Singapore Stock Strategy - CGS-CIMB Research 2020-11-17: First Earnings Upgrade Offers Hope; Mean Reversion Ahead

Singapore Stock Strategy - CGS-CIMB Research | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05)

Singapore Stock Strategy - First Earnings Upgrade Offers Hope; Mean Reversion Ahead

  • We saw our first market earnings upgrade in 3Q20, earlier than expected and important for the sustenance of any rally. Our new FSSTI target is 3,068 pts for CY2021.
  • We switch from COVID-19 pandemic beneficiaries to vaccine/recovery beneficiaries and Overweight banks, transport and capital goods sectors.

First earnings upgrade, earlier than expected; sustainable till 1H21F?

  • SG stocks' 3Q20 results offer hope that sell-side estimates have been too conservative. After repeated massive cuts in 1Q20-2Q20 when negative surprises overwhelmed positive ones, it was refreshing to see a switch of ratio to more beats than misses (20:11).
  • On a FSSTI market-cap weighted basis, there were a larger proportion of positive surprises led by banks, commodities, gaming and transport. Retail REITS was the sector that fell short.

Banks taking the lead

  • In 3Q20, analysts lifted CY20F and CY21F earnings by 6.8-7.5% q-o-q. Earnings beats across sectors prompted our first EPS upgrade, slightly earlier than our forecast that was still expecting a trickle of cuts until 4Q20F, following the pattern of the Global Financial Crisis when EPS cuts which started in 2Q08 took a full year to complete in 2Q09.
  • The biggest earnings upgrades were led by all three banks on lower credit costs in FY21F across the banks as asset quality appeared to be under control. The front loading of credit costs in FY20F paves the way for a significant earnings recovery in FY21F. In addition, pace of NIM compression should gradually taper as base rates bottom. Commodities’ earnings upgrades were due to our adjusted expectations on higher crush margin for oil seeds and grains.
  • On a ‘less bad’ CY20F, our CY21F expectations inched up to 27.7% (previously 26.9%). Although the quantum is small, mainly due to a stronger base for FY20F, we believe this is important for the sustenance of any rally and to keep valuations sane.

3Q20’s brighter picture vs. 2Q20’s rout

Mean reversion is back

Fully valued on CY21F earnings but still sane

  • FSSTI has rallied 6% over the past week, and appears to be fairly valued if we peg to 2021F earnings as current level of 2,779 is equivalent to 14.1x CY21F P/E, close to its historical mean, but this does not matter as the year is almost up. The market is looking forward to 2022 and at 12.6x CY22F, valuations are still reasonable.
  • On book basis, STI is trading at -2 s.d. of mean at 0.9x, which we deem to be undervalued as asset values are unlikely to blow up with impairments ahead. Market ROE looks set to be 6.8% in CY21F, in line with earnings growth.

Roll forward our FSSTI to CY22F; Singapore is compelling

LIM Siew Khee CGS-CIMB Research | Singapore Research Team CGS-CIMB Research | https://www.cgs-cimb.com 2020-11-17
SGX Stock Analyst Report ADD MAINTAIN ADD 25.510 SAME 25.510