STI struggles as earnings season approaches, but is holding out well

It is another torturous start to the week at least for investors and trading representatives doing trading in the local markets. This is especially so given regional stock markets like Hong Kong’s Hang Seng Index (HSI) are making another round of new highs, and the major US stock indices are also making some of their best gains in years. To compound the various concerns, fits and starts the Straits Times Index (STI) is facing are things like low trading volumes, investors sitting on the sidelines, and concentrated positions that might not matter much in terms of moving the index significantly, among others.

How is the frustration panning out for STI

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of the Straits Times Index (STI), October 11, 2017)

Although the STI managed to eke out some gains as in a mini-breakout since last Friday (October 06, 2017) when property and banking counters were seen jacking up the STI gains, there seems to be a loss of momentum in the second week of October 2017 when the index barely moves and struggles to keep up with other regional, and global stock indices. Although Wednesday trading volumes are huge at around 2.0 billion shares traded as compared to Tuesday’s 1.5 billion shares traded, the needle don’t seem to move a lot going by the charts shown above.

An expected earnings outcome from SPH

Singapore Press Holdings (SPH) kicked off the official earnings season on Wednesday, October 12 when it reported net profits of S$265 million on top of its top line growth of S$1.12 billion. According to a DBS Vickers report, core operating profit during the final quarter ending September 30, 2017 came in at S$78 million, and 4QFY2017 revenues came in at S$256 million. The quarterly profits were pulled down significantly by weaker media revenue (negative 15 per cent year-on-year (yoy), S$173 million), particularly display ads (negative 18 per cent yoy, S$63 million), classified ads (negative 20 per cent yoy, S$31 million), and magazines (negative 20 per cent yoy, S$23 million).

Others like property segment remained flat at S$60 million, while Others segment rose 76 per cent yoy to S23 million due to contribution of newly acquired nursing home business like Orange Valley.

The company is still being burdened by staff costs, but management has already lined up plans to reduce staff count by 10 per cent in the coming calendar year. According to the DBS Vickers report, the last time SPH undertook a staff rationalisation plan was in October 2016 when it intended to reduce the work force through attrition, retirement, non-renewal of contracts, outplacement, and retrenchment. Its staff count in August 2016 was 4,182, but it increased to 4,410 staff in August 2017 mainly from its recent acquisition of Orange Valley.

How does the chart of SPH look like

Source: Phillip POEMS 2.0 Trading Platform (One-year weekly chart of Singapore Press Holdings (SPH), Oct 13, 2017)

Looking at the chart above, we note that SPH’s stock has taken a severe beating for the past one year. However, if we were to look at the extreme right-hand side of the chart, it seems that there is some plateau in terms of the direction of the chart.

Based on the chart, the low point for SPH on the chart is $2.54 back in early September 2017. However, the stock price came back up, and closed at $2.73 on Friday, Oct 14, or almost a 7.5 per cent jump from the low point. We think that there could be some combination of factors namely the staff cuts announced, investors willing to give management some chances to turn the organisation around, and perhaps short covering. On Friday’s trading session, SPH’s short covering volume totalled at 3.5 million shares sold short, and they were worth around S$9.5 million.

Oil majors show some signs of bullish comeback

The oil majors, namely Keppel Corporation Ltd, and Sembcorp Marine were showing signs of some investor enthusiasm following some news about recovery of oil prices, and for Sembcorp Marine, the latest announcement of an agreement with Borr Drilling for the sale of nine Pacific Class 400 jack-up drilling rigs at a total consideration of US$1.3 billion proved to be some good news for the downbeaten stock.

Oil prices are rising

Source: Stockcharts.com (One-year weekly chart of Brent Crude Oil prices, October 14, 2017)

We noted that there has been some slight turnaround in oil prices at US$57.17 as of Friday’s close. According to news reports out of CNBC.com, crude oil prices rose initially, but it retraced back a bit after US President Donald Trump said he would refuse to certify the Iran nuclear deal and could terminate the international agreement if he cannot reach a solution with Congress and the allies. The President’s actions could potentially lead to renewed sanctions.

Apart from the Iran issue, the Organisation for Petroleum Exporting Countries (OPEC) currently has a March 2018 expiry date in order to clear stocks. However, many analysts expect the group will extend the deadline to beyond March 2018.

The combination of news, though conflicting, appear to have moved the crude oil prices higher judging by the overall trend shown in the above chart.

Short-term technical breakout for Keppel Corp stock

Source: Phillip POEMS 2.0 Trading Platform (One-year weekly chart of Keppel Corporation, October 13, 2017)

Looking at the one-year weekly chart of Keppel Corporation, we noticed that there appears to be a technical breakout, as prices move higher beyond the $7 per share mark. The price action started mid-September when Keppel shares were trading around S$6.20 to S$6.30 per share.  The latest price action on Friday was accompanied by a good trading volume of 13.1 million shares.

We also note that momentum for the stock is rising as investor sentiments started to show some positive turnaround on the counter.

On fundamentals wise, Keppel Corporation currently trades at about 16 to 17 times historical price-earnings multiples, and a dividend yield of 2.8 per cent. According to a consensus poll of 18 analysts by Thomson Reuters, most of them rate Keppel Corporation an ‘Outperform’ with an one-year price target of S$7.059 per share.

Sembcorp Marine is also moving upwards

Source: Phillip POEMS 2.0 Trading Platform (One-year weekly chart of Sembcorp Marine, October 13, 2017)

Similarly, the one-year weekly chart of Sembcorp Marine is also showing a mini-technical breakout, though it still has to confirmed by a crossover of the moving averages.

The momentum oscillator below is also showing some upward movements suggesting favourable sentiments towards the stock.

Fundamentally, Sembcorp Marine trades at a historical price-earnings (P/E) ratio multiple of 68 to 70 times, with a dividend yield of 1.06 per cent. However, unlike Keppel Corporation, Sembcorp Marine is generally rated as a ‘Hold’, with a one-year price target of S$1.764. The last price traded on Friday was S$1.88 which could mean a potential overvalued stock as the current price is above the fair value.

City Developments shares and property stocks continue to move higher

City Development Ltd (CDL) was in the news this week when it reportedly offered take its Millennium & Copthorne (M&C) hotel subsidiary private at a potential all-cash offer of 552.5 pence. In a OCBC Securities research report published this week, the analyst noted that on October 09, 2017, CDL indirectly owns 65.2 per cent of the shares of M&C. The proposed cash offer of 552.5 pence will comprise of a cash amount of 545 pence per M&C share and a special dividend of 7.5 pence which will be payable upon the offer becoming unconditional. According to the report, this represents an increase of 22 per cent to the Volume Weighted Average Price (VWAP) of 452.7 pence over the period of one month before October 06, 2017, and a premium of 21.4 per cent to the closing price of 455.0 pence on October 06, 2017.

CDL stock looks toppish

Source: Phillip POEMS 2.0 Trading Platform (One-year weekly chart of City Developments Ltd (CDL), October 13, 2017)

Looking at the above one-year weekly chart of CDL, we noted that there has been a significant run-up in the stock price of the luxury property counter as the stock breached the $12 psychological price level to close at S$12.66 per share. We think the stock, being one of the beneficiaries of the recent property boom cycle might have some room to run, However, it pays to be cautious that CDL is a luxury developer, and if there is a sudden or significant change in the sales coming from foreign or local high net worth investors (HNWI), the stock is susceptible to economic cycles.

However, with the latest 3Q2017 URA data flash estimates showing a first increase in private home prices. Moreover, the so-called en-bloc ‘fever’ is back with CDL picking up a freehold property, “Amber Park” for close to S$1 billion last week. These, and other contributors could outweigh some of the critics’ thinking that the stock could face future risks of corporate restricting when possibly less aggressive in land building.

On valuation wise, the O&G stock currently trades 19 to 20 times historical earnings multiples, along with a dividend yield of 0.6 per cent. Its current ratio is more than 2.0 and has a war chest of S$1.2 billion of operating cash flows. The OCBC Securities analyst has a one-year price target of S$13.06 per share price forecast (S$12.90 fair value, plus 12-month dividend forecast of S$0.16 per share.

The last close for CDL stock price was S$12.66 on Friday, along with a trading volume of 8.2 million shares.

Property sector as a whole is rising

Source: Phillip POEMS 2.0 Trading Platform (Three-year weekly chart of the FTSE ST Real Estate Holding and Development Index, October 13, 2017)

We noted that the FTSE ST Real Estate Holding and Development Index has been moving higher in part due to the liquidity, and the various collective sale agreement announcements might have pushed the index higher. There is a question of an overrun in the index for a short period of time, and we note that the Moving Average Convergence and Divergence (MACD) diagram below is trending downwards to flat. This could mean that some investors might be hesitant to join the buying frenzy, or some investors are still waiting to analyse other factors.

Nikkei 225 Index making new highs

Source: Stockcharts.com (One-year weekly chart of Nikkei 225 stock index, October 13, 2017)

Asian markets are dominated by news this week that Japan’s Nikkei 225 stock index is making new highs despite controversies about Kobe Steel selling poor quality steel parts to several automakers in the United States. On Friday, the stock index closed at a new high of 21,155.18 after touching a 21-year high during the previous session. It was quite a welcome change for Japanese stocks as the nation is about to head to polls later this month to select their new Prime Minister. The markets expect Shinzo Abe, the current PM to retain his majority control in the Lower House. However, Tokyo Governor and a former cabinet member, Yuriko Koike is hot on his heels.  According to a recent polls and Bloomberg News, most of the punters are expecting the Liberal Democratic Party led by PM Abe to win 289 seats, with its coalition partner, Komeito winning 30 seats. This will give the ruling coalition a total of 319 seats and is more than two thirds of the 465 seats up for grabs. However, as many polls, they are highly speculative, and the last ‘Brexit’ vote a year ago in the United Kingdom proves the point.

On the monetary policy front, Bank of Japan (BOJ) governor Haruhiko Kuroda has repeatedly noted that the central bank will continue to aim for an inflation target of 2.0 per cent, and is not about to halt its quantitative and qualitative easing measures.

Hong Kong markets continue to rise in anticipation of Chinese leadership transition

Source: Stockharts.com (One-year weekly chart of Hang Seng Index (HSI), October 13, 2017)

In the lead-up to the Chinese Community Party’s gathering on October 18, many expect Chinese President Xi Jiping to retain a firm grip of power in the country. Given the latest traded data showing the Chinese economy is still flourishing, despite slowing perceptions of slowing demand growth of ‘Made in China’ products from overseas.

Most Hong Kong investors will be keenly await the opening of the National Party Congress for policy clues next week.

Major European Stock Indices making new highs

Source: Stockcharts.com (One-year weekly change in the Stoxx Euro 600 stock index, October 13, 2017)

The pan-European Stoxx Euro 600 stock index continued to edge higher despite uncertainties over the ongoing negotiations with the United Kingdom over the terms of exit. The index closed Friday’s trading session at 391.42, and the 14-day relative strength index (RSI) is close to the ‘Overbought’ territory of 70. It ended at 62.93 on Friday.

Most of the European stocks gathered some pace on Friday following favourable trade data in China which showed major growth and trade movements.

Apart from the Chinese trade data, most European investors have largely looked past the Catalonia independence issue, and more focused on earnings growth. Most are still holding out the expansionary monetary policies to continue for at least another year.

Major US stock indices extend new highs

All the major US stock indices ended higher with the technology-focused Nasdaq scoring new highs.

Source: CNBC.com (October 13, 2017)

Technology sector leading the way

Source: Stockcharts.com (One-year weekly chart of the Nasdaq Composite Index, October 14, 2017)

Much has been said about the so-called ‘FAANG’ (Facebook, Amazon, Apple, Netflix, Google) moving US market indices higher. With Netflix heading past US$200 per share this week, most investors are thinking that technology stocks are heading to their best year so far. The companies on Nasdaq continue to drive the index to new highs, and earnings growth expectations have also risen. However, the potential downside is of course, earnings failing to beat or just meeting consensus estimates.

S&P 500 index is at all-time highs

Source: Stockcharts.com (One-year weekly chart of S&P 500 stock index, October 14, 2017)

The widely followed S&P 500 stock index breaks new ground with an addition of 0.1 per cent to close the trading session on Friday at 2,553.17. Leading the index are information technology and materials sectors.

Looking at the one-year weekly chart of the S&P 500 stock index, we noted that the 14-day RSI suggests that it is now at an ‘Overbought’ situation, with momentum continuing to head higher.

According to CNBC.com, the US earnings season got off to a good start, with 87 per cent of the companies reported that they have reported record bottom-line expectations. With an average price-earnings multiples of north of 20 times for most US stock counters, we think that earnings growth will be closely monitored in order to determine the continued sustainability in the index. Otherwise, most investors will start to question the so-called herd mentality, and dump their US shares resulting some form of a market correction. Until then, the momentum is expected to continue.

How did our model investment portfolio perform

Note: Model equity portfolio performance as of October 13, 2017. For illustration purposes only, and information is not verified by third party. Past performance is not necessarily indicative of future performance. Please seek the advice of your qualified licensed financial adviser before any investments are undertaken.

Since the inception of the model equity portfolio at the end of November 2016, the latest portfolio return this week has shown a major outperformance of 86.2 per cent, inclusive of capital returns, dividends earned, and realised returns earned during the last rebalancing round on July 01, 2017. This compares to the total return of 14.5 per cent for the Straits Times Index (STI) during the same time period.

The top three holdings in total return terms (dividends plus capital gains) include Nordic Group (up 39.5 per cent since end June 2017); followed by Cogent (up 34.3 per cent since January 2017), and Mapletree Logistics Trust (up 21.2 per cent since November 2016).

The model equity portfolio did experienced a shortfall coming from Sheng Siong (down 6.6 per cent since June 2017); followed by SATS Ltd (down 3.7 per cent since end December 2016), and Soilbuild Business Space Reit, and Singtel (both down 2.1 per cent since June 2017 and December 2016 respectively).

For now, we are not planning to make any changes or do any rebalancing for the portfolio. We shall actively monitor the model portfolio till end of December 2017.

Upcoming Earnings Season

Source: SGX, Phillip Securities Pte Ltd

Amid a short work week due to Deepavali holidays next Wednesday, several Reits will be reporting next week starting from October 16. The most anticipated earnings lookout for next week could be Keppel Corporation especially when the stock breached the S$7.00 per share earlier in the week. M1 will also be a closely watched name as many will be trying to decipher management’s thoughts on potential combinations with other telco players.

Local Economic Data

Source: TradingEconomics.com

Next week, the government will be releasing various data which might reinforced some of the expectations surrounding manufacturing growth and property sector frenzy. Earlier, 3Q flash estimates of Singapore’s Gross Domestic Product, along with an unchanged monetary policy statement helped to boost sentiments across.

This coming new week, data releases like September new home sales on Monday, October 16, followed by trade data, and the final estimate of the property price index could potentially raise some confidence among investors.

Chinese economic data as the National Party Congress draws closer

Source: Tradingeconomics.com

The new week will bring about important Chinese data including the inflation rate which is forecasted to be mild at 1.7 per cent, followed by estimates of China’s 3Q2017 GDP growth rate. With favourable trade data recently released, many investors are expecting Chinese GDP to maintain at 6.8 per cent for 3Q.

United States Economic Data

There will be a whole host of economic data in US to watch next week including housing data, the US Beige Book which is used for reference to set monetary policies in US, followed by various gauges of manufacturing growth in US.

Summary

The new week is expected to be an interesting one. With the latest news that US President Trump will not be ratifying or possibly abandoning the Iranian Nuclear Deal, most major US corporations that have started to establish business relationships could be impacted negatively.

However, as earnings season gets underway, it is always important to focus on earnings growth, and not to be too sunk in with all the buying frenzy going. Good luck all.

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About Peak Hour 59 Articles
Hock Meng has 12 years of financial industry experience, including three years working as a research associate for a hedge fund company in Wall Street, US, with assets under management (AUM) close to US$400 million during its peak in 2008. Hock Meng is a Chartered Alternative Investment Analyst (CAIA) holder and passed his Level I Chartered Financial Analyst examinations. Hock Meng is licensed to provide investment advisory services in the area of unit trusts, dividend portfolio construction, securities wrap services, and life insurance planning