Singapore Monthly (June 2019) - DBS Research 2019-06-04: Trade War Part 2

Singapore Market Strategy - DBS Group Research | SGinvestors.io SINGTEL (SGX:Z74) NETLINK NBN TRUST (SGX:CJLU) SATS LTD. (SGX:S58) SINGAPORE TECH ENGINEERING LTD (SGX:S63) THAI BEVERAGE PUBLIC CO LTD (SGX:Y92)

Singapore Monthly (June 2019) - Trade War Part 2




From trade optimism to fear all within a month



All Eyes On G20

  • FOMC meeting
    • FED funds futures currently anticipate a rate cut as early as September this year.
    • Keep watch on clues for possible rate cut later this year as this meeting is associated with a summary of economic projections.
  • Trump-Xi sideline talks at G20
    • Trump’s ‘John Wayne’ style of flashing tariffs at Mexico has investors worried that US-China trade impasse is likely to be prolonged.
    • There is growing belief that the current friction will go beyond issue of trade deficit.
    • For one, the US is determined to stop China’s emergence as a technology super power.


Trade War Part 2 Is Here

  • May sell-down signalled the continuation of the US-China trade war that is now threatening to be prolonged.
  • Recall ‘Part 1’ ended at end-Oct last year at STI 2966 with US imposing 25% tariffs on USD50bn of Chinese imports and 10% on an additional USD200bn.
  • ‘Part 2’ started in early May with an increase in tariffs from 10% to 25% on USD200bn and Trump threatening to impose 25% tariffs on another USD300bn imports, i.e. an all-out war.
  • All-out trade war could see Singapore’s 2019F GDP growth dip to the lower end of MTI’s forecast at 1.5%.
  • Two positive differences
    • FED is much more dovish compared to last year.
    • Chinese government is supportive of growth compared to last year.
  • DBS Economics Research’s views on the implications of an all-out trade war - see PDF report here.


STI Strong Defence Line At 3000 In The Short-Term

  • Selling of index heavyweight banking stocks resulted in STI’s rapid decline last month.
  • Failure of key 3190 support level points to 3120 (that’s gone too), 3068 and 3000 in the short-term.
  • At 3068, STI trades at above 11.7x (-1.25SD) 12-mth fwd PE.
  • If 3000 is tested, STI would be at 11.41x (-1.5SD) 12-mth fwd PE.
  • Valuation appears ‘cheap’ because forecasts have not factored the worsening trade war that is currently unfolding.
  • We see the 3000-level holding up unless an all-out trade war becomes a reality.
  • Oversold technical bounces for cyclical stocks will occur but timing is the million-dollar question.
  • Event to watch before G20 is FED meeting on June 18-19 and hints of any rate cut.


Strategy


Defensive names in favour

  • Cyclical stocks are crumbling under the weight of the rapidly worsening US-China trade relations over the past one month. The odds of a US-China all-out trade war appear higher and closer now when just two months back, it looked more like an unlikely nightmare. With no clarity in sight, we believe that investors will continue to hide in defensive names whose underlying business is resilient against worsening trade tensions. Our picks are SATS LTD. (SGX:S58), ST ENGINEERING (SGX:S63), THAI BEVERAGE (SGX:Y92) and SHENG SIONG GROUP (SGX:OV8).
  • The telecom sector traditionally outperforms in the current uncertain macro backdrop that disfavours cyclicals. We see no exception this time round, with the FTSE ST Telecom Index the best performing index in May. Our picks are SINGTEL (SGX:Z74) and NETLINK NBN TRUST (SGX:CJLU). SingTel is likely to see earnings recovery going forward. Final dividend payout of S$0.107 (ex-date 26 July) should also help underpin the stock over the next 1-2 months. Meanwhile, NetLink Trust offers a yield of 6%.

Defensive picks and Telcos


Company Closing Price 30 May 2019 12-mth Target Target Price Return Mkt Cap (S$m) Rcmd Div Yield 19 (%) Net Debt / Equity 19 P/BV 18 (x)
SINGTEL (SGX:Z74) 3.20 3.55 11% 52,251 BUY 5.5 0.4 1.8
ST ENGINEERING (SGX:S63) 3.91 4.50 15% 12,204 BUY 4.1 0.4 5.4
SATS LTD. (SGX:S58) 5.03 5.44 8% 5,605 BUY 4.0 cash 3.4
NETLINK NBN TRUST (SGX:CJLU) 0.83 0.90 8% 3,234 BUY 6.0 0.2 1.1
SHENG SIONG GROUP (SGX:OV8) 1.090 1.25 14% 1,639 BUY 3.3 cash 5.6
THAI BEVERAGE (SGX:Y92) 0.81 0.91 13% 20,342 BUY 2.7 1.3 3.9



REITs



Company Closing Price 30 May 2019 12-mth Target Target Price Return Rcmd Div Yield 19 (%) Net Debt / Equity 19 P/BV 18 (x)
MAPLETREE LOGISTICS TRUST (SGX:M44U) 1.47 1.60 9% 5.5 0.4 1.2
FRASERS COMMERCIAL TRUST (SGX:ND8U) 1.52 1.70 12% 6.3 0.4 0.9
KEPPEL-KBS US REIT (SGX:CMOU) 0.735 0.80 9% 11.2 0.6 0.7





Kee Yan YEO CMT DBS Group Research | Janice CHUA DBS Research | https://www.dbsvickers.com/ 2019-06-04
SGX Stock Analyst Report BUY MAINTAIN BUY 3.550 SAME 3.550
BUY MAINTAIN BUY 0.900 SAME 0.900
BUY MAINTAIN BUY 5.440 SAME 5.440
BUY MAINTAIN BUY 4.500 SAME 4.500
BUY MAINTAIN BUY 0.910 SAME 0.910



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