Brokers cautious but see more upside for STI

Business Times - 22 Jun 2011

Brokers cautious but see more upside for STI

Stock prices now reasonable but market hesitant over uncertainties

By MICHELLE TAN

SINGAPORE stock prices are now at reasonable levels in terms of valuations but the sky is not about to clear for the local market.

Based on the prognosis of brokers adopting a neutral tone, there are still uncertainties, including cyclical headwinds. But there is general consensus that the benchmark Straits Times Index (STI) will end higher by the year's close.

According to a CIMB report, the Singapore market does not look expensive at 1.6 times price-to-book value and a forward price-to- earnings of 12.8 times on earnings per share growth of 10 per cent.

However, there are reasons for the market's hesitant mood, including the lack of positive earnings- surprise catalysts for most of the blue-chip counters.

Goldman Sachs also views Singapore valuations as 'reasonable', albeit not low enough to counter a period of 'soft profit growth'. It was also highlighted that though Singapore's structural fundamentals are 'sound', cyclical headwinds - such as property 'cooling' measures - may serve as a dampener to property and banking counters, which make up more than 40 per cent of the listed index cap, inadvertently hurting the performance of the STI.

But there is a bright spark for the tourism sector. Despite the sharp appreciation of the Singapore dollar against the US dollar, which raised concerns of price competitiveness, brokers still see the tourism sector as one of the preferred ones that will ride out this patch of uncertainty.

'In our view, the 6 per cent appreciation of the Singapore dollar against the Singapore 'tourism-weighted' basket of currencies shows that the impact is not as significant as the headline Singapore dollar/US dollar appreciation of 14 per cent suggests,' said Sean Quek of Credit Suisse.

Mr Quek said that the pricing power for the tourism sector is likely to remain strong given robust demand, high utilisation rates and limited incremental capacity.

He also highlighted key sector picks to include counters such as Genting Singapore and CDL Hospitality Trusts (CDLHT).

Separately, the theme of dividend surprises was also raised amid an environment of slowing growth.

Identifying stocks that can offer such 'surprises' was Kenneth Ng from CIMB, who commented that 'Singapore stocks that trade above 4 per cent yields, yet pay out less than 80 per cent of their earnings are M1, Venture Corp, Fraser & Neave (F&N) and DBS'. But Mr Ng qualified that the latter two may not raise their dividends 'substantially', citing 'acquisition plans and land-banking plans'.

Moving on to market trends, JPMorgan highlighted that the STI is usually 'well correlated' with the earnings growth trajectory, with key market inflection points anticipating the earnings trend with a 6 to 12- month lead historically.

More importantly, market earnings declines are typically associated with external shocks such as the Asian financial crisis, the dotcom bust, 9/11 aftermath, Sars, and the global financial crisis.

'Barring an external shock of similar magnitude, we believe our estimates for Singapore's earnings trajectory, whilst decelerating, will continue to remain in growth mode in the next 2-3 years,' said Christopher Gee of JP Morgan.

This view is in line with most brokers' calls, which suggest the STI has more upside to go in times ahead albeit at a more moderate pace, with lingering worries over the effects of a strengthening Singapore dollar on the nation's cost-competitiveness and the potential implementation of government policies that could hurt corporate profitability.

CIMB, Citigroup and Goldman Sachs have year-end STI targets of 3,440, 3,500 and 3,600 respectively.

Yesterday, the STI closed 1.3 per cent higher at 3,053.51.

Source/转贴/Extract/: www.businesstimes.com.sg
Publish date:22/06/11