Maybank Kim Eng analysts Thilan Wickramasinghe and Gene Lih Lai are convinced that a new phase is about to unfold for the Straits Times Index (STI).

In a Sept 7 research note, the analysts note that earnings momentum is losing some steam, with half of Maybank Kim Eng’s coverage sectors witnessing h-o-h declines in net profit after tax. However, the market saw a 94% h-o-h increase, largely driven by a turnaround in retail REITS and industrials, combined with better performance from financials due to falling provisions.

Nonetheless, Wickramsinghe and Lai anticipate slower earnings per share (EPS) upgrades for certain sectors in the coming months.

“We think incremental upgrades for financials, agri, healthcare may likely slow given higher bases and much improved visibility. On the other hand, consumer, retail and hospitality REITs, industrials [and] telcos could see continued upgrade momentum from domestic and regional re-opening. Timing visibility for this remains poor given surging Covid variants,” they say.

But while EPS recovery momentum is slowing, Wickramsinghe and Lai believe multiples are set to expand. “In past cycles, when earnings upgrades slowed, multiples expanded,” they point out. Drawing comparisons to the Global Financial Crisis, they note that multiples expanded 20% once earnings normalised.

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They also note that valuations remain reasonable, highlighting that with the exception of the tech sector,  all STI sector P/E ratios are below their five-year mean.

“In the current context, we believe the market is still undergoing earnings normalization. However, it is closer to the end given smaller beats and higher bases. Nevertheless, in the next phase this may catalyse multiples to expand, especially given Singapore’s vaccine progress as well as continued uncertainty in regional markets, we believe," they say.

Wickramsinghe and Lai have raised their 12-month STI target 3,650, up from 3,537 previously, underpinned by target valuations which have been rolled forward following 1H2021 results. The higher target offers 18% upside. 

Their top picks include AEM Holdings, Ascendars REIT, CDL Hospitality Trusts, CapitaLand Integrated Commercial Trust, DBS Bank, ESR-REIT, Frasers Centrepoint Trust, OCBC, SingTel, and UMS Holdings.

Photo: Bloomberg