SINGAPORE (Mar 5): The earnings season is over for now and more companies have beat their FY18 results expectations than missed, with large-caps mostly boosted by one-off gains, according to CGS-CIMB Research in a Monday report.
Analyst Lim Siew Khee says, “We think YTD FSSTI’s outperformance (+7%) was somewhat helped by fewer poor results in the last two months where the beats exceeded misses – a first in seven quarters. However, the quality was less sterling.”
Capital goods mainly attributed its beat to one-off gains, while REITs saw divestment gain distributions.
Although these trends provide no confidence in earnings outlook, the banks, property and consumer sectors were seen to increase cuts.
The research house’s new top “buy” picks are DBS Group, due to better revenue data compared to peers; and Keppel Corporation for its efforts to step up recurring income base. These two stocks have replaced OCBC and Sembcorp Industries for the top bank and capital goods sectors pick, respectively.
CGS-CIMB has also removed Sheng Siong, Y Venture and China Sunsine from its Alpha list.
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“We now forecast market EPS growing 3-4.3% for FY19-20F. Accordingly, our FSSTI target is lowered to 3,110 (from 3,300), still based on 12x CY20F P/E or -0.5 SD of mean,” says Lim.
Currently, the FSSTI is trading 13 times CY19F/20F earnings, which Lim deems is not sufficiently cheap to sustain a strong 1H uptrend, having performed YTD.
Moreover, the market has gone from defensive to having some appetite for risk, accepting trade talks as a constant. But the lack of impressive corporate earnings growth in the upcoming quarters my dim this optimism.
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On the other hand, the research house has made several changes to sector rating.
“We shuffle sector calls to neutralise Consumer to ‘Neutral’ on above-mean valuations and unexciting growth outlook as companies grapple with higher costs,” says Lim.
The Transport sector has been upgraded to “overweight” (trading below mean), following the recent upgrade for SATS. The property sector is kept “overweight” on valuation grounds, although it is now more of a trading call given its 7% growth YTD.
Meanwhile, the research house has “soft overweight” ratings on REITs and banks.
Although above mean, stronger DPU growth and benign interest rate environment provide some shelter for REITs.
“Conversely, below-mean valuations and yield will still give us reason to own banks. Interest rate cuts could be the key risk,” adds Lim.
As at 1.10pm, shares in DBS are trading at $25.31, while Keppel shares are trading at $6.25.
