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
- More companies beat expectations than missed in Singapore’s FY18 results season, with large-caps mostly boosted by one-off gains. This does not inspire much confidence and we trim our FY19-20F EPS by 2.6-2.9%, led by banks, property and consumer sectors.
- Our new FSSTI target is lowered to 3,110. Large-cap picks are CapitaLand, City Developments, ComfortDelGro, Genting Singapore, ST Engineering. DBS Group and Keppel Corporation are new picks to replace OCBC and Sembcorp Industries.
- Small-cap universe shrank to only 3 safe picks: CSE Global, HRnetGroup and Silverlake Axis.
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
- The beat-to-miss ratio turned positive for the first time since the 1Q17 results season at 19:15, 1.27x. This is in part due to our more conservative estimates, given that the US-China trade spat was at its height during 4Q18, prior to the 90-day truce declared on Dec 18. Manufacturers who went up the value chain and reined in costs, such as Silverlake Axis (SGX:5CP) and UMS Holdings (SGX:558), outperformed.
- Thai Beverage (SGX:Y92) led one of the biggest positive surprises as domestic recovery in consumption and rise in Myanmar spirits volumes surprised on the upside. The y-o-y growth was also helped by a low base in FY18.
- Except for Keppel Corporation (SGX:BN4) (S$103m provisions for Sete Brazil), capital goods had more beats than misses, but we deem them uninspiring for Sembcorp Industries (SGX:U96), Sembcorp Marine (SGX:S51) and Yangzijiang Shipbuilding (SGX:BS6) as they were largely due to one-off gains and net write-back of provisions. Nevertheless, a positive trend that has emerged is for margins which have turned the corner for Sembcorp Marine and KEP O&M. Better margins also helped CSE Global (SGX:544)’s outperformance in 4Q18.
- ST Engineering (SGX:S63) beat our expectations on stronger-than-expected aircraft maintenance and modification volume in aerospace. It would have been a better set of results had it not been for the kitchen-sinking exercise in its land system’s specialty vehicle businesses in India and Brazil.
- The bulk of the S-REITs outperformance was due to one-off gains (CapitaLand Mall Trust (SGX:C38U), CDL Hospitality Trusts (SGX:J85), Ascott Residence Trust (SGX:A68U)), although ParkwayLife REIT (SGX:C2PU) and OUE Commercial REIT (SGX:TS0U) posted organic improvements in occupancy and operating performance.
- Oversea-Chinese Banking Corp (OCBC, SGX:O39)’s miss was due to Great Eastern Holdings (SGX:G07)’s weaker earnings, mark-to-market (MTM) losses and a sharp drop in net trading income, a reflection of the choppy market environment. We were also disappointed at its anemic loan growth (0.5%) with no NIM expansion.
- Telcos are still grappling with costs and lower service revenue as well as poor associate performance (SingTel (SGX:Z74)); barely meeting or coming below our forecasts. We do not expect expect improvements with the impending entry of the fourth telco (TPG) in Singapore.
- Weak CPO prices and downstream margins hit Golden Agri-Resources (SGX:E5H), while Wilmar International (SGX:F34) benefitted from higher margins from oilseeds.
- Dairy Farm International (SGX:D01) continued to struggle in its ASEAN supermarket/hypermarket segment, dragged by lower contributions from its associate Yonghui.
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
- DBS Group (SGX:D05) replaces OCBC as our pick in banks on better revenue data vs. peers.
- Keppel Corporation replaces Sembcorp Industries in the capital goods sector given its efforts to step up recurring income base.
- We remove Sheng Siong Group, Y Ventures Group (SGX:1F1) and China Sunsine Chemical (SGX:CH8) from our Alpha list.
- See CGS-CIMB Research Singapore Alpha Picks (March 2019)
LIM Siew Khee
CGS-CIMB Research
|
Singapore Research Team
CGS-CIMB Research
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https://research.itradecimb.com/
2019-03-04
SGX Stock
Analyst Report
8.410
SAME
8.410
29.000
SAME
29.000
0.600
SAME
0.600
1.030
SAME
1.030
0.620
SAME
0.620
