CDL HOSPITALITY TRUSTS (SGX:J85)
CSE GLOBAL LTD (SGX:544)
FU YU CORPORATION LTD (SGX:F13)
MANULIFE US REIT (SGX:BTOU)
OXLEY HOLDINGS LIMITED (SGX:5UX)
SHENG SIONG GROUP LTD (SGX:OV8)
SINGAPORE TECH ENGINEERING LTD (SGX:S63)
SUNTEC REAL ESTATE INV TRUST (SGX:T82U)
UNITED OVERSEAS BANK LTD (SGX:U11)
WILMAR INTERNATIONAL LIMITED (SGX:F34)
Singapore Equity Strategy - Uncertain Outlook, Stay Defensive!
2Q19 Earnings Wrap
2Q19 results were a tad below expectation
- For our coverage universe, about a quarter of the companies reported earnings that were below our estimates. In addition to the palm oil companies, Dairy Farm International, Wilmar International, ST Engineering, Sembcorp Marine (SGX:S51), ComfortDelGro, and SingTel reported earnings that were below expectations. Amongst key stocks, Silverlake Axis reported earnings that were above our expectations.
- Amongst stocks under our coverage universe, c.41% witnessed an increase in 1FY revenue estimates, but only c.18% witnessed an increase in 1FY earnings forecasts. Among the key stocks, Suntec REIT, Keppel REIT, and OCBC witnessed more than 3% increases in 1FY earnings estimates. Almost 46% of the companies saw a decline in their net profit forecasts, as they guided for a weaker 2H19.
Earnings downgrades have started again
- 2019 consensus earnings for the STI, which had witnessed a pause in downgrades since March, witnessed a 2% reduction since end June following a weak 2Q19 earnings reporting season. 2020 consensus earnings were also downgraded by a similar magnitude.
- Most downgrades came from the financial, offshore marine, and transport sectors. Based on Bloomberg estimates, the consensus net profit growth for 2019 now stands at 3.9%.
There exist risks of further downgrades to estimates
- If the trade tensions between the US and China remain unresolved, we foresee an accelerated decline in global manufacturing, a sharper slowdown in global trade flows, and further declines in global investments. All of this could lead to further downgrades to the STI’s 2020 consensus earnings. We believe much of these downgrades could come from the financial sector, which could be impacted by falling interest rates. Based on Bloomberg consensus estimates, almost a quarter of 2020 net profit growth is expected to be derived from the financial sector.
- In addition to the risks from worsening of the trade war, there exist macroeconomic risks from Brexit, sharp contraction in Global Purchasing Managers’ Indices, growth cycles in Europe turning while interest rates are still negative, and geopolitical tensions in the Middle East and Asia.
Key rating changes after the recent results season
| STOCK | NEW RATING | OLD RATING | LINK TO NOTE |
|---|---|---|---|
| UPGRADE | |||
| SUNTEC REIT (SGX:T82U) | BUY | Neutral | Suntec REIT - Enhancing Earnings Quality; Upgrade To BUY |
| VENTURE CORPORATION (SGX:V03) | BUY | Neutral | Venture Corporation - New Product Ramp-Up In 4Q19; Upgrade To BUY |
| DOWNGRADE | |||
| DBS GROUP (SGX:D05) | NEUTRAL | Buy | DBS Group - NIM Peaking In 2Q19 Despite Wider DBS Group - NIM Squeeze To Cap Share Price Upside |
| STARHILL GLOBAL REIT (SGX:P40U) | NEUTRAL | Buy | Starhill Global REIT - Fair Value Reached; Cut To NEUTRAL |
| SINGAPORE EXCHANGE (SGX:S68) | NEUTRAL | Buy | Singapore Exchange - Earnings Driven By Derivatives, But Priced In |
| THAI BEVERAGE (SGX:Y92) | TAKE PROFIT | Buy | Thai Beverage - Downgrade ~ High On Alcohol; Drink Again Later |
Market Outlook
The STI has underperformed other ASEAN markets
- The STI has given up most of its gains from early this year, given moderating profit growth expectations amidst a weakening macro outlook. YTD, in USD terms, the index has outperformed only the FBM KLCI within ASEAN. Thailand, the Philippines, and Indonesia have delivered 6-13% returns vs the STI’s 2% during the same period.
Valuations are looking reasonable
- The STI’s P/E valuation still looks reasonable relative to its long-term history. It is trading at 12.6x 1-year forward P/E, which lies at -1SD below its historical average of 1-year forward P/E of 13.9x. While the earnings outlook has moderated since early this year, consensus is still estimating the STI’s net profit growth for 2019 and 2020 at 3.9% and 6.9%.
- By contrast to Street estimates, our forecast for 2019 net profit growth – which is based on a combination of RHB and consensus estimates – stands at 2.5%.
The STI offers one of the highest yields amongst Asian markets
- The STI is currently trading at a forward yield of 4.4% (based on local currency). This is the highest amongst all Asian markets, exceeding Australia and Taiwan’s 4.3%. We believe such a relatively high yield should provide downside support amidst a backdrop of weakening growth and macro headwinds.
Tepid upside for the STI from here till year’s end
Lower STI target to 3,250 from 3,300 for end 2019.
- We reiterate that historical trends suggest that Singapore’s stock index returns follow the country’s nominal GDP growth closely. As we expect a slowdown in GDP growth to extend into 2019 and 2020, we believe it will be tough for the STI to generate strong positive returns from now till the end of 2019.
- We use a top-down method to derive our STI target, which is based on a P/E multiple on 2019’s forecast EPS. The STI’s 12.6x forward P/E is at its -1SD band. With a sharp slowdown in Singapore’s GDP growth, we believe a strong P/E expansion will be difficult to pencil in.
- We value the STI based on a 2019 year-end target P/E of 13x, which is below its 1FY average of 13.9x. Applying this to our 2019 EPS estimate, we derive an index target of 3,250 for end 2019.
- See also the Straits Times Index constituent ratings and target prices.
Top Picks
Stay defensive as macro headwinds persist
- Given the uncertain external environment, we continue to recommend investors to stay defensive in their stock picks and focus on buying counters that offer stable earnings, strong balance sheets, and sustainable dividends.
- REITs should continue to perform well amidst expectations of further cuts in interest rates. Among other sectors, we selectively prefer stocks that meet the abovementioned criteria. CSE Global, Fu Yu Corp, Oxley Holdings, Sheng Siong Group, ST Engineering, UOB, and Wilmar International are our preferred non-REIT picks.
- Within the REIT sector, Suntec REIT replaces Cache Logistics Trust in our Top Picks. The latter reported a weak 2Q19 results amidst a decline in committed occupancy rates. This led us to lowering forecast DPU 4-7%. In contrast, we upgraded Suntec REIT to BUY from Neutral amidst attractive below book valuations and higher-than-sector yields.
- In the Small-Mid cap space, we replace Silverlake Axis with CSE Global. Although the former was one of the key stocks that reported above expectation earnings, we had to lower earnings forecast 7% to account for potential higher taxes. In contrast, we have lifted CSE Global’s earnings forecast 15-17% following its recently-announced acquisition of Volta – a custom-engineering electrical equipment centre solutions provider.
- We remove Thai Beverage from our Top Picks, as the stock was downgraded to TAKE PROFIT from Buy after its share price reached our Target Price. We still like the growth prospects for Thai Beverage and recommend investors to accumulate if the share price goes below SGD0.83.
| Company | Rating | Target Price | % Upside | P/E (x) Dec-19F |
P/B (x) Dec-19F |
Yield (%) Dec-19F |
|---|---|---|---|---|---|---|
| CDL HOSPITALITY TRUSTS (SGX:J85) | BUY | S$1.79 | 9.8 | 15.5 | 1.1 | 5.7 |
| CSE GLOBAL (SGX:544) | BUY | S$0.69 | 48.4 | 9.7 | 1.3 | 5.9 |
| FU YU CORP (SGX:F13) | BUY | S$0.24 | 11.6 | 12.0 | 1.0 | 7.9 |
| MANULIFE US REIT (SGX:BTOU) | BUY | US$0.98 | 7.1 | 13.7 | 1.1 | 6.5 |
| OXLEY HOLDINGS (SGX:5UX) | BUY | S$0.41 | 32.3 | 3.4 | 0.7 | 8.1 |
| SHENG SIONG GROUP (SGX:OV8) | BUY | S$1.32 | 10.0 | 23.3 | 5.8 | 3.1 |
| ST ENGINEERING (SGX:S63) | BUY | S$4.70 | 20.5 | 20.1 | 5.3 | 3.8 |
| SUNTEC REIT (SGX:T82U) | BUY | S$2.08 | 7.2 | 18.0 | 0.9 | 5.2 |
| UOB (SGX:U11) | BUY | S$29.50 | 14.5 | 9.9 | 1.1 | 5.0 |
| WILMAR INTERNATIONAL (SGX:F34) | BUY | S$4.50 | 18.4 | 14.3 | 1.0 | 2.7 |
See attached PDF for complete report.
Shekhar Jaiswal
RHB Securities Research
|
https://www.rhbinvest.com.sg/
2019-09-11
SGX Stock
Analyst Report
1.790
SAME
1.790
0.690
SAME
0.690
0.240
SAME
0.240
0.980
SAME
0.980
0.410
SAME
0.410
1.320
SAME
1.320
4.700
SAME
4.700
2.080
SAME
2.080
29.500
SAME
29.500
4.500
SAME
4.500
