KOUFU GROUP LIMITED (SGX:VL6)
FU YU CORPORATION LTD (SGX:F13)
MEMTECH INTERNATIONAL LTD (SGX:BOL)
NETLINK NBN TRUST (SGX:CJLU)
SINGAPORE TECH ENGINEERING LTD (SGX:S63)
Singapore Strategy - 4Q18 Results Wrap-Up – Another Weak Quarter
- 4Q18 results recorded continued weakness, where 35% of the companies missed expectations vs 36% in 3Q18.
- Post results, we further reduced our 2019F EPS by 1.6%. We recommend investors stick to a select group of large caps and small caps with a strong economic moat and earnings visibility.
- End-19 FSSTI target of 3,450.
WHAT’S NEW
4Q18 – Continued to be haunted by misses.
- 35% of the companies within our coverage missed estimates, while 40% were in line, echoing a similar trend from 3Q18’s 36% earnings miss.
- Notable misses include StarHub (SGX:CC3) and ST Engineering (SGX:S63). Conversely, Singapore Airlines (SGX:C6L) and Japfa (SGX:UD2) were notable outperformers in the latest results.
ACTION
Further EPS cut reflects cautious outlook.
- Post the 4Q18 results, we have cut our 2019 EPS by 1.6%, while consensus has lowered EPS estimates by 2.6% ytd, reflecting a cautious outlook on the market. This reflects our modest expectation of 8% upside to our FSSTI target of 3450.
Banks – Mixed bag, DBS and UOB in line, OCBC missed.
- 4Q18 results were affected by a drop in contribution from market-sensitive sources, eg wealth management, net trading income and gains from investment securities. DBS Group (SGX:D05) and United Overseas Bank (UOB, SGX:U11) met expectations, while Oversea-Chinese Banking Corp (OCBC, SGX:O39) did not, as its subsidiary Great Eastern Holdings (SGX:G07) incurred mark-to-market losses on investments and larger provisions. That said, OCBC has the highest CET-1 CAR of 14% and we see OCBC narrowing the gap in dividend yield relative to peers.
- The three banks’ CET-1 CAR are significantly above the MAS’ minimum requirement of 9% and both OCBC and UOB increased dividends by 21.1% and 7.7% y-o-y to 23 S cents/share and 70 S cents/share while DBS Group maintained its final dividend at 60 S cents/share. Banks have guided for NIM expansion of 0-4bp in 2019.
- See report: Banking – Singapore - 4Q18 Round-Up ~ Hunker Down As External Environment Becomes More Uncertain.
Aviation – Singapore Airlines (SIA) topped expectation while SIA Engineering (SIAEC) and ST Engineering (STE) were below.
- Singapore Airlines’s earnings beat was primarily due to better-than-expected pax yield. SIA Engineering (SGX:S59) disappointed with slower growth on associates and JVs and continued top-line deterioration.
- ST Engineering’s earnings miss was due to non-recurring losses on the disposal of non-key businesses, excluding which 4Q18’s and 2018’s earnings would have been flat y-o-y. Even so, we maintain our BUY rating on ST Engineering as 2019’s top-line is expected to rise by a least 6%, excluding consolidation of the newly-acquired US nacelle manufacturer, MRAS. See report: ST Engineering - 4Q18 Slight Negative Surprise, But Should Fare Better In 2019.
Telecommunications – Mixed bag, Starhub below expectations.
- For 3QFY19 results, SingTel (SGX:Z74) was in line while Netlink was slightly below expectations. Conversely, StarHub (SGX:CC3)’s 4Q18 results missed expectations on the back of a declining revenue base and EBITDA margins. Service revenue for the sector in 2018 contracted 5% y-o-y, given intense prepaid competition, lower voice revenue as well as a higher mix of SIM-only plans (specifically for SingTel and StarHub).
- Sector EBITDA margin contracted 2ppt to 32% in 2018 amid higher customer acquisition costs, a notable shift towards SIM-only post-paid plans and higher marketing expenses in the quarter. We foresee sector earnings declining 18% in 2019 (2018: -28% y-o-y) before stabilising in 2020.
- We have BUYs on both NetLink NBN Trust (SGX:CJLU) and SingTel but the former is our top sector pick. See report: NetLink NBN Trust - 3QFY19 Moderation In Growth For Non-Residential.
Property – Developers missed, S-REITs largely in line.
- City Developments (SGX:C09)’s 4Q18 results missed expectations due to the impact from higher impairment losses on US hotels and lower profits from property development.
- On CapitaLand (SGX:C31), 4Q18 results came broadly in line, on the back of a better operating performance (underpinned by recognition from China residential) as well as higher disposal and revaluation gains. CapitaLand is our preferred pick among large-cap property stocks, for its diversified asset base, low exposure to the Singapore residential (7.3% GAV) segment, and high recurring earnings (79% of FY18 EBIT). See report: CapitaLand - Extending Its Wings.
- Within the S-REIT space, notable results came from CapitaLand Mall Trust (SGX:C38U) and CDL Hospitality Trusts (SGX:J85).
- CapitaLand Mall Trust posted a 4Q18 DPU of 2.99 S cents (+3.1% y-o-y), bringing 2018 DPU to 11.50 S cents. Revenue increased, mainly due to the acquisition of the remaining 70% stake in Westgate (ie which turned in positive rental reversion of +0.6% for 2018 (vs -0.5% for 9M18)). See report: CapitaLand Mall Trust - 4Q18 Above Expectation.
- As for CDL Hospitality Trusts, 2018 DPU came in at 9.26 S cents (+0.4%), which is above our expectations. The Singapore portfolio continues to see encouraging improvements (ie with SG RevPAR ex. Orchard Hotel seeing growth of 4.3%), supported by corporate demand, additional business from ASEAN Summit meetings, and Chinese/Indian inbound leisure travelers. See report: CDL Hospitality Trusts - 4Q18 Above Expectation.
Notable results – ST Engineering and Japfa.
- On a more positive note, the star outperformer was Japfa in 4Q18 as its full-year core net profit beats our expectation by 12%. Core PATAMI soared 676% on a low base of 2017 and was underpinned by the strong turnaround in the Animal Protein Other (APO) segment and solid performance of the Indonesian poultry segment. We raise our 2019-20 net profit forecasts by 5.4-5.8% and reiterate BUY with a higher SOTP-based target price of S$0.98. See report: Japfa - Concerns Overblown On African Swine Flu; Valuation Is Compelling.
- ST Engineering’s notable results was due to its forward guidance on orderbook recognition, which should lead to at least a 6% rise in top-line growth, excluding the consolidation of MRAS. This provides scope for strong earnings growth in 2019.
End-19 FSSTI target of 3,450.
- Investors should selectively accumulate on pull-backs.
- In the large-cap space, we like OCBC, CapitaLand, CapitaLand Commercial Trust (SGX:C61U), Keppel REIT (SGX:K71U), NetLink NBN Trust, SATS (SGX:S58) and ST Engineering.
- Mid-cap gems include Koufu Group (SGX:VL6), Fu Yu (SGX:F13) and Memtech International (SGX:BOL).
- SELL Golden Agri-Resources (SGX:E5H) and StarHub.
K Ajith
UOB Kay Hian Research
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Singapore Research Team
UOB Kay Hian
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https://research.uobkayhian.com/
2019-03-11
SGX Stock
Analyst Report
0.950
SAME
0.950
0.285
SAME
0.285
1.330
SAME
1.330
0.920
SAME
0.920
4.060
SAME
4.060
