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'Mixed bag' Q3 earnings expected on forex, trade concerns

Tech and telco stocks likely to underperform, while defensives such as consumer staples likely to do better: analysts

The market has lowered 2018 earnings expectations for Singapore equities by 1.5 per cent in the past three months.


CORPORATE earnings are expected to be "a mixed bag" in the third quarter ended September, due to continued volatility in foreign exchange movements and slowing global trade.

Across sectors, KGI Securities analyst Joel Ng thinks that technology stocks are likely to suffer due to trade-related risks and dislocation of supply chain, especially for those with factories in China.

Telcos, especially Singtel which is the most geographically diversified, will also continue to hurt given the strengthening Singapore dollar versus other regional currencies.

Offshore and marine companies are expected to still see weak margins, because of the oversupply of jack-ups. Margins are expected to remain weak, at least until 2019, even if oil prices have improved.

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On the upside, Mr Ng expects defensive stocks such as consumer staples to perform better, as they are more sheltered from global financial market gyrations.

The brokerage has "buy" calls on Sheng Shiong, expecting it to increase its store count and further expand its margins going forward, and Thai Beverage, on the belief that it will expand its market share in Thai-land and Vietnam.

On the real estate side, he believes real estate investment trusts (Reits) will report stable rentals across sectors, thanks to better supply-demand dynamics.

While residential properties have been slapped with new cooling measures - including higher stamp duties and tighter borrowing limits - in July this year, he believes that the impact on developers' top- and bottomline will only kick in from 2019 or 2020.

"The bigger picture is that earnings growth for most companies would have likely peaked in 2018, and we expect a downshift in growth expectations going into 2019 due to the reasons mentioned, as well as a tighter global monetary policy on the back of rising interest rates and shrinking central banks' balance sheets," he says.

Singapore joined the regional monetary tightening rush when its central bank earlier this month said that it would slightly increase the pace of the Singdollar's appreciation - for the second time this year.

Suresh Tantia, investment strate-gist at Credit Suisse, shares similar views. He also expects the third-quarter earnings season to be more subdued compared to the previous quarter. Besides trade concerns, there are also normalising exports growth and property cooling measures that could impact corporate profitability, he says.

Citing analysts' consensus estimates on Bloomberg, he says: "Market already appears to have anticipated that and lowered 2018 earnings expectations for Singapore equities by 1.5 per cent in the past three months."

He agrees with KGI's Mr Ng that the telco sector could continue to deliver dismal results, also given the upcoming entry of the fourth player and challenging operating environment overseas.

But he disagrees on the consumer discretionary and staples front; he believes these companies could struggle because of the threat of higher inflation, and property cooling measures could dampen consumer sentiments.

Meanwhile, banks are likely to deliver neutral results as improved margins offset a potential slowdown in loan growth and weakness in fee income, he says.

He notes that the Straits Times Index (STI) is among the worst performing indices among Southeast Asian market this year, despite Singapore's relatively stable currency and healthy growth environment.

"We expect STI to rebound to 3,450 over the next 12 months as a confluence of above trend growth, inexpensive valuation and high dividend yield attract investors' interest...

"We believe valuation has adequate cushion to withstand negative headlines, as the STI is trading at a price-to-earnings ratio of 11.9 times, at a 12 per cent discount to historical average.

"On top of this, healthy earnings growth expectations of 8 per cent in 2019 and high dividend yield of 4.4 per cent position Singapore as an attractive place to play for a rebound in Asian equities."

Phillip Securities' head of research Paul Chew likewise expects a slowdown in corporate earnings momentum, noting decelerating growth in macro indicators such as Singapore's GDP and factory output in the third quarter.

He thinks that coal producers such as Golden Energy and Resources and Geo Energy Group could surprise on the upside as coal prices and production have both recovered in the third quarter after a weather-disrupted first half of the year.

His view on technology firms is similar to consensus - bearish - as he points out that consumer electronics manufacturers such as Hi-P International have started to issue profit warnings.

The firm last week said that it expects to report lower revenue and profit for the third quarter, which is a worse performance compared to the higher revenue but similar profit it had projected in August.

"As the macro environment enters a soft patch, we expect the focus will turn back to high-paying yield stocks. This will include banks, commercial and hospitality Reits, and consumer staples. Another favourable sector will be beneficiaries of a strong dollar such as rubber glove manufacturers."

The latter group of companies - comprising names such as Top Glove, Riverstone and UG Healthcare - is a beneficiary of the strengthening dollar because most of their operating costs like labour and utilities are denominated in ringgit, but their revenue is quoted in the greenback.

KGI's Mr Ng notes that this year, from a macro perspective, the US has diverged from the rest of the world in terms of the strength of its economy and financial markets.

"Going into the last stretch of 2018, the impact of the trade war on companies' earnings will likely start to show up due to dislocation of the global supply chain. "

Mr Tantia agrees that the key macro risk for earnings remains on the trade front, because global trade could slump if the conflict escalates into a full-scale trade war, which will then hit the Singapore economy and corporate profitability hard.

Moving forward into the last quarter of the year, he believes that besides the gradually recovering offshore and marine sector, the transport sector, comprising taxi operators, could benefit from the less intense competitive environment following the Grab-Uber merger.

As for banking stocks, which are "a crowded trade" at the moment, they could offer handsome returns in the next 12 months given their high dividends yield and net interest margin expansion from rising rates, he says.

The reverse can be said for Reits, which will become more of an "income story", as higher interest rates would reduce their attractiveness as yield stocks.

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