KEPPEL CORPORATION LIMITED (SGX:BN4)
UOL GROUP LIMITED (SGX:U14)
UNITED OVERSEAS BANK LTD (SGX:U11)
Market Strategy - Prefer Liquid & Large Caps
- We think earnings predictability, value and yield will be key in the months ahead. We also prefer large and liquid stocks to absorb shocks in the market.
- Key change to our strategy: downgrading the bank sector to NEUTRAL from Overweight due to waning catalysts (risk of rate cuts, slower loan growth). See report: DBS OCBC UOB Banks - Trump Card.
- Singapore stock top picks - see: Alpha Stock Picks for 2H2019 - Prefer Liquid & Large Caps.
Earnings risks prevail for most sectors
- We make a screen on what could lead to earnings cuts in the sectors under our coverage. Most analysts are pessimistic. The three sectors that have low earnings cut risks are property (low take-up rates already factored in), healthcare (gestation costs in FY19 well guided) and tech (anybody’s guess on Venture Corp (SGX:V03)’s profit but we believe our forecasts of +4% y-o-y growth in FY19 is reasonable).
- We think Singapore corporate earnings are navigating through a tricky path of growth challenges which have little correlation with the domestic front. Instead, what has proven to be a bigger drag on earnings is the expected slowdown in the world and how the trade tensions progress.
- The government’s efforts to cushion a soft landing (slower economic growth) in its 2019 Draft Master Plan, which includes the repositioning of the Central Business District and upgrading of facilities in the two Integrated Resorts may offer little reprieve if the world is heading into a cold (war). See report: Property Development & Inventory - Sustainable Transformation.
1Q19 highlights
- The positive-negative surprise ratio dropped back to negative territory at 5:15 in 1Q19. Banks (DBS (SGX:D05), OCBC (SGX:O39), UOB (SGX:U11)) was the only sector that beat expectations, benefited from strong market sentiment during the lull in hostilities, posting higher net trading income; in addition to loan growth and marginal improvements to NIM.
- Thai Beverage (SGX:Y92) surprised on the upside on the back of higher interest income; following the integration of SABECO, its beer segment posted the largest increase in revenue (+53.4% y-o-y). However, its share price took a beating as its crown jewel, the spirit division, posted a y-o-y drop in revenue and profit.
- Sheng Siong (SGX:OV8) came in under, with GPM flat and SSSG still negative.
- REITs gave little if no surprises, with slight underperformances from CDL Hospitality Trusts (SGX:J85) and Far East Hospitality Trust (SGX:Q5T). CDL Hospitality Trusts due to lower RevPAR on the back of closures for asset enhancement initiatives (AEI), and Far East Hospitality Trust on weaker corporate segment in hotels.
- Divestment gains from Manulife Centre (S$144.3m) helped City Developments (SGX:C09) offset losses in the hotel segment due to the complete closure of Millennium Hotel London Mayfair for AEI, and lower earnings of Orchard Hotel.
- Lower ASPs and FFB output in CPO continued to bog planters (First Resources (SGX:EB5), Wilmar (SGX:F34)), although firms with more downstream production (Golden Agri-Resources (SGX:E5H), Wilmar) benefited from better processing margin and profitability. Business in the oil seeds and grains segment was negatively affected by African Swine Fever (ASF) and a drop in the ASPs of Brazilian soy beans.
- Japfa (SGX:UD2)’s swine production has so far escaped the clutches of ASF, but still underperformed vs. our expectation due to Indonesia feed margins (due to higher corn prices) and broiler chicken segment (ASP down 11% y-o-y).
- Telcos are still operating in a tough business environment in Singapore. With TPG beginning its operations (commercial launch scheduled for 2H19), we expect more intense competition in the mobile segment. SingTel (SGX:Z74) continues to be dogged by losses at Bharti; overshadowing the contributions from other associates.
- Transport was mixed with Singapore Airlines (SGX:C6L) performing above our expectation due to lower operating expenses and better associate earnings. ComfortDelGro (SGX:C52) was dragged down by weak taxi performance in China, while SATS (SGX:S58) had lower associates’ contribution.
- Small-cap tech/manufacturers (Jadason (SGX:J03), Silverlake Axis (SGX:5CP), UMS (SGX:558)) experienced a general slowdown and decreased GPM.
FSSTI range bound at 3,275
- We lift our overall EPS forecast by 1.5% for CY19F and 0.9% for CY20F with the biggest earnings increases in banks, Singapore Airlines and SingTel. First Resources had a hefty earnings cut due to weak FFB output. We now expect 2-3.9% core EPS growth for the stocks under our coverage.
- Our FSSTI target is lifted to 3,275 (previously 3,110) and based on CY20F P/E, assuming some progress made in trade talks after June. A full-blown trade war may see the index going lower if global growth slows.
Highlighted Companies
Keppel Corporation (Rating: ADD, Target Price: S$8.41)
- Strong O&M orders are a key catalyst. At 0.9x CY19F P/BV, Keppel Corp (SGX:BN4) is trading below -1 s.d. of 10-year mean. Our Target Price of S$8.41 is based on SOP (35% discount to RNAV for property, 1.5x CY19F P/BV for O&M).
UOB (Rating: ADD, Target Price: S$29.58)
- Top banking pick. UOB is our preferred pick among banks given its attractive valuations and 10.9% CY19F ROE. FY19F dividend payout is likely to be maintained at 50%. Our Target Price of S$29.58 implies 1.3x CY19F P/BV.
UOL Group (Rating: ADD, Target Price: S$8.45)
- Key re-rating catalyst is the planned rollout of two residential projects, totalling 1,130 units, in Singapore by Jun/Jul 2019. UOL (SGX:U14) is trading at attractive valuations, at 42% discount to RNAV. Our S$8. Target Price is based on 30% discount to RNAV.
Sector Outlook
Top Picks
LIM Siew Khee
CGS-CIMB Research
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Singapore Research Team
CGS-CIMB Research
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https://research.itradecimb.com/
2019-05-21
SGX Stock
Analyst Report
8.410
SAME
8.410
8.450
SAME
8.450
29.580
SAME
29.580
