticipated government policy changes that could restrict global trade;
  2. Renewed fears over the euro as investors fear the exit of Italy from the EU;
  3. Weaker-than-expected growth in China;
  4. Deteriorating relationship with Malaysia after the change in government and potential economic implications;
  5. Rising intensity in disruption of traditional sectors in Singapore; and
  6. Unfavourable regulatory changes in Singapore, impacting sectors such as property, land transport, etc.

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

SGX Stock Analyst Report BUY MAINTAIN BUY 29.500 SAME 29.500

BUY MAINTAIN BUY 6.10 SAME 6.10

BUY MAINTAIN BUY 4.060 SAME 4.060

BUY MAINTAIN BUY 1.380 SAME 1.380

BUY MAINTAIN BUY 0.840 SAME 0.840