Singapore market needs stronger earnings to make headway, says Maybank Kim Eng

Maybank Kim Eng has cut its end-2014 target for the Straits Times Index to 3,170 from 3,500, using a price-to-earnings multiple of 14 times, versus 15 times previously, to reflect weaker earnings growth.

Earnings for 2Q2014 from bellwether names SIA Engineering, ST Engineering and Wilmar International have been disappointing, and the market will only be “re-rated” if earnings “make a convincing recovery”, the stockbroking house said in a note today.

In terms of valuations, the Singapore market does not look attractive trading at 13.2 times forward earnings against a 10% earnings-per-share (EPS) compounded annual growth rate for FY2015 to FY2016, it said.

EPS for FY2014 are expected to fall 2.1% y-o-y, according to Maybank Kim Eng.

And while the local market may look cheap on a price-to-book basis of less than 1.4 times, this is “justifiable” as its returns on equity are expected to weaken to 10% to 11% for FY2014 to FY2016, from an average of 14.7% during FY2008 to FY2012, it added.

The market may start to pick up from next year, with banks leading the way as interest rates begin to rise.

Maybank Kim Eng has a target of 3,440, based on 14 times projected FY2015 earnings, for the Straits Times Index next year.

DBS Group Holdings is the broking firm’s top pick among banks, given its “much stronger” deposit franchise.

Property stocks could, however, remain in the doldrums as more new homes are completed, increasing residential supply.

“As interest rates rise, the appeal of property investment diminishes.

“Higher interest rates will quickly compress seemingly-high median rental yield spreads, which would coincide with a flood of new homes expected in the next three years.

“This comes on top of 2014’s higher-than-usual supply. It is expected to bump up vacancy, already at its highest in eight years, and weaken property prices and rentals.”

In the oil and gas space, lower oil prices would affect rig builders Keppel Corp and Sembcorp Marine as oil companies rein in spending, it said.

Operators of offshore support vessels, on the other hand, should hold up better than rig builders as an influx of new rigs this year and next should “precipitate a return in demand” for such vessels.

“Furthermore, the industry’s increasing migration to the production stage should benefit OSV owners and operators with the right assets.”

Maybank Kim Eng’s top picks in the oil and gas sector are Nam Cheong, Vard Holdings, Pacific Radiance, PACC Offshore Services Holdings, Ezion Holdings and Mermaid Maritime.