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Singapore Strategy - UOB Kay Hian 2016-04-15: Positioning After The Latest Monetary Policy

Singapore Strategy - UOB Kay Hian 2016-04-15: Positioning After The Latest Monetary Policy Singapore Strategy CITY DEVELOPMENTS LIMITED SINGAPORE POST LIMITED KEPPEL REIT ASCOTT RESIDENCE TRUST DBS GROUP HOLDINGS LTD

STRATEGY – Positioning After The Latest Monetary Policy 

  • We position selectively after the recent policy change to a neutral appreciation slope for the Singapore dollar. 
  • We prefer companies with foreign-denominated earnings or very resilient profits, given the uncertain growth outlook. 


WHAT’S NEW 


• A surprise move. 

  • The Monetary Authority of Singapore (MAS) announced a shift in the SGD nominal effective exchange rate (NEER) to a neutral appreciation slope but kept the mid-point and bandwidth of the policy band unchanged. 
  • The authorities cautioned that this is not a policy to depreciate the Singapore dollar (SGD). 


ACTION 


• Growth concerns. 

  • One of the major reasons for the move is that 2016 core inflation is expected to come in at the lower half of the MAS forecast of 0.5-1.5%. However, we think this could also be attributable to concerns over the growth outlook for the economy. 
  • A neutral SGD NEER policy is typically deployed during economic uncertainties and was implemented in 2008 (global financial crisis) and 2001 (dot-com collapse). 
  • While our base scenario is nowhere as dire as in 2001 or 2008, we think the move underscores the uncertain macro economic outlook. 

• Interest rate implications. 

  • UOB Global Economics & Markets Research expects nearterm stability for SIBOR and SOR. 
  • We maintain our forecast that the 3-month SIBOR and 3-month SOR would reach 1.5% and 1.7% respectively by end-16. 
  • We expect further upward movements in interbank interest rates to be correlated to the two interest rate hikes by the US Fed anticipated in 2016. 
  • Our top pick is OCBC (BUY/Target: S$10.68) for resilient asset quality and conservative management of its exposure to the oil & gas sector. 
  • We also have a BUY for DBS (BUY/Target: S$19.25). 

• Positioning for this. 

  • The FSSTI has rebounded 15% from the ytd low of 2,528. Given the strong bounce, we would position cautiously for the rest of the year. 
  • We see potential downside to corporate earnings growth in the face of the uncertain macro outlook. 
  • Against this background, we favour investments in: 
    1. stocks with resilient earnings or dividend yield, 
    2. beneficiaries of the SGD neutral appreciation slope, 
    3. hospitality S-REITs that are benefitting from a gradual recovery in tourists arrivals, and 
    4. stocks with company-specific catalysts, such as potential M&A 

• Stocks with resilient earnings or yield. 

  • In this space, we like ComfortDelGro (BUY/Target: S$3.16), SingTel (BUY/Target: S$4.41) (for its geographical diversification) and Raffles Medical (BUY/Target: S$5.07) as it is well positioned, given its capacity expansion in Singapore and China. 

• Beneficiaries of the SGD neutral appreciation slope. 

  • Should the SGD weaken, companies with foreign-denominated earnings are beneficiaries. SingTel is a key beneficiary as 74% of its pre-tax profit come from Australia, Indonesia, India, Thailand and Philippines (3QFY16). 
  • Growth from overseas markets will show up more visibly with the zero policy of S$ appreciation. In particular, the Australian dollar has strengthened 4% against the Singapore dollar since March. 
  • SingTel will benefit from stronger contribution from Optus, which accounted for 25% of group pre-tax profit in 3QFY16. 
  • Other beneficiaries include SIA (BUY/Target: S$13.90) on P&L improvement but capex will be affected, and SATS (BUY/Target: S$4.50) on increased visitor arrivals at Changi Airport, as the weaker S$ could attract increased tourism to Singapore. 

• Hospitality REITS could benefit from recovery in tourist arrivals. 

  • Prospects of a weakening SGD should bode well for the local hospitality scene as it becomes cheaper for overseas visitors to come and spend in Singapore. It is also boosted by strong Chinese arrivals (+34% yoy in 2H15) and revitalising Indonesian arrivals, which grew 10.7% yoy in 2M16. Over the same period, international tourist arrivals expanded 12.3% yoy while RevPAR grew 1.9% yoy on higher occupancies and room rates. 
  • CDREIT (BUY/Target: S$1.64) will be a key beneficiary of such a potential pick-up, given its exposure to the domestic market (71% of asset value in Singapore) and a strong institutional following. 
  • On the flip side, a weaker SGD could affect S-REITs as the currency weakness bites into the returns, resulting in less capital inflow into the sector. This is the opposite of the positive impact of an appreciating SGD in the past as the currency appreciation enhanced the returns. So, the domestic S-REITs will be more affected compared to those that derive value from overseas. 

• Stocks with company-specific catalysts such as M&A. 

  • Last but not least, we see opportunities in stocks with potential M&A flavour. Stocks in this bucket include Innovalues (BUY/Target: S$1.06), Valuetronics (BUY/Target: S$0.52) and United Engineers (NOT RATED). 

• Turning more cautious after recent bounce. 

  • After the recent bounce, we have turned more cautious as the FSSTI’s discounted valuations have narrowed whereas earnings visibility remains limited. 
  • As an indication, the FSSTI’s FY16F PE of 14.3x is only at a 7% discount to long-term mean PE of 15.4x. Hence, we would take the recent bounce as an opportunity to selectively top slice and would sell SMM, SIA Engineering, Super Group into strength
  • Stocks that we like include OCBC, SingTel, City Dev, SingPost, CDREIT and K-REIT. Investors with an appetite for mid-caps could consider Innovalues and Valuetronics. 


TOP RECOMMENDATIONS 




Andrew Chow CFA UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-04-15


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