Singapore Strategy:Slimmer pickings

Conclusion

    We raise our FSSTI target to 3,235 from 2,930, mainly driven by a better topdownEPS growth outlook. That said, SG’s expected mid-single-digit EPSgrowth rate remains among the lowest in the region and the market’s sharpre-rating since the start of the year leaves us with slimmer pickings, we think.

    As such, our top picks favour a compounder / defensive bias.

    Impact

    We raise our FSSTI target to 3,235 from 2,930. Our target represents theaverage of our bottom-up and top-down index valuations (Fig 5). Today’supgrade is largely driven by the latter, as we incorporate an improved topdowngrowth outlook of +6% for 2017 versus ‘flat’ at the end of last year. Thekey driver of the change is stronger NODX readings (~90% correlation withindex EPS growth). Our FX team also does not expect MAS to ease its policysettings on April 13th (easing tends to be negative for index EPS growth).

    But FSSTI has been quick to reflect the better earnings outlook, and hastraded up to its +1 standard deviation band. That level looks about fair, giventhe resumption of earnings growth post 2016’s contraction. But it doesn’tleave much upside, with most of our expected market TSR coming from itsstill-healthy dividend yield (FSSTI yield: 3.5%). In terms of our positioning:

    We raise our OW in Property, which continues to show solid earningstrends, led by big consensus upgrades to CAPL, which remains a toppick. While the top-down case for REITs is mixed, we add MINT as a toppick, as it offers solid and visible mid-single-digit DPU growth and is thebest play on Ken’s out-of-consensus call for bottoming industrial rents.

    We raise our OW in Financials. Ken’s proprietary analysis on the banks’asset quality shows that consensus loan loss provision expectations are20% too high, with DBS the best play on this theme. We have removedSGX as a top pick in light of weaker trends in monthly derivative volumes.

    We lower our OW in Telecom. Having started in Singapore, the trend ofrising mobile competition has spread to Australia post recent spectrumauctions. This impacts ST negatively and we remove it as a top pick.

    We move commodities to UW. We expect CPO prices to fall from 1Q17levels as production recovers post an El-Nino impacted 2016. We still likeFR, but see our other top picks as more actionable in the near term.

    We keep our UWs in Industrials and Consumer, where valuations lookvery elevated. Within these multi-faceted sectors, we do make JS a newtop pick; its higher liquidity post MSCI HK inclusion should narrow its wide25% discount to NAV. We keep THBEV as a top pick as the market is stillnot fully pricing in the share and margin gains Fransisca is calling for.

    Outlook

    We see slimmer pickings in SG. Our top picks feature names where we thinksolid compounder fundamentals remain undervalued (CAPL, THBEV, SATS,MINT) or where we see earnings / valuation risks skewed to the upside (DBS,JS, and CAPL fits here as well).