Singapore Strategy

by CIMB-GK RESEARCH (18 Nov)

THE Q3 2008 earnings season has just concluded. Despite marked-down expectations by our analysts, the number of companies with earnings misses still outnumbered those that sprang positive surprises by 2:1.

Sectors that disappointed this quarter were banks, transport, telcos, manufacturing and S-chips. Sectors that beat expectations were plantations and offshore and marine. In the past three months, we had pulled down our expectations for Straits Times Index (STI) EPS growth.

We now expect STI earnings to contract 6.3 per cent y-o-y in 2008 and 13.7 per cent y-o-y in 2009. The bulk of our earnings cut came in October/November - we chopped our estimates for STI 2008 EPS by 8 per cent and 2009 EPS by 27 per cent in that period. Whether these expectations are low enough remains to be seen. STI earnings fell on average 28 per cent in 1997/98, 2001 and 2003.

Few places to hide in a global recession: In the past three months, the MSCI Singapore Free Index fell 39 per cent. In Singapore, the banking, property, real estate investment trust (Reit), multi-industry, plantations, transport and manufacturing sectors underperformed the index.

The two worst-hit sectors were plantations and transport, as commodity prices went into free fall and the shipping sector suddenly saw demand evaporate, largely from the developed world. Only telcos, media and services outperformed the index.

Our top picks: As the STI attempts to find its floor in the next six to nine months, stocks that we like are either stable, cash businesses that provide decent yields despite recessions or stocks that will emerge from this recession for the better, benefiting from a strong balance sheet now or in a position to emerge as leaders in their industries. The opportunity to pick these stocks at marked-down valuations is their key attraction.

In the former category, the stocks include MobileOne (M1), Singapore Post, ComfortDelGro, Cerebos Pacific, Parkway Life Reit, Sembcorp Marine, Singapore Press Holdings and SP Ausnet. In the latter category, our favoured stocks are Parkway Holdings, CapitaCommercial Trust, Wheelock Properties, City Developments, Venture Corp, Singapore Exchange and Wilmar.

For the next six months, our preferred sectors are media, S-Reits and telcos. The sectors we are wary of are banks, property, transport and consumer discretionary.

We view recent rallies as relief rallies from oversold positions. As the market grapples with the realities of a recession, we expect the STI to lose ground and find a floor anywhere between 1,200 and 1,600 - recession P/B levels.

As companies streamline their cost structures and as governments pump-prime in zest and cut interest rates to near zero in the coming months, we expect the seeds to be sown for an eventual recovery from H2 2009. By our estimation of the typical duration of a recession, a market bottom in mid-2009 seems likely. Our end-2009 STI target is set at 2,040, based on a bottom-up methodology.

-Research Report by CIMB-GK RESEARCH (18 Nov)