It was a mixed week of bank earnings announcements with OCBC reporting on a sour set of earnings on Valentines’ Day, followed by DBS which saw its full-year 2016 net profits came in at under 2 per cent on a yearly basis to $4.24 billion, while its non-performing loan rate rose to 1.4 per cent from 1.3 per cent in 3Q, and 0.9 per cent a year ago. As for 2017 outlook, DBS expects loan and income growth to come in at mid-single digit, with total allowances to be similar with 2016 excluding Swiber. DBS was also impacted by the oil and gas (O&G) woes that have been one of the main news highlights since the beginning of 2016.
As for OCBC’s net profit for full-year 2016, it fell 11 per cent, with net allowances for loans and other assets for the last quarter of 2016 rising by 57 per cent from last year to $305 million. The main culprit for the rise of loan allowances, and non-performing loan (NPL) rates is the continuing impairments taken for loans relating to its O&G customers.
DBS is currently trading at $18.29, or up 6 cents at the time of this article on Thursday, February 16, while OCBC is trading downwards by 2 cents to $9.43. UOB reports on Friday, February 17, and is trading upwards by 3 cents to $20.78.
How did the bank stocks fare this week
The DBS stock chart is currently showing a retracement downwards from its previous all-time high of $19.20 in late January. The stock price has also recently touched the 50-day moving average (MA) line of around $18.17. At this level, if stock price continues to punch below the $18 support level, the next test for price support is $17 which is the 100-day MA. However, if it holds or break above the 50-day MA, we could still see prices moving back up above $19.
The Average Directional Index (ADX) has more positive directional index (DIs), than negative DIs. Positive DI as of February 16 is around plus 24.39, whereas negative DI is minus 22.89.
Chart comparisons of all the three banks and STI
As one might notice, despite the various announcements about loan write-offs, low net interest margins (NIMs), and Oil and Gas (O&G) sector woes, the bank stocks are still outperforming the STI. How come? Yes! Valuations in terms of price-to-book (P/B) ratios are still low. The three banks are also or have been taking down their exposure to O&G sector gradually, and the stable dividend payouts are some of the factors that investors are still seeing some positivity in the bank stocks.
Finance companies took the limelight this week
On Valentine’s Day Eve this week, The Business Times reported that the Monetary Authority of Singapore has proposed some relaxation of rules on finance companies in order to spur them to innovate and extend more loans to small and medium enterprises (SMEs). The move helped to drive the stock prices of the three local finance companies to as much as 32 per cent for two days from Monday. The three finance companies in focus are Hong Leong Finance Limited, Sing Investments & Finance, and Singapura Finance.
What was thought to be the so-called ‘grandfather time’ type of retail finance services offered, the three finance companies offer an alternative for many small & medium sized enterprises (SMEs) to procure loans at reasonable rates. According to The Business Times which cited a DBS research report citing that the threesome are currently below book value of 0.7, and the analysts believed that there is potential to re-rate on new prospects of merger and acquisition (M&A) and growth. The price-to-earnings (P/E) ratios range between 16 and 21 times, and from a price-to-book (P/B) perspective, the threesomes are trading at 30 per cent discount as compared to the local banks.
What did the charts of the three finance companies show
As one might notice, all the three finance company shares soared upon the MAS revamp of loan regulations for the segment, all the three finance company stocks started to get the interests of many shareholders. The Business Times quoted the example of Sing Investments &Finance’s stock price on Wednesday soared 22 per cent to $1.555 since Monday’s close of $1.275. The volume as heavy with 1.6 million shares changing hands. The paper also noted that out of the 20 trading days in January, shares of Sing Investments & Finance were traded on 11 days.
Should investors even bothered at looking at finance companies
Looking purely on technical analysis (TA), the stock received a sharp boost since Monday, and closed the week at $1.52. The 52-week high for the stock price was also breached at $1.60. However, the trading action was accompanied with a historically low volume turnover which does not provide any conclusive signal of the potential direction of the stock price. Unless there is a meaningful price and volume actions, I think investors should consider monitoring the stock prices of these three finance companies to determine the respective entry prices, or exit prices for the existing investors.
Health care sector triumphs STI for the week
The FTSE ST Health Care Index stood out as one of the major outperformers of all the sectors during the week. It ended the trading week, up by 17 points, or 1.15 per cent on an intraday basis on Friday, February 17, 2017, to close at 1,494.76. However, the STI closed up 10.96 points, or 0.35 per cent on an intraday basis to end at 3,107.65. Incidentally, the FTSE ST Health Care Index is at its 52-week high on Friday, February 17, 2017.
The bull case for investing in the health care sector are quite well known, including the increasing aging society, advances in medical technology, and rising costs of health care due to increasing affluence, among others. Several well-known SGX-listed health care stocks like Raffles Medical, Singapore Medical Group (SMG), and Q&M Dental have shown some outperformance. However, investors need to be comfortable about the growth story on health care, particularly the valuations, and ask themselves whether such outperformance can continue, and is there a limitation for further growth.
Some of the key price valuations and ratios of SGX-listed medical companies are shown here:
|Company Name||Industry||Market Cap (17 Feb, 2017) (S$mm)||Total Revenue (S$ mm)||P/E||Dividend Yield (%)|
|Cordlife Group Limited||Healthcare Providers and Services||249.0||60.4||0.000||0.00%|
|Health Management International Ltd||Healthcare Providers and Services||365.0||136.5||46.400||0.39%|
|Healthway Medical Corporation Ltd||Healthcare Providers and Services||100.9||96.7||0.000||0.00%|
|International Healthway Corporation Limited||Healthcare Providers and Services||172.5||51.3||0.000||0.00%|
|ISEC Healthcare Ltd||Healthcare Providers and Services||152.5||29.1||27.835||3.73%|
|Q&M Dental Group (Singapore) Limited||Healthcare Providers and Services||581.5||145.5||49.089||1.15%|
|RHT Health Trust||Healthcare Providers and Services||677.3||142.9||4.587||10.32%|
|Singapore Medical Group Limited||Healthcare Providers and Services||164.8||35.9||201.828||0.00%|
|Singapore O&G||Healthcare Providers and Services||311.1||22.8||37.777||2.05%|
|TalkMed Group Limited||Healthcare Providers and Services||808.3||68.5||21.992||3.73%|
|Raffles Medical Group Limited||Healthcare Providers and Services||2588.9||469.83||36.315||1.35|
Source: SGX StockFacts
As one might notice, in comparison to the STI’s median price multiples of around 13 to 14 times, the core healthcare sector is relatively expensive at around 27 to 30 times P/E when using the median method of averaging.
Analysing the STI Technicals
Using the Fibonacci Retracement and the Average Directional Index (ADX) methods, we noticed that the STI has break several key resistance levels including the 50 per cent level at 2,939.64, and the 61.8 per cent level of 2,981.57. The ADX is also showing more positivity in direction and the number of positive directional indexes (DIs).
There appears to be positive momentum going forward for STI heading upwards. We think that the index could face some resistance pressure as it marches towards key resistance level of 3,117.34. If it fails to hold at its current 3,100 to 3,110 levels, we could see a short term fall to about 3,050. However, if it pushes beyond this range, we could see STI heading upwards to its previous high of 3,118.30.
The STI closed the week with a year-to-date (YTD) performance of positive 7.8 per cent, and banking counters top the charts with positive rewards for shareholders despite lackluster earnings.
Going forward, we think there could be some minor corrections in the march. However, we are not expecting any major or large corrections, as investors appear to continue putting faith onto the bank counters despite the loan setbacks and impending downturn in the Singapore economy this year. Most investors are also eyeing upon impending interest rate hikes by the US Federal Reserve, and the possibility of an upward adjustment of the Nominal Effective Exchange Rate (NEER) curve by the Monetary Authority of Singapore (MAS) when they next meet to decide on the country’s monetary policy in April 2017.
Hang Seng continues to rise further
The Hong Kong’s Hang Seng Index (HSI) closed Friday, February 17 at 24,033.74 points, and is down 0.3 per cent on an intraday basis. Looking at the one-year chart above, the upward momentum of HSI continues to power the HSI from its lows of around 21,455 towards the end of last year. The ADX is also moving up nicely with a relatively consistent trading volume.
Looking ahead, many analysts quoted by Reuters indicate that they see Mainland Chinese investors’ for Hong Kong stocks improving due to their low valuations as compared to the Mainland stock exchanges, and the crackdown on speculative trading of onshore stocks/funds by the Chinese government.
Going forward, we think the upward momentum looks intact barring any unforeseen circumstances. We also think that breaking the 24,000 psychological level is not difficult and there is a possibility that that level could be broken However, it fails to break through the 24,000 resistance level, we think the HSI could go down as much as 22,000.
S&P 500 never looks back
Readers might recall that the ADX portion we have been illustrating for the S&P 500 Index has been falling consecutively. However, an interesting trend shown lately that there has been positive upward momentum in the ADX which soared from the low of 12 to 18. This could suggest that investors are still maintaining their confidence in the sustainability of the upward movement of the S&P 500 earnings growth, and business fundamentals in general.
However, with each increasing trend upwards, the trading volume gets lowered. Although the overall chart is showing a continuing upward momentum, there are questions how long it can last? Would the impending tax cuts to be announced by President Trump be permanent, or are they just temporary fixes? One of the reasons for this question is permanent tax cuts usually give the most impetus for companies and individuals to spend and invest. However, it comes at a cost which is large budget deficits and high borrowing costs. This could be a major issue particularly when the US Fed is signaling more interest rate hikes to come, and the US Dollar is already close or at the overvaluation territory.
How did our portfolio perform
Our portfolio managed to stay at around 5.1 per cent since inception at the end of November 2016. This is slightly down from the 5.4 per cent gain achieved for the same time period last week. Compared with the STI return for 7.01 per cent return for the same time period, we are slightly off by 2 per cent. Nevertheless, we are quite satisfied with the progress of our model portfolio, but we are still on the lookout for potential additions, including Ezion Holdings Limited, which unexpectedly issue a profit warning late Friday night after the markets close. In a press release filed with SGX, the company warned investors that it is expected to record net loss for 4Q2016 and full-year 2016. The company did not disclose the actual amount or a range, except to say that the impairments are yet to be determined.
Despite the negative profit announcement, the stock is still under our watchlist, as the company is generating positive free cash flows. Although the fundamentals remain challenging, we think that the company has the capabilities to manage their capital structure, and explore other non-oil revenue generating sources like building wind farms, among others. We shall continue to update investors in the coming months on how Ezion is performing.
What to look out for in the next week
Some of the major companies including Sembcorp Marine, Sembcorp Industries, City Development, UOL, and Venture are expected to report during the second half of the work week. Budget Day is on Monday, February 20. This is perhaps one of the most important events, apart from earnings to keep a lookout for as the government will give an update of last year’s budget and what are the plans in store in help boost Singapore’s competitiveness in light of global economic uncertainties, implications of United States pulling out of the Trans Pacific Partnership (TPP) Agreement, slowdown in China’s economy, elections in Europe, and “Brexit” among others.
Investors might also be interested in how the oil and gas sector (O&G) when Sembcorp Marine and Sembcorp Industries report earnings. Both companies are still reeling from the low crude oil prices hovering at about US$50 to US$60 per barrel since end November 2016 when the Organization for the Petroleum Exporting Countries (OPEC) announced output cuts. However, with the expected cap to the overall crude oil prices of US$60, it could be interesting to monitor how the overall O&G sector will perform in 2017.
Disclaimer: The views/analyses expressed by the author in this article are based on public information sources, and individual analyses. These views do not necessarily represent the views shared by my principal firm. Investors seeking to trade in the stocks mentioned in this article are advised to seek the opinions from licensed financial advisers.