Yesterday, the STI managed to inch back above the 2,900 level after trading at its lowest level since June 2012 just a day earlier. In a research report released yesterday, Macquarie Equities Research (MER) cut their target level on the STI by 8% from 3,500 to 3,215. Nevertheless, they remain positively biased towards the STI, and believes that Singapore deserves another look at current valuations…

Here are excerpts from the MER report released on 3 September 2015:

MER remains positively biased towards the Singapore market, despite the 8% cut they are making to their FSSTI index target (from 3,500 to 3,215). MER came away from a recent ASEAN conference feeling good about their picks and weightings. At current valuations, MER believes Singapore deserves another look.
 
Reducing their index target: MER’s target is set at the midpoint of their top-down and bottom-up targets. The top-down target dropped by 12% mainly due to cuts to MER’s FX forecasts for 2015 (now S$1.44 to the US$) and 2016 (S$1.42). The bottom-up target has been impacted to a lesser extent (-4%), by price target cuts to a few index constituents (mainly in industrials and commodities).
 
But remain constructive. Some cracks have emerged in MER’s thesis, but MER still sees three aspects as attractive amidst a globally deflationary backdrop:
  - Reasonable expectations. Consensus earnings expectations have come off by 3-4% since MER’s last update, prompting concern. But this is not a disaster, and MER sees Singapore’s mid-single-digit growth expectation for the next 12 months as reasonable on an absolute and relative basis.
  - Cheap PER; attractive yield. Mid-single-digit earnings growth would justify an average price-earnings-ratio (PER) multiple for the FSSTI (around 13.5x), based on past trading. Yet FSSTI’s PER has sold off to its minus 1 standard deviation band. Also, FSSTI’s forward dividend yield of 4% is the second-highest in the region.
  - Some downside policy risk, but reflected in MER estimates. With second quarter GDP contracting 4.6% quarter-on-quarter against a backdrop of low inflation, odds of policy easing in October have risen, but MER’s latest FX forecasts already reflect this possibility. On the flipside, MER sees some positive policy initiatives post the September 11 general election, ideally around looser immigration curbs (MER expects few changes to property cooling measures).
 
Few changes to index weights and top picks. MER was comforted by the banks’ views on asset quality at a recent ASEAN conference and stay overweight the sector, but with DBS as MER’s top pick (MER’s top pick was UOB previously. MER stays Overweight on UOB in the model portfolio).
 
MER replaces Dairy Farm International with Asian Pay TV Trust. Both offer mid-40% total return, but Asian Pay TV Trust is buttressed by a 10% yield, with more predictable fundamentals.
 
Jardine Strategic has a 78% stake in Dairy Farm International (36% of its net asset value) but MER keeps it as a top pick as it offers a 33% discount to the value of not just Dairy Farm, but also Jardine Cycle & Carriage and Hong Kong Land, where fundamentals are holding up well. The publication of this note will coincide with the results of a quarterly FSSTI Index review. The three Jardine constituents (Jardine Strategic, Jardine Matheson, Jardine Cycle & Carriage) risk exclusion under new liquidity benchmarks. But this does not reflect on their fundamentals and MER remains positive on these names irrespective of the review’s outcome.
 
Outlook
MER’s new Index target of 3,215 implies 15% total return for the STI (including a 4% dividend yield). MER believes investors should revisit this market post the selloff.

Source: Macquarie Research - 4 Sep 2015