Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
Country Assessment
2010 growth (%)
While we have upgraded earnings growth from 12% to
18% for 2010, EPS upgrade is slower than the region, due
to 1) dilutive effect of recent rights issues and cash calls, and
2) earnings for industrial sector, a late cycle play which has
yet to be upgraded. Singapore earnings are highly cyclical,
with 55% exposed to domestic cyclicals (Financials,
consumer discretionary) and 21% externally via industrials.
As such, we expect earnings upgrade curve to be steep, in
line with the V shaped recovery in Singapore and the region.
Following the decrease in risk aversion since March 2009,
Equity Risk premium has normalized to its long term average
of 4.2%. Assuming ERP at 4.2%, our sensitivity analysis
points to a further 2% upside for the FSSTI Index if our
growth forecasts stay at 18% in FY2010. We arrive at a
target of 2800 over the next 3 months, supported by price
to book and average PE of 16x on FY10 earnings.
Singapore equity risk premium
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
(%)
0.0
01 02 03 04 05 06 07 08 09
Source: Datastream, DBS. Earnings yield minus Singapore 10-year
bond yield
Potential return from Interest rate / Growth sensitivity
analysis based on ERP mean revision
Singapore Long Bond yield (%)
1.5 1.75 2 2.25 2.5 2.75 3
18 11% 7% 2% -2% -5% -9% -12%
23 16% 12% 7% 3% 0% -4% -7%
28 21% 17% 12% 8% 5% 1% -2%
33 26% 22% 17% 13% 10% 6% 3%
38 31% 27% 22% 18% 15% 11% 8%
43 36% 32% 27% 23% 20% 16% 13%
48 41% 37% 32% 28% 25% 21% 18%
Based on our nominal GDP growth forecasts, absolute GDP
level will return to pre-crisis levels by end of 2010. Assuming
earnings return to pre-crisis levels, this will translate to
earnings growth of 38% from current, which will lead to a
12 month target of 3160.
Possible correction presents opportunities to accumulate.
With valuations at mid-cycle levels, the market needs a
healthy correction as it awaits clearer signs of a recovery on
the economic and earnings front. In our view, the equity
market in 2009 mirrors the recovery cycle in 1998. In 1998,
the equity market surged 60% from its low, corrected by 1/3
in the 2Q of recovery before resuming its uptrend(see chart
on Singapore market recovery in previous crisis). Assuming
support at –1 standard deviation from the current average
PE, the STI could potentially correct to 2275 (based on 2010
earnings).
In our view, key risk factors are a) unforeseen external
shocks leading to a rise in equity risk premium b) inflation
concerns if commodity and oil prices continued its rise, due
to supply shortage and slide in US$ c) concerns over
overheating in China; and d) fear of rising interest rates
given that the next move from the current low levels will be
up.
MSCI Singapore 12m fwd P/E (x)
MSCI Forward PE
26.0
24.0
22.0
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
(x)
90 91 92 94 95 96 98 99 00 02 03 04 06 07 09
MSCI Singapore - 12MTH FWD PE RATIO
Source: Datastream
Current support 12-mth target
Source: Datastream. Based on current index of 2681 and bond yield
of 2%
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