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
- The positive-to-negative-earnings surprise ratio was 20:11; and 21 in-line. Previous COVID-19 beneficiaries continued their strong runs, beating forecasts (again),
- Commodities: Japfa (SGX:UD2) (Higher Indo poultry and dairy EBIT), Wilmar (SGX:F34) (strong growth in all segments), First Resources (SGX:EB5) (higher CPO prices).
- First Resources - CGS-CIMB Research 2020-11-16: Higher CPO Price Expected To Lift 4Q20F.
- Japfa - CGS-CIMB Research 2020-10-30: Indonesia Poultry & Dairy Beats Expectations.
- Wilmar International - CGS-CIMB Research 2020-10-30: Record 3Q Earnings & Special Dividend.
- Wilmar International - CGS-CIMB Research 2020-11-03: 3 Things To Look Forward To Post YKA Listing.
- Consumer staples: Sheng Siong (SGX:OV8) (higher SSSG);
- Glovemakers: Riverstone (SGX:AP4), UG Healthcare (SGX:8K7) (higher ASPs).
- Commodities: Japfa (SGX:UD2) (Higher Indo poultry and dairy EBIT), Wilmar (SGX:F34) (strong growth in all segments), First Resources (SGX:EB5) (higher CPO prices).
- Despite falling NIMs, the three local banks outperformed; DBS (SGX:D05) (higher treasury income), OCBC (SGX:O39) and UOB (SGX:U11) (lower credit costs), while iFAST (SGX:AIY) saw higher retail trading and strong inflows into unit trusts (before a CPF-IS regulation change).
- DBS - CGS-CIMB Research 2020-11-07: Provisions Taken Up Front; Upgrade To ADD.
- OCBC - CGS-CIMB Research 2020-11-07: Capital Build-Up; Upgrade To ADD.
- UOB - CGS-CIMB Research 2020-11-04: The Worst Could Be Over; Upgrade To ADD.
- Singapore Banks - CGS-CIMB Research 2020-11-06: Focusing Less On BV Risks, More On ROE.
- iFAST Corporation - CGS-CIMB Research 2020-10-23: Beneficiary Of The Work-From-Home Norm.
- Slower-than-expected resumption of travel has impacted
- airlines: Singapore Airlines (SGX:C6L)
- aerospace-support industries: SIA Engineering (SGX:S59) and SATS (SGX:S58)
- SingPost (SGX:S08) (freight capacity constraints and margin pressures on international services)
- and added to the woes of retail REITs/property companies. SPH REIT (SGX:SK6U), CapitaLand Mall Trust (SGX:C38U), CDL Hospitality Trusts (SGX:J85), Mapletree North Asia Commercial Trust (SGX:RW0U), Lippo Malls Indonesia Retail Trust (SGX:D5IU), Frasers Centrepoint Trust (SGX:J69U), Frasers Property (SGX:TQ5) formed the bulk of underperforming REITs.
- CapitaLand Mall Trust - CGS-CIMB Research 2020-10-22: Welcoming The Merged Entity.
- CDL Hospitality Trusts - CGS-CIMB Research 2020-10-21: Divesting Novotel Brisbane.
- Frasers Centrepoint Trust - CGS-CIMB Research 2020-11-03: Warding Off COVID-19 Impact.
- Frasers Property Limited - CGS-CIMB Research 2020-11-11: Dragged By One-Offs.
- Lippo Malls Indonesia Retail Trust - CGS-CIMB Research 2020-11-03: Challenging Quarter.
- Mapletree North Asia Commercial Trust - CGS-CIMB Research 2020-10-30: Not Entirely Out Of The Woods Yet.
- SPH REIT - CGS-CIMB Research 2020-10-07: Not Out Of The Woods Yet.
- Keppel REIT (SGX:K71U) was the sole REIT outperformer in 3Q20, thanks to positive rental reversions.
- In addition lower property income, SPH (SGX:T39) continued to face advertising headwinds in its media segment.
- Boustead Singapore (SGX:F9D) more than made up for the drop in property revenue (Boustead Project (SGX:AVM)), with strong growth in the energy engineering and geospatial segments.
- Travel curbs notwithstanding, Genting Singapore (SGX:G13)’s gaming revenue unexpectedly picked up to close to pre-lockdown 1Q20 levels (S$212.9m vs. 1Q20: S$267.9m), lifting 3Q20 EBITDA.
- Demand for tech products continued to stay high, due to the prevalence of remote work, manufacturers: Valuetronics (SGX:BN2) (better sales mix, margins), Sunningdale Tech (SGX:BHQ) (increased demand), Fu Yu (SGX:F13) (better product mix, cost reductions), UMS (SGX:558) (productivity gains, cost reductions) outperformed, while Silverlake Axis (SGX:5CP) experienced a weaker topline due to a cybersecurity issue which impacted service.
- AEM Holdings - CGS-CIMB Research 2020-11-04: On Track For Record FY20F Net Profit.
- Frencken Group - CGS-CIMB Research 2020-11-12: Managing Well Despite COVID-19.
- Fu Yu Corp - CGS-CIMB Research 2020-11-12: Growth Returns.
- Sunningdale Tech - CGS-CIMB Research 2020-11-09: Privatisation Offer Overshadows Results.
- UMS - CGS-CIMB Research 2020-11-13: Diversification Efforts Intensify.
- Silverlake Axis - CGS-CIMB Research 2020-11-13: Stay Optimistic Beyond The 1Q Blip.
- SingTel (SGX:Z74) faced falling profits (in all markets, except India), on the back of Mobile competition and Enterprise EBITDA erosion, StarHub (SGX:CC3) had similar woes, but beat expectations on lower operating expenses.
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
- We roll forward our FSSTI target to 3,068 points for end-CY21, now based on 14.2x CY22 P/E (historical mean).
- If we value FSSTI on book basis, 1x CY P/BV would bring us to 2,878, still offering a slight upside from where we are today.
- See PDF report attached below for detailed analysis.
- Continue to read: Singapore Stock Picks - CGS-CIMB Research 2020-11-17: Go With The Flow, Don’t Fight The Market.
LIM Siew Khee
CGS-CIMB Research
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Singapore Research Team
CGS-CIMB Research
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https://www.cgs-cimb.com
2020-11-17
SGX Stock
Analyst Report
25.510
SAME
25.510
