Singapore Monthly (Mar 2019) - DBS Research 2019-03-04: Deepening Cuts, Improving Macros

HI-P INTERNATIONAL LIMITED (SGX:H17) SILVERLAKE AXIS LTD (SGX:5CP) UMS HOLDINGS LIMITED (SGX:558) THAI BEVERAGE PUBLIC CO LTD (SGX:Y92)

Singapore Monthly (Mar 2019) - Deepening Cuts, Improving Macros

Earnings recession deepens: STI earnings cut by 5%/4.3% for FY19F/20F.
A temporary pause – STI support 3180.
Dividend boost – Venture Corp, UOB, ST Engineering, ComfortDelGro.
Stocks most impacted by the latest results season – APAC Realty most positive; iFAST Corporation, mm2 Asia, StarHub negatively impacted.
Four stocks to take profit after strong YTD run-up – Hi-P International, Silverlake Axis, Thai Beverage, UMS Holdings.

STI ended February up 20pts (+0.6%, see Performance of Straits Times Index & Constituents in February 2019) lifted by optimism of US- China trade deal and a possible pause in US rate hikes.
Consumer goods (Thai Beverage (SGX:Y92)), O&G (Sembcorp Marine (SGX:S51)) and industrial (ST Engineering (SGX:S63) ) sectors outperformed.
Consumer services underperformed (Genting Singapore (SGX:G13)).

ST Engineering benefits from the government’s continued focus on defence spending and smart nation initiatives.
Enhanced CHAS scheme benefits participating GP/dental clinics with high subsidies – e.g. Raffles Medical Group (SGX:BSL), Singapore Medical Group (SGX:5OT).
Deferment of foreign worker levy hike for marine sector marginally lowers the cost for Singapore yards, e.g. Sembcorp Marine.
Impact on STI limited as ST Engineering’s weighting on index is low.

Earnings growth slashed to +4.6% (previously +7.4%) for FY19F – all sectors suffered earnings cuts except technology and industrial.
FY19F earnings cuts came from banks (UOB (SGX:U11), OCBC Bank (SGX:O39)), real estate (City Developments (SGX:C09), UOL Group (SGX:U14)), telco (SingTel (SGX:Z74), StarHub (SGX:CC3)), consumer goods (Thai Beverage) and O&G.
Earnings growth lifted marginally to +6.8% (previously 6.6%) for FY20F.
STI earnings growth forecast lowered to just +2.8% (previously +5.7%) for FY19F, uplifted to +7.1% (previously +6.4%) for FY20F.

STI suffered a 5% earnings cut for FY19F and 4.3% earnings cut for FY20F.
Earnings downtrend deepens -> We maintain our view that the earnings recession trend will extend for another quarter into 1QFY19 given the US-China trade uncertainties, before it ends.
At its February high of 3286, STI traded at slightly above 12.89x (-0.25SD) 12-month forward PE -> near-term valuation cap given the current earnings downward revision trend.
Barring a negative turn in macro developments (e.g. re-ignition of US-China trade war), we peg firm valuation support at between 3123 (12.3x 12-month forward PE, -0.75SD) and 3200 (12.59x 12-month forward PE, -0.5SD) for bargain hunters.

Optimism of US-China trade deal and a dial-back in rate hikes already played out well in the past two months, the devil is in the details if a deal is signed.
But we expect a higher-low pullback on a dial-back in macro risks (e.g. FED policy stance, low likelihood of an all-out US- China trade war) even as global growth slows.
Upcoming ex-dividend period in April-May should also attract bargain hunters on pullback for component stocks with attractive payouts (e.g. UOB, ST Engineering, ComfortDelGro (SGX:C52), Venture Corp (SGX:V03)) .
We peg likely support at 3180 (38.2% downward retracement), strong support at 3140 (50% downward retracement).
Our bull-case scenario of 3500 by year-end remains a possible outcome.

The stock market is likely to consolidate its YTD gains in the near term, following the strong YTD run-up. Against this backdrop, we think stocks with a relatively good dividend payout during the upcoming ex-dividend period of April and May should attract bargain hunters and find support on pullback. Among the lists of large-cap stocks with upcoming dividends, Venture Corp, UOB, ST Engineering and ComfortDelGro have an upcoming dividend/price ratio of > 2.5%.

We apply the following to filters out stocks under our coverage most impacted by the earnings season, both positively and negatively,
1. change in target price,
2. change in earnings revision,
3. change in recommendation.
Here’s what we found:
- APAC Realty (SGX:CLN) returned the most positive outcome with an upgrade to BUY, 25% upward revision in Target Price to $0.70 and 23.5% upward revision to FY19F earnings as well as 27.6% upward revision to FY20F earnings. The stock currently offers 23% upside to Target Price with a high FY19F yield of 7.3%.
- Raffles Medical Group was upgraded to HOLD with a 12% Target Price increase to $1.12 and mid-single upward revision to FY19F and FY20F earnings. However, the stock has a near nil upside to Target Price and a much lower yield of 2.3%. See report: Raffles Medical Group - Patient-ly Waiting.
- iFAST Corporation (SGX:AIY), mm2 Asia (SGX:1B0) and StarHub were negatively impacted with recommendation, Target Price and earnings downgrades. All 3 stocks are currently trading below their target prices with iFAST trading the closest to its Target Price (i.e. least upside). See report: iFast Corporation - Limited Upside, mm2 Asia - In Need Of Deleveraging, mm2 Asia - In Need Of Deleveraging, StarHub - Earnings Rebound Likely To Be Delayed.
Conclusion – Based on this exercise, APAC Realty is the most positively impacted while iFAST Corporation faces the risk of further downside post results season.

We apply the following criteria to identify stocks to take profit on given their strong run-up since end-2018:
1. strongest 3- month relative performance with STI,
2. less than 10% upside to Target Price.
The stocks identified through this filter are Hi-P International (SGX:H17), Silverlake Axis (SGX:5CP), Thai Beverage and UMS Holdings (SGX:558). We use the exponential moving averages (refer to table in attached PDF report) to identify possible pullback support levels for these stocks.

Kee Yan YEO CMT DBS Group Research | Janice CHUA DBS Research | https://www.dbsvickers.com/ 2019-03-04

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.120 SAME 1.120

BUY MAINTAIN BUY 0.620 SAME 0.620

FULLY VALUED MAINTAIN FULLY VALUED 0.550 SAME 0.550

BUY MAINTAIN BUY 0.870 SAME 0.870