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Nikkei Markets

Singapore company earnings show selective recovery

Domestic market benefits by comparison to others in region

SINGAPORE (Nikkei Markets) -- The strong showing by Singapore's banks during the latest earnings season has powered the domestic market in recent weeks but the patchy performance of companies in some other sectors is tempering the outlook for the rest of the year.

Although views on earnings quality and estimates of profit growth vary, there is broad consensus amongst brokerages on the groups of companies that are likely to do well in the months ahead.

Lenders have it best. A combination of rising interest rates, the continuing economic recovery and higher oil prices, which have lowered the risk of bad loans at Singapore's offshore companies, is expected to help their profit margins.

And then there is property. While earnings from real-estate firms such as City Developments were tepid in the first quarter, that could be due to the limited number of new launches, say many analysts. Prices for homes are tipped to rise in the latter part of the year.

Some stocks in the capital goods and industrials categories, which include rig builders Keppel Corp. and Sembcorp Marine, as well as a few in the consumer goods and services sector also find favor.

On the flip side, analysts are cooling on real-estate investment trusts, whose borrowing costs are likely to rise along with interest rates, and whose yields could look less attractive compared with those of government bonds, considered a safer investment category.

Technology and telecommunication companies such as Singapore Telecommunications and StarHub, are also facing headwinds. Mobile revenues are already under pressure as consumers switch to free data-based calls, and the entry of a fourth player, expected later this year, is set to intensify competition.

Nearly half the 44 stocks it covers missed earnings expectations for the January-March period, Daiwa Capital Markets said in a note last month.

CGS-CIMB called the earnings season "dismal," and cut its overall earnings per share growth forecast for this year by 0.7% across sectors other than transportation and banks. However, CGS-CIMB is optimistic about capital goods companies, based on expectations of higher oil prices, as well as property developers.

By contrast, UOB Kay Hian has raised its EPS growth estimate for the market to 10.1% from 8.0% with upward revisions for the banking and aviation sectors. According to the brokerage, the first quarter results were largely in line with expectations and showed good momentum.

Maybank Kim Eng expects core profit for the 49 companies it covers to grow between 9-16% each year until 2020. That's lower by around 1-2 percentage points from its forecasts mid-way through the reporting season.

Still, the 10% growth in core profit in the first quarter marked the fifth straight quarter of growth, a consistency not seen in at least three years before the recovery began, the brokerage said in its report.

Singapore's benchmark 30-stock Straits Times Index has risen around 2% since the start of the year, making it among the best-performing markets in Southeast Asia where many of its peers have tumbled, pressured by a stronger U.S. dollar and domestic concerns.

Soon after announcing its earnings on April 30, shares of DBS Group Holdings, the largest of Singapore's three lenders with a near 17% weighting in the STI, rose above the 30-Singapore-dollar ($22.46) mark, sparking a sector-wide rally.

Although stocks in the index have given up some gains in the recent bout of volatility that has rocked global markets, DBS, and its peer United Overseas Bank, remain top picks at Daiwa. The brokerage has raised its earnings forecasts for Singapore's banks by 4-7% for each year until 2020.

Estimates of how much the STI is likely to gain by year end range from UOB Kay Hian's 3710, which works out to a rise of some 7% from current levels, to Daiwa's 3840.

That's provided trade rifts are contained and there is no major change to currency and economic growth forecasts.

The export-dependent Singapore economy has so far proved resilient, with growth broadening to include services, benefiting companies outside of manufacturing.

Robust consumer demand at home, and in the region, has created a tailwind for companies such as Singapore Airlines, whose earnings exceeded expectations in the quarter.

Singapore is the least volatile of the major markets in the 10-country Association of Southeast Asian Nations grouping, DBS Group Research said in a recent note, adding that it expects STI component stocks to grow earnings by an aggregate 14.4% this year. "This is high by historical standards and should support valuations," DBS said.

A chart from Nomura shows that Singapore's earnings revisions are still the best in ASEAN.

Maybank Kim Eng said that in the ASEAN context, the STI has the lowest prospective price-to-earnings ratio for this year and next at 13.7 times and 12.6 times, respectively.

Its top picks include City Developments, UOB, SATS, a ground handling and catering service provider for Singapore's Changi airport, and ST Engineering, companies that also feature in Daiwa's list.

--Leslie Shaffer


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