Date: July 28, 2018
- US-EU trade war worries eased as the two parties agreed to renegotiate;
- Local banks were STI’s main drivers as index rose 0.8% for week;
- 10-year yield came close to 3% but later backed off;
- Wall Street sold off Facebook and Twitter after disappointing earnings;
- SembCorp Marine and SIA took big hits after announcing latest figures.
The phrase “stuck within a trading range’’ springs to mind when viewing the way trading went last week. The Straits Times Index slipped 5 points on Monday and Tuesday before Wednesday’s large bank-based push added 1%. Wall Street also rose sharply that day, after the US and European Union agreed to shelve tariff plans and to return to the negotiating table. However, weakness later set in, with the index weakening in low volume. For the week, the STI rose 27 points or 0.8% to end at 3,324.98, most of the rise coming on Wednesday when it gained 34 points.
Banking on the banks
On Wednesday, the Straits Times Index jumped just over 1% after Bloomberg reported that Morgan Stanley sees upside for the three banks.
“Singapore banks’ return-on-equity will
continue to increase even as macro risks rise, Morgan Stanley analysts led by Nick Lord write in note, upgrading OCBC and UOB, before DBS starts the 2Q results season Aug. 2’’ reported Bloomberg.
* ROE to increase 240 bps at DBS, 140 bps at OCBC, and 100 bps
at UOB, between 2018 and 2022, due to expansion of NIMs;
* Share prices and earnings estimates are also not factoring any
benefit from digitisation;
* Banks are trading 1-standard deviation below their long-term
average PE after underperforming MSCI Asean Index and Asian
peers since May.
Price targets for DBS, UOB and OCBC were reported to be S$30.30, S$26.70 and S$13.10 respectively. All three banks were again responsible for the STI staying in positive territory on Thursday, when their rise were the main contributors to the index’s 1.72 points gain at 3,328.60.
Deutsche Bank in its 26 July preview of the banks’ 2Q figures noted that after a strong first quarter, the three banks will be working against a relatively high base.
“While NIM, loan growth and asset quality trends should largely fall within expectations, the key is fee income sustainability, a key strength for the sector in recent years. As capital markets weakened, we expect to see more pressure in this quarter. Among the three SG banks, we believe UOB’s earnings should look more defensive in 2Q, as its fees are less affected by capital market activities’’ said Deutsche.
On Wall Street
The big point in the US however, was earnings, starting with Facebook’s disappointing 2Q numbers which saw US$120 billion wiped off its market cap in Thursday’s trading – the first time in history that a single company has lost at least US$100 billion in one session.
This was followed by Twitter’s disappointing figures on Friday that saw the stock crash almost 21%. Investors were said to be upset by news that the number of active monthly users fell from 336 million to 335 million over the past three months.
In the US Treasury market, there was a huge, 10.8 basis points spike up in the 10-year yield on Monday to 2.96% that was largely shrugged off by Wall Street equities. According to some news reports the bond selloff was in sympathy with movements in Japan, where that was speculation that the Bank of Japan was about to make significant changes to its monetary policy.
In local news
Offshore and marine firm SembCorp Marine’s shares on Monday crashed S$0.13 or 6.6% to S$1.83 with 14.2 million traded after the company reported a net loss of S$50m for the 6 months ended 31 June. The operating loss for the period was S$33m.
Phillip Securities in its 23 July report on SMM recommended a “reduce’’ on the stock with S$1.78 target price and noted that the company is still struggling despite an oil price recovery to a 3-year high. The broker also noted that SMM’s management foresees work volume to remain low and margins to stay compressed.
“We revised down our FY18e BVPS (book value per share) from S$1.30 to S$$1.10 due to protracted weak performance. Based on the 5-year average PBR (price to book ratio) of 1.6x, we derive an updated target price of S$1.78 for FY18. It is worth mentioning that the historical PBR low was around 1.0x. We maintain our REDUCE recommendation’’ said Phillip. The stock closed the week at S$1.84.
Singapore Airlines’ shares suffered a large hit, plunging S$0.70 or 6.4% to S$10.22 on Thursday and Friday after the national carrier reported its results for the first quarter ended 30 June – core net profit of S$135.7m, which was down 47.5% year-on-year.
In response, Maybank Kim Eng downgraded SIA from “hold’’ to “sell’’. “We were misled by the impressive 1Q19 operating statistics thinking yield recovery is at hand. Alas, passenger yield plunged, continuing its downtrend since 2014. Our earnings forecasts are unchanged. We switch our FV (fair value) peg from 0.93 (long-term mean) to 2018 P/BV (price/book value) of 0.82x, which is the lowest point for the past 12 months due to a dreary outlook. Our revised FV is S$9.65 (from S$10.95)..’’ said the broker.
China shipbuilders Yangzijiang and Cosco however, benefited from a large Tuesday stock market rally on the mainland that pushed the Shanghai Composite Index up 1.62% and added 1.4% to the Hang Seng Index.
The latest company to list its shares in the local market is mechanical and electrical engineering firm DLF Holdings. It made its debut on Wednesday on Catalist, finishing at S$0.169 on volume of 2.63m versus the S$0.23 offer price. It closed the week at S$0.18.
