Maybank Securities analyst Thilan Wickramasinghe is maintaining a positive outlook for the Singapore market, raising his target for the Straits Times Index (STI) to 3,583 points. The new target still follows a 50:50 ratio weighting of bottom-up fundamentals and an unchanged target P/E and P/B methodology. This higher target offers an upside of 7%.
In his report dated June 5, Wickramasinghe notes that the Singapore market should benefit amidst changing rate expectations. While 1Q2024 has shown bottoming downgrades, earnings have displayed a “surprise” upside potential.
“1Q2024 shows downgrades are bottoming, while earnings have upside surprise potential,” he says.
Despite expectations of five to six Fed rate cuts in early 2024, this has been replaced by two to no cuts, writes the analyst.
“This should bring Singapore’s defensive and low-gearing characteristics back in favour,” adds Wickramasinghe.
The analyst highlights medium-term themes of corporate restructuring such as the Johor-Singapore special economic zone (SEZ), decarbonisation and artificial intelligence (AI) as additional catalysts.
Additionally, Wickramasinghe notes an 8.3% y-o-y increase in market earnings in 1QFY2024, the fastest pace seen since 2QFY2023, which was led by industrials, banks and small and medium-sized capitalisations (SMIDs).
The analyst notes that net margins also saw a rebound of an estimated 14% in 1QFY2024, with margin expansions largely led by industrials and financials.
“This signifies the ability across key sectors to pass on higher input and interest costs and keep margins intact,” says Wickramasinghe.
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REITs and healthcare were highlighted as the key exceptions in 1QFY2024, with the former experiencing effects from rising interest costs and the latter experiencing headwinds from competition from Malaysia and Thailand coupled with slow volume recovery from post Covid-19.
Furthermore, the analyst adds that forecast earnings downgrades fell to 17%, in contrast to the REIT-led 43% seen in 4QFY2023. With downgrades and upgrades at an equal 3.2% of total coverage in 1QFY2024, ratings have remained largely unchanged, writes Wickramasinghe.
“We think these all point to expectations bottoming in terms of further downgrades in earnings and ratings,” says the analyst.
To this end, Wickramasinghe remains confident in STI earnings growth forecasts for FY2024, which has been raised to 5.6% y-o-y, up from the 4% estimate mentioned at the start of 2024.
The analyst also notes support across multiple themes in driving earnings and margins in the Singapore market. With policy and investment measures boosting tourist arrivals in Singapore, this could be a “boon” to the gaming sector, writes Wickramasinghe.
Additionally, he also notes positive effects on the industrial sector resulting from ongoing global decarbonisation initiatives which include strategies pivoting towards the green economy.
Wickramasinghe also sees the potential of the Johor-Singapore SEZ as a “bonus”, which could multiply positive spillovers across sectors through the marriage of Singapore’s global financial capabilities with Johor’s competitive land, labour and energy.
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“We believe that Singapore’s defensive capabilities and the demonstration of its ability to pass on higher operating costs and preserve margins should catalyse a rotation of investor flows back to the country from more growth-oriented markets,” says the analyst.
His top picks for themes include DBS Group Holdings, Dyna-Mac, Marco Polo Marine 5LY , Singapore Telecommunications Z74 (Singtel) and Singapore Technologies Engineering S63 , as well as laggards such as Frencken, Genting Singapore G13 and StarHub CC3 .
He is also upbeat on the prospects of the gaming, industrials and telecommnication sectors as well as SMIDs.
As at 4.38pm, the STI is trading at 3.94 points higher or 0.12% up at 3,333.95 points.
