AS THE THIRD quarter results reporting season gets into full swing, Citi analysts prefer to err on the side of caution. “We expect more misses this quarter. With lowered expectations post-2Q12, misses make up approximately two-thirds of our coverage this time versus nearly 90% last quarter,” the analysts say in a preview report dated Oct 18. DBS Vickers is another research house which expects downgrades during the third quarter earnings season following consecutive cuts in Singapore’s GDP growth to 1.8% and 3.2% for 2012 and 2013 respectively.
To keep things in perspective, the STI is up 15% this year, trading at 15 times forward P/E, which is just about at its historic mean. Forward price to book for the STI stands at 1.4 times. However, the STI has underperformed compared to some of its sub-sector components. Developers stocks are up 35% since the start of the year, while REITs and conglomerates have gained 34% and 29% respectively.
Looking into specific sectors, banks could meet expectations, Citi figures, but not because their core business is booming. “This will likely be due to a combination of bond divestment profits and continued low provisions. Investors, however, should focus on weakening top-line operating trends, particularly sluggish loan growth and weaker NIMs (net interest margins),” Citi warns. “NIM pressure appears to be broadening and deepening, with QE3 likely providing more pressure on asset yields and high LDRs (loan to deposit ratios) placing a floor under cost of funds.” DBS Vickers also expects earnings downgrades from the banks because of slower loan growth and NIM pressure.
Oversea-Chinese Banking Corporation will book a $1.15 billion one-off gain from divestment of its non-core F&B investments, which may add to market conjecture of capital management or M&A.
Meanwhile, REITs results are likely to be watched by investors “in order to get a sense of the implications of a weaker macro operating environment on the commercial and industrial sectors”, Citi cautions. Upside surprise could fuel more confidence in the REIT space, particularly if other traditional yield stocks in Singapore post misses. DBS Vickers believes they still have value despite yield compression. It likes Suntec REIT, Frasers Commercial Trust and Far East Hospitality Trust.
For developers, results would largely be a non-event as usual, given the unpredictability of the revenue recognition schedule, analysts say. The notable exception is CapitaMalls Asia as investors would be watchful on any potential impact of a weaker Chinese economy on retail spending. In additional, CMA is one of the STI’s top performers, up 45% this year.
The physical property market could continue to display a good degree of resilience as rents and occupancies are likely to be sticky in the current business environment, Citi reckons.
Elsewhere, Citi appears quite confident that IHH Healthcare Bhd will miss an overly optimistic consensus forecast. Also, the setting up of operations at newly-opened Mount Elizabeth Novena is turning out to be slower than expected.
Offshore & Marine companies are likely to meet earnings’ forecasts, particularly the mid and small cap stocks. For the big caps, the key will probably be margins. These have been mediocre given that lower priced contracts are being recognised this year. “For 2012E, we are consistently below street estimates for Cosco Corporation and Sembcorp Marine due to lower margin assumptions,” the Citi report states. Indeed, it expects Cosco to disappoint on further provisions and lower profitability from shipping and ship repair.
DBS Vickers thinks the offshore sector remains undervalued at 9.5 times P/E. Its top picks are SembCorp Marine, Ezion Holdings, STX OSV and Nam Cheong.
For plantation stocks, they are likely be under pressure from high inventories and depressed CPO prices, DBS Vickers says, and it prefers to sell on strength. Citi thinks that Singapore-listed planters could do okay with First Resources slightly exceeding expectations. Wilmar International could miss forecasts, Citi adds.
Finally, the consensus view on transportation is that Neptune Orient Lines makes a profit for the first time in six quarters while Singapore Airlines is likely to disappoint.
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