DBS Group - OCBC Investment 2019-06-19: The S$63B REIT!


DBS Group - The S$63B REIT!

  • DBS share price decline since May.
  • Rates are heading lower.
  • Current yield of 4.8%.

Sharp price correction

  • From recent high (S$28.64) to recent low (S$24.01), DBS’s share price has come off by some 16.2% over a period of 5 weeks.
  • While the trade tensions between US and China was cited as one of the main reasons, the other reason was the recent decline in interest rates. The US 2-year yield has dropped from a recent high of 2.97% in Nov 2018 to a recent low of 1.77% in Jun 2019. Based on consensus, US economists are generally expecting more cuts in 2H 2019.
  • Do note that at the previous FOMC meeting in May, the target range for the federal funds rate remained the same at 2.25% to 2.50%. However, based on consensus, the implied interest rate probability seems to point to about 2 cuts rates by year end.
  • The market is also pricing in further rate cuts, especially since this is dependent on economic outlook and increasingly, the direction and impact of trade tensions. While the federal fund rate is likely to hold at this week’s FOMC meeting, market watchers will be closely monitoring the statement for future rate direction in view of the weakening economic growth outlook.
  • Based on a Bloomberg poll, almost 70% of economists are now expecting increased risks to growth at the June survey versus less than 20% in the Sep 2018 survey. This is also clearly reflected in the decline in world economic growth, which is now projected at 3.3% for 2019, down from 3.8% in 2017 and 3.6% in 2018.

Net profit CAGR of 11% and DPS of 8%

  • Fed funds rate stayed flat for most of 2009-2015 and only started to move up in 2016. During this period, 3-month SIBOR (SIBF3M) was also relatively flat from 2009-2014 at below 0.5%, but started to move up from 2015 to current level of about 2.00%.
  • In the last 10 years, DBS GROUP (SGX:D05)’s net earnings have grown by a compounded annual growth rate (CAGR) of 10.6% from S$2,041m in FY09 to S$5,577m in FY18. Dividend payout grew by a CAGR of 7.9% during the same period from 56 cents to S$1.20 currently. See DBS's dividend history.

DBS: The mega REIT

  • With S$1.20 dividend per share or 30 cents per quarter, DBS has some REIT-like traits including quarterly dividend payout. Based on 18 Jun 2019 closing price of S$24.80, dividend yield is 4.8%.
  • In our company report dated 30 April 2019, we stated that we will turn buyers at S$27.50 or lower. See report: DBS - Find Joy At Lower Price Level. At current DBS share price, it is an opportune time to accumulate the stock.
  • Our fair value remains unchanged at S$29.18.

Carmen Lee OCBC Investment Research | https://www.iocbc.com/ 2019-06-19
SGX Stock Analyst Report HOLD MAINTAIN HOLD 29.180 SAME 29.180