Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Think Singapore
Revisiting Earnings Revisions – Shapes and Trends from 2008
and 2001
Halfway through weak exports data? — High semiconductor inventory levels feeding
into weak electronic exports for much of this year have us leaning towards a repeat of
2000/2001. Weak electronics exports, with a 17% YoY decline for July, have weighed
Singapore’s STI down for most of this year. Judging by declines seen in 2001 and 2008
(up to a 40% YoY decline), Singapore could already be halfway through the contraction
cycle in manufacturing / exports. Foundry TSMC’s July and Aug revenue was stronger
than earlier thought (making up 71% of expectations for 3Q11) and conclusions from
Citi’s recently concluded tech conference in the US offer some support that Singapore’s
export malaise could reach its trough later in 4Q. Our economics team reduced
Singapore's 2011 GDP forecast twice to 5.3% (prev: 5.7%) with a technical recession
likely in Q3.
Comparing current EPS declines versus trends in previous downturns — In 2001,
Singapore’s exports slumped following the dot-com bust led to ~25% in EPS decline for
2000-01. During the global financial crisis (GFC) in 2008/09, EPS declined by almost
35%. Matching 2001’s experience would lead to at least 10-15% more in negative EPS
revisions (from -5% currently) and matching the STI’s price to book lows in 2001 would
have the STI index falling by about 10% from current levels to 2500 points. A repeat of
events similar to those that triggered the GFC unfortunately suggests 40% more
downside for the STI index assuming similar p/book lows.
Near to halfway mark on negative revisions? — Negative revisions exceeded
positive revisions counts by 29% in early September – the sixth consecutive month the
ERC has been in the negative zone. During the GFC period, the ERC spent 16 months
in the negative zone and during the tech bust, 13 months, i.e. the market is about 37-
46% through the current malaise either on the GFC or tech bust as a reference
framework.
EPS revision trends: three sectors to note — Revision data for 2008/2009 stands
out for three sectors – commodity traders and industrial firms in that these exhibited
recovery trends earlier in 2009. Transport names offer a strong contrast with negative
revisions being sustained way into 2009.
Key stock picks — Preference within this volatile environment are for large cap stocks
with low growth expectations into 2012 to minimize the risk of earnings
disappointments. These include Singtel & A-Reit (we like both for their dividend yields
and defensive qualities), Genting (as a proxy for regional arrivals remaining strong)
DBS (Singapore’s banks have a strong equity base) and Wilmar on the continued
turnaround of its oilseeds unit
Not expecting a repeat of 2008
While 2011 bears similar notes to the 2008/09’s GFC, we believe this is not a
repeat. GFC was sparked by an acute credit crisis while the ongoing rout is linked to
risks of anemic growth amongst developed markets and issues with developed
nations’ sovereign debt.
What’s different this time?
1) There has already been negative momentum in our earnings revisions count
(ERC) in the last 9 months, with downgrades exceeding upgrades since April 2011
2) Expectations are lower as STI‘s PER is at 13x (-1 s.d) vs about 17x 2 quarters
before the GFC started
3) Declining Govt bond yields, which have now gone to a low of 1.52% (in contrast,
yields rose during GFC)
4) S$ has continued to strengthen, though we note it has weakened to 1.23 this
week as we pen this piece (the S$ weakened 8-10% during the GFC)
5) Credit remains accessible (eg Noble CDS at ~20% of peak levels in 2008)
Before the US credit rating downgrade in August, our outlook for the market had
been guided by continuous weakening of our ERC indicator since April. Negative
revisions have exceeded positive revisions by 29% in early September – this is now
the sixth consecutive month the ERC has been in the negative zone. In
comparison, during the GFC period, the ERC spent 16 months in the negative zone,
between Jan 2008 to April 2009.
The STI Index bottomed a month earlier in Mar 2009 ~1500 points and about four
months after the ERC hit its worst patch with negative revisions exceeding positive
revisions by 70% in November 2008.
In the 2000-2001 tech bust period, the ERC was negative for 5 months in 2000
(between July-Nov2000) and a further 13 months between Jan 2001 and Jan 2002.
Near to being halfway through on negative revisions? – Thus far, the message
from Singapore’s weak electronics export data and our ERC is similar in that the
market is about 37-46% through the current malaise, even if one uses the GFC or
the tech bust period of 2000/2001as a reference framework.
That said, one would expect the quantum of negative revisions (only -5% so far, see
figure 10) to become larger in the next few months as investors and analysts make
reductions to earnings estimates.
Deciding on what constitutes the half-way point will be an important task in the next
few months.
Valuations near strong support levels, unless a crisis erupts – Investors have
moved more quickly this time, with the STI already trading at a support level of 13x
PER, which is seldom breached except during major recessions. A similar outcome
can also be concluded looking at the STI using P/B ratios. STI’s earnings yield of
c.7.5% is almost 600bps higher than the 10-yr govt bond yields of c.1.5%.
Matching the STI’s price to book lows in 2001 tech bust recession would have the
index falling by about 10% from current levels to ~2500 points.
Unfortunately, a repeat of events similar to those that triggered the GFC suggests
40% more downside for the index assuming similar p/book lows.
Key stock picks
In this volatile environment, our preference is for large-cap stocks with low
growth expectations into 2012 to minimize risk of earnings disappointments
In our May Think Singapore note2, we had added defensive companies such as AREIT
(as a proxy of S-REITs) and Singtel for their attractive dividend yields in
replacement of higher beta stocks SIA and GLP from our Singapore stock pick list.
In our last Think Singapore note in August3, we added Genting (as a proxy for
regional arrivals remaining strong) in replacement of Keppel as a pick. While Horng
Han continues to like Keppel’s dominance in the rig building segment, he sees
rising risks on slower orderbook growth in 2012. Concerns on the impact of
European financing onto the rigs value chain also needs to be watched. Meanwhile,
our Genting analyst George Choi highlights that Genting’s valuations are attractive
at a 20%+ discount to Macau centric names, having lost some shine on Resorts
World Sentosa losing some market share to Marina Bay Sands. Gross gaming
revenue for Singapore is still likely to grow 10% in 2012 from an estimated US$5.4b
in 2011. The possible addition of legalized junkets to the Singapore scene can also
be helpful as this may allay concern on credit risk away from Genting's receivables.
We also continue to like Wilmar on the back of a sustained turnaround seen at its
oilseeds division. Wilmar could see better volume growth as China’s lifting of price
caps in August allows for volume growth for soybeans and edible oils to regain
momentum in 2H11.
We also continue to have DBS as a proxy for a well capitalized bank in Singapore.
Robert Kong remains constructive on Singapore banks despite negative sentiment
of GDP downgrades and concerns of a further quarter of qoq economic contraction
in 3Q11, given banks' continued strong loan and currently benign asset quality and
strong capital levels.
In the property sector, Wendy Koh and Tan Chun Keong continue to reiterate that
the risk reward ratio remains unfavorable for developers4 and continue to prefer
REITs as a more defensive play within the property sector. The view remains that
developers will remain in a 'no-win' situation. If demand remains strong, developers
are likely to be subjected more policy risks. Should the economy go into a full-blown
recession, we clearly run into a risk of a price decline and further downgrades in
RNAVs. Among the REITs, the preference is for MCT (MACT.SI; S$0.85; 1L), FCT
(FCRT.SI; S$1.46; 1L), A-REIT (AEMN.SI; S$2.12; 1L) and MIT (MAPI.SI; S$1.21;
1L).
Ongoing risks – Uncertainty due to volatile markets can be a big dampener to
consumer spending and can feed into further GDP weakness in Singapore. TSMC’s
data and our conclusion from the tech conference aside, the current soft patch in
electronics exports caused by high inventory stockpiles can well be extended into
one that also bites into the consumption element as job losses at locally based
manufacturers start to become a concern as we have started to detect duress and
margin erosion within technology exporters due to the continued strength of the
SGD. Headline inflation for July was 5.4% YoY. Our economist expects CPI to
average 4-5% YoY for 2011, even as a record strong S$ helps dampen imported
inflation.
There is now effectively a conflict of interest between exporters (who may needs a
lower S$) and domestic consumers and policy makers (who need to tame
inflationary pressures). This mean inflation remains a risk factor for investors -
despite a 10-15% fall in headline commodity prices since the recent peak in April,
we remain concerned on risks from inflation and will watch inflation data carefully for
in the coming months.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Think Singapore
Revisiting Earnings Revisions – Shapes and Trends from 2008
and 2001
Halfway through weak exports data? — High semiconductor inventory levels feeding
into weak electronic exports for much of this year have us leaning towards a repeat of
2000/2001. Weak electronics exports, with a 17% YoY decline for July, have weighed
Singapore’s STI down for most of this year. Judging by declines seen in 2001 and 2008
(up to a 40% YoY decline), Singapore could already be halfway through the contraction
cycle in manufacturing / exports. Foundry TSMC’s July and Aug revenue was stronger
than earlier thought (making up 71% of expectations for 3Q11) and conclusions from
Citi’s recently concluded tech conference in the US offer some support that Singapore’s
export malaise could reach its trough later in 4Q. Our economics team reduced
Singapore's 2011 GDP forecast twice to 5.3% (prev: 5.7%) with a technical recession
likely in Q3.
Comparing current EPS declines versus trends in previous downturns — In 2001,
Singapore’s exports slumped following the dot-com bust led to ~25% in EPS decline for
2000-01. During the global financial crisis (GFC) in 2008/09, EPS declined by almost
35%. Matching 2001’s experience would lead to at least 10-15% more in negative EPS
revisions (from -5% currently) and matching the STI’s price to book lows in 2001 would
have the STI index falling by about 10% from current levels to 2500 points. A repeat of
events similar to those that triggered the GFC unfortunately suggests 40% more
downside for the STI index assuming similar p/book lows.
Near to halfway mark on negative revisions? — Negative revisions exceeded
positive revisions counts by 29% in early September – the sixth consecutive month the
ERC has been in the negative zone. During the GFC period, the ERC spent 16 months
in the negative zone and during the tech bust, 13 months, i.e. the market is about 37-
46% through the current malaise either on the GFC or tech bust as a reference
framework.
EPS revision trends: three sectors to note — Revision data for 2008/2009 stands
out for three sectors – commodity traders and industrial firms in that these exhibited
recovery trends earlier in 2009. Transport names offer a strong contrast with negative
revisions being sustained way into 2009.
Key stock picks — Preference within this volatile environment are for large cap stocks
with low growth expectations into 2012 to minimize the risk of earnings
disappointments. These include Singtel & A-Reit (we like both for their dividend yields
and defensive qualities), Genting (as a proxy for regional arrivals remaining strong)
DBS (Singapore’s banks have a strong equity base) and Wilmar on the continued
turnaround of its oilseeds unit
Not expecting a repeat of 2008
While 2011 bears similar notes to the 2008/09’s GFC, we believe this is not a
repeat. GFC was sparked by an acute credit crisis while the ongoing rout is linked to
risks of anemic growth amongst developed markets and issues with developed
nations’ sovereign debt.
What’s different this time?
1) There has already been negative momentum in our earnings revisions count
(ERC) in the last 9 months, with downgrades exceeding upgrades since April 2011
2) Expectations are lower as STI‘s PER is at 13x (-1 s.d) vs about 17x 2 quarters
before the GFC started
3) Declining Govt bond yields, which have now gone to a low of 1.52% (in contrast,
yields rose during GFC)
4) S$ has continued to strengthen, though we note it has weakened to 1.23 this
week as we pen this piece (the S$ weakened 8-10% during the GFC)
5) Credit remains accessible (eg Noble CDS at ~20% of peak levels in 2008)
Before the US credit rating downgrade in August, our outlook for the market had
been guided by continuous weakening of our ERC indicator since April. Negative
revisions have exceeded positive revisions by 29% in early September – this is now
the sixth consecutive month the ERC has been in the negative zone. In
comparison, during the GFC period, the ERC spent 16 months in the negative zone,
between Jan 2008 to April 2009.
The STI Index bottomed a month earlier in Mar 2009 ~1500 points and about four
months after the ERC hit its worst patch with negative revisions exceeding positive
revisions by 70% in November 2008.
In the 2000-2001 tech bust period, the ERC was negative for 5 months in 2000
(between July-Nov2000) and a further 13 months between Jan 2001 and Jan 2002.
Near to being halfway through on negative revisions? – Thus far, the message
from Singapore’s weak electronics export data and our ERC is similar in that the
market is about 37-46% through the current malaise, even if one uses the GFC or
the tech bust period of 2000/2001as a reference framework.
That said, one would expect the quantum of negative revisions (only -5% so far, see
figure 10) to become larger in the next few months as investors and analysts make
reductions to earnings estimates.
Deciding on what constitutes the half-way point will be an important task in the next
few months.
Valuations near strong support levels, unless a crisis erupts – Investors have
moved more quickly this time, with the STI already trading at a support level of 13x
PER, which is seldom breached except during major recessions. A similar outcome
can also be concluded looking at the STI using P/B ratios. STI’s earnings yield of
c.7.5% is almost 600bps higher than the 10-yr govt bond yields of c.1.5%.
Matching the STI’s price to book lows in 2001 tech bust recession would have the
index falling by about 10% from current levels to ~2500 points.
Unfortunately, a repeat of events similar to those that triggered the GFC suggests
40% more downside for the index assuming similar p/book lows.
Key stock picks
In this volatile environment, our preference is for large-cap stocks with low
growth expectations into 2012 to minimize risk of earnings disappointments
In our May Think Singapore note2, we had added defensive companies such as AREIT
(as a proxy of S-REITs) and Singtel for their attractive dividend yields in
replacement of higher beta stocks SIA and GLP from our Singapore stock pick list.
In our last Think Singapore note in August3, we added Genting (as a proxy for
regional arrivals remaining strong) in replacement of Keppel as a pick. While Horng
Han continues to like Keppel’s dominance in the rig building segment, he sees
rising risks on slower orderbook growth in 2012. Concerns on the impact of
European financing onto the rigs value chain also needs to be watched. Meanwhile,
our Genting analyst George Choi highlights that Genting’s valuations are attractive
at a 20%+ discount to Macau centric names, having lost some shine on Resorts
World Sentosa losing some market share to Marina Bay Sands. Gross gaming
revenue for Singapore is still likely to grow 10% in 2012 from an estimated US$5.4b
in 2011. The possible addition of legalized junkets to the Singapore scene can also
be helpful as this may allay concern on credit risk away from Genting's receivables.
We also continue to like Wilmar on the back of a sustained turnaround seen at its
oilseeds division. Wilmar could see better volume growth as China’s lifting of price
caps in August allows for volume growth for soybeans and edible oils to regain
momentum in 2H11.
We also continue to have DBS as a proxy for a well capitalized bank in Singapore.
Robert Kong remains constructive on Singapore banks despite negative sentiment
of GDP downgrades and concerns of a further quarter of qoq economic contraction
in 3Q11, given banks' continued strong loan and currently benign asset quality and
strong capital levels.
In the property sector, Wendy Koh and Tan Chun Keong continue to reiterate that
the risk reward ratio remains unfavorable for developers4 and continue to prefer
REITs as a more defensive play within the property sector. The view remains that
developers will remain in a 'no-win' situation. If demand remains strong, developers
are likely to be subjected more policy risks. Should the economy go into a full-blown
recession, we clearly run into a risk of a price decline and further downgrades in
RNAVs. Among the REITs, the preference is for MCT (MACT.SI; S$0.85; 1L), FCT
(FCRT.SI; S$1.46; 1L), A-REIT (AEMN.SI; S$2.12; 1L) and MIT (MAPI.SI; S$1.21;
1L).
Ongoing risks – Uncertainty due to volatile markets can be a big dampener to
consumer spending and can feed into further GDP weakness in Singapore. TSMC’s
data and our conclusion from the tech conference aside, the current soft patch in
electronics exports caused by high inventory stockpiles can well be extended into
one that also bites into the consumption element as job losses at locally based
manufacturers start to become a concern as we have started to detect duress and
margin erosion within technology exporters due to the continued strength of the
SGD. Headline inflation for July was 5.4% YoY. Our economist expects CPI to
average 4-5% YoY for 2011, even as a record strong S$ helps dampen imported
inflation.
There is now effectively a conflict of interest between exporters (who may needs a
lower S$) and domestic consumers and policy makers (who need to tame
inflationary pressures). This mean inflation remains a risk factor for investors -
despite a 10-15% fall in headline commodity prices since the recent peak in April,
we remain concerned on risks from inflation and will watch inflation data carefully for
in the coming months.
No comments:
Post a Comment