RHB Singapore Strategy
3 January 2017

The outlook for Singapore’s key macro drivers remains lacklustre as a rising interest rate is expected to sap demand, leading to slower GDP growth. A slowdown in exports could also place downside risks on growth. However, our Top Picks in Consumer Staples, Healthcare, Land Transport, Offshore & Marine and REITs sectors should hold up well against a weak macroeconomic environment.

Macroeconomic headwinds to persist. Our economics team expects Singapore to witness another challenging year in 2017, with an expected decline in GDP growth rate, slowdown in exports growth, decline in manufacturing output and moderation in private consumption. We forecast GDP growth to slow to 1.2% in 2017, from an estimated 1.4% in 2016. This compares with the consensus GDP growth estimate of 1.5% for 2017. We believe easing of immigration policies and property cooling measures could provide some relief, but both seem unlikely in the near term.

More downgrades to index earnings likely. The FSSTI’s earnings experienced a contraction in 2016. Although the consensus 2017 index EPS estimate has declined by 15% during 2016, consensus is still forecasting EPS growth of 5% in 2017, which we believe may be difficult to achieve, if our more bearish view on the macroeconomic drivers holds true. We estimate 2017 EPS growth at 3.5%, which may also be at risk if there is a sharp deterioration in the economic outlook from current projections.

Stock selection remains the key. We would recommend that investors stay selective - with consumer, healthcare, REITs, land transport and offshore & marine as our preferred sectors. Below are our Top Picks for:

i. Sustained earningsgrowth outlook – $DairyFarm USD(D01) for its recent efforts to improve operating efficiencies and enhance margins. $CityDev(C09) for its asset monetisation ability, nimble capital management and continuing acquisition potential. $ComfortDelGro(C52) for its ability to grow its well-diversified business despite rising competition from Uber/Grab, as well for its gradually increasing dividend payout.

ii. Probable themes for 2017 – $Keppel Corp(BN4) as a play on recovery in oil prices in 2017. $Raffles Medical(BSL) for strong earnings growth in 2017, aided by higher contribution from Holland V and completion of its hospital extension.

iii. REITs – $CapitaCom Trust(C61U) for its resilient office sector portfolio that can weather the near-term sector headwinds. $ManulifeReit USD(BTOU) as a proxy to the rebounding US economy and strengthening USD.

iv. Quality small-cap names – $Spackman(40E) and $SingMedical(5OT) for strong and almost certain earnings growth potential.

End-2017 index target of 3,010. We derive our FSSTI index target based on a P/E multiple on 2017F EPS. Amidst the lack of strong re-rating catalysts, we value the FSSTI based on forward P/E of 14x, which is in line with the historical average P/E of 13.9x and also where the index is trading right now. Our index target of 3,010 for end-2017 offers 4.5% return. Including a 3.9% dividend yield for the market, this implies a total shareholder return of 8.4% in 2017F.

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CapitaLand Commercial Trust

CCT has rebounded strongly by 5% since the beginning of the year. We believe stock has more legs with positive news flow from redevelopment of GSCP acting as a key catalyst. A potential stake sale in One George Street could also allow it to recycle capital and eliminate any funding concerns. Despite negative headwinds facing the office market in 2017 we believe it is relatively well positioned due to its quality assets and high portfolio occupancy. Maintain BUY with a SGD1.68 TP (8% upside). It remains our Top Pick among the office S-REITs.

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Maintain BUY with unchanged DCF-derived TP of SGD0.68, suggesting 33% upside. With acquisition earnings kicking in, SMG reported a solid 1Q18, with topline growing 37% YoY to SGD19.23m, and PATMI surging 138.9% to SGD3.41m. The strong 1Q18 earnings did not include its 85% stake in SW1, an aesthetic and plastic surgery clinic that was acquired at the end of March. We also understand that past acquisitions that were completed are still enjoying double-digit growth YoY. As a result, we are projecting better quarters ahead for the rest of 2018.

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Banking On Residential Segment Recovery

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Another Steady Quarter

MUST reported a steady set of 1Q18 results, backed by contributions from acquisitions. Its recent acquisition of Penn and Phipps are expected to be completed by 2Q18, and should contribute positively in 2H18. We also see some room for occupancy improvements in Figueroa and Peachtree, with the fundamentals of the US office segment remaining strong. Its portfolio’s average rental rate is still 5-10% below the passing market rental rates – which offers room for positive rental reversions. The threat of faster rate hikes is mitigated by its 100% fixed-debt profile. MUST offers attractive FY18F-19F dividend yields of 6.3% and 6.6% respectively, which is more than 100bps over the Singapore office REIT average. Maintain BUY, with a TP of USD1.00 (5% upside).

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