After briefly trading below the three-year low of 2,800 five weeks ago, the STI has gained momentum and headed steadily towards the 3,000 psychological level. Yesterday, the index closed at 3040.48, adding 1.4% for the day. Macquarie Equities Research (MER) released a research report on Monday (2 Nov) targeting a 7% upside for the index, some excerpts are found below…..
 
 
Event
As MER churns through 3Q15 earnings season, they track the evolution of forward estimates, share prices and valuations. MER outlines some headline observations below, and plan to revisit the analysis periodically. MER hopes the analysis can also serve as a screening tool for investors looking for outliers in Singapore on which to do more work.
 
Impact
FSSTI expectations started to tail off in August post a lacklustre mid-year reporting season, which coincided with renewed jitters over global growth trends. 2015E and 2016E index earnings estimates have been cut by 5% to 8% since the start of the year, and call for ~5% growth for the next twelve months (NTM).
 
MER is not far off consensus and still see mid-single digit forward growth warranting an average multiple for FSSTI (i.e. 13.4x versus the prevailing 12.5x). MER has 7% upside to its index target. Coupled with a 4% forward dividend yield, MER remains constructive on the FSSTI.
 
Banks showing a significant earnings / price mismatch. Banks have been the FSSTI’s stalwarts for several years now and estimate stability has remained a theme in FY15. But the group’s shares have come off due to concerns over slowing top line growth and asset quality. This, in turn, has left the likes of UOB and OCBC trading below their past -1 standard deviation levels on price per book value (PBV). Thomas and Ken share the market’s concerns to a degree, but see the declines as overdone. All three banks have just reported solid numbers and MER keeps banks as key index overweights.
 
Outliers in Industrials…. Industrials are dealing with a variety of challenged end-markets, but MER would note the de-ratings of the Jardine Group head stocks (JM and JS) as set against only moderate estimate trims. This may have been driven by their recent deletions from the FSSTI index – a technical factor in MER’s view – and MER continues to see value in the two names.
 
…and Property. Despite posting low single-digit earnings upgrades year-to-date, City Dev has underperformed against the backdrop of a muted Singapore property market. Tuck and Sam are not calling for a reversal of cooling measures anytime soon, but everything has a price and MER re-flag their recent upgrade of City Dev (CapitaLand is also cheap and MER’s Top Pick).
 
Consumer and commodities behaving largely as expected. Both sectors have suffered from fairly onerous cuts to forward earnings since the start of the year, with share prices following suit. The declines in Dairy Farm and Noble look overdone to MER though. MER also thinks the worst in terms of estimate cuts is likely behind the likes of JCNC and GENS. Indeed MER saw good interest in the latter on a recent gaming marketing trip.
 
MER’s Outlook
With reasonable forward earnings expectations, the highest dividend yield in Asia ex Japan, and lower than expected FX policy risk, MER thinks Singapore deserves a seat at the regional table.
 

Source: Macquarie Research - 5 Nov 2015