SINGAPORE (Dec 14): OCBC Investment Research is upgrading its call on DBS Group to “buy” with a higher fair value estimate of $27.40 based on 1.4 times FY18E book while projecting for the group’s earnings to rise 25% in FY18.
In a Thursday report, lead analyst Carmen Lee notes that the stock is up 45% in the year to date (YTD), largely contributing to the boost in the Financial Index’s 31% rise for the year.
This is also in line with the outperformance of Asian banks with the gain of 13% YTD based on the MSCI Asia ex-Japan Financial Index, versus just 4% for the MSCI World Financials Index.
Lee is in the view that the worst is now over for DBS’ exposure to the beleaguered oil and gas (O&G) sector, and believes it is entering 2018 on an even stronger footing – especially with the improving sentiment for the Singapore property sector providing another boost in addition to higher interest rates in 2018.
As such, the analyst has raised DBS’s FY18 earnings projections to $5.5 billion from $5.44 billion previously.
“Having provided for its exposure to the oil and gas sector, we have cut allowances from an estimated $1.8 billion in FY17 to $757 million in FY18. Together with an 8.2% rise in Net Interest Income and a 5.4% rise in Non-interest Income, we are expecting a 25% rise in net earnings,” explains Lee.
“Valuations for banks have moved up in tandem with higher share prices. DBS’s price-to-book is currently at 1.4 times, in line with its peers, lower than its Asian peers of 1.5 times but higher than the US/European banks of 1.1 times. In the past 10 years, DBS has traded between 0.6 times book (during the Global Financial Crisis) to as high as 1.53 times book,” she concludes.
As at 10:46am, shares in DBS are trading 0.9% lower at $25.08, or 2.59% FY18F dividend yield.
