HAPPY NEW YEAR 2011 & HUAT ARHHHH....

Business Times  Brokers' Take29/12/10

Published December 29, 2010

Brokers' Take

2011 Asia equity outlook - Singapore
DBS GROUP RESEARCH, Dec 27

STRONG liquidity inflows spurred by the strong Singapore dollar, a low interest rate environment, and buoyant economic growth set the backdrop for a positive ride into the new year.

Potential headwinds halting the market's ascent towards the second half could come from an earlier than expected interest rate hike or anti-inflationary moves from the government.

Projected earnings growth for the stocks covered by DBS Vickers Securities is 20.4 per cent in FY2010 before normalising to 12.3 per cent in FY2011, translating into a PE of 13.9x on FY2011 earnings. Singapore's equities have lagged emerging countries in the region, trading at its historical average PE while the region is trending at close to or more than one standard deviation (SD) above the historical average. In terms of PE, Singapore is cheaper than Malaysia and Indonesia. We maintain our STI target at 3,500 based on +0.5 SD or 15.8x FY2011 earnings.

As we enter an 'inflationary boom', demand for capital goods and basic materials should pick up as companies tackle capacity constraints. The offshore and marine sector will benefit from a sustained recovery of orders for new rigs and production platforms, even as oil prices rise.

Plantation companies will ride on the rise in crude palm oil prices in H1 2011 due to demand drivers coinciding with low yields and weather disruptions.

Singapore banks are laggards trading at 1.4x P/B, an unjustifiable discount to their Asean peers. We advocate accumulating Singapore banks for their strength in asset quality and capital versus Asean peers. Continuous regionalisation efforts and build up in non-interest income generating activities will provide ROE upside.

The key reason for overlooking Singapore banks is their low net interest margins versus their Asean peers, and hence slower earnings growth. While our view is for Sibor (the Singapore interbank offered rate) to rise only in Q4 2011, the possibility of an earlier Sibor uptick due to inflationary pressure will provide the catalyst. In addition, there is upside to our loan growth assumption of 8 per cent, given the robust outlook for the Singapore economy.

Having registered 15 per cent GDP growth this year, we forecast Singapore to grow at 7 per cent in 2011, higher than the government's forecast of 4-6 per cent. Singapore's October exports rebound suggested little possibility of a technical recession in Singapore, and also reflected the resilience of the economy.

There is upside bias for consensus earnings growth forecast of 10 per cent for 2011 in our view. We maintain our 'neutral' stance in Singapore, and are overweight on the offshore and marine, plantations, and gaming sectors.