Analysts see a brighter year ahead after flat 2016

Singapore

IN THE end, 2016 turned out to be a year of sound and fury, signifying nothing - at least on the surface.

After trading ended on Dec 30, 2016, the benchmark Straits Times Index (STI) closed the year at 2,880.76 points, almost unchanged from the end-2015 close of 2,882.73 points.

But the total value of the 753 companies listed on Singapore Exchange (SGX) tracked by The Business Times was S$879 billion, up 2.7 per cent from S$856 billion a year ago.

While there were more delistings by value than new listings, the gains made by a few of Singapore's largest stocks such as the Jardine conglomerate outweighed declines in mid-cap and small-cap stocks.

Except for January and February, when markets took fright over a China and oil price crash, the index mostly stayed within the 2,800s.

Looking ahead, analysts at brokerage houses are projecting single-digit growth from current levels. Citi is gunning for an end-2017 STI target of 3,090 points, CIMB 3,140 points, and Maybank Kim Eng 3,000 points.

The latest estimates mean that analysts think the index will trade between 14 to 15 times projected earnings - roughly in line with recent years, and slightly cheaper than most other Asian indices with the exception of Hong Kong, South Korea and Russia.

Earnings are projected to recover, or at least stop sliding. Among the more hopeful analysts was Patrick Yau, Citi's head of equity research for Singapore and Malaysia.

"We do think we may see growth next year. Not that the topline is going to change, but costs are being managed more aggressively downwards," he told The Business Times.

His stock picks include DBS Bank and palm oil processor Wilmar International.

Banks are expected to do better with a steeper yield curve, given that they can get higher interest income from loans compared to their interest costs paid out on consumer deposits.

Commodity players are also expected to do better given better supply and demand dynamics and recovering prices.

Citi also continues to like "cash-rich yielders" such as ground handler and in-flight caterer SATS, land transport play ComfortDelgro and contract manufacturer Venture Corp.

After businessman Donald Trump's victory in the US presidential election, aerospace, electronics, marine and defence play ST Engineering can also benefit from its 40 per cent revenue exposure to defence contracts, Citi said.

Mr Trump's unexpected victory in November had led to optimism on how he could push through tax cuts and infrastructure spending. The STI hit its year's high of 2,980.77 on Dec 8, 2016 but did not push past the 3,000-point mark last seen in 2015.

CIMB Singapore's head of research Lim Siew Khee said in a December note that the market was "impatiently looking past 2017" and ignoring near-term lacklustre fundamentals.

Nevertheless, CIMB analysts highlight property developer UOL, ST Engineering and convenience store giant Dairy Farm as companies to buy.

UOL has a stable income profile and visible residential earnings, CIMB said. ST Engineering is a proxy for the stronger US economy and US dollar. And Dairy Farm's margins might have bottomed with Indonesia and Singapore showing signs of recovery.

OCBC Investment Research head Carmen Lee said that Singapore offers value to longer-term investors.

The numerous privatisations that took place this year is a signal that stock prices are inexpensive, she said. Major privatisations this year include massage product retailer OSIM International, toll road operator China Merchants Holdings (Pacific), and rail operator SMRT.

OCBC's stock picks include a number of property plays it sees value in: Ascendas Reit, CapitaLand, Frasers Centrepoint Trust, Frasers Logistics & Industrial Trust, Global Logistic Properties, Keppel DC Reit, and OUE.

Meanwhile, Maybank Kim Eng Research was one of the more pessimistic houses around.

Economic growth is sluggish, index valuations uncompelling, earnings recovery expectations are weak and there are rising risks of protectionism in the West, said analyst Neel Sinha.

Singapore is also not as much a safe haven in Asean as commonly perceived, he said.

"The structure of the market has evolved in over the past decade with a significant proportion of Singapore company earnings being derived from overseas and a growing number of foreign listings in the market."

While the cycle of earnings downgrades might be bottoming out, cost cuts cannot continue forever, he said.

"We suspect that the easy gains may likely be behind us. Companies will soon have to seek other levers too like technology adoption, mergers and acquisitions, and rational diversification," Mr Sinha said.

He is downbeat on Singapore's banks. Despite benefiting from rising interest rates, more provisions are likely to be made on their loans, he said.

But he likes property real estate investment trusts (Reits) such as CapitaLand Commercial Trust and Keppel Reit. "They are well-placed to ride through the storm with their . . . low lease expiry profile in the near term," he said.

Winners and losers

The flattish performance of the STI in 2016 belied the turbulence beneath. Two consumer-related stocks, Thai alcohol play Thai Beverage and palm oil producer Wilmar International, contributed the most to the index's moves in 2016.

Thai Beverage had rallied significantly on its successful relaunch of its Chang beer brand. Wilmar rose on improving palm oil prices.

DBS analyst Ben Santoso said in a November report that he is maintaining his "hold" on Wilmar with a target price of S$3.39.

"We do not expect any significant near-term upside catalyst to propel the counter's valuation well above our target price, as we believe the sequential recovery in Q3 2016 earnings is already priced in," he said.

The STI's largest stock, Singtel, ended the year at S$3.65 a share, essentially unchanged from S$3.67 a year ago. Anticipated Fed interest rate hikes have thrown a dampener on the regional telco stock, seen as a utility play offering stable dividends.

But Singtel's smaller and less-diversified counterparts, StarHub and M1, were badly hit with the impending entry of Singapore's fourth telco, Australia's TPG Telecom.

DBS analyst Sachin Mittal said in a Dec 15 note that M1 was the most vulnerable due to its higher exposure to mobile revenue and a more price-sensitive subscriber base.

He projects that TPG can gain an 8.5 per cent mobile revenue market share by 2022. He has target prices of S$1.78 on M1 and S$2.65 on StarHub.

A couple of property-related firms were a notable drag on the STI's performance in 2016: CapitaLand, which owns sizeable assets in Singapore and China, and Hongkong Land, a significant office landlord around the territory's Central area.

Worries over China's slowing growth, rising debt levels amid a rising rate environment, and a potential property price bubble have kept investors away.

But sell-side analysts remain optimistic about both firms.

At S$3.02 a share, CapitaLand is trading at a 38 per cent discount to OCBC Investment Research's revised net asset value (RNAV) estimate of S$4.90.

The broker fixes its price target of S$3.68 at a 25 per cent discount to RNAV.

OCBC said CapitaLand's exposure to China is confined mainly to resilient areas. Residential unit sales remain strong along with retail mall operating statistics, it said.

"The completion of four large-scale Raffles City mixed-developments from 2016 to 2018 (Raffles City Changning, Hangzhou, Shenzhen, Chongqing) will further boost recurring income," it said.

As for Hongkong Land, DBS Group Research said in a November report that it has a price target of US$7.76 a share. Valuations are inexpensive and office supply in Central is tight, allowing for higher rentals signed upon lease renewals, it said.

A luxury retail complex in Beijing, WF Central, is scheduled to open in mid-2017 and will spice up the company's rental income, DBS said.

Public transport stock ComfortDelGro was another major downward drag on the STI in 2016. The company's taxi segment had faced stiff competition from ride-hailing apps, while its duopoly with SMRT in the bus space is being broken up.

Macquarie Research analyst Justin Chiam turned optimistic on the stock in an end-November report.

Driverless taxis are still at least 10 years away, and valuations are cheap even with disruption risks, he said. He has an "outperform" call with a target price of S$2.80.

Oil stocks subdued

Finally, with oil prices staying around the US$50 a barrel mark for most of the year, the offshore and marine (O&M) sector on the local bourse was hard hit.

The largest oil firms in the world have cut back on their spending, affecting their supply chain of oil explorers and shipbuilders.

The most dramatic stock market incident of 2016 was the winding-up application filed by Swiber Holdings at the end of July. The application was then replaced by judicial management, a process seen as preferable to a liquidation because a financially troubled firm can yet return to health under court supervision.

Swiber, a contractor for oil and gas projects, had taken on significant debt, notably S$700 million lent by DBS. Meanwhile, a hoped-for equity injection did not arrive.

Oilfield vessel operator Swissco also filed for judicial management after bankers did not support a bond restructuring proposal from the company. Another troubled firm trying to restructure its debt is shipping trust Rickmers Maritime.

On the blue chip side, rigbuilder Sembcorp Marine was removed from the STI, while rival Keppel Corp, a retail investor favourite, stayed below S$6 a share for most of the year, and closed at S$5.79.

Keppel, which also owns a multi-billion property portfolio, was the biggest drag on the STI in 2016 along with ComfortDelGro.

Keppel had rallied in December to as high as S$6.31 after oil cartel Opec (Organization of the Petroleum Exporting Countries) agreed to production cuts for the first half of next year.

Its offshore and marine segment secured new contracts worth S$500 million as at late October.

Maybank Kim Eng Research, in a Dec 9 report, said that was "weak". The broker was the most bearish on the street, with a "sell" call and a target price of S$4.57 on Keppel.

There could be more writedowns and dividends will not be attractive, it said. It added that earnings from its property arm are insufficient to fill the gap left by the offshore and marine arm.

But in a contrarian report, KGI Securities analyst Joel Ng upgraded Keppel to "buy" at end-October.

"We like Keppel's diversified business and strong balance sheet that may help to tide it through the current downturn," he said. "Keppel's track record of unlocking value via divestments may also provide upside to earnings and further strengthen its balance sheet."

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