Navigating Singapore - CGS-CIMB Research 2018-11-29: 2019 Sector Allocation & Market Valuation

2019 Market Strategy Singapore - CGSCIMB Research | SGinvestors.io CITY DEVELOPMENTS LIMITED (SGX:C09) CAPITALAND LIMITED (SGX:C31)

Navigating Singapore - 2019 Sector Allocation & Market Valuation

Key change to our 1H19 strategy is to upgrade developers from Neutral to Overweight

  • Developer share prices have retraced by 22% YTD and are currently trading at a c.50% discount to RNAV or midway between -1 s.d. and -2 s.d. from the long-term mean, close to crisis valuation periods and pricing in the prospect of a sharp price correction and the need to make haircuts on land bank values.
  • However, as current clearing levels indicate, residential prices are expected to stay stable in the near term amid moderated volume while the possibility of provisioning appears low. Hence, we think developers have been overly sold down at this juncture.

Upgrade to Overweight on valuations

  • We are upgrading property developers to Overweight as we think there are trading opportunities given that valuations have taken a beating in an environment where new launches are progressively clearing at new but stable price points and operating margins remain lower but steady.
  • Singapore GDP is projected to expand by a slower but positive 2.6% in 2019 and household balance sheets remain healthy, thus preserving buyers’ affordability. While large supply remains a concern, a stable market should enable developers to clear inventory without the high possibility of having to temper land carrying values. Key catalysts would appear as we move closer to the end of the interest rate normalisation cycle towards end-2019.
  • Our preferred picks amongst developers are City Developments (Target Price: S$10.65) and CapitaLand (Target Price: S$3.55). 
  • We like City Developments (SGX:C09) for its bellwether position and strong track record within the Singapore residential market. In addition, it has plans to grow, enhance and transform its asset portfolio and business operations. It has set a 10-year target to achieve S$900m of recurring EBITDA vs. S$599m in FY17, to be driven by growing fee income and new capital deployment. Our Target Price of S$10.65 offers 25% upside.
  • We also like CapitaLand (SGX:C31) for its strong capital recycling activities with the divestment of S$4bn worth of assets YTD and redeployment into S$6.1bn worth of new investments. It appears to be on track to achieve its annual ROE target of 8%, having locked in c.6.9% for 9M18. A 20/80 trading/recurrent income split provides good income visibility. Our target price of S$3.55 offers 12% upside.

SREITs – Overweight (selected stocks)

  • SREITs are trading at 5.5% forward dividend yield, still hovering between average and +1 s.d. long-term yield, as investors continue to seek shelter from market volatility and pay for income stability. P/BV valuations are a tad below average at 0.98x.
  • We maintain our Overweight stance on SREITs in this still risk-off environment, where we think 1H19 will continue to feel the impact of 2 potential rate hikes. However, we would adopt a more selective stance given elevated valuations.
  • We prefer the office, hospitality, retail and industrial sub-sectors, in this order. Our ranking for the retail sub-sector is moved ahead of industrial due to protracted uncertainty over the outcome of the trade spat. To be sure, at present the escalation in trade tensions has weakened sentiment rather than caused an actual shift within the global supply chain. However, we think corporates may continue to adopt a cautious stance until a clearer resolution is in sight.

Other sectors unchanged

  • We are Overweight on banks, consumer/gaming and capital goods.
  • We are Neutral on tech/manufacturing, transport and commodities and Underweight on healthcare and telcos.

Market Valuation - FSSTI target at 3,300

  • We think global issues will continue to dominate investors’ minds. One of the only reprieves in the Singapore market is that valuations are not expensive. The near-term outlook is not superb but neither is it unbearable. The key question is how much of a pinch on corporate profits has been built in and have stocks already factored in all the negatives?
  • FSSTI is now trading at 11x CY19F P/E or -1.5 s.d. from its mean vs. net profit growth of 4% in CY19F, led by the banks, SREITs, capital goods and consumer sectors. The current valuations have baked in a negative growth environment, in our view. Note that our economist is still forecasting growth in Singapore GDP, albeit at a slower pace (2019: +2.6%).
  • Our 12-month FSSTI target is now 3,300 based on 12x CY20F P/E, or -0.5 s.d. from its mean, taking in some element of uncertainty and slower growth.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-11-29
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