Singapore Market Monitor - Maybank Kim Eng 2019-04-17: Foggy With A Hint Of Sunshine

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SINGAPORE TECH ENGINEERING LTD (SGX:S63) NETLINK NBN TRUST (SGX:CJLU) MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) DBS GROUP HOLDINGS LTD (SGX:D05) UNITED OVERSEAS BANK LTD (SGX:U11)

Singapore Market Monitor - Foggy With A Hint Of Sunshine

• Singapore’s 2019 growth outlook is amongst the weakest in years and correspondingly, q/e Dec 2018 shows core profit for our coverage universe contracting on a y-o-y basis after seven successive quarters of growth.
• Although consensus FSSTI profit expectations for 2019/2020 have since been adjusted downwards, we believe further downside risks exist. Seeking earnings and dividend certainty, the lion’s share of our top stock picks are comprised of ones we believe to have relatively low earnings volatility.

Profit momentum waning but valuations supportive

Q/e Dec 2018 recap: MKE coverage growth plummeted

• For our MKE coverage universe, cumulative core profits for q/e Dec 2018 fell 4% y-o-y. This ended a streak of seven consecutive quarters of positive growth, the last four of which were in healthy double digit levels of 11-16%.
• The number of companies that reported earnings in line with the street as well as MKE was relatively high at c60% and the number of beats versus misses somewhat even at c20% each.
• But companies that beat expectations did so by relatively small margins but the companies that missed did so by a much larger quantum.
• Notable surprises were
  • JAPFA LTD. (SGX:UD2),
  • NETLINK NBN TRUST (SGX:CJLU),
  • VALUETRONICS HOLDINGS LIMITED (SGX:BN2),
  • MAPLETREE COMMERCIAL TRUST (SGX:N2IU), and
  • SATS LTD. (SGX:S58),
  while disappointments were
  • GENTING SINGAPORE LIMITED (SGX:G13),
  • SINGTEL (SGX:Z74),
  • MM2 ASIA LTD. (SGX:1B0),
  • SINGAPORE TECH ENGINEERING LTD (SGX:S63),
  • SIA ENGINEERING CO LTD (SGX:S59), and
  • OVERSEA-CHINESE BANKING CORP (SGX:O39).
• Revenue growth for q/e Dec 2018 was anaemic at 0.6% y-o-y reflecting the weaker Singapore macro and slowdown across the region, especially in China where a number of Singapore firms have operations.
• A theme that we saw across the reporting season was that many firms incurred higher-than-expected operating costs, partly related to some front-loading for new initiatives or expansion costs. As a result, EBITDA margins declined y-o-y and q-o-q by more than 1ppt, and EBITDA fell 1.3% y-o-y.

FSSTI basket did not fare much better either

• The benchmark index revenue growth for q/e Dec 2018 was 4% y-o-y but EBITDA growth was flat and core profits increased just 1%. More importantly, FSSTI revenue growth was weaker at 1% y-o-y, while EBITDA and core profits fell 2% and 1%, respectively, excluding the Hong Kong based Jardine group companies (as JARDINE MATHESON HLDGS LTD (SGX:J36), JARDINE STRATEGIC HLDGS LTD (SGX:J37) financials include revaluations and one-offs in the operating line items as pure holding companies).
• Q/e Dec 2018 core profit for our coverage fell 4% y-o-y. FSSTI core profit (ex-Jardine Group) did not fare much better either, down 1%. Consensus earnings outlook has since been lowered but we believe the 9%/7.3% growth forecast for 2019/2020 may hold further downside risks. Growth forecast for our coverage basket is a more muted 3.4%/6.1%. That said, FSSTI valuations remain a bright spot with trailing P/E and P/B of 13.6x and 1.1x relatively undemanding versus the last 10 years.
• In the regional context, FSSTI has the lowest prospective P/E and highest dividend yield relative to ASEAN peers. Also, we believe with the Fed is on hold for the rest of 2019, and a normalization of dividend yield gaps towards the long-term average should be supportive of further price appreciation to the c9% levels witnessed YTD. Over a 12m period, we forecast a base case index target of 3,470 and c8% TSR potential, including dividends.

Street expectations muted but may still be too optimistic

• Consensus revenue growth for FSSTI for 2019/2020 is 2.6%/5.8%, relatively muted compared to the 7.1%/12.4% in 2017/2018 mainly driven, we believe, by the uncertainties around the US-China trade war and its knock-on impact on the regional economies.
• But post the soft q/e Dec 2018, growth expectations appear to have been just ‘pushed-to-the-right’ as 2019 consensus for 9% core profit growth on the back of 2.6% revenue growth implies an ambitious net margin expansion of c70-80bps. We believe this is unlikely given the higher y-o-y interest rate environment and generally lower operating leverage that accompanies slow top-line growth.
• Expectations for 2020 core profit growth at 4.3% on the back of 5.8% revenue growth appear more realistic, in our view.

2019 outlook for MKE coverage basket lower than FSSTI

• Core profit growth estimates for MKE’s stock coverage universe for the first and second forecast financial years FY1/FY2 are 2.8%/5.8%, and on a calendar 2019/2020 basis at 3.4%/6.1%.
• The growth outlook for our coverage basket for 2019 is lower than the street expectation for FSSTI but higher for 2020. This is in part because our coverage includes a number of small and mid-cap companies that have higher leverage to interest rates and economic cycles.
• Our screen for the top 10 core profit growth stocks in calendar years 2018 and 2019 include large caps SINGAPORE TECH ENGINEERING LTD (SGX:S63), NETLINK NBN TRUST (SGX:CJLU), DBS GROUP HOLDINGS LTD (SGX:D05) and SATS LTD. (SGX:S58), while the rest are largely small-and medium-cap stocks (sub USD2b). The bottom ten stocks for both years include the incumbent telcos, which face pressure with the new entrant scaling up its offerings.
• And unsurprisingly, the list of top fifteen high dividend yield stocks is dominated by REITs, although there are a few large cap operating companies, like SINGTEL (SGX:Z74), SATS LTD. (SGX:S58) and STARHUB LTD (SGX:CC3) as well (DBS GROUP HOLDINGS LTD (SGX:D05) just misses the cut).

Valuations: Reasonable but few upside catalysts

• After a lackluster 2018 where ASEAN shed 8-17% in USD terms, 2019 has started off on a better note. Barring Malaysia, all the ASEAN benchmark indices are up YTD with Singapore’s FSSTI the second best performing at c9% behind Vietnam.
• We expect 2019 to be a choppy year for markets in general, and for Singapore, which is highly exposed to trade flows, it may likely be even more so than the rest of ASEAN. Forward looking profit growth expectations have fallen over the past six months with the weakening macro outlook. That said, after the de-rating of 2H18, index valuations are reasonable relative to long-term history and the high dividend yield should provide downside support given the backdrop of tepid growth and uncertainty over a resolution of US-China trade war issues. Also, news of the Fed ending its rate hike cycle earlier in the year has eased pressure on the equities market with a normalization of earnings and dividend yield gaps.
• Our 12m base case index target of 3,470 is based on an equal weighting of:
  1. top down +0.5sd 10-year mean P/E of 13.8x (vs. current 13.6x) on 12m forward consensus index EPS; and
  2. bottom-up target 12-months, based on MKE TP’s for covered stocks and consensus TP’s for non-covered stocks.
• Our base case estimate holds 4.1% appreciation upside, and combined with a prospective dividend yield expectation of 4%, a total return in SGD terms of c8%.
• External trade war issues aside, the key risk to our view is negative macro developments that result in a worse than expected slowdown over the coming 12-18 months that lead to further consensus ratings downgrades and lowered corporate profit expectations.

Seeking earnings certainty in uncertain times

The factors shaping our sector preferences

• Our sector preferences for 2019/2020 are influenced by where the growth outlook lies in the sector cycle, a return potential determined by market valuation versus MKE estimates, and sector price performance over 6/12 month periods.
• Give the soft economic backdrop, external uncertainties related to the US-China trade war and decelerating corporate earnings, we veer towards picking sectors and stocks with a relatively high degree of earnings resilience and dividend certainty over ones that may offer potentially higher growth but with commensurately higher deliverability risks.
• Also, some medium-term trends that influence our sector views are:
  1. the return of bank lending spreads;
  2. global fleet and air traffic growth driving a need for supporting services;
  3. rising per capita protein consumption with rising disposable income in developing economies; and
  4. ASEAN e-commerce growing out of its infancy.
• Rising interest rates: Repricing for a large proportion of Singapore banks’ loans take place with a lag to SIBOR rate movements. Banks should continue to benefit from NIM expansion through 2019 with CASA deposits accounting for a large source of funding (c45-60%), and the repricing of loans leading the repricing of deposits.
• Global aircraft fleet and traffic growth: Global fleet growth over the past three years has been spurred by record levels of new aircraft deliveries of c1,000-1,500 annually with leading OEMs Boeing and Airbus still having order backlogs of close to 10 years of current production. A couple of main factors driving this is increasing affordability of travel with growth in low cost carriers, as well as the development of secondary and tertiary airport infrastructure in APAC cities, the second largest aviation market in the world.
• Protein consumption in emerging Asia: Consumption habits in populous developing markets in Asia currently with low per capita protein consumption reflect a swap from plant-based to animal-based. In 2007- 2017, ASEAN’s 2.5% CAGR in meat consumption outpaced the global demand at 0.7% CAGR. Despite the historical higher growth rates in the last decade, consumption in many of these markets remains well below global levels – for example Indonesia’s per capital meat consumption is c12kg, a fraction of the global average of c34kg. This gap will continue to narrow.
• ASEAN e-commerce growth: Retail e-commerce penetration in ASEAN is still in relative infancy. Euromonitor estimates e-commerce channels accounted for just 2.1% of cumulative ASEAN retail sales in 2017 (with Singapore highest at 5.4%, Philippines lowest at 0.9%), and forecasts a 2018-2022 e-commerce sales CAGR of c22%. Singapore is well positioned to be a hub for the region during the early growth years, which should provide growth opportunities for logistics and industrial REITs.

Singapore Sector Weighting Recommendations 

OVERWEIGHT:

• Financials. See: Financial Sector Outlook - Structural Changes Paying.
• Industrials & Transaport. See: Industrial Sector Outlook - On A Recovery Path.
• Hospitality REITs. See: Hospitality REITs Sector Outlook - Preferred S-REIT Sector.

NEUTRAL:

• Agricommodities. See: Agricommodities Sector Outlook - An Opportunity To Trade In 2Q19.
• Industrial REITs. See: Industrial REITs Sector Outlook - Bottoming Out; Overseas Deals To Lift DPU.
• Retail REITs. See: Retail REITs Sector Outlook - Sector Stablised; Exposure Via Destination Malls.
• Consumer. See: Consumer & Gaming Sector Outlook - Pinched Purse Strings, ASF And Levies.

UNDERWEIGHT:

• Gaming. See: Consumer & Gaming Sector Outlook - Pinched Purse Strings, ASF And Levies.
• Telecom & Media. See: Telecom & Media Sector Outlook - Still Waiting For The Last Domino To Fall.
• Technology. See: Technology Sector Outlook - Resilience Amidst A Lackluster Outlook.

Top Stock Picks

• Our top stock picks generally lie within the sectors that we suggest have either Overweight or Neutral weightings, although company-specific bottom up factors obviously play a large part in this selection process.
• See: Top Stock Ideas - Singapore Market Monitor ~ Foggy With A Hint Of Sunshine.

Neel Sinha Maybank Kim Eng Research | Lai Gene Lih Maybank Kim Eng | https://www.maybank-ke.com.sg/ 2019-04-17

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