STI 12-mth forward PE levels reduced nearly triple digits post 1Q results (DSBV)

We had highlighted in the past that STI tends to trade at levels between 12.4x (-1SD) and 14.6x (Ave) 12-mth forward PE levels. With the mid-year approaching, we use the blended FY11 and FY12 reading as our reference. This places a cap on the STI at 3343 over the next 2 months. The rise in STI is also expected to be gradual at a pace of about 100pts per quarter or 33pts per month. Meanwhile, the - 1SD level of 2843 should provide a floor for the STI in the event of an external shock that leads to a rise in risk aversion. Bottom line- Expect more bumpy rides with only modest net gains for the STI in the month(s) ahead.



More risks than catalysts post 1Q results
We maintain our view that equities lack catalysts to trend higher post 1Q results season as stocks enter the typically quiet months from May-July.

Firstly, the scorecard for the 1Q results season itself offered little or no upside triggers. Post 1Q reporting season, FY11F earnings have been cut by 4% and FY12F earnings tweaked down by 3%. Earnings growth for our DBSV basket of stocks is now 5.6% for FY11F and 13.4% for FY12F. STI 12- mth forward PE levels are reduced triple digits. Attention may turn to macro risks:

1. Supply disruption due to the Japan earthquake. We do not expect supply chain disruption for the high tech industry to surface in 1Q because inventory should last till May-June. However, there could be earnings downside in 2Q and beyond should this disruption persist in Japan, in turn affecting component supplies to the rest of the world. The automotive industry is also affected by this same issue.

2. US bond yields can start to rise when the second phase of US quantitative easing (QE2) ends in June. Rising bond yields will make equities look relatively more expensive, resulting in an outflow of funds from equities. The yield for the US 10-yr treasuries is currently at about 3.22%. Asian equities can easily stomach the current bond yield level but the pressure on equities will increase if the yield rises closer to 4%.

3. Finally, attention could return to the Europe’s debt woes and the weak economic outlook there. A survey by Bloomberg revealed that 85% of international investors now think that Greece will default on paying off its debt with majorities predicting the same fate for Portugal and Ireland. Portugal’s economy has slipped back into recession after 1Q11 GDP declined 0.7% q-oq on government spending cuts and higher taxes. According to Bloomberg, Greece, Ireland and Portugal, the euro region countries that needed €256bil (USD366bil) in emergency aid to avoid default may all see their debt loads exceed the size of their economies this year.

Yield stocks to outpace inflation
We think interest in yield plays can be rekindled because with Singapore’s 2011 CPI forecast of 4.2%, inflation remains a major concern and yield stocks offer a hedge against the uncertainty of rising inflation. The incentive to park some funds into yield plays increases given the modest growth rate for Singapore equities. Earnings growth for our DBSV basket of stocks is at a single digit 5.6% for FY11F and 13.4% for FY12F. We highlighted 8 stocks that offer at least 5% yield for FY11F last week: MobileOne, Mapletree Logistics Trust, CDL Hospitality Trust, Venture Corporation, Frasers Centrepoint Trust, Parkway Reit, ST Engineering, SIA Engineering. With a special dividend of 80cts and final dividend of 40cts (total $1.20), investors can also take a short-term view on SIA shares.

Source/转贴/Extract/: DBS Vickers Research
Publish date:16/05/11