Markets Insight

Focus on offshore marine sector, banks

Sembcorp Marine is due to announce its results on Tuesday (Oct 25). Its profits have been on a decline since the third quarter in 2014.
Sembcorp Marine is due to announce its results on Tuesday (Oct 25). Its profits have been on a decline since the third quarter in 2014. PHOTO: REUTERS

Reits showing significant resilience as local results reporting season continues into week

The local banks and some oil-and- gas-sector firms will be in the spotlight this week as the local results reporting season picks up pace after a less-than-stellar first week.

Investors found little to cheer about last week, although real estate investment trusts (Reits) again showed significant resilience.

Broadly, fresh signs emerged of stiff economic headwinds and choppy business conditions.

At Singapore Exchange, earnings dropped 16 per cent in the three months to Sept 30 as market activities stagnated, and chief executive Loh Boon Chye is not sure whether a rebound is near.

Third-quarter revenue at M1 slid 10.3 per cent, as net profit fell 23.4 per cent. M1 expects full-year earnings to be about 12 per cent lower.

But the most alarming result was when Keppel Corp announced that its third-quarter net profit plunged 38 per cent and some 3,080 jobs have been axed in the period.

Investors harbour little optimism and trading has been slow as a result. While the Straits Times Index gained 0.56 per cent over the past week, turnover in the blue-chip segment actually dropped some 30 per cent from a week earlier.

This week, the oil-and-gas sector will remain in the spotlight, with Sembcorp Marine announcing its results tomorrow, followed by Sembcorp Industries on Thursday.

With its profit on a decline since the third quarter in 2014, SembMarine's outlook is anything but encouraging so its shares have been stuck below $1.40 for more than two months - the lowest level since the global financial crisis.

But investors will also look to the non-performing loans of local banks to gauge whether the rot in the oil-and-gas sector has spread further. OCBC will announce its third-quarter results on Thursday, followed by United Overseas Bank on Friday. DBS Group Holdings will do so next Monday .

There is no sign that the local banks faced a major implosion in the third quarter akin to the Swiber Holdings saga that shocked DBS in the second quarter, but overall asset quality is likely to remain vulnerable. The banks' top line is also facing risks, given slowing trade and economic growth as well as volatile investment markets.

With these concerns, rating agency Moody's downgraded the outlook on the Singapore banking system from stable to negative in June.

Bank shares have also weakened, with DBS dropping around 12 per cent in the past 12 months to $15.03 at the last close. Over the same period, OCBC shares shed around 6 per cent to $8.49 and UOB lost around 2 per cent to $18.82.

At their current price levels, the banks' price/earnings ratios are all below 10, implying that all three have been far more profitable than the market believes. Some analysts, such as OCBC investment research head Carmen Lee, noted that the negatives in the banks' outlook have been priced in.

But it was not all doom and gloom last week. Reits again emerged as the anchor of stability, and DBS analysts liked what they saw in the latest results, giving Frasers Commercial Trust, Ascendas Reit and Ascott Residence Trust a buy call.

Ascott last week announced a distribution per unit of 2.35 cents for the third quarter - the highest in three years due partly to currency gains. Its units last closed at $1.145.

"We believe Ascott's diversified portfolio with serviced residences and rental housing across 14 countries in the Asia-Pacific, Europe and the United States offers investors a more resilient DPU outlook," DBS analyst Mervin Song said, giving a $1.32 target price.

A version of this article appeared in the print edition of The Straits Times on October 24, 2016, with the headline 'Focus on offshore marine sector, banks'. Print Edition | Subscribe