Singapore Market Strategy - Reporting season scorecard: More earnings cuts

Following a 660 bp outperformance since June 2015, we believe MSCI Singapore’s weakness in the past week was driven mainly by lacklustre 2Q15 corporate earnings, compounded partially by macroeconomic concerns with muted employment data.

With 66% of MSCI Singapore reporting so far, consensus 2015 EPS for MSCI Singapore were cut by 0.6% in July 2015, following an 8.1% reduction since January 2014. Stocks that have seen the most negative revisions to 2016E EPS are GLP (-4.1%), SMM (-3.4%), HPHT (-3.4%), SGX (-2.9%) and Keppel (-2.2%). Stocks that have seen earnings raised so far are SIA (+1.1%), CMT (+0.9%), SPH (+0.5%) and OCBC (+0.1%).

We expect more earnings cuts for companies yet to report their 2Q15 results. In particular, earnings for Sembcorp Industries (low Singapore power spreads), Noble (fall in commodity prices) and STE (no turnaround in aerospace) are likely to be weak.

With a lack of significant drivers, we expect upside to MSCI Singapore to be limited in the near term. However, we expect valuation support from attractive P/B and a dividend yield of 3.6%. Our top picks are DBS, SGX, CMT and Raffles Medical.

More earnings cuts with 2Q15 results
Consensus 2015 earnings for MSCI Singapore were cut further by 0.6% in July 2015, following an 8.1% reduction since January 2014. This is driven largely by 2Q15 earnings disappointment, as well as a lacklustre outlook provided by management. Following the downgrades, MSCI SG is now expected to grow only by 1.8% in FY15, with banks contributing to the bulk of earnings growth.

Earnings cuts led by Industrials
15 stocks representing 66% of MSCI Singapore have reported their CY2Q15 results so far, and we have seen consensus earnings cuts for nine of these stocks. Stocks where we have seen the most negative earnings revisions are GLP (-4.1%), SMM (-3.4%), HPHT (- 3.4%), SGX (-2.9%) and Keppel (-2.2%). Stocks that have seen earnings raised so far are SIA (+1.1%), CMT (+0.9%), SPH (+0.5%) and OCBC (+0.1%). This would put SIA as the stock with the largest EPS increase YTD (+16.2%).

Cautious on SCI and STE among companies yet to report
We expect more earnings cuts for companies yet to report their 2Q15 results. In particular, earnings for industrials—Sembcorp Industries (weak Singapore power spreads), Noble (fall in commodity prices) and STE (no turnaround in Aerospace)—are likely to be weak.

Valuation and dividend yield support for Singapore market
Following a 5.0% correction over the past week, MSCI Singapore P/B has fallen to 1.28x, below its previous Fed tightening lows. In addition, we expect valuation support as MSCI Singapore now offers a dividend yield of 3.6%, the highest yield in Asia ex-Japan. However, with a lack of significant drivers, we expect upside to be limited in the near term. We would continue to hide in banks and consumer staples. DBS remains our largest overweight as we expect earnings to outpace peers, lower ASEAN exposure-related risks and better leverage to higher rates. (Read Report)

Read Related Reports
HSBC 2H15 outlook for Singapore - Low expectations
Tuesday, 4 August 2015
- HSBC Global Research
Singapore Market Strategy - Model portfolio: Seven stocks to position for 2H15
Tuesday, 21 July 2015
- Credit Suisse Asia Pacific Equity Research

Source : Credit Suisse Asia Pacific Equity Research

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