Singapore Strategy - Another dismal reporting season


■ 70% of index stocks see 2016E EPS lowered in the past month

■ Banking sector results were most promising

Overweight: banks and S-REITS; underweight: oil & gas and consumer goods sectors

Summary:
Downward earnings revisions continue to be a dominant trend in the recently-concluded September results season. Our bottom-up earnings forecasts now suggest 2016/17E market earnings growth of 5.9/7.5%, respectively, down from 6.8/7.9% previously. Despite this, we retain our 2016E year-end FSSTI Index target of 3265, as we believe 2016 earnings cuts in banking sector stocks were perhaps a bit premature, given the significant shift in market opinion over Fed rate hike probabilities over the past 2 months. Banking sector stocks continue to be our #1 trade for the Singapore market for the coming year.

Fundamentals:
The September earnings season was a forgettable one, with around 60% of the stocks in our coverage universe missing earnings forecasts. The misses were concentrated mainly in the oil & gas and smallcap consumer sector stocks we cover. Positive surprises were seen mainly in the results of banks and REITS.

Within the banking sector, asset quality of loan portfolios held up much better than market expectations, which should assuage investor worries over the fallout from the China slowdown and low commodity prices. Bloomberg consensus earnings forecasts for 2016 were however trimmed as analysts scaled back on prospects for NIM expansion. It appears to us that these views were driven by the then declining odds for the Fed’s rate hike in 2015 (1st Oct: 43%; 15th Oct: 30%; now: 74%), which has since reversed course. Among the REITS, good control of operating expenses, driven by minor improvement in efficiencies in areas such as utilities, was a key highlight. ComfortDelgro was one of the few stocks that reported strong results, driven by margin improvement in its bus and taxi operations.

On the other hand, revenue pressures were evident across telecom stocks, though Singtel managed to do relatively better than its peers as it gained mobile revenue share. Perhaps unsurprisingly, offshore marine stocks we cover continue to reel under operating-margin pressures, even as news of contract deferrals gathered steam. Within the small-cap space, consumer stocks with China exposure (OSIM and Breadtalk) disappointed as enduser demand fell sharply. Accordingly, we are removing Breadtalk from our small-caps picks list.

Meanwhile, the QTD rally in FSSTI Index, which was led by beaten down names in consumer goods and services sectors, appears to be disconnected to earnings-revisions trends, as 2016E EPS for over 70% of the index constituents were revised down. SATS and Capitaland were among the handful of stocks that saw positive earnings revisions.

We maintain our 2016E FSSTI index target of 3265, which now translates to a 1-year-forward PER of 12.2x, which is still at a discount of 7% to the past-15- year mean. We continue to believe that being overweight on the banking sector is the best way to capture further upside. (Read Report)

Source : Daiwa Capital Markets

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