• Heightening trade war tensions and rising rates. We have reviewed our year-end FSSTI target as a result of the escalating trade tensions and the change in expectations of four hikes in FED funds rate in 2018 rather than three. Hence, we adjust our risk-free rate assumption for Singapore and highlight a sensitivity analysis on sectors/stocks that would be negatively impacted.
• Lowering year-end target. In our earlier report dated 4 June, we urged investors to tread carefully after the market run-up but we had under-estimated the extent of the sharp pullback in FSSTI due to the escalating trade tensions. In addition, interest rates expectations have also been adjusted upward to four hikes rather than three in 2018 after the latest June FOMC. As a result, we reduce our year-end FSSTI target to 3,450 (from 3,720), which is based on a blended 15% discount to long-term mean PE and mean P/B.
• Corporate earnings growth still robust. We forecast market EPS growth at 8.6% yoy in 2018 and 9.5% yoy in 2019. On our estimates, 2018 earnings growth will be driven by the banks before broadening out to other sectors such as plantations and shipyards in 2019. However, we see possible downside risk in 2019 earnings from developers as a result of the recent property cooling measures. As for the banks, we see limited impact on loans growth from the recent cooling measures as the recent demand recovery in residential properties was relatively short-lived and homes purchased for investment accounted for just 27% of the new housing loan limit granted in 4Q17, as past cooling measures had already moderated investment demand.
• Sector/stocks impacted by rising rates. Given the expectations that the FED will hike rates four times this year, our base-case risk-free rate (RFR) assumption is raised from 2.5% to 2.75%. Sectors or stocks that could be negatively impacted are the S-REITs, banks, telecommunications and stocks that are valued on a DCF-basis. We will adjust our target prices once the upcoming 2Q18 results are announced. We have done a sensitivity analysis to find out how various interest rate-sensitive stocks will react to a 25bp and 50bp rise in RFR (pls see next page)
• Investment themes for the rest of the year. Beyond the near-term external noise, we see selective bargains after the recent pull-back. Key reasons include reasonable valuations and relatively attractive EPS growth.
2H18 investment themes to consider include:
a) Mature growth plays – Keppel, CityDev, CD REIT, RMG
b) Unloved stocks at attractive valuations – Sunningdale, SingPost, CSE, Tianjin
c) Stocks with potential earnings upside – SIA (tactical buy), CD REIT, SingPost.
d) Defensive stocks at reasonable valuation and dividend yield – SingTel, STE
• More palatable after recent pull-back. Since hitting the 12-month high of 3,615 in May 18, the FSSTI has pulled back by 10%. At the latest closing price, the FSSTI is trading at a FY18PE of 14.2x, which compares with its long-term mean of 15.0x. FY18F P/B of 1.28x also remains inexpensive, at a 18% discount to long-term mean. Given reasonable valuations, we would look to accumulate our key picks on sharp pull-backs.
Source : UOB KayHian Research