Singapore Strategy - CGS-CIMB Research 2019-03-04: Low Quality Beats, Better Than None

Singapore Strategy - CGS-CIMB Research ) | SGinvestors.io KEPPEL CORPORATION LIMITED (SGX:BN4) DBS GROUP HOLDINGS LTD (SGX:D05) CSE GLOBAL LTD (SGX:544) HRNETGROUP LIMITED (SGX:CHZ) SILVERLAKE AXIS LTD (SGX:5CP)

Singapore Strategy - Low Quality Beats, Better Than None




Underlying drivers were one-off

  • We think YTD FSSTI’s outperformance (+7%) was somewhat helped by fewer poor results in the last two months where the beats exceeded misses - a first in seven quarters. However, the quality was less sterling.
  • Capital goods’ beat was driven mainly by one-off gains, while REITS had divestment gain distributions. The trends provide no confidence in earnings outlook but we saw more cuts, led by banks, property and consumer sectors.


Lower FSSTI to 3,110 (from 3,300)

  • We now forecast market EPS growing 3-4.3% for FY19-20F. Accordingly, our FSSTI target is lowered to 3,110 (from 3,300), still based on 12x CY20F P/E or -0.5 s.d of mean.
  • The FSSTI is trading at c.13x CY19F/20F P/E, not sufficiently cheap to sustain a strong 1H uptrend, having performed YTD, in our view. The market has gone from defensive to having some appetite for risk, accepting trade talks as a constant. However, a lack of impressive corporate earnings growth in the quarters ahead may take away some of this optimism.


4Q18 highlights



FSSTI earnings changes leave little room for error

  • After the 2.6-2.9% cut, we now forecast market EPS to grow 3-4.3% for FY19- 20F. The 4Q18 cut was led mainly by the banks sector on lower loan growth expectations of a mid-single-digit growth rate and flattish NIM expansion in FY19. However, we are still expecting c.5% earnings growth in FY19 with upside coming from stronger-than-expected trading income. We think this could limit earnings cuts in the next quarter.
  • Property earnings cut was largely driven by CapitaLand (SGX:C31) as we tweak our residential margins and tax rate assumptions for China. Consumer sector had the third-largest cut (in absolute quantum) – mainly for Dairy Farm International (lower food margins) and Sheng Siong Group (SGX:OV8) (consecutive negative same-store-sales growth).
  • We are NEUTRAL on the Singapore market which has outperformed by c.7% YTD. At 13x CY19F and 12.5x CY20F P/E, it is not cheap as corporate earnings growth in the quarters ahead may not be impressive enough to justify another rally.


Interest rates and sector calls

  • Our OVERWEIGHT rating on property at end-2018 has paid off as the market is now pricing in a Fed rate pause in 1H19. This has also led to the well-owned and still OVERWEIGHT REITs sector’s outperformance of c.7% YTD. We think a rate hike, even if it happens once in 2H19, could be a de-rating risk to our calls.
  • Conversely, benign interest rates should work to banks’ disadvantage but we keep the banking sector at OVERWEIGHT on the back of its below-average valuations of c.1.2x CY19 P/BV (-0.5 s.d of mean) vs. stable ROE of c.11% as well as decent asset quality. A positive outcome of the US-China trade talks could be a key catalyst.


What are we more concerned about?

  • We have taken a more negative view on consumer and downgrade to NEUTRAL from Overweight. Sheng Siong Group has seen its second-consecutive quarter of negative same-store-sales growth and potentially higher-than-expected gestation costs for new stores, while Dairy Farm International is not turning around in ASEAN. Thai Beverage has done well (+33% YTD) and we would not chase as the election catalyst plays out.
  • We remain NEUTRAL on the tech sector with several downgrades in the small-mid cap names, including Memtech International (SGX:BOL), Sunningdale Tech (SGX:BHQ), UMS Holdings and Valuetronics (SGX:BN2), as the earnings outlook becomes uncertain. Venture’s share price rose to a 52-week high which could be due to expectations of a good 1Q19 after its V-shaped recovery in 4Q18. We see an opportunity to take some profit ahead of the announcement of seasonally-slower q-o-q earnings in 2Q19.
  • Telcos and Healthcare remain as clear UNDERWEIGHT sectors with limited catalysts.


What are we more bullish about?

  • Transport is a new OVERWEIGHT (from Neutral) following our recent upgrade in SATS (SGX:S58), backed by a recovery in associates, aided by a stronger rupiah and higher franchise fee. ComfortDelGro (SGX:C52) and SATS are preferred picks within the sector as they are backed by resilient earnings growth of 9-10% y-o-y in FY19F, net cash and below-mean valuations.
  • Capital Goods is still an OVERWEIGHT with Keppel Corporation being a new preferred pick, replacing Sembcorp Industries as the latter faces structural and regulatory challenges in the power markets across India, UK and Singapore. Keppel Corporation is trading at c.0.9x CY19F P/BV or -1 s.d of mean vs. ROE of 8.4%. We think Keppel Corporation is taking steps to build a recurring income base in the O&M and infrastructure division.


DBS and Keppel Corp are new top picks






LIM Siew Khee CGS-CIMB Research | Singapore Research Team CGS-CIMB Research | https://research.itradecimb.com/ 2019-03-04
SGX Stock Analyst Report ADD MAINTAIN ADD 8.410 SAME 8.410
ADD MAINTAIN ADD 29.000 SAME 29.000
ADD MAINTAIN ADD 0.600 SAME 0.600
ADD MAINTAIN ADD 1.030 SAME 1.030
ADD MAINTAIN ADD 0.620 SAME 0.620



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