Singapore Equity Strategy - RHB Invest 2019-06-06: Headwinds Persist; Stay Defensive!

SGinvestors.io

SINGAPORE TECH ENGINEERING LTD (SGX:S63) THAI BEVERAGE PUBLIC CO LTD (SGX:Y92) WILMAR INTERNATIONAL LIMITED (SGX:F34) UNITED OVERSEAS BANK LTD (SGX:U11) CDL HOSPITALITY TRUSTS (SGX:J85) MANULIFE US REIT (SGX:BTOU) STARHILL GLOBAL REIT (SGX:P40U) FU YU CORPORATION LTD (SGX:F13) HRNETGROUP LIMITED (SGX:CHZ) SHENG SIONG GROUP LTD (SGX:OV8) SILVERLAKE AXIS LTD (SGX:5CP)

Singapore Equity Strategy - Headwinds Persist; Stay Defensive!

• 1Q19 results largely met expectations, with 70% of stocks under our coverage reporting earnings that were in line.
• While most crude palm oil companies reported lower-than-estimated earnings, Wilmar surprised with strong performances at its oil refining, consumer, and sugar businesses.
• Although YTD earnings revisions for STI remained negative, we noticed a small upgrade to 2019’s earnings during April-May.
• Post results, we downgraded Dairy Farm and Venture Corp to NEUTRAL from Buy. Wilmar, ST Engineering and SingTel witnessed the highest increases in target prices.

1Q19 results met expectations

• For our coverage universe, 70% of companies reported earnings that were in line with our estimates. Amongst key stocks, Wilmar reported earnings that were above our expectation. Palm oil companies, hospitality REITs and some small & mid cap stocks were among those that reported earnings that were below expectations.
• Amongst stocks under our coverage universe, c.50% witnessed an increase in 1FY revenue estimates and c.30% witnessed an increase in 1FY earnings estimates. Among the key stocks,
  • FRASERS CENTREPOINT TRUST (SGX:J69U),
  • WILMAR INTERNATIONAL (SGX:F34),
  • ASCENDAS REIT (SGX:A17U),
  • CAPITALAND MALL TRUST (SGX:C38U) and
  • SINGAPORE EXCHANGE (SGX:S68)
  witnessed more than 2% increase in 1FY earnings estimate.

Key rating changes after the recent results season

Downgrade to NEUTRAL

• DAIRY FARM INTERNATIONAL (SGX:D01)
  • See report: Dairy Farm - Wait For Bargain Sales; Reduce To NEUTRAL
• GSS ENERGY LIMITED (SGX:41F)
  • See report: GSS Energy - Cost Down + Strong Competition Hits Margins
• SINGAPORE MEDICAL GROUP (SGX:5OT)
  • See report: Singapore Medical Group - Growth Initiatives Need Time; Downgrade to NEUTRAL
• VENTURE CORPORATION (SGX:V03)
  • See report: Venture Corporation - Recovery Intact But Fairly Valued

Upgrade to BUY

• ISOTEAM (SGX:5WF)
  • See report: ISOTeam - Time For a Relook On Strong 3Q; Raise To BUY
• TALKMED GROUP (SGX:5G3)
  • See report: TalkMed Group - Earnings Recovery Gains Pace; Upgrade To BUY

Earnings downgrades seem to have stopped…

• 2019 consensus earnings for STI, which have witnessed downgrades since Jul 2018, continued to see sharp declines in early 2019. However, the downgrades stopped in March and in line with the minor increase in earnings estimates for banks and REITs, we noticed a small upgrade to 2019 earnings estimates during April-May.
• Based on Bloomberg estimates, since the end of 2018, 2019’s consensus EPS has been downgraded by 3.1%. The consensus EPS growth for 2019 now stands at 3.9%.

…but downside risks persist

• Amidst escalating trade tensions between the US and China, STI declined 8.3% m-o-m in May (see: Performance of The Straits Times Index (STI) and Constituents in May 2019). Singapore also reported weak economic growth for 1Q19. The final 1Q19 GDP growth figure has been revised downwards to 1.2% y-o-y from a flash estimate of 1.3%.
• Citing the following three major downside risks:
  1. escalation of the US-China trade war,
  2. sharp slowdown in China’s growth; and
  3. impact from the UK Brexit uncertainty,
  the Ministry of Trade and Industry (MTI) downgraded the country’s 2019 GDP growth forecast to 1.5-2.5% from 1.5-3.5%. Our economist has downgraded 2019 GDP forecast to 1.8% from an earlier estimate of 2.5% (see PDF report: Singapore economics: 1Q19 GDP At 1.2%, Signals Tough Times Ahead).
• We reiterate that historical trends suggest that Singapore’s stock index returns follow the country’s nominal and real GDP growth closely. As we expect a slowdown in GDP growth to extend into 2019 and 2020, we believe it will be tough for the STI to generate strong positive returns, especially with risk of potential downgrades to earnings estimates.

STI has given up most of its gains from early this year

• In USD terms, till end April, STI was amongst the top two best performing ASEAN equity markets. However, with escalating trade tensions and downgrade to GDP growth guidance by the Government, the STI index gave up most of its gains during the month of May.
• Amongst ASEAN markets, STI’s performance now lags Thailand and the Philippines.
• (see STI Constituents Share Price Performance)

Market valuation looking compelling again

Maintain STI target of 3,300 for end-2019.

• We use a top-down method to derive our STI target; based on a P/E multiple on 2019’s forecast EPS. The STI’s 12x forward P/E is at its -1SD band.
• With expectations of a slowdown in GDP growth, we believe a strong P/E expansion will be difficult to pencil in. We value the STI based on 2019 year-end target P/E of 13x, which is slightly below its 1FY average of 13.3x. Applying this to our 2019 EPS estimate, we derive an index target of 3,300 for end-2019.

Top Picks

• We maintain our view that amidst an uncertain external environment, investors should stay selective and focus on buying stocks that offer stable earnings, strong balance sheets, and sustainable dividends.
  • The consumer and industrials sectors are preferred defensive sectors that outperformed after peak GDP growth in previous economic cycles. SHENG SIONG GROUP (SGX:OV8), WILMAR INTERNATIONAL (SGX:F34), and THAI BEVERAGE (SGX:Y92) are our preferred consumer picks and ST ENGINEERING (SGX:S63) is our preferred industrial pick.
  • REITs should continue to perform well amidst expectations of a pause in interest rate hikes and possibly a cut in interest rates.
  • Following a downgrade to NEUTRAL (see report:Genting Singapore - Casino Tax Hike, Huge RWS Capex ~ DOWNGRADE), we remove GENTING SINGAPORE LIMITED (SGX:G13) from our Top Picks.
  • With risk of potential downside risks to earnings, we exclude DBS GROUP (SGX:D05) from our Top Picks as well. Given its lower valuation and higher dividend yield, we retain UNITED OVERSEAS BANK (SGX:U11) as our only top pick in the banks sector.
  • As a defensive earnings growth story, we add THAI BEVERAGE (SGX:Y92) to our Top Picks.

RHB's Top Singapore Stock Picks

Company name	Rating	Target Price	Upside (%)
Large Cap
ST ENGINEERING (SGX:S63)	BUY	4.45	11.3
THAI BEVERAGE (SGX:Y92)	BUY	0.92	9.5
UNITED OVERSEAS BANK (SGX:U11)	BUY	30.80	28.3
WILMAR INTERNATIONAL (SGX:F34)	BUY	3.94	19.4
Small & Mid Cap
CDL HOSPITALITY TRUSTS (SGX:J85)	BUY	1.77	9.9
FU YU CORPORATION (SGX:F13)	BUY	0.24	20.6
HRNETGROUP (SGX:CHZ)	BUY	0.94	32.4
MANULIFE US REIT (SGX:BTOU)	BUY	0.96	13.6
SHENG SIONG GROUP (SGX:OV8)	BUY	1.23	11.8
SILVERLAKE AXIS (SGX:5CP)	BUY	0.65	22.6
STARHILL GLOBAL REIT (SGX:P40U)	BUY	0.78	6.1

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-06-06

SGX Stock Analyst Report BUY MAINTAIN BUY 4.450 SAME 4.450

BUY MAINTAIN BUY 0.920 SAME 0.920

BUY MAINTAIN BUY 3.940 SAME 3.940

BUY MAINTAIN BUY 30.800 SAME 30.800

BUY MAINTAIN BUY 1.770 SAME 1.770

BUY MAINTAIN BUY 0.960 SAME 0.960

BUY MAINTAIN BUY 0.780 SAME 0.780

BUY MAINTAIN BUY 0.240 SAME 0.240

BUY MAINTAIN BUY 0.940 SAME 0.940

BUY MAINTAIN BUY 1.250 SAME 1.250

BUY MAINTAIN BUY 0.650 SAME 0.650