Singapore Market Monitor - Maybank Kim Eng 2019-08-26: Deconstructing The June 2019 Quarter

Singapore Market Monitor - Maybank Kim Eng Research | SINGTEL (SGX:Z74)

Singapore Market Monitor - Deconstructing The June 2019 Quarter

Mixed messages

  • Quarter ended June 2019 saw a 2.4% y-o-y cumulative core PATMI decline (vs. +6.3% in quarter ended Mar 2019) for our coverage. Yet, in our view, the quarter was not as bad as headline numbers suggest with around two-thirds and half of the stocks delivering revenue growth and core PATMI growth. Specifically, four stocks saw profit declines much worse than expected, excluding which, core PATMI would have grown 5.1% instead.
  • But macro, earnings risks remain, dictating our unchanged defensive view in top stock picks.

A few bad apples spoiled the basket

  • Cumulative revenue and EBITDA for our coverage basket grew 1.1% and 5.7% with most of the operating leverage resulting from lower commodity related input costs. But this EBITDA growth was eroded by higher D&A, higher financing costs and weaker associate/JV performance at some specific large caps. There were four notable drags responsible for the 2.4% core PATMI decline: Wilmar International, SingTel, Singapore Airlines and Japfa.
  • Consensus FSSTI earnings expectations for 2019/2020 have come down by 50/70bps to 8.5%/6.1% in just the past month but we believe there is still some tail risk in these estimates, particularly for 2019, given how quickly the macro outlook has deteriorated in the past 2-3 months. In comparison, profit growth outlook for our coverage currently stands at 3.7%/7% for 2019/2020.

Defensive bias in selecting stocks unchanged

  • Our sector preferences and top stock picks for Singapore remains unchanged, predicated on valuations and our defensive bias for dividend yield and earnings, and cashflow certainty as detailed in our earlier market report, Singapore Market Monitor: Re-jigging our top picks,15 July 2019. Market earnings expectations still seem to hold some downside risks and, valuations, while presently undemanding, could de-rate should the economic and earnings cycle deteriorate materially more than expected.
  • Our top picks are ones that we believe have:
    1. relatively low earnings volatility and cashflow resilience;
    2. a high degree of dividend certainty over the coming four quarters; and
    3. reasonable valuations versus our estimates, as well as medium-term history.

Key risks: further capitulation on the macro, trade

  • Company specific factors aside, the downside risks to our profit growth outlook and valuations could arise if the economy materially deteriorates further from our existing sombre GDP forecast of 0.6% for 2019, the lowest since the GFC, followed by a modest recovery to 1.6% in 2020. The key unknown on the macro outlook is the extent of global trade disruption and diversion we are faced with given the US-China trade war impasse.
  • Meanwhile, the upside risks to our view could stem from:
    1. a sharper-than-expected economic rebound should a US-China trader deal pan out, although this looks increasingly unlikely given recent events involving additional tariffs; and
    2. a stronger-than-expected near-term domestic stimulus from the record special transfers in the 2019 Budget.

More misses than beats

Quarter ended June 2019 vs. expectations

MKE coverage basket performance

A few bad apples spoiled the basket

  • Cumulative revenue growth for our coverage basket was 1.1%/(1.5%) y-o-y/QoQ, suggesting a somewhat weak demand environment for the corporate sector in line with the macroeconomic growth deterioration witnessed.
  • However EBITDA grew 5.7%/2.7% on a y-o-y/QoQ basis. We estimate most of this operating leverage was a result of lower commodity related input costs. Note that prices of most of the key soft and hard input commodities (steel, aluminium, copper, coal; crude oil, naptha & related petrochemical distillates, crude palm oil, soybean, etc.) are at materially y-o-y lower levels. Sector EBITDA margins were generally stable y-o-y with a few witnessing minor sequential upticks.
  • But this EBITDA growth was eroded by higher D&A, higher financing costs (with the interest rate increases of the past 12-15 months) and weaker associates & JV performance at some specific large caps.
  • Core PATMI for our coverage basket fell 2.4%/4.4% on a y-o-y/QoQ basis as a result. Barring financials and property, core PATMI was down y-o-y for all the other sectors.
  • Four notable drags on core PATMI:
    1. Wilmar International (SGX:F34) saw profits almost halve y-o-y effected by the China slowdown and African Swine Flu (see report: Wilmar International - Hog-sided);
    2. SingTel (SGX:Z74) saw a c22% y-o-y profit drop driven by poor performance at key associates Bharti Airtel (BHARTI IN; INR352.65; Target Price INR375.00; Hold) and Telkomsel (see report: SingTel - Too Soon For Sigh Of Relief?);
    3. Singapore Airlines (SGX:C6L) saw a 20% y-o-y profit drop from slowing inbound tourist arrivals and a weaker cargo market due to the US-China trade war; and
    4. Japfa (SGX:UD2) saw a c60% profit drop, also largely due to African Swine Flu factors, i.e. weaker hog prices and much higher biosecurity related costs (see report: Japfa Ltd - 2Q19 A Big Miss).
    Excluding just these four stocks, the cumulative core PATMI pool would have actually grown 5.1% y-o-y.
  • Despite the core PATMI decline in the quarter, 1H 2019 growth was still in positive territory at 2.3% h-o-h thanks to the 6.3% growth of the prior quarter.
  • In terms of absolute stock count, almost two-thirds of our coverage witnessed y-o-y revenue growth, 58% had EBITDA growth and half delivered core PATMI growth.

FSSTI index basket performance

Ex-Jardines’ PATMI growth 2ppt better than MKE coverage

  • FSSTI saw somewhat better fortunes for q/e June 2019 with a 2.3% y-o-y core PATMI growth.
  • Excluding the five Jardine group constituents in the FSSTI (as most are holding companies with accounts that have numerous mark-to-market, asset revaluation and currency translation adjustments), core PATMI growth was just marginally down by 0.4% y-o-y.
  • Four stocks were mainly responsible for the relatively better core PATMI performance of the FSSTI ex-Jardines’ basket vs. the MKE coverage basket –

Market earnings outlook and valuations

Some tail risk to FSSTI consensus growth outlook

  • Consensus core profit growth for FSSTI for 2019/2020 stands at 8.5%/6.1%, around 50/70bps lower than around a month ago as we observed in our report: Singapore Market Monitor: Re-jigging our top picks,15 July 2019. We believe street estimates could be at risk of further downgrades, especially for 2019, which comes on the back of just 2.8% revenue growth expectations. For 2019, this would imply a net margin expansion of c70bps.

2019 outlook for MKE coverage basket lower than FSSTI

  • Core profit growth estimates for MKE’s stock coverage universe on a calendar 2019/2020 basis stands at 3.4/7% (and first and second forecast financial years FY1/FY2 at 3.3%/5.7%).
  • The growth outlook for our coverage basket for 2019 is lower than the street expectation for FSSTI but higher for 2020. We believe this is in part due to our coverage, which includes a number of small and mid-cap companies that have higher leverage to interest rates and economic cycles.

FSSTI valuations still reasonable

  • While profit growth expectations have moderated over the past six months with the weakening macro outlook, FSSTI P/E and P/BV valuations still look reasonable relative to their long-term history, and the high dividend yield should provide downside support amid a backdrop of tepid growth and macro uncertainty. Also, in part, the news of the Fed ending its rate hike cycle earlier in the year has eased some pressure on the equities market with a normalization of earnings and dividend yield gaps.
  • In an ASEAN markets context, FSSTI has the lowest prospective P/E for 2019 and 2020 of 12.5x and 11.8x with the highest prospective, and arguably defensive, dividend yields of 4.3% and 4.3%, respectively.
  • FSSTI is trading at a 12-month forward P/E of 12.3x, a shade below its 10-year average of 12.6x.

Neel Sinha Maybank Kim Eng Research | 2019-08-26
SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.440 SAME 3.440