Dividend plays still sizzling hot STI could give a 2013 total return of 8%. Whilst STI P/B of 1.43x is below the 1.58x 10-year average, FY13 P/E of 14.6x is higher than the historical norm of 13.9x. Investors concerned with global macro-economic developments are unlikely to invest aggressively into the equity markets.  We forecast a 12-month STI total return of 8%, inclusive of a 3.2% dividend yield. Our 12-month STI target is 3251, derived from sum-of-the-parts.  The dividend play theme should remain the highlight as we move into 2013, whilst the leisure tourism and commodity themes can add the icing to the cake.  

 
Soft government bond yields to  add sizzle to dividend plays. The 10-year Singapore government bond yield has fallen by 54 bps YTD to 1.29%. We do not rule out further yield softness, particularly with a) US Federal Reserve stance to keep interest rates low, b) close correlation of US and Singapore interest rates, and c) MAS stance to keep the S$ strengthening.  Dividend plays could therefore outperform further. We overweight REITs, with office-related Suntec REIT (TP: S$1.80) and FCOT (TP: S$1.51) being our top picks.  Telcos offer resilience, and Starhub (TP: S$3.40) remains our favourite within this space.  ComfortDelgro (TP: S$1.85) is another yield play, with great potential from its overseas operations.   

Tourism plays to ride on leisure visitor arrival growth.  We see visitor arrivals rising high single digit rate in 2013, driven mainly by leisure travelers. New attractions and abundance of low-cost flights will all contribute to this trend.  Whilst we do not recommend hospitality REITs due to their greater dependence on business travelers (seen to be softer), we like Global Premium Hotels (Unrated), which caters mainly to the budget-conscious visitors.  

Commodity stocks offer value.  We forecast 2013 average CPO price of RM2,750, which is a recovery from the current RM2,230. Factors to drive this include reduction in CPO export duties, Malaysia nationwide rollout of biodiesel, new Indonesia refining capacity and seasonal production downcycle.  Our best BUYs in the palm oil space include First Resources (TP: S$2.36) and Golden Agri (TP: S$0.82).  In addition, we are overweight the supply chain management space.  Both our BUY calls Noble (TP: S$1.45) and Olam (TP: S$2.20) have good earnings growth potential. For Olam, the upcoming rights issue, with underwriting by Temasek,should allay investors' concerns.

ECONOMICS
A weak economic growth in 2012, dragged down by external headwinds. The Singapore economy is expected to grow at a  modest pace of 1.5%  in 2012, with risks remain tilted to the downside as weakness in services and manufacturing may continue to weigh on activity and output in the final months of 2012. The electronic sector had been in the doldrums in the first ten months of the year, declining by 12% in the period due to weak external demand and difficulties in the global environment. Growth in industrial output ytd was mainly led by pharmaceuticals and transport engineering, which helped to offset the drag from electronics. Reflecting the slowdown in exports and trade-related activities, growth in manufacturing output is expected to  slow to just 0.9% in 2012, while services output is projected to moderate to 1.1%.  Inflation is likely to average 4.6% in 2012, driven mainly by record high COE premiums and housing prices.  Moreover, the generally tight labor market conditions are likely to continue to spill over onto services costs ahead, keeping core inflation above 2.0% at the end of the year.  Against expectations, the Monetary Authority of Singapore (MAS) maintained a modest and gradual appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) with no change in the slope, centre and width of the policy band in Oct.  Policy seems to have biased towards inflation, with greater emphasis expected to place on 'domestic supply-side factors' that drive inflation higher, such as the tight labour market, continued rise in owner-occupied accommodation costs and higher COE premiums.

Economy likely to see a moderate recovery in 2013.  We think Singapore's real GDP growth may improve modestly to 3.5% in 2013, in line with a gradual stabilization of global conditions and reflecting a moderate uptick in manufacturing and services output growth. The improvement in manufacturing activity could come from continued growth in specific industries such as transport engineering and biomedical although electronics is likely to remain a drag due to weak external demand. As in 2012, externally-related sectors such as the wholesale trade segments and financial services are expected to face continued headwinds in 2013 as a result of the slow global recovery. Domestic-oriented industries such as healthcare and construction may be more resilient, benefiting from firm demand and projects already in the pipeline. Similarly, we expect domestic consumption to provide some support to the economy, helped by households' willingness to spend amidst the tight labor market and a benign interest rate environment.  For the whole of 2013, our forecast is for the manufacturing output to edge up slightly to 3.1% and the services sector to grow by 3.4%. The downside risks to our economic forecasts remain largely external, which include a worsening of the European crisis and possible weaker global recovery and world trade.  On the inflation front, we expect risks to inflation in 2013 to come from both domestic and imported sources. Domestically, the COE premiums and housing rents will likely remain elevated while tightness in the labour market may exert upward pressure on services costs, keeping core inflation (which excludesaccommodation and private road transport) above its historic average of 1.7%. Externally, the loose global liquidity and weather-related price hikes may lead to higher imported inflation, including temporary increases in food and commodity prices. However, as the Singapore  dollar is expected to remain strong, the inflationary pressures could be tempered by the strengthening currency and favorable base effects. Overall, we project headline inflation to average 3.5% for 2013, which is at the lower end of the government's estimate of 3.5-4.5%.

Exchange rate policy stance would likely remain unchanged.  The balance of risk in 2013 is likely to shift to inflation again rather than growth given that potential upside risk to inflation from both internal and external factors is still an issue.  Our current forecast is for the MAS to stand pat at its next meeting in April 2013 and continue to do so for the rest of 2013 as it monitors closely the pace of global recovery while anchoring inflationary expectations. Nevertheless, we believe that a move to a neutral policy is still likely if the external environment deteriorates sharply, putting the government's forecast of 1-3% real GDP growth for 2013 at risk.  Barring no further worsening of the external environment that leads to a 'flight to USD safety', our current forecast is for the USD/SGD to move stronger to 1.20 by end-2013 on the back of an improvement in growth and no change in the policy stance due to elevated inflation.  As for the 3-month SIBOR, it should remain soft at 0.35% at end-2013.

2013 MARKET OUTLOOK
Forecast end-2013 STI level of 3251

Forecast 12-month STI total return of 8%. At the end of 2011, when the STI was 2646, we set a Dec 2012 STI target of 3022, derived  from sum-of-the-parts methodology. In middle 2012, we raised the 12-month target  STI to 3162. With the STI at 3118 (as of 11 Dec 2012), we are now aiming at a 12-month target of 3251, which gives a potential upside of 4.3%. Including forecast dividend yield of 3.2%, the STI is expected to give a total return of ~8% over the next 12 months.

Minor upside for STI through 2013, but volatility to remain high.  A positive for the STI trend is that current P/B ratio of 1.43x is lower than the 10-year average of 1.58x. However, FY12 P/E of 15.5x is above the 10-year average of 13.9x. Even factoring in our expectation of 6% FY13 EPS growth, the FY13 P/E of 14.6x is still higher than historical average. Adding on investors' concerns on global macro-economic developments, some of which include the US fiscal cliff, political changes in Italy, we see only marginal upside for the STI over the next 12 months ' our 12-month STI target is 3251.  During this period, however, we could see great swings in volatility arising from these global developments.

 

 Mild 2013 earnings growth expected.  We are forecasting 6% 2013 market EPS growth.  However, there are large variations across the sectors. For the finance sector, our forecast of 14.6% EPS decline is largely attributed to 2012 one-time items that will not be repeated eg sale of partial BPI stake by DBS, and sale of F&N and APB shares by OCBC. For the oil & gas sector, the EPS decline is largely attributed to expected decline in 2013 property income for Keppel Corp. As for the forecast robust 2013 EPS growth for the industrial and technology stocks, this is largely attributed to a low 2012 base.

We are forecasting stronger Singapore GDP recovery in 2013. Whilst we estimate 2012 Singapore GDP growth of a soft 1.5%, we forecast a stronger 2013 Singapore GDP growth of 3.5%, as our economics team expects a gradual stabilization of global conditions, which will help to support both the manufacturing and services sectors. Domestic consumption will be driven by households' willingness to spend amidst the tight labour market and a benign interest rate environment. Results of a MAS survey, which were released in mid-Dec 2012, showed that private sector economists have a median 2.7% GDP growth forecast for 2013, within the government's expectations of between 1% and 3%.

Our stance for 2013

Theme 1: Expect interest rates to remain soft

Expect Singapore government bond yields to stay soft. The Singapore 10-year government bond yield has narrowed sharply through 2012. From 1.83% at the end of 2011, it has contracted to 1.29% currently. We expect the yield to remain soft through 2013, on the back of
1)  Continued soft US Fed Fund rate  ' In mid Dec 2012, the US Federal Reserve announced it will continue to suppress interest rates as long as the US unemployment rate stays above 6.5%, as long as inflation does not threaten to break above 2.5%. We see this translating to continued low US interest rates over the next few quarters.  

2)  To cap inflationary pressures (we are forecasting 2013 Singapore inflation of 3.5%), the Singapore MAS monetary policy stance of an appreciating S$ against the NEER is likely to remain unchanged, although some tweaking may take place in Apr 2013, when the next policy meeting takes place. The expectation of an appreciating S$ will increase the attractiveness of investing in S$-denominated assets, which includes the Singapore government bond yields.  This will keep the Singapore 10-year government bond yield soft, even if the US 10-year government bond yields shows sign of bottoming out.

A key beneficiary of soft bond yields are REITs. We are particularly excited on the REITs space. Through 2012, as the Singapore government bond yields narrowed, share prices of REITs have performed well, with YTD total returns ranging from 27.7% to 77.8%, with the yield spread currently still trading at about 50bps above historical average of 430bps.   Amongst the REIT space, we  like FCOT and Suntec, on the back of cheap valuation, strong outlook and room for further growth of both revenue and DPU.

Continue to favour Suntec REIT  (SUN) despite reduction in DPU. During the last quarter, Suntec's earnings suffered due to the loss in income from the divestment of CHIJMES and the commencement of the AEI work  at Suntec City. Going forward, with a higher than expected pre-commitment rate of 71.2% for the upcoming space at Suntec City, coupled with its cheap valuation (0.8x P/B), we continue to like SUNTEC and maintain our BUY rating with a DDM based TP of S$1.80.

Frasers Commercial Trust (FCOT) remains exciting. Recently, FCOT successfully redeemed 47.6% of the total issued CPPU (which is currently costing the trust 5.5% annually). From this exercise, we expect DPU for FY13 and FY14 to increase by c.10% and 13% respectively.  In addition, given a stellar  4QFY12 results, together with high portfolio occupancy rate of 94.9%, AEI at China Square Central and a healthy gearing of 28.6% (vs 36.8% previously), we continue to like FCOT and maintain our BUY rating on FCOT with a DDM based TP of S$1.51.

In addition, Singapore telcos also offer attractive dividend yields. Telcos' earnings are generally resilient, even during periods of economic slowdown. Hence, their dividends are relatively stable. If the Singapore government bond yields soften further, yield spread (over risk-free rate) for the telcos could widen, triggering a rally in their stock prices. Within the NEUTRAL weighted telcos space, we prefer Starhub over the other two telcos, as there is room for further active capital management given its low net debt/ebitda of 0.5x (the lowest among the Singapore telcos) and smaller risk of capex overruns despite the upcoming 4G spectrum bid. We expect Starhub to maintain its good operational execution and cost discipline (highest EBITDA margin recorded in 3QFY12 since FY09). Our TP is S$3.40 based on 8% WACC. Share price is well supported by its dividend yield of 5-6%. 

Other Singapore yield plays include the land transport and media sectors. Within our NEUTRAL-weighted Land Transport space, we prefer ComfortDelGro (CD) (BUY; TP: S$1.85) over SMRT (NEUTRAL;  TP: S$1.60) for the former's cheaper valuations and greater overseas expansion potential. This is despite CD currently trading at a lower 3.4% FY13 dividend yield versus SMRT's 4.3%. We are NEUTRAL on media player SPH (NEUTRAL; TP: $3.95) due to its core publishing business that could be adversely affected by slower economic growth. However SPH currently commands an attractive FY13 dividend yield of 6.0% which will limit downside to share price in our opinion.

Theme 2: Tourism growth may yet again be strong 
 
We believe visitor arrivals will continue to be strong as we move into 2013. For the first six months of 2012, visitor arrivals rose 11.4% YoY, attributed to the various initiatives of the Singapore government to promote tourism via new infrastructure developments and activities. We believe the new attractions, eg Gardens by the Bay, Oceanarium, River Safari and Cruise Terminal will continue to drive visitor arrivals into Singapore. Rising influx of leisure travelers could possibly offset the weakness in business travelers  ' anecdotal accounts suggest a recent softening inflow of business travelers and reduced expenditure by this group. We believe an overall 2013 visitor arrival growth rate of high single-digit is achievable. 

Hospitality REITs could be lacklustre as business travelers slow. Despite expected growth in 2013 visitor arrivals (forecasted at high single digit growth rate), we believe hospitality REITs could experience softer earnings as the share of business travelers is seen to shrink (business travelers generally pay higher room rates) relative to leisure travelers.  Hence, we are not bullish on hospitality REITs.

Economy-rate hotels could benefit. Our pick in the sector is Global Premium Hotels (GPH). GPH's hotels are positioned in the economy-tier segment, which has proven its resilience in past down-cycles. It is currently benefitting from the robust strength in the leisure travel market, underpinned by the rising number of tourist attractions in Singapore.  The current shortage of economy-tier and 3 star hotels also plays to its advantage, with the supply pipeline limited to 2-3% growth p.a. On the operational front, GPH has consistently chalked up occupancy in the mid to high 80% levels and enjoys the highest gross margins (86-88%) among its peers, due to its no frills operations. Beyond the 22 hotels in its initial portfolio at IPO, GPH has also acquired a hotel site at Tyrwhitt Road, which it is developing into a 260-room Parc Sovereign hotel, lifting its room portfolio by some 15%. Price catalysts include further upward revaluation of its room portfolio at year end and a stronger 4Q operational performance.

More leisure travelers mean higher SATS business volumes. SATS could benefit from the popularity of travelling via LCCs for leisure travelers. With more passengers expected to pass through Changi Airport and the new cruise terminal, it would translate into increased business volume (in terms of passengers handled, meals provided and ground handling services) for SATS. This could somewhat offset the effects of expected softness for the cargo segment.  With increased government levies and headcount, we believe the cost pressures (especially from staff cost) would remain. The International Cruise Centre (SATS has a 50% stake) has commenced operations, but positive contribution is expected only from FY14. We like SATS for its stability, good dividends and strong balance sheet, but current share price has largely priced in  the positives. Hence, we have a NEUTRAL recommendation with a TP of S$2.63, but its FY14F yield of 4% could attract some investors.

Source: OSK