Singapore Market Focus - DBS Research 2019-11-22: To Deal Or Not To Deal?

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SHENG SIONG GROUP LTD (SGX:OV8) KOUFU GROUP LIMITED (SGX:VL6) SINGAPORE TECH ENGINEERING LTD (SGX:S63) CDL HOSPITALITY TRUSTS (SGX:J85) MANULIFE US REIT (SGX:BTOU)

Singapore Market Focus - To Deal Or Not To Deal?

• 3Q19 results season - Negative earnings revisions of -1.5% for FY19F and -1.7% for FY20F.
• STI pullback support at 3175-3145, upside to 3320 by year-end if Phase 1 deal can be inked this year.
• Barbell strategy for stock picks.

A less disappointing quarter

• Ratio of earnings surprise vs disappointment improved significantly to 1:1.2 compared to 1:4 in 2Q.
• Banking and Consumer Goods surprised
  • Banking: Growth in non-interest income more than offset decline in net interest margin (UOB (SGX:U11))
  • Consumer Goods: Outperformance mainly due to a recovery in CPO prices and volume (FIRST RESOURCES (SGX:EB5), BUMITAMA AGRI (SGX:P8Z)), and strong results from tropical oils business (WILMAR INTERNATIONAL (SGX:F34)).
• Consumer services and O&G disappointed
  • Consumer Services: Fall in taxi business earnings (COMFORTDELGRO (SGX:C52)) and weak cargo and Scoot numbers (SINGAPORE AIRLINES (SGX:C6L))
  • O&G: Weak order wins, higher costs (SEMBCORP MARINE (SGX:S51), SEMBCORP INDUSTRIES (SGX:U96))
• Technology mixed: Uptick in the semiconductor cycle lifted earnings (UMS (SGX:558), FRENCKEN GROUP (SGX:E28)), but falling margins due to competition and pricing pressure affected VENTURE CORPORATION (SGX:V03).

Earnings in ‘technical recession’; Further cut in earnings; REITs remain resilient

• Stocks under our coverage saw negative earnings revisions of -1.5% for FY19F and -1.7% for FY20F. With revisions of -2.2% for FY19F and -1.3% for FY20F in 2Q, the earnings revision trend has slipped into a ‘technical recession’. Going forward, we expect the earnings revision trend to be either less negative or turn slightly positive if a US-China ‘Phase 1’ deal can be signed.
• Earnings cut for consumer services, O&G, technology and real estate.
  • Consumer Services: Muted taxi recovery and higher operating costs negate fare hikes (COMFORTDELGRO).
  • Oil & Gas: Earnings cuts of 11% for FY19 and 8% for FY20 due to sluggish contract wins (SEMBCORP MARINE, SEMBCORP INDUSTRIES).
  • Real Estate: Reduced earnings by 10% for FY19 and 2% for FY20 due to weaker sales projections in the secondary market (APAC REALTY (SGX:CLN)), and lower development profits (FRASERS PROPERTY (SGX:TQ5)).
  • Technology: Reduced FY19 earnings by 4% and FY20 by 3% due to a more cautious environment as a result of the trade war (VENTURE CORPORATION, SILVERLAKE AXIS (SGX:5CP))
  • Telecommunications: Operating metrics remain weak (SINGTEL (SGX:Z74), STARHUB (SGX:CC3))
• Banking mixed: Raise FY19F earnings by 2%, cut FY20F earnings by 2% in anticipation of NIM pressure from lower interest rates and competitive pricing pressure (UOB, OCBC (SGX:O39))
• REITs positive: Maintained FY19 earnings and raised FY20 earnings by 3% on the back of additional acquisitions (MAPLETREE LOGISTICS TRUST (SGX:M44U), MAPLETREE INDUSTRIAL TRUST (SGX:ME8U), KEPPEL DC REIT (SGX:AJBU)), and resilient occupancy rates and positive rental reversions (MANULIFE US REIT (SGX:BTOU)).

STI pullback support at 3175-3145.

• The current November pullback from 3285 high is within STI’s seasonal trend behaviour. After much positive anticipation, the correction is triggered by concerns that a US-China Phase 1 deal may miss the 15 December US tariff deadline. At 3200, STI trades at 12.3x (-0.75SD) FY20F PE. Technical support is at 3175 and 3145, we think the 3175 level should hold.
• While the outcome remains unclear, we believe that if a Phase 1 deal is inked this year, there should be upside to 3320 or slightly above by year-end.

Barbell strategy.

• With Singapore’s 2020 GDP expected to improve modestly to 1.4% from 0.6% this year and the US-China trade war showing signs of improvement, we adopt a barbell strategy in our stock picks.
• Early recovery sector outperformers such as banks (UOB), property developers (CITY DEVELOPMENTS (SGX:C09), UOL GROUP (SGX:U14)) and semiconductor stocks (UMS, AEM HOLDINGS (SGX:AWX), FRENCKEN GROUP) have performed well and selected industrial stocks (SIA ENGINEERING (SGX:S59), YANGZIJIANG SHIPBUILDDING (SGX:BS6)) have also picked up on improving sentiment on a partial US-China trade deal.
• Our early-mid cyclical recovery picks are UOB, CITY DEVELOPMENTS, SIA ENGINEERING and YANGZIJIANG SHIPBUILDDING.
• For defensive/yield stocks, we pick SHENG SIONG GROUP (SGX:OV8), KOUFU (SGX:VL6), ST ENGINEERING (SGX:S63), CDL HOSPITALITY TRUSTS (SGX:J85), FAR EAST HOSPITALITY TRUST (SGX:Q5T) and MANULIFE US REIT (SGX:BTOU).

Kee Yan YEO CMT DBS Group Research | Janice CHUA DBS Research | https://www.dbsvickers.com/ 2019-11-22

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