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Market Strategy Refer to Important Disclosures at the End of This Report Singapore Market Focus Market Strategy Refer to important disclosures at the end of this report DBS Group Research . Equity 2 Jun 2017 Shifting Sands STI : 3,204.79 • STI 3250 near term cap – Trim UOB, OCBC, Keppel Corp, Analyst Yeo Kee Yan CMT +65 6682 3706 Janice Chua +65 6682 3692 SIA Eng, GLP, YZJ [email protected] [email protected] • Interest switches to consumer discretionary and industrials – Genting, ST Eng, SembCorp Industries Key Indices • Hospitality REITs gather interest – CDL Hospitality Trust Current % Chng and Far East Hospitality Trust STI Index 3,204.79 -0.3% FS Small Cap Index 403.91 -0.4% • Sentiment is positive for property developers – City Dev USD/SGD Curncy 1.41 1.8% and UOL Daily Volume (m) 1,131 Daily Turnover (S$m) 602 June rate hike well anticipated. We expect the FED to lift the FED Daily Turnover (US$m) 427 funds rate by 25bps to 1.25% rates and go for another two more (consensus expects one more) by year-end. YTD recovery story intact, growth moderating. While the YTD Market Key Data recovery story remains intact, be watchful of signs that suggest (%) EPS Gth Div Yield the manufacturing sector is peaking. The risk comes from China’s 2016 (6.1) 3.5 tight credit conditions and property market that could indirectly 2017F 12.6 3.7 affect Singapore’s exports of electronic components. The latest 2018F 8.2 3.7 China Caixin PMI for May slipped into contraction territory at (x) PER EV/EBITDA 49.6, the first time since June 2016. 2016 17.8 14.4 2017F 15.8 13.0 STI May’s high unlikely to be taken out anytime soon. While the 2018F 14.6 12.0 STI can head for 3350, pegged to 14.02x (+0.25SD) FY18F PE, by 2016 (6.1) 3.5 year-end, we think that the recent high of 3274 should continue to provide a near-term cap given the earnings cut from the 1Q17 results season. If the 3188 level fails, expect a further dip to 3160 or lower to 3110 before finding support. Trim large caps such as STOCKS banks UOB, OCBC, Keppel Corp, SIA Engineering, GLP and 12-mth Click here Yangzijiang that have outperformed YTD with limited/no returns Target for Price Mkt Cap Price Performance (%) Company to TP. Guide S$ US$m S$ 3 mth 12 mth Rating Sentiment is positive for property developers. The rapid Genting succession of three en-bloc sales that were closed over the Singapore 1.165 9,935 1.35 17.7 58.5 BUY past 1-2 week points to Singapore developers’ bullish outlook ST Engineering 3.68 8,135 4.12 0.0 14.6 BUY towards land-banking good quality sites as they price in a recovery in 2018. City Dev and UOL are key beneficiaries of a Sembcorp rise in home prices given their existing unsold stock and Industries 3.16 3,999 3.80 (1.3) 12.5 BUY potentially better margins for recent land-banked projects. CDL Hospitality Switch to consumer discretionary and industrials. We see the Trusts 1.595 1,129 1.75 12.7 13.5 BUY likelihood of a shift in sector relative performance as the Far East economic recovery theme progresses. Interest in bank and Hospitality Trust 0.635 817 0.66 8.5 5.8 BUY property stocks should shift to consumer discretionary stocks and City industrial sectors. Among the STI component stocks in these two Developments 10.48 6,758 12.63 10.7 25.5 BUY sectors, our picks are Genting Singapore, ST Engineering and UOL Group 6.87 3,922 8.73 4.2 21.0 BUY SembCorp Industries Closing price as of 30 May 2017 Hospitality REITs gather interest. Going into the next year, new supply that has been an overhang should materially decline while Source for all data in this page: DBS Bank, Bloomberg Finance L.P. demand should receive a boost from 2018 being a biannual conference year. This should end the sector’s two-year downturn. We maintain our positive view on Singapore’s hospitality REITs. Our top two picks in the sector are CDL Hospitality Trust and Far East Hospitality Trust. ASIAN INSIGHTS VICKERS SECURITIES ed: CK, JS / sa:SM, PY Market Focus June Market Outlook Looking back at May Noble Group was a major contributor to the overall earnings cut. The O&G sectors suffered earnings cut through the likes The benchmark STI ended the month of May up 35pts of Ezra, Ezion and PACC offshore. The consumer services (+1.1%), coming off a high of 3275 and following a mixed sector was dragged down by SIA while the consumer outcome from the 1Q17 results season. Gains in bank stocks services sector was affected by Japfa. were offset by weakness in real estate (Capitaland and UOL) and consumer services (SIA) sectors. The technology sector benefited from a positive earnings uplift from Venture Corp and UMS. SREITs sector enjoyed a Our positive view on the technology sector last month (refer modest upward revision to DPU from Ascott Residence to Monthly Strategy dated 3 May and entitled “Uplift to Trust, CapitaLand Retail China Trust and CDL Hospitality 3250”) where we highlighted Venture Corp, UMS and Hi-P Trusts amongst others. paid off as the sector continued its YTD run-up. Shares of UMS shares rallied 27% while Hi-P surged 32% on earnings optimism. Outlook FTSE ST sector indices performance for May Key Event Event Date Comments FOMC June 13- Consensus sees a 100% chance that the meeting 14 FED funds rate will increase to 1.25% Source: DBS Bank June rate hike a certainty unless a comet strikes Earth It’s a quiet month on the events calendar with the mid- month FOMC meeting as the only key event. The FED had Source: DBS Bank recently signalled that it will look past the recent mixed US data and will likely hike rates come June. We expect the FED 1Q results season fails to lift Singapore market to lift the FED funds rate by 25bps to 1.25% rates and go for another two more by year-end. Consensus has priced in The 1Q17 results season saw a resumption of the a 100% chance of a June rate hike, followed by another by downward earnings revision trend for the stocks under our year-end. Investors will be eying the FED’s comments for coverage. FY17F earnings were revised down 2.9% while indications on the pace of rate hikes going forward. FY18F earnings were cut by 1.5%. This is against earlier YTD recovery story intact amid signs of growth moderation optimism that the earnings upward revision witnessed in the previous 4Q16 results season can sustain, given the slew of Singapore’s 1Q GDP growth was revised up to 2.7% y-o-y economic data pointing to a recovery. from the 2.5% advanced estimates. Our Singapore economist expects full-year GDP growth of 2.8%. This, Back to negative earnings revision trend however, is on the premise that global economic conditions continue to improve. For Singapore, the main concern is that the turnaround thus far has been uneven and restricted to just a few externally driven clusters such as electronics. The rest of the economy has yet to feel the uplift and the labour market has also remained soft. Source: DBS Bank ASIAN INSIGHTS VICKERS SECURITIES Page 2 Market Focus Electronics PMI Singapore non-oil domestic exports (y-o-y) Source: Bloomberg Finance L.P., DBS Bank Source: Bloomberg Finance L.P., DBS Bank Our Singapore economist observes signs suggesting the Industrial production y-o-y manufacturing sector may be peaking. Tighter credit conditions and stiffer regulations on the property market in China could weigh down on consumer sentiments and indirectly on Singapore’s exports of electronics components. The latest China Caixin PMI for May, a private gauge of China’s manufacturing, slipped into contraction territory for the first time since June last year (actual 49.6, consensus 50.1). China Caixin PMI contracted for the first time since June 2016 Source: Bloomberg Finance L.P., DBS Bank STI Outlook – May’s high unlikely to be taken out anytime soon The 1Q17 results season saw a 0.7% downward revision for FY17F and 0.4% downward revision for FY18F. Trading at above 14.02x (+0.25SD) blended FY17/18F PE, May’s high of 3274 now stuck out like a ‘sore thumb’ in the near term, as the earnings revision trend turned negative again. While the STI can head for 3350, pegged to 14.02x Source: Bloomberg Finance L.P. (+0.25SD) FY18F PE, by year-end, we think that the recent high of 3274 should continue to provide a near-term cap. A difficult Brexit process could be another risk factor. The The 3188 level is key. If this level fails, expect a further transport engineering cluster is not entirely out of the pullback to the 13.64x (average) blended FY17/18F PE level woods given that oil prices have turned sideways. Hope is at 3160 or lower to 3110 before finding support. now pinned on companies’ capex spending to increase and for consumer demand in the US to be sustained that will STI at various forward PE levels lend some support to the manufacturing sector in the -0.5sd -0.25sd Avg +0.25sd +0.5sd months ahead. 12.87x 13.25x 13.64x 14.02x 14.41x PE PE PE PE PE FY17 2,889 2,974 3,062 3,147 3,234 FY18 3,074 3,164 3,257 3,348 3,441 Avg 2,981 3,069 3,160 3,248 3,338 17 & 18 Source: DBS Bank ASIAN INSIGHTS VICKERS SECURITIES Page 3 Market Focus Straits Times Index (Daily) Strategy Sentiment is positive for property developers.
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