Singapore 3Q19 Results Trend - CGS-CIMB Research 2019-11-19: Healthier Tone


Singapore 3Q19 Results Trend - Healthier Tone

3Q19 Results Trend - A good quarter

  • The positive-negative surprise ratio improved q-o-q with outperformers and underperformers evenly split as earnings-surprise ratio stood at 15:17 (2Q19: 13:22). Overall earnings were up by c.0.9-1.5% in FY19F-20F.
  • Banks and Tech & Manufacturing (mainly semiconductors) surprised with the most beats while Transportation and Capital Goods sectors disappointed but share prices were supported by M&A hopes.

The 3Q19 outperformers

Financial sector was the heavy weightlifter (NEUTRAL)

  • All three banks outperformed our expectations and led the earnings upgrade (+4% for FY19-20F) in Singapore. Lower NIMs were widely expected but they beat on stronger-than-expected wealth fees and sustained trading income. Precautionary provisions for Hong Kong were the banks’ Achilles heels; stress tests on real estate values have been benign and cashflows broadly intact. Non-interest income (II) drivers come into focus as key growth engines.
  • As expected, DBS GROUP (SGX:D05) was our pick to ride on the 3Q19 results as it surpassed expectations with a +2% q-o-q in earnings profit instead of q-o-q decline like peers thanks to very strong trading income.
  • UNITED OVERSEAS BANK LTD (UOB, SGX:U11) beat on higher investment gains and credit card income.
  • OVERSEA-CHINESE BANKING CORP (OCBC, SGX:O39) was in line, saddled with higher loss provisions, due to slower regional economic growth and O&M NPLs.
  • SINGAPORE EXCHANGE LIMITED (SGX, SGX:S68) thrived on increased market volatility, surprising with strong performance across all its business segments (fixed income, currencies and commodities, equities and data, connectivity and indices).
  • Although US Fed-rate cut momentum will dissipate, we see few compelling catalysts for us to turn Overweight on the sector.
    • Firstly, DBS is still trading at 1.3x CY20F P/BV (+0.5 s.d. of 15-year mean) with escalating uncertainty from HK. We would add DBS if it trades closer to its xx average of 1.2x forward P/BV.
    • UOB is cheaper at 1.1x CY20F P/BV but its FY20F NIM compression magnitude (5-10bp) is above peers expectations of -5bp to -7bp. This may not excite the market.
    • Meanwhile, OCBC’s patchy credit cost track record does not offer much confidence.
  • The positive for the sector is the strong capital structure (11-12% ROE in FY19F among the banks) with potentially higher DPS in FY20/21F. To play the dividend angle, we like DBS the most, followed by OCBC, SGX and UOB.

Semiconductors likely to do well in 4Q19F (NEUTRAL)

  • Tech/manufacturing sector, especially the smaller cap names (FRENCKEN GROUP (SGX:E28), UMS HOLDINGS (SGX:558), and VALUETRONICS HOLDINGS (SGX:BN2)), exceeded expectations in 3Q19 on better cost control. AEM HOLDINGS (SGX:AWX) was boosted by strong demand from key customer (Intel) and improvements in other business segments. We expect the strong showing to continue for the semiconductors (AEM, FRENCKEN GROUP and UMS) in 4Q19F into FY20F.
  • 5G which would have been a key driver for the semiconductor industry in 2019 is also making a comeback as the industry pushes forward with 5G plans. Taiwan Semiconductor Manufacturing Co (TSMC, 2330 TT) plans to spend as much as US$15bn on technology and capacity in 2019 - roughly 50% higher than originally envisioned spurred by its vision that the emergence of 5G, the foundation of future technologies from automated factories and smart homes to blazing-fast consumer electronics, will help underpin its business in the coming years. TSMC commented that the company was more optimistic than six months ago and that the 5G momentum was larger than the company expected.
  • World Semiconductor Trade Statistics (WSTS) expects global semiconductor sales in 2019 to decline 13.3% y-o-y to US$406.6bn. All geographical regions are expected to see revenue decline. Worldwide semiconductor revenue was up 13.7% y-o-y in 2018 to US$468.8bn, an all-time high. For 2020, all regions are forecasted to grow with the overall market up 4.8% y-o-y.
  • We think the trade war is likely to continue into 2020. Currently, there is an effort from both sides to work towards a phase 1 deal as a ceasefire in the trade war. If successful, this could set the stage for an eventual resolution of the trade war. Meanwhile, companies in the electronic manufacturing space continue to mention that the trade war is affecting their customers’ plans for new product launches.
  • The silver lining is that these companies could benefit from migration of manufacturing out of China. Some customers have also decided to manufacture their products outside China due to the trade tariffs.
  • Among the tech manufacturing stocks under our coverage, AEM offers the best visibility in the near term. AEM has guided for a full-year revenue of S$305m- 315m (3Q19: S$84m, 9M19: S$235m). As semiconductor chips become more complex and their use in mission-critical applications (such as 5G, electric vehicles, Industry 4.0, etc.) increases, AEM’s products are well-placed to tap into this demand. Although Intel remains the key revenue contributor, there has been progress in AEM’s other businesses too. We think AEM can achieve strong profit in FY19F and FY20F due to the following reasons:-
    • demand for existing products remain strong,
    • a greater need for system level testing (for which AEM already has an established product), and
    • the launch of a hybrid Test Handler (TH) in 2020 which we think could command the same price range as existing THs.
  • AEM has also leased additional floor space to cope with the stronger demand. For 4Q19, we are expecting a net profit of S$8.8m (+100% y-o-y, -36% q-o-q). Our 4Q19 earnings expectations could be conservative still as we have not given AEM the benefit of margin expansion in our forecasts.
  • The other name that we think could do better q-o-q in 4Q19F is UMS given that the recovery in the semiconductor industry is underway and UMS has successfully renewed some contracts with customers. We also note that the oversupply situation in the memory market is easing. For 4Q9, we are expecting net profit of S$10.4m (+14% q-o-q, +56% y-o-y). To justify further re-rating, UMS will have to repeat its FY17 profit performance. We will have better earning clarity going into FY20. For now, we think the earnings momentum will continue into 1Q20 at least. Looking back at the 2017 earnings peak, UMS’s share price could re-rate to S$0.96 to S$1.41 if the coming semiconductor upcycle is as strong as that experienced in FY17.
  • We are Neutral on the overall tech/ manufacturing sector because the outlook for sub-segments are mixed among the semiconductors above (positive), contract manufacturers such as VENTURE CORPORATION (SGX:V03) and VALUETRONICS (uncertain) and plastics injection mould makers such as SUNNINGDALE TECH (SGX:BHQ) (cautious).

The 3Q19 underperformers

Transport has weak near-term outlook (downgrade to NEUTRAL)

  • All three transportation names disappointed in 3Q19 and we think pressure is likely to persist in the next six months. Although the main carrier performed well, SINGAPORE AIRLINES (SIA, SGX:C6L) was impacted by associates’ losses and weaker cargo yields. Both SIA and SATS (SGX:S58) retain their bearish views on the cargo markets. SIA does not see signs of an upturn, and excess capacity that had been in place since the airfreight boom in 2017-18 is still in place and is now placing pressure on cargo yields. In addition to trade tension, SATS’s catering and gateway businesses could be affected by the escalating social unrest in HK reducing the number of flights and cargo volume tagged to passenger carriers.
  • In the recent quarter, SATS missed on higher tax rate and interest expense. Revenue improved y-o-y due to consolidation of lower-margin businesses (GTR and Country Foods). However, in the next two quarters, we believe that Indian associates may remain weaker y-o-y as time is required to backfill JetAirways gap. There could also be start-up costs in China.
  • After three consecutive quarters of earnings cuts, we recently downgraded COMFORTDELGRO (SGX:C52) from Add to HOLD as the company is pressed on the private (unabated competition in taxi and reduced taxi fleet size) and public (DTL licence charge payment) fronts. We think margin pressure cap previous hopes of acquisition led earnings growth.

Capital Goods hopes on M&As (OVERWEIGHT)

  • Capital Goods mostly came in below expectations (ST ENGINEERING (SGX:S63), SEMBCORP MARINE (SGX:S51), KEPPEL CORPORATION (SGX:BN4), YANGZIJIANG SHIPBUILDING (SGX:BS6) but share prices were not affected.
  • We believe market understands ST ENGINEERING’s miss was due to a one-off well-flagged arbitration claim provision in marine. The 15% y-o-y earnings growth for FY19F seemed in the bag on MRAS consolidation. In addition, 3Q19 contract momentum has been impressive for aerospace at S$1bn bringing YTD wins to S$3.1bn (2018: S$2.1bn). Electronics contract wins also levelled up from c.S$560m/quarter in 2016-18 to c.S$780m/quarter in 2019, with more smart-city related projects. Notably, in 3Q19, it secured S$833m of new contracts with a bulky c.S$300m smart-city related next-generation emergency responses management system for a public safety agency out of Singapore. YTD wins for electronics totalled S$2.35bn (FY18: S$2.2bn).
  • KEPPEL CORPORATION’s 3Q19 earnings disappointment (lack of divestment gains in property) was quickly glossed over by the partial offer by Temasek to acquire an additional 30.55% of shares at S$7.35/share, with the potential to bring its stake in KEPPEL CORPORATION up to 51% if it goes through. As such, even with a wider-than-expected gross loss in SEMBCORP MARINE’s 3Q19 recently, share price remained firm as the outlook for the yard is highly dependent on how Temase can extract better returns in the Temasek-linked group of companies (KEPPEL CORPORATION, SEMBCORP MARINE and SEMBCORP INDUSTRIES (SGX:U96)).
  • YANGZIJIANG SHIPBUILDING earnings miss was due to lower reversal of provision in contract losses in shipbuilding. However, it is trading at 5-year trough of c.0.7x CY19F P/BV, a huge discount over Singapore yards (c.1.2x P/BV). YANGZIJIANG SHIPBUILDING is one of our top picks in the sector because of its cheap valuations and the impending return of its chairman to duty in the near-term.

Sector preference

  • We make some changes to our overall sector preference.
  • Upgrade Commodities from Neutral to Overweight on the back of lower stockpile (lower output, higher exports and consumption) and higher CPO prices in the near term. We think FIRST RESOURCES (SGX:EB5) FY20F earnings likely to recover (+54% y-o-y) on the back of higher CPO prices and FFB output. WILMAR INTERNATIONAL (SGX:F34) has a clear near-term catalyst, i.e. successful listing of Yihai Kerry Arawana Holdings (YKA) in China by 1QFY20. WILMAR’s outlook for 4Q is also bullish on the back of higher consumer products sales and higher CPO prices.
  • Downgrade Transport from Neutral to Underweight on the back of weaker near-term outlook in cargo as well as margin pressure for COMFORTDELGRO as mentioned above.
  • Downgrade REITS from Overweight to Neutral. SREITs have done well, generating a total return of 23.5% YTD. The sector is now trading at an average 1.13x P/BV and 4.8% dividend yield. The latter translates to a 300bp spread over the Singapore risk free rate of 1.8%, below the long term average of 342bp. With prospects of further rate cuts diminishing and upside catalysts reflected in the compressed yield spread, we think the sector could likely perform in line with the broader market going forward.
  • A key driver for the sector has been potential accretive acquisitions. YTD, a total of S$6.2n worth of equity have been raised by 17 SREITs to fund new purchases, which have been completed or are pending completion. With most of the anticipated deals already done, we think forward deal flow momentum could slow.
  • On the organic front, the latest round of 3QCY19 results indicated that rental growth outlook remains tepid amid a cloudy macro environment. Hence we believe, organic growth would continue to be measured, with retail and office still experiencing positive rental reversion and industrial segment still seeing a slight negative bias.
  • In terms of sub-sectors, we retain our preference for the retail, office, industrial and hospitality sectors, in this order of preference. Our top SREITs picks are FRASERS CENTREPOINT TRUST and MANULIFE US REIT (SGX:BTOU).

Valuation and Reccomendtion

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2019-11-19
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