DBS GROUP HOLDINGS LTD (SGX:D05)
Equity Strategy 2020 - Euphoria Vs. Fears; Accept Some Risks
Economic stabilization; low rates ahead and economic stimulus
Emerging green shoots?
- Economic activity slowed in 2019 as a result of the impact from protracted US/China trade tensions. The International Monetary Fund (IMF) is projecting global growth of 3.0% in 2019, down 0.2% from its projection in Jul 2019. As trade issues are complex and deep-seated, this situation is unlikely to be resolved soon and the likelihood is for a limited deal first.
- The US Federal Reserve cut rates three times since Jul 2019, and we expect a low interest rate environment to be favorable for corporates in the coming quarters, especially for highly geared companies.
- Economic stabilization seems possible in 2020 as we expect cut in taxes and increased economic stimulus coupled with low interest rates to result in increased economic activity.
Recovery expected to start from 2H 2020
Trade tensions have hurt the region too…
- The global slowdown has also affected the rest of the region, with economic growth projected to slow in 2019 before staging a recovery in 2020-2021.
- Besides the decline in purchasing manager indices (PMI) across several key economies, new orders have also come off. For example, China’s new export orders PMI have stayed persistently below 50 in 2019 (low of 45 in Feb 2019).
- While the business environment is challenging, we believe that Asia is able to withstand this short-to-medium term uncertainty and companies are likely to watch costs to ride this out.
- Infrastructure spending and domestically-focused investments are likely to be rolled out.
Valuations: Not too hot, not too cold; just right…
Stay invested; selective buying
- For the near term, market focus is likely to remain on trade frictions; with low expectations of an early resolution. Corporate earnings have been revised down. We expect sentiment to toggle between euphoria and fear. In this environment, we prefer selective buying into defensives and certain growth stocks.
- The market is counting on policy makers to stimulate global growth, and that should allow for selective risk exposure. Several mega themes are likely to continue to be in play and this includes climate change and sustainability, cloud computing, data storage and blockchain, digital and mobile payments, gaming and online sports, and Biotech.
- Equity valuations are currently not too high, nor too cheap. Most indices are trading close to 10-yr historical averages. (Click on view full report button below to see PDF report with more data, charts)
Singapore: steady as she goes…
- Investment Strategy:
- Stay invested; equities will continue to be favoured in low interest rate environment.
- Singapore’s blue chips offer decent dividend yields.
- In the core sectors, which are financials, property and REITs, gains so far in 2019 were good, ranging from 9-17%. Based on this strong outperformance, it is unlikely that the strong gains will sustain into 2020, especially since earnings growth is projected at single-digit in 2020. However, we believe that quality companies are well-positioned to ride out any potential short-term uncertainty, as most have healthy balance sheets.
- Dividend payouts are fairly predictable and consistent, especially for the STI component stocks. CAPITALAND (SGX:C31), DBS GROUP (SGX:D05), SINGTEL (SGX:Z74), SINGAPORE EXCHANGE (SGX:S68), ST ENGINEERING (SGX:S63) and SATS (SGX:S58) are just some companies that have paid out progressively higher dividends per year in the past.
Singapore: Earnings growth to pick up in 2020
- The slowing global economic outlook has dampened the outlook for corporate earnings in 2019, which led to the dismal growth projections in 2019, as weakness in progressively softer economic numbers led to further downwards revisions in earnings growth throughout the first three quarters of 2019. As earnings have already been cut in the past few quarters, we believe that current estimates have taken into account softer revenues and profit estimates.
- Overall, earnings growth prospects for 2020 are starting to look better as the recent 3 interest rates cuts should help to lower operating expenses and costs. While current expectations are for a tough business operating environment and muted earnings growth in 1H 2020, any turnaround is likely to be a pleasant surprise especially as companies have been managing costs and revenue picks up.
Singapore Banks: Neutral for now; buy on price pull-backs
Healthy balance sheet to ride out medium term volatility
- Despite the economic slowdown, the three local banks put in a creditable set of 9M19 performance. DBS saw a 15% rise in net profits, while OCBC reported an 2% increase and UOB posted an 8% rise. Strong improvement was seen at the Net Interest Income level (y-o-y gains of 7-9%), while Non-interest Income saw gains of 8- 17%.
- Going forward, there are market concerns of slowing Net Interest Margin (NIM), especially with expectations of lower interest rates in 2020. With strong balance sheets and healthy ratios, this should position the local banks to ride out any near to medium term volatility.
- Earnings growth is expected to be near low end of single digit in FY20, but should revert back to normal of mid-single digit in FY21.
- Dividend payouts are likely to hold in 2019/20, with yields of 3.9% to 4.7%. (See DBS Dividend History; OCBC Bank Dividend History; UOB Dividend History.)
STI: Bull, Bear or Bland?
Scenario analysis
- Based on historical trends, in the last 20 years, Singapore equities generally ended 1Q on a positive note. Based on the last 20 years (2000- 2019), the average gain was 0.25% in January, -0.45% in February and +1.06% in March. However, based on more recent 10 years, the gains were 0.90%, 0.39% and 2.02%, respectively.
Base, bull and bear
- In our base case, based on 4% earnings growth in FY20 and 10-year historical average PER of 13.4x, the STI should trade at around 3435, a potential upside of 7% from current levels.
- Assuming the bear case scenario, with PER of 12.5x (-1SD from average), the STI should trade at 3206,
- For the bull case, at 14.3x (+1SD from average), the STI is estimated at 3,664.
- See attached PDF report for more data, charts.
- (See also Straits Times Index STI Constituents Target Prices & Stock Ratings)
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Carmen Lee
OCBC Investment Research
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https://www.iocbc.com/
2019-11-25
SGX Stock
Analyst Report
27.500
SAME
27.500
