Muted earnings for Q4; but property, banks may surprise on upside

Singapore

PROPERTY developers, banks and plantation players are expected to be winners in the upcoming earnings season, despite overall muted projections due to the weak economic conditions in the October-to-December quarter.

While developers will benefit from recent merger and acquisition activity, banks are expected to generate higher wealth management fees and trading income compared to the low base a year ago. Plantation companies are riding on higher crude palm oil prices and greater demand due in part to the earlier Lunar New Year period which is a traditional boost for consumer goods.

Real estate investment trusts (Reits) and other defensive stocks are also expected to report stable earnings in the fourth quarter, analysts said.

They added that much of the expected earnings slowdown stemming from the trade war and impact from exposure to the Hong Kong market has already been factored into estimates earlier.

That said, OCBC Investment Research head Carmen Lee notes that there are "early signs of green shoots" that could result in upwards revision of corporate earnings in 2020. She is expecting at least a 4 to 5 per cent year-on-year increase in earnings over FY2019.

DBS Bank equity market strategist Yeo Kee Yan agreed, saying that barring a U-turn from the US-China Phase One agreement, he expects earnings per share for the stocks that DBS covers to deliver a high single-digit growth of 8.2 per cent for FY2020, compared to less than 1 per cent for FY2019.

For index-linked stocks, Mr Yeo expects earnings growth of 6.2 per cent for FY2020, compared to 2 per cent for FY2019. Earnings turnaround is driven by a good mix of cyclical and non-cyclical sector stocks. "Singapore's small, open economy should gain as US-China trade tension eases, the global electronics cycle turns up and the economies of China and Europe stabilise."

Some uncertainty will also be lifted with the US-China Phase One deal, and export-oriented companies with exposure to US customers should benefit from China agreeing to purchase an additional US$200 billion in US goods over the next two years.

Mr Yeo added: "Fortunately, the US-Iran tension has cooled since early January with oil prices back to December 2019 level. Unless the US is badly provoked, we think the odds of a US-Iran military conflict is low this year heading into the November US presidential elections. In the unlikely event that a conflict does occur this year and oil prices spike, the impact of rising jet fuel price for Singapore Airlines is well contained because it has a relatively high jet fuel hedging ratio of about 65 per cent."

CGS-CIMB head of Singapore research Lim Siew Khee however, is less sanguine. She expects the likelihood of physical war to affect earnings of aviation and cargo-related companies, with possibly wider impact felt by other sectors. "It will affect sentiment," she said.

For the fourth quarter, analysts see sequential improvement for the offshore and marine (O&M) sector. DBS expects Sembcorp Marine's losses to narrow, aided by cost savings from the return of its Tanjong Kling yard, while Keppel O&M has reported three consecutive quarters of single-digit profit in 2019 and the trend is likely to continue.

Ms Lim believes that Sembcorp Industries will in tandem be hit by earlier-guided losses from its marine segment, offset by more profit recognition from residential projects sold under its urban development segment.

Certain Reits are expected to report strong quarters, driven by their acquisition activities in the past year. In addition, the supply squeeze in Singapore across major asset classes will lend support to stronger rental increases, as the leasing spreads between market rents and expiring rents continue to widen. DBS expects selected names in the industrial and retail Reits to deliver stronger results.

Selected property developers are also expected to deliver a strong set of results, mainly from robust merger and acquisition activities in 2019; for instance, the CapitaLand & Ascendas-Singbridge merger; City Developments' privatisation of Millennium & Copthorne hotels; and UOL acquiring a majority stake in Marina Centre Holdings.

For Singapore banks, Ms Lee said DBS Bank's management has updated that prior guidance remains on track, ie that FY2019 full-year expectations of net interest margin is expected to stay at 1.88 per cent and loan growth at 4 per cent, on the back of stabilising housing loans and growth in non-trade corporate loans, while fee income growth should go up by low double-digits. Its guidance for dividends of 30 Singapore cents per quarter remains unchanged.

For UOB, dividend payout ratio is expected at 50 per cent, with the payment frequency to stay at twice a year. Following the interim H1 2019 dividend of 55 cents per share, the upcoming final DPS is forecast to be at 65 cents per share. UOB is also expected to achieve a return on equity still in the low teens and loan growth of 4 to 5 per cent, while facing competition in the higher tier corporate and mortgage segments.

Telcos may continue to report weak earnings, but in line with street expectations, due to their higher uptake of cheaper SIM-only plans and consumers switching from pay-TV to over-the-top platforms such as Netflix, Mr Yeo said. Ms Lim added that Singtel still faces falling mobile revenue and intense competition, while enterprise contracts were also renewed at a lower margin in the last few quarters.

Consumer stocks will likely be a mixed bag, with locally-focused consumer staples such as Sheng Siong and Koufu performing within expectations, while overseas-focused ones could suffer underwhelming performance.

"This largely stems from operations being impacted by unrest in Hong Kong, which affects Dairy Farm International and BreadTalk. We are expecting other consumer names such as Thai Beverage and Delfi to also deliver within expectations," Mr Yeo said.