Still The Place To Be
In aggregate, our portfolio of key focus stocks outperformed the STI in 1H23 due largely to the industrials sector. While the STI’s valuations are not stretched, with a 2023F PE of 10.7x, P/B of 1.0x and a yield of 4.5%, we have moderated our STI target to 3,240 due to potential economic headwinds. Nevertheless, we forecast 9% EPS growth for the large-cap stocks under our coverage due to the low-base effect from 2022 for key sectors.
WHAT’S NEW
• Limited upside for the STI in 2H23. While the Straits Times Index (STI) has done well vs its regional peers in 1H23, we have moderated our stance on its outlook for 2H23 given the persistent risk of recession. As a result, we forecast that the STI will reach 3,240 by year end using a top-down methodology and using target PE and P/B multiples of 12.5x and 1.3x respectively. These multiples are c.15% discount to the index’s long-term average which we believe to be fair given moderating earnings growth into 2024 and potential recessionary risks to the economy and thus to our forecasts. The market remains a defensive one which should lead to relative outperformance in our view, and stock picking will remain key for investors in the short to medium term.
• 9% core net profit growth for 2023. We forecast <1% EPS growth for the STI’s constituents under our coverage which is broadly on par with consensus growth estimates. However this is meaningfully lower than the 9% core net profit growth forecasted for our overall large-cap coverage. Since Jan 23, we have raised our earnings forecasts for aviation, finance, land transport, REITs, telcos and consumer names while downgrading earnings for the technology sector.
• 2023 valuations for the STI appear inexpensive, as it currently trades at a forecast 2023 PE and P/B of 10.7x and 1.0x respectively, as well as paying a yield of 4.5%. We highlight that these PE and P/B multiples are meaningful discounts to the STI’s long-term averages, and its PE multiple is at the bottom of its 15 year PE trading range.
• In aggregate, our focus stocks rose 5.3% in 1H23, outperforming the STI which fell 1.4%. While six of our 11 stocks beat the benchmark, it was notable that a large part of the outperformance was driven by two stocks – Sembcorp Industries and Keppel.
• UOB Global Economics & Markets Research (UOB GEMR) has retained its full-year 2023 GDP growth for Singapore at 0.7%, ie at the bottom end of the Singapore Ministry of Trade and Industry’s (MTI) forecast range, which reflects its more cautious external outlook. Two downside risks to the global economy highlighted by the MTI are: a) tightening of global financial conditions, and b) escalations in the Russia-Ukraine war and geopolitical tensions among major global powers.
• Our top large-cap picks are CapitaLand Investment, Genting Singapore, Keppel Corp, Mapletree Logistics Trust, Sembcorp Industries, OCBC, SATS, Sea Ltd, Seatrium, Singapore Telecommunications, Wilmar International and Yangzijiang Shipbuilding.
• Forecasting 9% earnings growth in 2023 for our universe of coverage. The five key sectors that will contribute to the positive earnings growth in 2023 are the aviation, financials, land transport, telecommunications and “others” sectors (see table below), with aviation and land transport coming off a low base in 2022. We expect the healthcare, property and plantation sectors to be the sectors that will degrade the positive earnings growth, with the latter sector to be negatively impacted by weaker CPO prices. Note that the property sector’s EPS decline is due to City Development’s extraordinary gain from
the sale of its Millenium Hilton in Seoul that was recognised in 2022.
• Timing will be key. We highlight that our top picks only include one REIT, namely Mapletree Logistics Trust; however, with the US interest rate cycle potentially peaking in the latter part of 2023, we believe that the S-REIT sector could outperform in the medium term. Compared to 2022, the S-REIT sector saw a much higher representation within the top 20 share price outperformers in 1H23 with nine out of the top 20 (2022: three out of 20), albeit off a low base.
• In summary, while we are neutral on the STI, we believe that it should outperform its peers on a relative basis due to the prevalence of quality, value and dividend stocks relative to its regional peers. Importantly, Singapore presents a lower risk vs other countries in the region, especially given the defensive nature of a number of its listed companies. In our view, careful stock picking will be the key to portfolio outperformance in 2H23 given the prevalence of risks, the key one being a global recession.
ECONOMIC OUTLOOK
• Macro issues on our mind. UOB GEMR expects Singapore’s manufacturing sector to contract by 5.4% in 2023 on the back of a 10% yoy decline in the non-oil domestic exports (NODX), with a slight improvement expected in late-23. While services has fared better in 2023, due to the continued recovery in leisure and business air travel as well as inbound tourism which has and will benefit in-person services sectors, the extent of services’ improvement may be curtailed by the potential weakness in global growth, banking sector issues and geopolitics. In the meantime, we point out that Singapore’s manufacturing and electronics PMI has been below the key 50.0 level for the past seven months, reflecting regional economic weakness, in our view.
• No change to expectations for elevated inflation. We expect headline inflation to average 5.0% and core inflation at 4.0% in 2023. Excluding the 2023 GST impact (a questionable policy move in our view), headline and core inflation should average 4.0% and 3.0% respectively in 2023, both still above the “standard” 2% objective.