Hopes up as Singapore earnings season begins

Pedestrians crossing the road along Shenton Way in Singapore's central business district.
Pedestrians crossing the road along Shenton Way in Singapore's central business district.PHOTO: ST FILE

SINGAPORE (THE BUSINESS TIMES) - UST as traders toasted the gains of 2017 a month back, the market could be looking at another annus mirabilis this year.

Earnings season is upon us, which often offers watchers a referendum on the health of a stock.

And if the news is especially rosy, company financials could be a shot in the arm for the local bourse.

The benchmark Straits Times Index has largely been coasting along at decade-high levels for a week now.

Eli Lee, head of strategy for the Bank of Singapore, told The Business Times: "Notwithstanding an 18 per cent rally last year, valuations in the Singapore equities market remain undemanding.

"We anticipate gains from Singapore equities again this year as the economy benefits from an ongoing synchronised pick-up in global growth, and financial conditions continue to stay fairly accommodative."

Many happy Reit-urns

Even as most of the blue-chips on the index will share earnings only from early February onwards, various real estate investment trusts (Reits) have already been setting the pace.

CapitaLand Mall Trust, CapitaLand Commercial Trust and Ascendas Reit last week joined a slew of non-index fellows - from Cache Logistics Trust to Frasers Centrepoint Trust - in dropping results announcements.

Now, folks may disagree on whether, say, the industrial segment or the commercial space is looking more favourable.

Office rents will rise, but by how much? What will the tailwinds be from the manufacturing boom's hunger for high-tech buildings?

But these questions might well be less existential angst than fun brain teasers for a boom time.

And despite various Reits clocking distributions per unit (DPUs) that are only modestly higher than the previous year's - if not flattish or in decline - sector analysts retain high hopes.

RHB Research Institute, for instance, reiterated an "overweight" stance on Reits on Jan 24.

Vijay Natarajan, the team's property and Reits analyst, separately told BT in an e-mail: "Taking advantage of low interest rates and buoyant Reit market, many of the Reits have done yield accretive acquisitions last year. So the contributions will slowly start kicking in as (the) year progresses.

"The growth in the economy should also filter into industrial and hospitality rents, in the form of higher rents, which are coming off from a low base. This should support DPU, although I believe this will take one or two more quarters."

And the biblical predicament of "no room at the inn" may in fact be cause for cheer in the hospitality segment this year, even as Singapore's chairmanship of Asean is expected to lift visitor numbers.

"For the first time in the last four years, hoteliers are saying, 'Yes, we can raise the room rates,'" said Mr Natarajan.

Vincent Yeo, chief executive of CDL Hospitality Trusts' managers, told a briefing on Jan 26 that the industry expectation is for 2 per cent to 5 per cent growth in revenue per available room (RevPAR) in 2018.

Meanwhile, in a sector update on Jan 24, UOB Kay Hian analysts Vikrant Pandey and Loke Peihao noted that Keppel Reit's performance was below consensus expectations. Yet they went ahead, and stuck anyway to an "overweight" call on the sector.

As the Republic's general economy is thriving for now, Mr Pandey and Mr Loke noted that there is both a positive outlook for the office market - where new supply is tapering off in the mid-term - as well as the expectation of a recovery in retail rents.

Speaking to BT over the phone, Mr Loke added: "Generally, we're quite positive on the hotel segment because of the tight supply."

But the sustained optimism among Reit observers may not extend to local mall portfolios.

Maybank Kim Eng analyst Chua Su Tye wrote in a report on Jan 25: "We are negative on retail S-Reits, given structural challenges from e-commerce disruption and sales leakage."

RHB's Mr Natarajan called the retail segment the "wild card" in the Reit sector, saying: "Unlike other sectors where the supply is declining, the retail supply is still steady."

Other bogeymen are also hiding under the bed. Some Reit managers are shifting away from floating interest rates on their debt, and towards fixed rates instead.

"The real bad omen for Reits to watch out (for) is an unexpected sharp spike in interest rates, and wane in market demand for yield and safe-haven instruments," said Mr Natarajan.

Oil's well for all

Banks are frolicking on loan growth and higher interest rates. Industrial manufacturers are cashing in on gains from the global tech supply chain. And a property bonanza has swept the island by storm.

KGI Securities research analyst Joel Ng told BT that equity markets have had a "surprisingly strong" start to 2018 so far.

The oil and gas sector has also bounced back, to brokers' delight.

"As oil majors continue to adapt to the oil price environment and are better positioned to make investment decisions, order wins will return to the sector, but mainly in the non-drilling segment initially," said Mr Lee, from the Bank of Singapore.

Mr Ng said: "We are most bullish on oil and gas companies and believe that we are at the beginning of a multi-year bull run in this sector...

"We believe the massive under-investment in this sector is setting up the stage for a supply-demand mismatch in the next one to two years."

Lim Siew Khee, head of Singapore research at CIMB Research, noted that oil and gas bubbliness will spill over into the capital goods sector, too.

"We like the yards and expect stronger orders to come in," she said.

But sectors that might struggle include telecoms and transport.

The DBS Group Research team wrote gloomily, in a telco industry report on Jan 25: "The incumbents' complacency in embracing digitisation and failure to invest in digital channels to improve distributions, customer interactions and customer care could heavily weigh on future growth and subscriber additions."

KGI's Mr Ng singled out taxi operator ComfortDelGro as another potential victim of technological disruption and hot competition.

He summed up the state of affairs in an e-mail thus: "On the broader market, we remain optimistic going into 2018, but do not expect the same levels of gains that we experienced in 2017.

"Singapore's equity market is expected to benefit from positive global economic growth amid a minimal inflationary environment (which is great for corporate profits!)."