SILVERLAKE AXIS LTD (SGX:5CP)
HRNETGROUP LIMITED (SGX:CHZ)
FU YU CORPORATION LTD (SGX:F13)
SHENG SIONG GROUP LTD (SGX:OV8)
GENTING SINGAPORE LIMITED (SGX:G13)
Singapore Equity Strategy - Headwinds Persist; Stick With Quality!
Weak 4Q18 results
- For our coverage universe, c.20% of companies reported earnings that were below our estimates. Amongst key stocks that reported below expectation earnings were Dairy Farm International (SGX:D01), Genting Singapore (SGX:G13) and Golden Agri-Resources (SGX:E5H).
- A similar percentage of stocks reported results that were ahead of our expectations. Best World International (SGX:CGN), Raffles Medical Group (SGX:BSL), and Thai Beverage (SGX:Y92)’s results surprised us and the market positively.
- In line with guidance for moderation of growth in 2019 by most companies under our coverage, c.50% of our coverage universe witnessed reductions in 1FY revenue and earnings estimates.
Earnings downgrade continues
- Downgrade in 2019 consensus earnings eased during 3Q18. However, the pace of downgrades picked up as the 4Q18 results season progressed. Based on Bloomberg estimates, in last four weeks, 2019 consensus EPS has been downgraded by 2%. The consensus EPS growth for 2019 now stands at 4.2%.
- From Sep 2018, the telecom, transport, consumer staples and banking sectors have seen the most downgrades to consensus earnings.
Key rating changes after the recent results season
- Post results, we upgraded ComfortDelGro to BUY from Neutral amidst better than expected performance of its taxi business despite an increase in competitive intensity from the launch of Go-Jek operations in Singapore. See report: ComfortDelGro - Where’s The Taxi Competition? Raise To BUY.
- Although we continue to like Ascendas REIT (SGX:A17U) for its ability to recycle capital and strong industrial assets, we downgraded to stock to NEUTRAL from Buy after a strong YTD share price performance and as the upside from current levels was not compelling enough. See report: Ascendas REIT - Nearing Fair Value; Now A NEUTRAL.
Key Target Price changes after the recent results season
- Amongst large caps, ComfortDelGro (SGX:C52) and Thai Beverage saw uplift in target prices. Rise in ComfortDelGro’s Target Price was on an improved earnings outlook for its taxi business, while the rise in Thai Beverage’s Target Price was supported by a 6% uplift in FY19 earnings. See report: Thai Beverage - Spirits Rising, Beer Too ~ BUY.
Markets may have performed well, but…
- Expectations of slower US federal fund rate hikes and therefore slower rise in the Singapore Interbank Offered Rate, as well as a positive impact from a likely resolution of the trade war between the US and China have supported the STI Index.
- With an YTD positive return of 5%, Singapore has been the best performing ASEAN market in local currency terms. In USD terms, it has lagged Thailand, which has delivered 7% YTD returns.
…macro headwinds persist
- However, we remain cognisant of macro headwinds from slowing non-oil domestic exports and slowdown in GDP growth to a tad below 2.5% (from 3.2% in 2018) – based on guidance provided by Singapore’s Ministry of Trade & Industry.
- Historical trends suggest that Singapore’s stock index returns follow the country’s nominal and real GDP growth closely. As we expect a slowdown in GDP growth to extend into 2019 and 2020, we believe it will be tough for the STI to generate strong positive returns, especially with continuing downgrade to earnings estimates.
Top Picks
- We maintain our view that amidst an uncertain external environment, investors should stay selective and focus on buying stocks that offer stable earnings, strong balance sheets, and sustainable dividends.
- The consumer and industrials sectors are preferred defensive sectors that outperformed after peak GDP growth in previous economic cycles. Sheng Siong Group (SGX:OV8), Wilmar International (SGX:F34), and Genting Singapore are our preferred consumer sector picks and ST Engineering (SGX:S63) is our preferred industrial pick.
- REITs should continue to perform well amidst expectations of a pause in interest rate hikes. However, large-cap REITs have outperformed the market and we believe investors should rotate into quality small-mid cap REITs that offer higher yields. We remove Ascendas REIT from our top picks (see report: Ascendas REIT - Nearing Fair Value; Now A NEUTRAL) and replace it with ESR-REIT (SGX:J91U).
- CDL Hospitality Trusts (SGX:J85) is our preferred hospitality REIT (see report: CDL Hospitality Trusts - Turnaround In Sight, Our Top Pick; BUY),
- Manulife US REIT (SGX:BTOU) is our preferred overseas REIT (see report: Manulife US REIT - Proving Its Mettle; Remains A Top Pick), and
- Starhill Global REIT (SGX:P40U) is our preferred office REIT (see report: Starhill Global REIT - The Cheapest Retail / Office REIT – BUY).
- With 31% YTD returns and limited upside from current share price levels, we remove Venture Corp (SGX:V03) from our Top Picks.
- Banks have underperformed the market and we believe the sector should play catch up as the year progresses. Our preferred pick in banks is United Overseas Bank (SGX:U11) over DBS Group (SGX:D05).
- We believe selective opportunities exist for investing into small-mid cap companies that offer either strong visibility on earnings growth, sustainable high dividends, and/or are trading at compelling valuations. Amongst small-mid caps, our preferred picks are
Market valuation
Maintain STI target of 3,300 for end-2019.
- We use a top-down method to derive our STI target, based on a P/E multiple on 2019’s forecast EPS. The STI’s 12.5x 1FY P/E sits at slightly above its -1SD band, which has only been breached twice since the global financial crisis – each time, the market witnessed a sharp rebound. With expectations of a slowdown in GDP growth, we believe a strong P/E expansion will be difficult to pencil in.
- We value the STI based on 2019 year-end target P/E of 13x, which is slightly below its 1FY average of 13.3x. Applying this to our 2019 EPS estimate, we derive an index target of 3,300 for end-2019.
- (see also STI Constituents Price Target & Stock Ratings)
Shekhar Jaiswal
RHB Securities Research
|
https://www.rhbinvest.com.sg/
2019-03-13
SGX Stock
Analyst Report
0.650
SAME
0.650
1.060
SAME
1.060
0.240
SAME
0.240
1.270
SAME
1.270
1.220
SAME
1.220
