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Singapore Strategy - Earnings bubbling

Shared By Stock Fanatic on Monday, March 5, 2018 | 5.3.18

■ The 4Q17 results of Singapore corporates were not impressive, with underachievers outnumbering those that beat expectations 15 to seven.

■ This shows that corporates are still grappling with costs and kitchen-sinking. However, overall EPS still held up, mainly led by banks and manufacturing sectors.

■ Order book upgrade in capital goods also added meat to forward EPS expectations; we see risks of disappointment by mid-18 if orders do not trickle in.

■ Our bottom-up target for FSSTI now stands at 3,705, based on 14.2x 2018F P/E (+0.5 10-year mean) vs. 10% yoy EPS growth for 2018F.

Our Alpha picks are SMM, VMS, UOL, GENS and STE (big caps); and AEM, China Sunsine, Yongnam and mm2 (small caps).

4Q17 review: notable events in the past two months of results
4Q17 was not an impressive quarter. Windfall dividend by DBS was the most ‘exciting’ event over the two months of earnings reporting. Hype over corporate actions between SCI and SMM kept interests strong within the capital goods sector until the earnings misses.

Banks (OW) and Telcos (UW)
Banks have cleaned up their oil & gas loan book with FRS 109. Higher NII and fees, and benign credit costs are tailwinds for all three banks. We are OW on banks as they seem most defensive, trading at mean of CY18F 1.35x P/BV with 11.3% ROE. All three telcos disappointed in 4Q17 on higher-than-expected costs and weak associate contribution. Earnings outlook is still grim given the impending entry of a fourth telco. Valuations are also not screamingly attractive at 16x CY19F P/E vs. 10-year average of 15x.

Property (OW) and REITS (N)
The REITs' results were largely in line except for CDL HT which beat estimates on higher RevPar in Singapore (first improvement in five years), supporting our expectation of 5% yoy rise in RevPAR in FY18F. CDL HT, MLT (share price weakness) and CCT (proxy for office recovery) are our preferred picks among the REITS. Our OW call on developers remains on the premise of replacement housing for enbloc buyers and nascent recovery in residential prices and land bank restocking. CIT and UOL are our top picks.

Capital goods (OW)
More kitchen-sinking provisions were made across the yards after KEP stomached the S$618m global settlement of Brazilian penalty. Weak operating leverage is apparent among the Singapore yards due to the cumulative effects of anaemic orders over the past two years. STE appears to be the least risky for now on the back of the return of the engine repair cycle. We prefer SMM over KEP given the recent share price weakness. At current price, it is trading at 1.6x CY18F P/BV, below its 20-year average of 2.5x.

Tech & manufacturing (OW), gaming (OW)
Creative Technology’s (Non-rated) unveiling of its latest Super X-Fi technology created more buzz than the tech/manufacturing earnings. Results were mixed with VMS living up to expectations from earnings to dividend while UMS and AEM outperformed on higher sales. VMS and AEM are our picks. GENS's in-line earnings disappointed the market after two sequential quarters of outperformance. We see a buying opportunity after its recent share price correction and see volume growth as a key re-rating catalyst.

Alpha picks
Our picks are based on 
1) earnings growth, 

2) share price correction, and 

3) valuations. 

With that, our Alpha picks are SMM, VMS, UOL, GENS, STE among the big caps; and AEM, China Sunsine, Yongnam and mm2 among the small caps. We removed Sunningdale (forex uncertainty and lower ASPs) and KEP (noises from various arbitrations). (Read Report)

Source : CGSCIMB Research


Posted on Monday, March 5, 2018 | 5.3.18
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