2Q19 Results Trend - CGS-CIMB Research 2019-08-23: More Misses And Cuts


2Q19 Results Trend - More Misses And Cuts

  • Post 2Q19 results, we rejig our sector allocation and upgrade consumer from Neutral to Overweight with Thai Beverage and Sheng Siong as our preferred picks.
  • We downgrade transport from Overweight to Neutral as this sector has company-specific risks: ComfortDelGro – reducing fleet, SATS – freight volume could remain weak and Singapore Airlines - the first to be hit as business travel spending gets cut.
  • We also upgrade Telco from Underweight to Neutral , backed by +5% yield.
  • We continue to be Overweight on Capital Goods, Developers, REITS and Underweight on Healthcare.
  • Although FSSTI’s valuations (12.3x) are inexpensive as the market is already trading at 0.5 s.d. below 10-year mean of 12.5x, the capacity to spring a positive surprise is quite limited. Most of our analysts are still pessimistic and see earnings risks across sectors into 2020. Our revised FSSTI target is tweaked to 3,225, still based on 12.5x CY20F P/E.

2Q19 results trend

  • The positive-negative surprise ratio remained in negative territory at 13:22 in 2Q19. Banks, capital goods and manufacturing had more beats vs. misses.

Banks beat

  • All three banks beat expectations in 2Q19, just like the previous quarter with UOB (SGX:U11) ranked first in the race, lifted by unexpected non-interest income and below-cycle credit costs. The robust results of the banks were backed by
    1. decent NIM expansion,
    2. treasury income and wealth management.
  • UOB posted the strongest +11% q-o-q profit growth and showed a long-awaited +2bp q-o-q NIM. DBS (SGX:D05) beat was driven by superior +3bp q-o-q NIM and impressive wealth management as well as treasury income riding on capital markets. However, loan growth were tepid with OCBC (SGX:O39) delivering the best (+1.6% q-o-q) among the banks. Our earnings for banks were cut by 1-3% for FY19-21F to reflect lower NIM. Our base case for FY20F is a 1-2bp contraction on tipping SIBOR/LIBOR/HIBOR rates on the back of c.4-6% y-o-y loan growth.
  • See report: DBS OCBC UOB - A Strong Showing From All 3 Banks.

Earnings outlook

  • Loan growth for 2020 could be lower if Singapore’s economy goes into a recession. Asset quality may also face some threat from the regional operations.

Capital goods beat but not quality

Earnings outlook

  • Keppel Corporation profit could come in weaker-than-expected in 2H19 if enbloc sale is weaker in property division. In addition, there could be a risk of impairment of investment in Kris Energy (SGX:SK3) which has filed for a moratorium from creditors payment and is under restructuring. The carrying amount in Keppel Corporation’s books at end-18 was about S$196m with S$53m impairment charge recognised in 2018.
  • On the other hand, Sembcorp Industries gas portfolio management in Singapore and low coal costs in India could result in positive earnings surprise for 2H19.

Tech/ manufacturing beat on stronger revenue

  • Manufacturing’s performance was not as bad as we thought. Most of the companies had higher-than-expected revenue. We upgraded Venture Corp (SGX:V03) post its 2Q19 results as previous concerns of a weaker 2H19 have been priced in. 2Q19 results beat expectations thanks to lower R&D costs and tax rates. Other than the unpredictability of its customers’ product launches in 2H19F, we now think that its 2H19F performance could mirror its 1H19's. See report: Venture Corporation - 2Q19 Better Than Expected.
  • Among the smaller names, AEM (SGX:AWX)’s revenue rose 34% y-o-y as its major customer ordered more test handlers in anticipation of its own product launch roadmap. Frencken Group (SGX:E28)’s revenue grew 11.5% y-o-y as a result of stronger industrial automation which grew 129% y-o-y.

Earnings outlook

Consumer mixed performance

  • Sheng Siong Group (SGX:OV8) was slightly ahead of our expectations on the back of better-than-expected same store-sales performance y-o-y (1H19: -0.3%, 1Q19: -1.0%). Expansion efforts of new stores since 2018 paid off with revenue rising close to 12% y-o-y in 2Q19. GPMs have also stabilised. We believe Sheng Siong could stay aggressive in new store bids to gain market share; this will provide a continual pipeline for new store revenue growth. Admin expenses to revenue ratio should moderate in FY20/21F as revenue trickles in from the new stores. We upgraded Sheng Siong from Neutral to ADD post 2Q19 results. See report: Sheng Siong Group 2Q19 - Powering Market Share.
  • Thai Beverage (SGX:Y92) is the other outperformer but on the back of higher gains from Frasers Property (SGX:TQ5). As long as domestic volumes remain stable, our +16% y-o-y earnings growth in FY19 is achievable with SABECO as the key driver. We estimate SABECO accounted for 60-70% of its beer EBIT in 9M19.
  • Dairy Farm (SGX:D01) fell short of our expectations as the group was affected by lower sales and higher SG&A with new IKEA stores. Its crown jewel, North Asia segment is now facing uncertainty amidst competitive landscape in Taiwan, made worse by the social unrest in Hong Kong. We downgraded the stock from Hold to REDUCE post 2Q19. See report: Dairy Farm Int'l - 1H19 Still In Reset Mode.
  • Japfa (SGX:UD2) was caught in a downcycle with oversupply of broilers in Indonesia and pork in Vietnam as fears of African swine flu (ASF) rose.

Earnings outlook

  • Thai Beverage’s earnings risk is low because we have assumed conservative volume growth for its domestic alcohol volumes.
  • Similarly for Sheng Siong, we have assumed flattish y-o-y GP margin of 26.9% as a result of delayed distribution centre expansion.
  • Dairy Farm earnings risk could come from its supermarket/ hypermarket business if recovery does not take place.

Developers in line but agencies missed

Earnings outlook

  • 7M19 sales of 5,633 units is midway of our expectations of 9,000-10,000 units for the full year. YTD property price index increased by +0.1% which falls at the lower end of our FY19 expectations of 0-3%.
  • For the agencies, we expect to see a rebound in 2H19 on the back of strong pipeline of new launches. Private resale transaction volume has picked up 27% q-o-q in 2Q19. Overall unemployment rate remained steady q-o-q at 2.2% in 2Q19, but we will keep a close watch on the resident’s unemployment rate as it inched up to 3.1%, from 3% in the preceding two quarters.

Telco missed

  • SingTel (SGX:Z74)’s 1QFY20 was hit by wider share of Bharti losses and lower mobile service revenue in group consumer and enterprise. This has resulted in our earnings being cut by 9-15% for FY20-22F.

Earnings outlook

  • Upcoming quarter may still see weakness as there was a finance income of S$55m related to returns on pre-IPO investment for Airtel Africa that was not adjusted out in 1QFY20. Earnings risks could come from worse competition in Singapore post TPG’s potential commercial launch in 2H19F, and/or market competition intensifies in Australia and India for SingTel.

Transport missed

  • The sector’s earnings were reduced by 10% on average in 2Q19 as analysts slashed their forecasts after a weak showing.
  • Singapore Airlines (SGX:C6L) was affected by losses in associate & JV contribution, lower cargo profits and losses in SilkAir and Scoot, although demand was strong for the mainline passenger carrier to date, with premium demand and yields holding up.
  • SATS (SGX:S58) was also not spared from trade tension as lower volume handled in freight segment weakened the operating leverage in addition to the grounding of Jet Airways that caused some loss of income.
  • Our previous hope of acquisition-led growth for ComfortDelGro (SGX:C52) has been tampered by weaker taxi business and weaker pound and Aussie dollar. Taxi competition has heated up hence ComfortDelGro's 1H19 taxi operating profit declined y-o-y as taxi fleet shrank 7% hoh to 11,467 as at end-June (end-Dec 18: 12,360).

Earnings outlook:

  • Singapore Airlines: Looking three months forward, no weakness has been detected for the mainline passenger segment, contrary to Cathay Pacific’s warnings of substantial pressure on long-haul passenger yields in the coming months. However, drop in business demand and slowing airfreight demand may require us to cut our earnings. There is a historical lagged correlation between cargo demand and demand for premium-cabin and business-related travel, which poses a downside risk.
  • ComfortDelGro’s earnings cut risk could surface from further contraction in its taxi fleet-size.
  • SATS: We think earnings risk is low in 2H19 as weak cargo volume could be offset by short-term spike in passenger movements. We expect tourist arrivals in Singapore to see some positive ripples from HK unrest and pick up hoh.

Other notable misses

  • SPH (SGX:T39) was pressed on all fronts - weaker media profitability, one-off professional fees and impairment, as well as lower investment income. On top of digital disruption, advertisers turned more cautious on economic outlook and cut spending which weighed on its overall operating leverage.
  • Despite lower associate losses, SingPost (SGX:S08)’s 1QFY20 core earnings were below our expectations (in line with consensus) on lower logistics profitability and higher financing charges from SFRS16.

Earnings outlook

  • Post a weak FY8/19F, we expect a slower topline decline and relatively stable margins for SPH’s media business, which could be offset by stronger property contribution (Figtree, UK student accommodation assets and sale of Woodleigh Residences).
  • For SingPost, we see easing pressure on postal margin which could be offset by near-term revenue headwinds from slower international mail growth and steeper decline in domestic mail. Logistics continue to lack in scale and face potential trade risks, but could benefit from new customer acquisitions. The announced sale of its US e-commerce business remains pending and could offer relief to SingPost’s earnings and share price.

Sector preference

  • We downgrade Transport sector from Overweight to Neutral,
  • We upgrade Consumer from Neutral to Overweight and upgrade Telco from Underweight to Neutral.
  • We continue to be Overweight on Capital Goods, Developers, REITS and Underweight on Healthcare.

FSSTI target: 3,225 (12.5x CY20F P/E)

  • We trim overall EPS forecasts in 2Q19 by 2.7-2.8% for CY19F and CY20F with the biggest earnings cuts from SingTel and SIA. First Resources had its second consecutive hefty earnings cut by us due to weak FFB yields and CPO price. We now expect 2-3.1% core EPS growth (previously 2-3.9%) in CY19-20F for the stocks under our coverage.
  • Our FSSTI target is tweaked to 3,225 (previously 3,275) and based on 12.5x CY20F P/E, 1 s.d. below its 10-year trading band.
  • A full-blown global recession is a key risk.

LIM Siew Khee CGS-CIMB Research | Singapore Research Team CGS-CIMB Research | https://research.itradecimb.com/ 2019-08-23
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