Daiwa upgrades Singapore market to Overweight amid earnings recovery

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Daiwa upgraded the Singapore market to Overweight, pointing to a recovery in earnings momentum and solid economic growth.

“The past year has been full of positive surprises on the economic front, and recent data suggests the Singapore economy remains in good shape,” the investment bank said in an Southeast Asia strategy note last week. “Singapore equity valuation is starting to become more reasonable in comparison to peers, in our opinion.”

Singapore’s consensus 2018 price-to-earnings ratio of 14.1 times compares well with Hong Kong’s 16.7 times, it noted. Singapore’s earnings growth estimates for 2018 of 13.1 percent are higher than all Southeast Asian countries except Indonesia, as well as being higher than Hong Kong’s 11.3 percent forecast, it added.


Among its picks, it noted that banks will be the key beneficiaries of a rising interest-rate environment, while traditional defensive yield sectors such as REITs and telecoms will be the most vulnerable to rising rates.

Positive on banks

“An above-market earnings growth outlook remains the key reason to stay invested in Singapore banking stocks,” it said, adding that interest rate hikes by the U.S. Federal Reserve will likely be a positive catalyst as they should boost net interest margins (NIM) and SIBOR. It noted that DBS’ earnings per share (EPS) is twice as sensitive to SIBOR increases as its peers, estimating every 10 basis-point increase in the three-month SIBOR leads to its EPS rising 2 percent.

Daiwa wasn’t positive on all sectors, however.

“On the other hand, the entry of a new player in the telecom market and likely increases in bond yields on back of the Fed tightening of its balance sheet remain negative factors that underpin our Underweight calls on the telecoms and the S-REITs sectors,” Daiwa said.

Daiwa also said it liked property developers as buyers are returning to the residential market after three years of sluggish and below-average primary home sales. It forecast that property prices will rise by 5-8 percent on-year this year and next. Its top property pick was City Developments.

‘Pockets of opportunities’

Daiwa said it saw “a few pockets of opportunities” in the rigbuilder and maintenance, repair and overhaul (MRO) players, as they are facing challenges, making consolidation a key theme.

It said it particularly liked MRO players on well-supported demand as the global aircraft fleet will likely double over the next two decades and as the government’s proactive support meant the Singapore-based companies are well-placed to withstand competition from lower-cost peers.

“We see significant synergies between heavyweights ST Engineering and SIA Engineering due to their complementary expertise and geographic footprints,” Daiwa said. “On the other hand, we are less enthused about rig builders as we view the expertise and customer
footprints of SembCorp Marine and Keppel Corp. as substitutes.”

Among other Singapore stocks, Daiwa also said it liked Wilmar for its potential China IPO and Raffles Medical for its overseas expansion strategy.

It tipped avoiding telecoms as a new player was set to enter the market this year, supermarket operators on concerns over e-commerce competition, and land-transport companies on higher regulatory and competitive risks.