Singapore Strategy - Further downside risk; Stay defensive


■ We have shaved our current earnings estimates for the Singapore market even further post 3Q15 results.

We have turned more bearish on the Offshore & Marine sector. Defensive sectors have outperformed, such as Healthcare and Consumer, despite earnings misses, indicating low risk tolerance.

■ No stocks outperformed post earnings disappointments suggesting risks not fully priced in. With fundamentals weak, we expect further downside before value emerges and buying resumes.

How have our views been challenged?
Offshore & Marine sputters. We have become more bearish after 3Q results. More delivery deferrals and provisioning by yards suggest clients’ unwillingness or inability to pay due to cash flow issues. For example, we note that weak companies are seeking to amend bond covenants, and some are diversifying away from the oil & gas sector, implying low confidence for a recovery in 2016. We see increasing risk for SMM (SELL), and would pair trade: long-Keppel, short-SMM.

Healthcare an evergreen sector? Despite substantial outperformance, healthcare stocks should remain resilient due to their defensive nature and structural growth outlook. While investors looked past 3Q15 earnings misses for 2 out of the 4 stocks under coverage, the forward P/E of >30x appears rich. Therefore, caution is justified as poor project execution or delays in M&A, which are largely concentrated in China and Malaysia, could lead to a valuation de-rating. Companies must select the right partners, set achievable targets, and be prepared for regulatory uncertainty, while remaining nimble amid variable economic growth. Stick with Raffles Medical (BUY) and ISEC Healthcare (BUY).

Non-consensus trades. We have a contrarian SELL on ComfortDelGro, given its rich valuation and structural threats to its taxi franchise, about which the market appears complacent. We retain BUY on ST Engineering, despite its earnings miss. Aircraft maintenance may surprise to the upside, as we expect airlines to defer fleet retirement due to the low oil price environment. We remain SELL on OCBC and Yangzijiang, with both stocks trending lower, despite good 3Q results.

Industrial REITs performed well due to rising occupancies, despite oversupply and a weak economy. With 2016 the final year of industrial oversupply, an upturn in the global economy could further lift occupancies, as well as earnings. Our views remain unchanged on the Banks (Underweight), Property (Overweight) and Telcos (Neutral).

Below consensus, more than before
Heading into reporting season our FY15-16 estimates were 1-2% below consensus, but after EPS cuts of 9-13%, we are now 2-3% below consensus. We cut EPS for nearly all sectors, except Consumer, Telcos, Banks, and Property. Sixteen of our 56 stocks missed while 9 beat. Earnings that beat were of low quality, mostly bolstered by forex gains or non-recurring items. Also, balance sheets deteriorated. The market reaction to results suggests that the negatives are not fully priced in.

Not all risks are priced in yet
Stock prices moved almost in line with results. Stocks that missed earnings were punished; those that beat rallied. We were hoping to identify stocks that have risen more than 2% despite their earnings shortfall. In our view, this would suggest that most negatives have been priced in. Unfortunately, we found none, strongly suggesting that negatives are not fully priced in. (Read Report)

Source : Maybank Kim Eng Research

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