DBS undergoes target price cuts after a record FY18, but remains a 'buy'

DBS undergoes target price cuts after a record FY18, but remains a 'buy'

Michelle Zhu
19/02/19, 10:44 am

SINGAPORE (Feb 19): Jefferies Singapore, OCBC Investment Research and RHB Research are maintaining their “buy” calls on DBS Group while lowering their price targets to $28.50, $29.31 and $28.80, respectively.

This comes after the release of its 4Q18 results, which saw earnings grow 8% y-o-y to $1.32 billion to bring the bank’s earnings for the full year to a record high of $5.63 billion.

In a Tuesday report, Jefferies analyst Krishna Guha says he has lowered his FY19-20 earnings per share (EPS) estimates on the back of reduced loan and non-interest growth, although valuations remain attractive at 10.3 times P/E given the implied 5% growth and yield.

While he found DBS’s headline expense growth in 4Q “a bit disappointing”, he continues to like the stock for the management’s healthy FY19 guidance and multiple revenue drivers, which he believes will contribute to mid-single-digit revenue growth in a base case scenario.

“Mid-single-digit loan growth, higher margins and improvement in market sentiment are likely to result in high-single-digit income growth. Along with a steady expense ratio and normalized credit cost, profitability improvements should continue, albeit at a slower pace,” says Guha.

In a separate note on Tuesday, OCBC analyst Carmen Lee says she has lowered FY19 estimates to reflect a more cautious operating environment amid continued headwinds, such as the spillover effect from a slowdown in China, ongoing trade tensions, and disruptions.

Nonetheless, she expects continued improvements on some silver linings and growth areas in Asia, including healthy domestic growth and demand as well as the possibility of fiscal stimulus.

“While the market was generally expecting 2-4 hikes in 2019, this expectation has since come off, but management is positive of improvement in return on equity (ROE) during the year. Management is of the view that there is still potential to re-price a large part of its loans progressively and this could help to lift net interest margin (NIM),” notes Lee.

Meanwhile, RHB has lowered its long-term ROE assumption to 13.5% from 13.8% previously with the view that DBS’s management guidance for a 2019 ROE of 12.5% comes on “bullish expectations” as 2018’s 12.1% ROE was already the highest in more than a decade, in the view of analyst Leng Seng Choon.

The research house’s lower target price of $28.80, compared to $29.80 previously, is pegged to 1.5 times 2019 book value.

“This is derived from CoE assumption of 10.1%. We believe the ascribed P/BV premium over the 5-year historical P/BV of 1.2 times is justified, given rising NIM and cost efficiencies from digitisation,” explains Leng.

As at 10:29am, shares in DBS are trading 4 cents higher at $25.24, or 1.31 times FY19F book according to RHB estimates.

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