Singapore Market Focus - DBS Research 2019-07-01: Limbo Rock

Singapore Market Focus - DBS Group Research | SGinvestors.io WILMAR INTERNATIONAL LIMITED (SGX:F34)

Singapore Market Focus - Limbo Rock

  • Pre-emptive strike against deep slowdown.
  • Attractive yield despite slower growth.
  • Tariffs on hold, raised STI target to 3450 by year-end.
  • Volatility here to stay – earnings growth (risk on) vs visibility (risk off).

Growth & Valuation

GDP growth expectations pared

  • Our Singapore economist recently downgraded Singapore’s GDP forecast for 2019 to 2.1% y-o-y (prev 2.6%) on the back of worsening trade tensions between US and China that has spread to several global technology giants and will likely impact global electronics demand.
  • On worst-case basis, we think 2019f GDP growth could weaken further to 1.5% y-o-y if US implements tariffs on a further USD300bn Chinese imports, resulting in an all-out trade war.

A marginally better 2H19 because of low-base effect

  • While the outlook of the export-oriented sectors is uncertain, signs of bottoming out the domestic services clusters and positive impetus from the construction sector could cushion the slowdown. Stimulus measures from China could also lend some support to growth. GDP growth in 2H19 will be marginally stronger than 1H, given the low base in the same period last year.

Positive turn in 1Q19’s earnings revision trend

Earnings outlook turns cloudy

  • Going forward, the earnings outlook remains uncertain. Earnings revision trend risks turning negative again amid slowing growth, trade tensions and geopolitical uncertainties. We expect more downgrades than upgrades in the upcoming quarters.
  • The biggest contributor to earnings - banks - could be affected if the FED proceeds with the anticipated 50 to 75bps interest rates cuts by year-end. Our sensitivity analysis shows that every 25bps cut may have 1-3bps impact on NIM for FY20F while every 10bps change in NIM has 5-7% earnings impact on banks’ FY20F bottom line. UOB (SGX:U11) is our preferred pick for its high 4.7% yield, strong capital profile and lesser exposure to Greater China.
  • The most vulnerable are cyclical sectors - oil and gas, plantation, technology and manufacturing sectors which are likely to face earnings uncertainties with volatile oil prices, falling global PMIs and semiconductor shipments and billings on the decline. Transport related sectors are sensitive to global slowdown, and volatility in oil prices adds to forecast risks.

Potential earnings upgrade


  • Given expectations of lower interest rates ahead, we see upside risk to DPU estimates as various S-REITs refinance their debt at lower rates versus initial expectations of a 25 to 54bps increase.

Transport Related

  • We have assumed that jet fuel price averages US$85/bbl in 2019 vs US$73/bbl currently. If jet fuel prices remain lower than expected, there would be earnings upside for Singapore Airlines (SGX:C6L).
  • Assuming global demand for air travel remains intact, we could see earnings upside for ST Engineering (SGX:S63)’s MRO segment if the Boeing 737-Max is grounded for a protracted period of time, as it would prompt airlines to reactivate idle older aircraft. Reactivation of such aircraft will require mandatory bridging checks, while the delayed retirement of older aircraft will boost MRO demand.

Potential earnings downgrade


  • Depending on the timing of Fed cuts, with Fed’s dovish shift, our sensitivity analysis shows that every 25 bps cut in interest rates may have 1-3bps impact on NIM for FY20F: every 10bps change in NIM has 5-7% earnings impact on banks’ FY20F bottom line.
  • Full blown trade war will also pose downside earnings risks, affecting market-related income and loan-growth sentiment and at the same time put pressure on asset quality. Sensitivity of loans growth to earnings is marginal - every 1ppt increase in loan growth has only less than 1% impact on earnings.
  • Based on our sensitivity analysis, every 5bps uptick in credit costs may impact sector earnings by c. 2.5%.

Offshore and Marine

  • Offshore yards’ earnings growth hinges on the recovery of contract wins, which has been lagging expectations in 1H19. The Singapore rigbuilders won ~S$2.1bn worth of new orders YTD, making up ~42% of order assumptions (S$2.5bn each yard).
  • Keppel O&M fared better with S$1.8bn worth of new orders while Sembcorp Marine (SGX:S51) has only clinched a mere ~S$300m new orders. While ordering tends to be patchy and we are hopeful of capex recovery, any further delay in contract awards will defer earnings recovery as yards are operating at sub-optimal level of S$2-2.5bn revenue on a full year basis which is merely breaking even. Ideally the yards require S$3-4bn each in terms of order wins and revenue p.a.


  • Recent soybean price trend may cap CPO price upside potential despite ongoing inventory drawdown.
  • Earnings performance in 2Q19 and rest of the year may only be supported by output expansion and cost efficiencies, before recovery in 2020 on better price trend.
  • Key risks are CPO prices and development over geopolitical tension which would affect edible oil price dynamics.

Transport Related


  • Margins are hit and visibility remains low as customers are less willing to commit to orders in view of the cloudy outlook. A prolonged US-China trade war could have further impact on the whole value chain.
  • Relocation out of China or changing suppliers need time and not all of the manufacturing process can be easily transferred out of China.
  • Improving operational efficiencies can help to reduce costs but the impact to the bottomline is usually not significant.


  • While SingTel (SGX:Z74) is gaining market share from Telstra in Australia, there could be downside from the weak Australian economy and further decline in AUD. Australia contributes almost one-quarter of SingTel earnings and every 10% decline in earnings from Australia could lead to 2.5% drop in earnings for SingTel.
  • Rising mobile sector competition is a matter of concern for players like StarHub (SGX:CC3) who secure majority of earnings from this sector

Earnings growth expectations lowered to 3-4%

  • Growth expectations have been lower since the end of last year amid global trade uncertainties and lower GDP growth expectation. We see 2019F EPS growth of 4.1% (prev 7.4%) for stocks under our coverage and 3.4% (prev 5.7%) for the STI.
  • Earnings cut among the banks, consumer goods and industrial sectors resulted in lower growth expectations.
    • OCBC (SGX:O39) led the earnings cut for banks, weighed down by lower insurance and wealth income.
    • The consumer goods sector was dragged down by Japfa (SGX:UD2) as high corn prices and soft broiler prices hampered its Indonesian operations, and First Resources (SGX:EB5) on lower-than-expected output.
    • The O&G sector also saw earnings cut from Sembcorp Marine (SGX:S51) due to a lack of order wins.

Attractive yield is a draw

8% downside risk if all-out trade war breaks out

  • The Singapore market currently trades at 12.3x (-1SD) 12-mth forward PE. Over the past 10 years, the two major bottom inflexion points had occurred around the 11.3x (-2SD) 12- mth forward PE level – once during the height of the Eurozone crisis in 2011, and the other in 2016 amid recession fears and a collapse in oil price.
  • The Singapore market had again rebounded from 11.3x (-2SD) 12-mth forward PE last October, upholding the resilience of the valuation support. Central banks’ policies are much more accommodative now compared to just 6 months ago, and corporate earnings expectations were lowered.
  • We see 8% downside risk (i.e. a re-test of the -2SD valuation support) for the Singapore market if an all-out trade war breaks out between the US and China. As seen in the past 10 years, if valuations undershoot (triggered by all-out trade war and temporary spike in Middle East geopolitical tension), it is likely to be temporary and is an opportunity. If further tariffs are put on hold post G20 summit and US-China works progressively towards a trade deal, than its likely that Singapore equity market has already seen a major low last October.

Straits Times Index Outlook

  • In our previous semi-annual strategy update titled “Singapore 2019 Outlook & Strategy - Pitch on Value” on 26 Nov last year, our base case was for the STI to recover towards 3250 pegged to 12x (-1SD) blended FY19/20F PE. This was on the premise that there will be no all-out trade war. Consensus expectation back then was for the FED to hike rates twice this year. But the inverse is more likely now with the FED looking to cut rates at least twice this year. Looking back, our base case view panned out rather well with STI concluding 1H19 at 3321.
  • At 3321, STI trades at 12.59x (-0.5SD) 12-mth fwd PE. We see 3 possible scenarios to the outcome of the current US-China trade tensions in 2H19.

Base case – Tariffs on hold, negotiations continue, STI year-end target raised to 3450

  • Our assumptions are
    1. US tariffs on China stops at US$250bn of Chinese imports, both countries work towards a deal;
    2. FED cuts rates twice; and
    3. US-Iran tension does not escalate into a military conflict resulting in a surge in oil price
  • Our STI year-end objective has been raised to 3450, pegged to 12.59x (-0.5SD) and rolling over to FY20 earnings base.

Bad case – More tariffs imposed, STI falls but finds support around 3000

  • Our assumptions are
    1. US imposes tariffs on a further US$300bn of Chinese imports and
    2. USDCNY rallies beyond 7
  • We think this is likely to happen in 3Q19 if this does occur, it will not long after the G20 summit. The FED would have to cut rates more than twice. STI falls and finds support at around 3000 pegged to 11.41x (-1.5SD) 12-mth fwd PE. Any ‘undershoot’ below 3000 is likely temporary.
  • STI’s year-end objective would be 3,275 pegged to 12x (-1SD) FY20F PE.

Good case – Deal concludes, tariffs roll back, STI pushes up to 3600

  • If an US-China trade deal is reached by year-end and tariffs start to be rolled back in stages, STI should rise to 3600 by year-end, pegged to 13.19x (ave) FY20F PE. If a deal does conclude, we think it is likely to happen after the second anticipated FED rate cut this year.

See also

Kee Yan YEO CMT DBS Group Research | Janice CHUA DBS Research | https://www.dbsvickers.com/ 2019-07-01
SGX Stock Analyst Report BUY MAINTAIN BUY 3.860 SAME 3.860