CFA Society Singapore
SINGAPORE (Aug 17): UOB Kay Hian has upgraded its FTSE Straits Times Index (FSSTI) target forecasts up to 3,410 from 3,250 previously on “pockets of solid outperformances” in the 2Q17 financial reporting season, which concluded this week.
In a Thursday report, analyst Andrew Chow recaps on what he calls an encouraging 2Q17 reporting season, which saw 28% of companies reporting results that exceeded UOB’s expectations versus 24% in the previous quarter – with the beats concentrated on banks and technology/exporters.
While 51% met expectations compared to 44% in 1Q, the number of disappointments fell to 21% in 2Q from 31% in the previous quarter, with notable disappointing results including those of Raffles Medical and Ezion.
While Raffles Medical came in only slightly below what was forecasted, Chow notes that investor concerns have arisen over the extent of the group’s 2018/19 startup costs for its new China hospitals and how it would impact FY2017-19 earnings. The stock has been rated “hold” after its recent share price correction, with 2017/19 net profit projects being cut by 3-15% following its 2Q results announcement.
Driving the market earnings increase was the banking sector, where non-performing loan (NPL) formation eased on-year for all three banks, which enjoyed growth in fee income and asset quality. Chow’s top “buy” bank picks are DBS and OCBC at target prices of $24.85 and $13.38 respectively.
The analyst also notes a stellar quarter for technology/exporter stocks under UOB’s coverage, with most enjoying earnings upgrades – especially Sunningdale, which has been rated “buy” by the analyst with a target price of $2.51.
Another “buy” key technology pick is Memtech, which has been given a price target of $1.18 as its 2017-19F net profit estimates were raised 5-10% following the reporting of its results.
Meanwhile, developer stocks saw mixed results within the property sector with CapitaLand’s 2Q results in line with UOB’s estimates, whereas CityDev fell short of expectations on lower-than-expected contributions on timing of project completions.
Chow’s preferred property stock picks are big caps Frasers Logistics & Industrial Trust (FLT), CapitaLand Commercial Trust (CCT), Frasers Hospitality Trust (FHT) and Ascendas REIT (A-REIT) with the respective price targets of $1.20, $1.90, 80 cents and $2.97.
As for shipyards, the analyst notes that Sembcorp Industries (SCI) – rated “buy” with a $3.57 price target and highlighted for preferred exposure within the sector – came in line with UOB’s expectations, whereas Keppel’s offshore and marine (O&M) contributions disappointed in contrast.
“All eyes are on SCI’s strategic review which is expected to take place in late-17, with details available in early-18. SMM’s 2Q17 actually exceeded our expectations due to strong core operating margin of ~10%, comparable with 2Q16’s. We believe the improved margin was likely due to stronger contribution from the repair & upgrades segment,” says Chow.
“We continue to favour reasonably priced stocks with visible earnings and reasonable yield. Our key picks are OCBC, CapitaLand, FLT, A-REIT, FHT, SATS, ThaiBev, Wing Tai and CCT… Investors with appetite for mid-caps could consider China Aviation Oil (CAO), Hotung, Memtech and Tianjin Zhongxin,” says the analyst.
But Chow says investors should stay clear of SIA Engineering. He also advises “tactically topslicing” Singapore Airlines as the stock is trading at a premium to UOB's fair value of $10.10.