4Q Earnings Review by CIMB-GK.

This Singapore Strategy Report was compiled by analyst Kenneth Ng for CIMB-GK on 5th March 2008:

4Q07 earnings review.

Expectations of a recession have only started to be built into estimates, post 4Q-results. There were generally more companies that disappointed this season. The ratio of companies that beat expectations against those that missed dropped from 1.08x (in 3Q) to 0.48x (in 4Q).

Our STI EPS upgrade/downgrade momentum has clearly swung towards downgrades. 4Q was the first quarter when we had overall EPS cuts. We trimmed CY08 EPS by 1.9%, with the EPS downgrades fairly spread out across sectors. We expect 2008 EPS growth of 13%.

Big-cap earnings resilient; China stocks sprung numerous disappointments.

The results season differentiated the men from the boys. In the long list of companies that disappointed, S-chips featured prominently. With many of the S-chips showing that they could not cope well with inflationary pressure in recent quarters, there is cause for short-term concern on S-chips.

Across the Singapore stock universe, we are more comfortable with big-cap stocks at the moment.

We cut our end-2008 STI target from 4,100 to 3,480; expect 2H08 to be better when property sentiment stabilises.

At 2,919, the STI is now trading at 12.6x 12-month forward rolling P/E, cheap by historical standards. Although valuations have fallen to historical trough levels, we believe the STI could stay de-rated at least through 2Q08, until the extent of US woes on Singapore job growth becomes clearer.

Our view is that Singapore has remade itself sufficiently to ensure that asset prices do not peak out at 2008. However, with lots of supply looming, investors need to see more clarity on demand before confidence can return. Our STI target is based on a top-down approach, setting it based on a bottom-up process that implies 13.5x CY09 P/E. Recession-era P/E ranges from 12x to 15x while boom-time P/E ranges from 15x to 18x.

Maintain Neutral.

The STI has less commodity-driven earnings than its ASEAN-4 peers and we do not expect it to outperform its peers in the short term. For our top picks, we are inclined towards:

1. deep-value stocks;
   
2. high yields;
   
3. 3) commodity offerings;
4. 4) safer proxies for Singapore’s construction boom.

We see deep value picks in DBS, Keppel Land, Swiber and United Engineers. We consider DBS, Mapletree Logistics Trust, SembMarine, StarHub and United Engineers as stocks that will provide yield support to the portfolio.

We replace our plantation pick, Golden Agri, with Indofood Agri. We remain bullish on the Singapore construction sector but prefer exposure through crane leasers that continue to deliver (Tat Hong) or material suppliers (Hong Leong Asia).

4Q07 review: The start of EPS downgrades

4Q07 earnings review.

Expectations of a recession have only started to be built into estimates, post 4Q-results. There were generally more companies that disappointed this season. The ratio of companies that beat expectations against those that missed dropped from 1.08x (in 3Q) to 0.48x (in 4Q).

Our EPS upgrade/downgrade momentum has clearly swung towards downgrades. 4Q was the first quarter when we had overall EPS cuts. We trimmed CY08 EPS by 1.9%, with the EPS downgrades fairly spread out across sectors. We now expect 13% growth for the market. We are currently still 2% above consensus.

At 2,919, the STI is now trading at 12.6x 12-month forward rolling P/E, cheap by historical standards. The concern is that the round of EPS downgrades has only just begun.

Banking & finance.

4Q07 results for DBS and UOB came in below expectations mainly because of unexpected investment-related write-downs.

OCBC reached our numbers on strong loan growth, rising margins and buoyant wealth management / insurance income. At the key operating cash earnings level, all three actually met expectations. Our EPS downgrades were mostly driven by more cautious assumptions for fee income.

Manufacturing.

Chartered Semiconductor was once again the key culprit driving EPS cuts. Although sales were in line, margins contracted rapidly while financing costs and investment income fell short.

Venture was within expectations but we still trimmed estimates to factor in lower growth expectations in this uncertain environment.

The smaller tech stocks generally missed expectations because of cost pressures.

SPH was within expectations.

Offshore & Marine.

The sector disappointed for the first time in a long while. Keppel Corp had learning pains at its Brazil yard as losses from the Petrobas P-52 project dragged down its O&M operations. Keppel drove the bulk of our EPS downgrades for the sector.

SembMarine resolved its forex issue but results fell short because of tax provisions. We prefer SembMarine to KepCorp now that SembMarine’s order-book guidance is more optimistic.

SCI faces some drag from a slower utilities division.

Property.

City Developments was ahead of expectations on stronger-than-expected recognition of residential profits.

CapitaLand had large revaluation gains.

Smaller developers that saw their earnings pushed back to 2008 included Bukit Sembawang (deferred launches) and United Engineers (recognition).

Sentiment is currently not with the sector as residential sales volume are slow and commercial capital values retreat but valuations of the big caps are now at 13-39% discounts to RNAV.
Telecommunications.

Mostly in line, with StarHub being the slight outperformer in the season. StarHub did better in holding on to margins, as revenue grew through ARPU.

SingTel continued to grab mobile market share. EPS cuts for the sector came mostly from lower margins, on signs that competition has started to nibble margins.

Transport & logistics.

SIA and NOL had good quarters. The key positive for SIA was passenger yields.

NOL benefited from better liner and logistics performances.

Sector EPS downgrades were minor, factoring in higher fuel price assumptions.

Please see the full and detail report here.