1H19/2Q19 Singapore Stocks Report Card - UOB Kay Hian 2019-08-20: Nothing To Write Home About


1H19/2Q19 Singapore Stocks Report Card - Nothing To Write Home About

  • This earnings season mostly saw in-line results with 65% of companies meeting expectations which is the highest in the past five years.
  • In addition, we note that only 8% of the companies beat expectations in 2Q19 which is the lowest percentage of beats in the past three years.
  • Post the results we have reduced our market EPS growth further and have cut our 2019 year-end target for the FSSTI by 7% to 3,210.


An in-line quarter.

  • While the results were mostly in-line with expectations, the outlook for most of the sectors that we cover is muted at best, given concerns over weaker growth ahead as markets contend with external issues such as the US-China trade war, pockets of regional unrest, inverted yield curves, and volatile emerging-market currencies.
  • The key sectors that saw better-than-expected results, and which resulted in earnings upgrades, were finance and healthcare.

Downgrades to our earnings forecasts for 2019 and 2020.

  • Due to the weaker outlook, our earnings forecasts have been trimmed by 1.4% for 2019 and 2.3% for 2020. The reduction for 2019 was primarily due to media, plantation and telecommunications while banks and healthcare were the minor bright spots.
  • We now expect market EPS to increase by 7.3% y-o-y in 2019 (previously 8.8%) and 6.5% y-o-y in 2020 (previously 7.4% y-o-y). However, we would caution that much of the 2019 EPS growth is driven by shipyards coming off a low base in 2018.
  • We highlight that consensus has marginally lowered their 2019 EPS estimates by 1ppt since the start 2Q19.


Lowering our year-end target for the FSSTI.

  • Following our earnings cut, the FSSTI’s 2019F and 2020F PE of 13.8x and 13.0x is at a 7% and 12% discount respectively to its 20-year mean of 14.8x. With the external environment putting pressure on top-line and margins potentially continuing to soften for the rest of the year, we have lowered our FSSTI target by 7% to 3,210 from 3,450, thereby implying a c.3% upside to current levels.
  • We highlight that in 2019, Bloomberg consensus is expecting a 17% decline in cash flow per share for the FSSTI while net debt is forecasted to increase by over 186% y-o-y, potentially indicating increased stress on Singapore companies’ balance sheets.

Our top picks.

Aviation – Overall, a weak 1H19.

  • SATS LTD. (SGX:S58) 1QFY20’s earnings were below expectations with the company recording a 14% y-o-y decline in net profit vs our expectation of a 4% decline. We had subsequently downgraded the stock to SELL, with a target price of S$4.80. We still believe that it is not time to accumulate SATS as earnings out of Greater China are likely to remain weak and we reckon street estimates are too high.
  • We are neutral on SIA ENGINEERING (SGX:S59), SINGAPORE AIRLINES (SIA, SGX:C6L) and ST ENGINEERING (SGX:S63). While the former has the best growth potential, we believe that near term positives have been factored in and we would prefer to buy on dips, closer to S$4.00. SIA’s 1QFY20 operating profit was in line with expectation, but non-operating profit was below expectation due to loss provisions for Virgin Australia. Going forward, SIA could benefit from weak fuel prices and potential transit traffic diversion from Hong Kong to Singapore.

Banks – Strong showing.

  • All three Singapore banks reported results that were above expectations. Banks benefitted from higher mortgage rates but costs of deposits have started to ease as well. Continued NIM expansion helped banks achieve high-single-digit growth in net interest income.
  • DBS (SGX:D05), OCBC (SGX:O39) and UOB (SGX:U11) saw wealth management fees grow 11%, 8% and 21% y-o-y respectively, supported by steady expansion of AUM. DBS, OCBC and UOB registered robust net trading incomes of S$357m, S$193m and S$245m respectively. Asset quality remained stable, while CET-1 CAR was resilient at about 14%. OCBC and UOB have increased interim dividends for 1H19 by 25% and 10% y-o-y respectively to 25 S cents and 55 S cents. DBS has maintained its interim dividend for 2Q19 at 30 S cents.
  • Maintain OVERWEIGHT on the sector – our top pick is DBS with a target price of S$31.30.

Consumer sector – Mixed bag.

  • SHENG SIONG GROUP (SGX:OV8)’s 2Q19 earnings were slightly above our expectations, primarily due to the strong growth in new store sales (11.3% y-o-y). We expect this trend to continue in 2H19.
  • For the F&B service companies under our coverage, KOUFU (SGX:VL6)’s results were in line while JUMBO GROUP (SGX:42R) missed expectations.
    • The key reason for Jumbo Group’s earnings miss was the 4-week closure (due to renovation) of the Jumbo Seafood restaurant located at The Riverwalk. While we trim our FY19 earnings forecast by 11%, there is potential for a better 4QFY19 from normalised earnings of the outlet which is now fully operational, as well as contributions from the newly-opened Jumbo Seafood outlets at Jewel Changi and ION Orchard.
    • On the other hand, Koufu’s earnings are on track to meet our 19% forecast growth for 2019, with full-year contribution from Rasapura, new outlets ramping up and steady roll-out of the R&B Tea outlets.
  • Among our large market cap stocks, THAI BEVERAGE (SGX:Y92)Thai Bev largely met expectations, posting higher profit growth with better Spirits margins. However, near-term volume growth seems unlikely as spirits volume levels appear to be normalising to levels seen in FY16-17, with slow farm income growth.

Manufacturing sector - Weaker results with a more cautious outlook.

  • The majority of the companies' results were weaker y-o-y, but came in within expectations, as we had revised our forecasts downwards over the past few quarters. SUNNINGDALE TECH (SGX:BHQ) was the only company that missed our forecast as it unexpectedly fell into a loss-making position due to higher-than-expected decline in its auto sales and slower-than-expected ramp up of new factories. Overall, its outlook has turned more cautious due to the escalating trade war and slower global growth.
  • Companies with a neutral second-half outlook compared to 1H19 include VENTURE CORPORATION (SGX:V03) and Valuetronics. However, we believe that Venture Corp, Valuetronics and Sunningdale Tech are unlikely to beat the high base effect of 2H18 on a y-o-y basis.
  • On the other hand, FU YU (SGX:F13) is likely the only company which stands a chance of growing on a y-o-y basis for 2H19 due to cost savings, revenue growth in Malaysia and Singapore, and new customers in China.
  • In addition, Sunningdale Tech is likely to sequentially record a better second half due to the low-base effect of the first half, stemming from slower-than-expected ramp up of its new factories.

Plantation sector – Lower-than-expected production.

  • 2Q19 results were below expectations mainly due to lower-than-expected production. Earnings for BUMITAMA AGRI (SGX:P8Z)’s and GOLDEN AGRI-RESOURCES (SGX:E5H) were worse than expected, negatively affected by lower CPO prices and FFB production. However, Golden Agri-Resources’ downstream exposure, especially in biodiesel, partially cushioned the weak performance of its upstream operations.
  • WILMAR INTERNATIONAL (SGX:F34)’s earnings were also below expectations with lower-than-expected pre-tax profit margins from the oilseed & grains and sugar segments.
  • On a slightly brighter side, FIRST RESOURCES (SGX:EB5)’s earnings met our expectations as their downstream exposure partially offset its weak selling prices.
  • Looking forward, we expect a better 2H19 for the plantation sector supported by more robust production and selling prices; we note that prices have start to recover since early-August. For Wilmar, we expect better contribution from its sugar division and festive demand to drive sales volume, as well as better margins from consumer packs.
  • Wilmar is our top pick in the sector with a target price of S$4.40.

REITs – A decent quarter.

  • Most REITs reported results that were in-line with expectations. Highlights for the quarter include:
    • ASCOTT RESIDENCE TRUST (SGX:A68U)’s reported 2Q19 DPU of 1.98 S cents (+7.6% y-o-y) with revenue increasing 1.5% y-o-y due to acquisition of Citadines Connect Sydney Airport and higher revenue from the existing properties in the Philippines (completed refurbishment of Ascott Makati), UK (growth from corporate and leisure) and Japan (strong leisure demand). Overall RevPAU rose 2% y-o-y to S$158.
    • CDL HOSPITALITY TRUSTS (SGX:J85) reported a 2Q19 DPU of 2.07 S cents (-3.3% y-o-y) with gross revenue relatively flat, dragged down slightly by the closure of Raffles Maldives Meradhoo, offset by inorganic contribution from Hotel Cerretani Florence and higher contributions from Munich and UK hotels. Singapore and Europe were flagged as focus areas for acquisitions given its ample debt headroom of S$524m.
    • MAPLETREE COMMERCIAL TRUST (SGX:N2IU) reported a DPU of 2.31 S cents for 1QFY20, up 3.6% y-o-y. VivoCity outperformed with revenue growth of 5.2% y-o-y, high occupancy of 99.1% and positive rental reversion of 7.3%.
    • PARKWAYLIFE REIT (SGX:C2PU) reported a DPU of 3.27 S cents for 2Q19 (+2.6% y-o-y) with revenue growing 2.9% y-o-y due to:
      1. revenue contribution from Konosu Nursing Home Kyoseien in Japan that was acquired in Feb 18, and
      2. upward revision of minimum guarantee rent for Singapore hospitals, namely Mt Elizabeth Hospital, Gleneagles Hospital and Eastshore Hospital, by 1.38% effective 23 Aug 18.
  • Our top picks in the sector are Ascott Residence Trust and CDL Hospitality Trusts.

Shipyards – Not expecting a quick recovery.

  • While KEPPEL CORPORATION (SGX:BN4) met our and the market’s expectations due to strong performances from its infrastructure and property segments, SEMBCORP MARINE (SGX:S51) disappointed with a net loss for 2Q19.
  • Keppel Corporation’s 2Q19 operating profit for the offshore marine segment jumped more than 4.5x q-o-q to S$11.4m, albeit off a low base. While we do not envision a quick recovery in the rig-building sector, we note that as a reflection of management’s growing confidence, its headcount in this business segment rose 7% q-o-q. Importantly, the tone at both analyst briefings were markedly different as Sembcorp Marine was decidedly downbeat, guiding for continued weakness in 2H19 and possibly into 1Q20.
  • We have a BUY rating on Keppel Corporation (Target price: S$7.61) and a HOLD on Sembcorp Marine (Target price: S$1.32, Entry price: S$1.20)

Telecommunications – Below expectations.

  • Both SINGTEL (SGX:Z74) and STARHUB (SGX:CC3) missed our expectations and led us to cut 2019 net profit forecasts by 13% and 11% respectively. In essence, the quarter saw telcos grappling with heightened mobile competition, given the entry of more MVNOs, and weak business sentiment that affected enterprise business revenue.
  • We downgraded SingTel to HOLD with a lower DCF-based target price of S$3.32 and entry price of S$3.00.
  • Positively, NETLINK NBN TRUST (SGX:CJLU) grew 2Q19 net profit by 10% y-o-y thanks to higher residential connections as StarHub continues to migrate its existing cable customers to fibre connections.
  • Our top pick in the sector is Netlink Trust – it provides a defensive shelter amid external volatility, in our view, and we have a target price of S$0.92. The stock offers a 5.7% sustainable dividend yield.

Singapore Research Team UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-08-20
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