Singapore Equity Strategy - RHB Invest 2019-10-02: Expectations For The Rest Of 2019


Singapore Equity Strategy - Expectations For The Rest Of 2019

  • Plantation sector may outperform in 4Q. While we expect moderating earnings for most sectors, we upgraded the plantation sector to a contrarian OVERWEIGHT rating, as we expect CPO prices to trend up in 4Q19 and continue rising in 1H20. Historically, CPO prices are the leading indicator of the expansion in plantation companies’ P/Es. FIRST RESOURCES and WILMAR INTERNATIONAL are sector Top Picks.

Stick to defensive names.

  • Amidst an uncertain macroeconomic environment, investors should stay selective and invest in companies that offer low earnings volatility, and have low gearing or net cash balance sheets, on top of sustainable dividends.
  • In addition to office and hospitality REITs, selective stocks from the consumer and industrial sectors are our preferred picks.

Consumer Sector

Consumer Sector outlook for 2H19

  • Limited upside from heavyweights in the near term. Given the uncertain external environment, consumers have turned cautious on spending, resulting in slower sales growth. We do not expect a major turnaround in consumer sentiment over the next six months. We are now NEUTRAL on the consumer sector as we expect some of the larger-cap names such as DAIRY FARM INTERNATIONAL (SGX:D01) and THAI BEVERAGE (SGX:Y92) to deliver weaker-than-expected results in 2H19, as estimated by the Street.
  • We are also NEUTRAL on GENTING SINGAPORE (SGX:G13). Although we expect gaming volumes to be stronger in 2H19 on higher tourist arrivals, especially from Mainland China, we think the corporate governance issue from sister company Genting Malaysia’s recent controversial related-party transaction could put a drag on its share price.
  • Small-mid caps with resilient business models such as DELFI (SGX:P34), SHENG SIONG GROUP (SGX:OV8), JUMBO GROUP (SGX:42R) and FOOD EMPIRE (SGX:F03) should continue to deliver steady earnings in 2H19, driven by stronger sales growth but partially offset by higher operating costs.

Consumer Sector Performance in 1H19

Consumer Sector Top Picks

  • Gravitate towards low-risk stocks over the next six months amidst slowing economic outlook and potential market volatility derived from trade uncertainties. Our Top Picks are SHENG SIONG GROUP and DELFI. SHENG SIONG GROUP remains our top sector pick, as grocery players remain more resilient vs the rest of the retail sector. We also like DELFI, as the pruning of unprofitable value-products should also help to improve earnings in the near term.
  • In the longer term, we think there is potential upside for GENTING SINGAPORE, as expansion of the integrated resort and the Government’s plan to develop the Greater Southern Waterfront area could boost foot traffic. Positive results from the Osaka integrated resort bids would also be a catalyst for its share price too.

Financials Sector

Financial Sector outlook for 2H19

  • Expect NIM to have peaked in 2Q19. The US Fed cut the Federal Funds Rate (FFR) by 25bps in the mid-September Federal Open Market Committee (FOMC) meeting. More FFR cuts are expected going forward. Given the historical positive correlation between the US FFR and the 3-month SIBOR, we expect further softness in the latter, which is currently at 1.88% (and lower than the 2Q19 average of 1.98%).
  • Amongst the three Singapore banks, DBS (SGX:D05)’S NIM is the most leveraged to changes in the 3-month SIBOR – we forecast DBS’ NIM to narrow most (amongst peers) from its 2Q19’s 1.91%. OCBC (SGX:O39) and UOB (SGX:U11) are also forecasted to record NIM compression after peaking in 2Q19. With the slowing Singapore economy, we forecast the three Singapore banks to register 2019 loan growth of around mid-single digit levels.

Financial Sector Performance in 1H19

  • Respectable 1H19 earnings for the three banks. All the three banks recorded high single-digit y-o-y net interest income expansion. 2Q19 NIM widened and 2Q19 loan expanded sequentially for all three banks. Other P&L segments performed fairly well to support overall 2Q19 net profit.
  • DBS has the highest percentage loan exposure to Greater China. As of Jun19, 29.9% of DBS’ loans are to Greater China, higher than OCBC’s 24.2% and UOB’s 15.7%. Given the current trade tensions between the US and China, and the ongoing protests in Hong Kong, DBS’ larger percentage exposure is not a positive.

Financial Sector Top Picks

  • UOB is our top sector pick. Falling US interest rates will be negative for Singapore banks’ NIM. However, mildly positive loan growth will help to sustain net interest income. In addition, fee and commission income could grow with more income from wealth management businesses. UOB is our only Singapore bank with a BUY recommendation – we forecast high single-digit 2019 net profit growth, and a ~5% dividend yield. UOB’s smaller percentage loan exposure to Greater China will soften loan loss provisioning impact on its earnings, if the economic situation in Greater China deteriorates.

Offshore & Marine Sector

Offshore & Marine Sector outlook for 2H19

  • Expect some orderbook pick-up in 2H19. In early September, SEMBCORP MARINE (SGX:S51) announced it has won a raft of new projects valued at SGD400m, including engineering solutions for offshore gas and wind farm developments, and upgrades for cruise ships – this is sharply higher than the SGD175m orderbook secured by SEMBCORP MARINE in 1H19. Industry-wide, we see more orderbook growth for both KEPPEL CORPORATION (SGX:BN4) and SEMBCORP MARINE, particularly for FPSO conversion projects. Such new orders will help drive the revenue for offshore and marine players for FY20 and beyond. For 2H19, SEMBCORP MARINE has guided for losses to be worse than that for 1H19, due to insufficient outstanding orders to be delivered. We expect KEPPEL CORPORATION to record relatively stable 2H19 earnings (vs 1H19), mainly anchored by its property division.

Offshore & Marine Sector Performance in 1H19

  • Weak offshore & marine earnings for 1H19. SEMBCORP MARINE recorded weak 1H19 financials, with a 1H19 net loss of SGD7m – due to low business volume. To help secure more orders, SEMBCORP MARINE took a SGD2bn 5-year subordinated loan facility from parent SEMBCORP INDUSTRIES (SGX:U96) in June, and also responded more actively to tenders and enquiries for production and gas value chain segments.
  • In 1H19, property accounted for 56% of KEPPEL CORPORATION’s 1H19 EBIT, offsetting the weakness for KEPPEL CORPORATION’s offshore and marine business.

Offshore & Marine Sector Top Picks

Plantation Sector

Plantation Sector outlook for 2H19

  • We recently upgraded the plantation sector to OVERWEIGHT. Our contrarian view is premised on the expectation that CPO prices are likely to rerate upwards in 4Q19 and continue rising in 1H20. Historically, CPO prices are the leading indicator for plantation companies’ P/Es. When CPO prices start moving, plantation companies’ P/Es will expand first, before earnings catch up and valuations return to normal. As such, we have lifted our target P/Es for the stocks under our coverage by 2-5x to trade at 1SD above their historical averages. See report:
  • We maintain our CPO price assumptions of MYR2.200/tonne for 2019 and MYR2,400 for 2020. However, the main premises for our upgrade are:
    • The trade war is still on, with import duties being levied on US soybeans;
    • CPO production slowdown in 2020, while inventories should normalise by 1Q20;
    • Demand should remain strong from China, due to the continuing African swine flu epidemic in the country;
    • The B30 biodiesel mandate in Indonesia will mop up any excess supply from the market in 2020;
    • Crude oil prices remain at high levels, causing a positive CPO-gasoil price gap;
    • Weather conditions remain normal.

Plantation Sector Performance in 1H19

  • In 1H19, we saw disappointing production output numbers in Indonesia, where companies we cover saw a 7.7% y-o-y drop in FFB output, bringing 1H19 output to a 3.4% decline. This is contrary to official Indonesian Palm Oil Association (GAPKI) numbers, which show 12%/16% y-o-y increases for 2Q19/1H19. We believe the difference could be due to weather variations in various geographical areas as well as potential inaccuracies from non-comprehensive official numbers.
  • CPO prices remained subdued for most of 1H19, weighed down by high inventory levels as well as uncertainties with regards to global economic conditions and trade war risks.
  • For planters with downstream operations, most companies saw stronger earnings, on lower-priced feedstock inventory. Those with biodiesel operations continued to benefit from higher domestic mandates in Indonesia, as well as the wider CPO-gasoil gap, which led to higher domestic and export sales volumes.

Plantation Sector Sector Top Picks

Real Estate Sector

Real Estate Sector outlook for 2H19

  • Volumes to remain resilient, Flattish price outlook for 2H19. Despite some recent optimism in new launches, we do not expect property prices to climb up steeply in 2H19 as the deteriorating macro-economic outlook and more choices from higher supply are expected to act as dampeners, offsetting the low interest rate environment. For 2H19 we expect the URA property index to be in the range of 0-1% and maintain our full year price growth expectation of 0-2% for 2019. Sales volumes for 2H19 is expected to exceed 2H18 volumes as there was a knee-jerk impact on transactions last year post the implementation of cooling measures. For the full year, we expect full-year sales volumes at 9,500 -10,500 units (YTD Aug: 5,628 units), slightly exceeding last year’s 9,300 units.

Real Estate Sector Performance in 1H19

  • Projects with right attributes continued to attract good demand. In 1H19, developers sold a total of 4,450 units, 5% higher than 1H18 – driven by a flurry of new launches which were mainly acquired via en bloc transactions in 2017-2018. Prices were relatively flattish with the URA property price index up 0.8% in 1H19. Both the transaction volumes and prices were in line with our expectations. In terms of sales, projects with right attributes (pricing, location near MRT and amenities) continued to attract strong buying demand while sales were relatively quieter at others – indicating buyers are more price-sensitive.
  • Key sellers in 1H19 include Treasure at Tampines, The Tre Ver, Affinity at Serangoon and Amber park. Take-up rates (at the launch weekend) at new launches were generally lower-ranged at 10- 30% in 1H19 , compared to 20-40% in 2017-2018. Buying demand was mainly driven by locals (~80%) as the stringent additional buyer’s stamp duty (ABSD) measures took a bite on foreign purchases.

Real Estate Sector Top Picks

  • Developer’s margins to stay thin. The challenging market conditions mentioned above are likely to compel developers to focus more on volumes and less on margins. As such, we expect margins to remain pressured, at around 5-15%, vs c.15-25% in the past. We prefer developers with well-diversified geographical exposure and high recurring income, along with volume-related plays (real estate agencies). We see APAC REALTY (SGX:CLN) as a key beneficiary of the pick-up in property volume.


REITs Sector outlook for 2H19

  • Economic conditions moderating, but investors’ yield appetite remains unabated. After a strong rally in REITs stocks in 1H19, we expect a flattish to slight outperformance for 2H19. The key premise of our view is based on global central banks’ continuous push to prolong the lower interest rate environment, with all major central banks (US Fed, ECB, and Bank of Japan) forecasted to lower rates and loosen monetary policies.
  • However, we note that weak macro-economic data on the back of the prolonged trade tensions – likely to impact DPU growth ahead – is partially offset by accretive inorganic acquisitions from REITs.
  • Overall while we maintain our OVERWEIGHT rating, we are selective on our REIT picks and prefer laggards with stock-specific catalysts.

REITs Performance in 1H19

  • Strong outperformance in REITs by 1H19 not a surprise and was driven by the following four factors in our view:
    • Falling interest rates and volatile macro-economic environment fuelling strong demand for yield instruments across global markets;
    • Tapering supply outlook, which has relieved some of the rental and occupancy pressures across REITs seen in the past years;
    • Lower interest costs from a prolonged lower interest rate environment;
    • DPU growth potential from inorganic acquisitions by taking advantage of low borrowing costs.
  • See S-REITs share price performance.

REITs Sector Top Picks

  • Prefer laggards and REITs with catalysts. We prefer the office and hospitality REITs followed by industrial and retail REITs. We also like US office REITs for its superior yields, long WALE and inbuilt rental escalations. In terms of valuations, S-REITs are at 1.2x P/BV with a dividend yield spread of 340 bps above 10-year bonds, both of which are at +1SD vs historical valuations.

Technology Sector

Technology Sector outlook for 2H19

  • Still awaiting a resolution to the trade war. Since US President Donald Trump initiated the possibility of a trade war against China and its other key deficit trading partners in Mar 2018, Singapore stocks, especially those in the manufacturing sector, have taken a significant hit. However, since the end of Jan 2019, there has been positive news on this front from both parties, as they met and held talks during 1Q19, with President Trump extending the 1 Mar trade deal truce deadline, citing positive progress in trade talks. Both parties have also expressed optimism and keenness to work towards a trade deal in front of the media recently, and scheduled talks for Oct 2019.
  • While both countries have also given measures of goodwill, we think that it is still hard to expect a positive conclusion from the upcoming talks. A delay in a trade agreement is highly likely, in our view.

Technology Sector Top Picks

  • South-East Asia a strong competitor for manufacturing. Low-cost labour in places like Myanmar, Cambodia and Laos, coupled with cost-effective manufacturers in Thailand, Vietnam, Indonesia and the Philippines, and higher-end producers in Singapore and Malaysia empowers South-East Asia to be a strong competitor to China for manufacturing. This is especially so, with the surge in labour costs in China and the tariffs from the trade dispute between the US and China. South-East Asian nations have committed to establish an ASEAN community by 2015 where goods, services, capital and labour can move freely between the member states. ANZ estimated that the South-East Asian nations could lift intra-regional trade to SGD1trn by 2025. Foreign direct investment into ASEAN from the major economies could surge to SGD106bn in 2025, having already eclipsed investment into China for the first time in 2013.
  • Winners of relocation – Venture, Fu Yu and Frencken. FU YU (SGX:F13) and VENTURE CORPORATION (SGX:V03) have sizeable manufacturing capabilities in Singapore, as well as in Malaysia. It is the same for FRENCKEN GROUP (SGX:E28), which also has strength in Europe. As a result, shifting production from their China factories to avoid tariffs would be much easier and faster, without the time needed to set up a new factory from scratch. In addition, companies will likely also benefit from new customers that want to shift their production out of China, and require production to be ramped up in a short period of time.
  • Remain NEUTRAL on the sector. We stick to the above stock picks for FY19F while awaiting a resolution to the trade war. We think that a trade agreement between the twp economic giants will likely not be struck any time soon, despite lasting for over a year already. Our Top Picks within the manufacturing sector include FU YU and FRENCKEN GROUP.

Telecommunications Sector

Telecommunications Sector outlook for 2H19

  • Incumbents continue to offer superior 4G networks. With mobile data plans already exhibiting considerable value and operators doubling down on promotions since the start of the year, it would be interesting to see how TPG Telecom (TPG) intends to differentiate itself when its service is fully-commercialised by year-end. TPG’s chairman John Teoh had earlier stated that “customers can look forward to many other innovations the company is planning to bring into the market”. The fourth mobile licensee has been offering free unlimited mobile data (capped at 2GB per day on 4G) as part of its trial service launched late last year. A survey conducted by OpenSignal in July ranked TPG’s 4G network as being the slowest among the four mobile network operators (MNO), at 21Mbps vs. SINGTEL (42.5Mbps), STARHUB (39.5Mbps) and M1 (36.1Mbps). The survey results reaffirm the superior quality of incumbent networks with the three MNOs.
  • New mobile virtual network operators (MVNOs) are flooding the market. RedOne and Grid Mobile (GM) were the latest to launch their mobile services in late June/ early July. This adds to the five existing MVNOs in the market and two digital brands from SINGTEL (SGX:Z74) and STARHUB (SGX:CC3). GM’s service leverages on SINGTEL’s network while STARHUB is the host network for RedOne. RedOne’s (a Malaysian MVNO) entry-level SIM-only plan of SGD8/mth (3GB data on 4G) is targeted at the sizeable population of Malaysians working in Singapore with shared data roaming quota.
  • Details on 5G deployment to be announced soon. We expect the Infocomm Media Development Authority (IMDA) to assign the mid band (3.5GHz) and mmwave spectrum (26-28GHz) by 1H20, marking the first of 5G spectrum to be allocated in the region. This should pave the way for commercial 5G deployments in 2H20, at the earliest. In the second public consultation on 5G mobile services and networks completed in 9 Jul, the IMDA received 63 individual submissions. The regulator intends to announce its final decision on the 5G policy framework by end-2019. It had proposed for the 5G spectrum to be assigned via a call for proposal/beauty contest.

Telecommunications Sector Performance in 1H19

  • Singtel disappointed on earnings. SINGTEL disappointed in terms of core earnings for the June quarter (1QFY20) while STARHUB’s results were in line. SINGTEL’s Singapore mobile revenue and STARHUB’s mobile revenue (MSR) fell 7-10% y-o-y and 6-8% y-o-y in 2Q19 and 1H19 respectively, as ARPUs slipped further due to higher take-up of SIM-only plans and structural roaming revenue pressure. Cost initiatives have largely sustained the telcos’ EBITDA which rose 2% y-o-y for SINGTEL (SG consumer EBITDA) and -0.4% for STARHUB.

Telecommunications Sector Top Pick

  • SingTel remains our preferred pick due to its earnings diversity, and dividend certainty (committed DPS payouts for FY19/20) which augur well in a low growth/risk-off environment. Key upside/downside risks are weaker/stronger than expected competition.

Transportation Sector

Transportation Sector outlook for 2H19

  • Taxi business to remain a key drag on earnings for ComfortDelGro. Based on data provided by the Land Transport Authority (LTA), COMFORTDELGRO (SGX:C52)’s taxi fleet has declined by 9.4% during the first seven months of 2019 to 11,200. This, along with the loss of drivers to ride-hailing players, have pushed the idle rate for the company’s Singapore taxi fleet to c.4% from 2.5%. Management guided that the replacement of older Hyundai Sonata taxis with hybrid cars, which has helped in offsetting some weakness from declining fleet size, is also being delayed due to a supply shortage. We expect competitive pressure in the taxi business to persist, given the increase in private car rental fleets in Singapore. COMFORTDELGRO could forgo some EBIT margin in its taxi business (17.8% EBIT margin in 2Q19) by offering higher incentives to retain drivers. It also expects to end the year with a smaller fleet.
  • Headwinds for ComfortDelGro from Singapore’s rail business. Singapore’s Public Transport Council noted that fares could increase by up to 7% as a part of the 2019 fare review exercise (news). While this may help improve the profitability of rail operations, we believe that the positive impact could be partially negated by expected cost increases. COMFORTDELGRO expects cost pressures in the coming quarters due to higher maintenance costs related to mid-life refurbishments to be undertaken at the North-East Line.
  • Aviation may have a tough 2H19. While there has been no visible weakness in passenger traffic for SIA’s mainline business, we believe weakening economic growth and slowing discretionary spending could have a negative impact on airlines’ passenger yields. Slowing global trade flows have already started showing up in airfreight demand for airlines. The only positive for airlines is a subdued current and forward oil price environment.

Transportation Sector Performance in 1H19

  • Lower-than-estimated earnings for COMFORTDELGRO. COMFORTDELGRO reported 2Q19 PATMI of SGD75.pm (+1.2% y-o-y). 1H19 PATMI of SGD146.3m accounted for 45% of our and Street 2019 estimates. Excluding the negative FX impact, new acquisitions accounted for 80% of the growth in revenue. Its contribution to the EBIT growth was SGD8.4m. EBIT contribution from existing businesses was a negative SGD0.8m.

Transportation Sector Top Pick

  • Like ComfortDelGro, except for its relatively expensive valuation. COMFORTDELGRO’s earnings will be driven by its public transport business in Singapore and contributions from its recently acquired businesses overseas. However, rising operating costs and a weak taxi business remain a key drag in the near term.
  • While we like the defensive nature of COMFORTDELGRO’s earnings and strong FCF generation, the stock looks fairly priced – it is trading at 16.9x 2019F P/E (5-year average: 15x).

Singapore Equities Valuation Table

  • See attached 30-page PDF report for complete analysis.
  • Also in the attached PDF report:
    • RHB's Top BUY ideas sorted by market cap; and
    • Stocks that are yielding more than STI sorted by rating and 2FY yield.

Shekhar Jaiswal RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-10-02
SGX Stock Analyst Report BUY MAINTAIN BUY 1.900 SAME 1.900