Is a Bottom in Earnings Revisions in Sight?
3Q13 Misses and Beats—While 3Q13 results presented investors more misses that beats, the rate of decline in the Earnings Revision Count indicator has slowed to -20% from -31% at the of 2Q13’s result season (Figure 1). Notable misses came from firms linked to resources (GGR, IFAR, Noble, SMM), Industrials (transport names such as NOL, SIA, SMRT) as well as some firms from the high-dividend yielding group (SATS, SPH, SingTel, M1, CDL Hosp Trust), real estate firm (CityDev). Upgrades were in Genting, Keppel, banks (UOB, OCBC) and real estate firms Keppel Land & MIT. Within our coverage universe, the aggregate FY13 EPS trend is now at -3% (-2% post 2Q13 results). This is expected to grow 10% in 2014E, with positive revisions expected from the Industrials (conglomerates, transport), Consumer Staples and Consumer Discretionary segments (Figure 3), reflating as Singapore's GDP growth normalizes to 3.5% in 2014E (3.7% in 2013E, 1.3% 2012).
Valuations at mean—Year-to-date, the flat STI Index has underperformed ASEAN peers, though there has been a degree of outperformance in the past 5 months as the US tapering phase begun to be priced in. The STI Index is now trading at historical mean of ~15.3x PER and slightly below -0.5SD of 1.33x fwd P/B. Our Gordon Growth-derived STI target into 2014 is 3278, translating to a PER of 15.7x.
Remaining in stock-picking mode; prefer external over domestic names— Aggregate export recovery to Singapore’s largest trading partner Europe present recovery potential in 2014 as these nations recover from recessions. Still, while Singapore’s exports have bottomed, the uptick thus far is tepid due to cost & labor woes and caution on restocking inventory to normal levels. These factors together with the risk of household debt unwinding (refer to Think Singapore: Households Held to Ransom by Debt) leads us to prefer stocks exposed to external drivers. Top picks: Keppel Corp (rig cycle intact despite oil price volatility), two China-exposed firms, Wilmar (conduit for Asia’s food needs, and now, part of Indonesia’s energy needs) and CMA (robust B/S, earnings anchored by recurring income in Singapore) as well as DBS (highest NIM/earnings leverage to eventual SGD rates rises). We are inserting Keppel Land (sustainable pre-sales from China, potential divestment of MBFC Tower 3 over the next 12 months) over our previous pick HK Land (challenges in HK’s office segment). Investors are expected to begin to reduce weights in interest-rate sensitive segments given the 94 bps rise in 10Y yields since mid-2013 and tapering expectations in 2014.
Rebalancing Challenges in 2014—The challenge for Singapore next year will be to manage the recovery phase as GDP growth expectations reflate. Companies here, especially SMEs, could find it harder to expand and meet rising orders as Singapore’s labor restrictions start to bite but the aggressive productivity push fails to deliver results so quickly.
Publish date: 18/11/13