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Singapore corporate earnings peaked in 2022, difficult to beat next year: CGS-CIMB

Singapore’s projected calendar year (CY) 2022 aggregate net profit growth of an estimated 30% compared to pre-Covid levels in 2019 will be a “tall order” to beat in CY2023, amidst slower economic growth, says CGS-CIMB Research.

In the brokerage’s Navigating Singapore report dated Dec 9, analyst Lock Mun Yee notes that the benchmark Straits Times Index (STI) was one of the best performers in the region in 2022, with a 4.1% rise year-to-date (ytd), as the economy shook off the effects of the Covid-19 pandemic and borders reopened.

Re-opening plays, capital goods and financials outperformed, although this was partly “marred” by the Russian-Ukraine conflict, US-China geopolitical tensions and a weakening macro environment, says Lock.

Should the rate pivot come into play towards end-FY2023, she says the market may adopt a more risk-on strategy and look for companies with strong growth potential. “We advocate investors to consider medium- to long-term positions in the recent ‘fallen angels’ — companies with strong competitive edge, good growth prospects and which are trading at cheap valuations — such as Nanofilm, Yangzijiang, Sea Limited and TDCX.”

Aside from these companies, Lock’s key themes are a pause in interest rate hikes, size and scale and China re-opening plays. She is anticipating the rate upcycle to pause after a hike in 1HFY2023, while her STI target for 2023 is 3,350, pegged to 1.5 standard deviations (s.d.) below mean.

“Our theme for 2023 is to look for sectors that can benefit from a pause in rate hikes, such as S-REITs. We think timing the rotation is key,” says the analyst. “As economies emerge from the Covid-19 pandemic, growing topline and market share, driving cost efficiencies and increasing environmental, social and governance (ESG) efforts have never been more important.”

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“As such, size and scale matter, and we expect to see more synergies growth among corporates as they execute merger and acquisition (M&A) plans in 2023,” she adds, citing the Sembcorp Marine-Keppel Offshore Marine and Sats-Worldwide Flight Services (WFS) M&As, as well as a potential merger between Starhub and Simba, formerly TPG Telecom.

Her top conviction big-cap picks going into 1HFY2023 are Clarus, Class Acceleration, CapitaLand Integrated Commercial Trust (CICT), Genting Singapore, Raffles Medical Group, Singtel, Singapore Technologies Engineering (ST Engineering), Thai Beverage, UOB and Venture Corp (VMS).

Meanwhile, Lock’s small-cap picks are UMS Holdings, Boustead Singapore, BRC Asia, Silverlake Axis and Yangzijiang. Key risks to her view include a protracted and higher-than-expected rate hike cycle that could derail corporate earnings growth and lead to a recession in Singapore.

See also: Singapore’s manufacturing output decreases by 0.8% in October, marking first y-o-y contraction since Sept 2021

Economic outlook

According to Lock, the stage for 2023 is one where inflation is likely to peak — and stay above trend — and economic activity is anticipated to moderate in anticipation of the global slowdown.

CGS-CIMB economist Nazmi Idrus is projecting Singapore’s GDP to grow 2% y-o-y in 2023, compared to 3.8% in 2022, and consumer price inflation (CPI) to slow to 4.5% in 2023.

Idrus explains that deep recessions in a few of the global economies are still a possibility, which pose a major downside risk to CGS-CIMB’s projections. “In addition, a number of challenges will probably affect how well the economy performs in 2023, including persistently strong inflationary pressures, resurgence of geopolitical issues and the lingering consequences of global monetary tightening,” he says.

On the domestic side, the consumer-facing and travel-related sectors should continue to recover in the near term, but as the impact of the economic reopening wears off, the rate of growth in these sectors might moderate. “Our base case is no recession in Singapore on the back of continued re-opening tailwinds for the hospitality and retail sectors, with a catch-up in construction activity offering some support,” says Lock.

She believes that the pace of China’s reopening remains a “wildcard” even as it announces a relaxation in its zero-Covid policies. “With China tourists accounting for around 19% of Singapore’s tourist arrivals in 2019, the positive effects of more tourist flows into the tourism, services and retail sectors are likely to offset some of the effects of a global slowdown on Singapore’s economy,” says Lock.

“Furthermore, the effect of a full reopening in China, possibly in 2H2023, could be gradually but increasingly felt in the latter part of 2023, potentially spurring the economy further towards the end of next year,” she adds.

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Idrus explains that China’s eventual removal of the zero-Covid policy could aid the resurgence of Singapore’s tourism industry, which will have favourable, short-term spillover effects on the retail and food and beverage industries.

“Nevertheless, a higher GST rate to take effect in January 2023 should have longer negative implications on consumption in 1H2023 although it may contribute to a temporary spike in spending in 4Q2022. This was the case in 2007, where retail sales in June 2007 spiked prior to the GST hike in July 2007,” he notes.

In consideration of global demand moderating, Idrus says that Singapore’s trade-related sectors may be the first to be affected. “The electrical and electronics sector, a mainstay for Singapore’s trade, has shown weakening prospects. The recent electronics Purchase Managers’ Index (PMI) fell to 49.7 in October, indicating a second consecutive month of contraction in the sector as new orders and export components declined.”

Idrus also expects other external-oriented production such as precision engineering, petrochemicals, as well as marine and offshore to moderate in tandem.

Sector allocation and top picks

Lock says that CGS-CIMB is neutral on banks, capital goods and transport. On an annual basis, banks have underperformed the FSSTI by 9% despite having experienced the steepest US Fed Fund Rate (FFR) hikes. “Our 2023 to 2024 earnings per share (EPS) have also been upgraded by 23% to 30% since January, which we think is a tall order to beat in 2023 on the back of a lower y-o-y quantum rate hike; hence, we have downgraded the sector to neutral recently.”

“From a top-down perspective, we are also turning neutral on capital goods after its 36% outperformance in 2022, mainly due to corporate actions and strong power prices,” she adds. “We opt for company-specific catalysts, such as earnings growth, while Keppel and

CGS-CIMB is also overweight on an interest rate retreat for S-REITS and developers, although Lock says it is a “valuation call” for the latter. She is also positive on construction for their robust order books.

“We think the time to accumulate S-REITS could be after or during the upcoming 1QFY2023 results season, as consensus may still need to downgrade earnings to account for higher re-financing costs,” she says, adding that she is also watching out for the certainty of the FFR pause.

Meanwhile, the fear of order deferment among major customers and a weakening economic outlook de-rated the tech sector’s forward price-to-earnings ratio (P/E) from around 14x in January to the current multiple of 9.5x.

As a result, Lock says Maybank is “gradually rotating” into a beaten-down tech sector. “Among the large caps, we have largely kept our two-year EPS forecasts intact through the year as demand outlook and guidance remained firm, suggesting that the sector could be ready for a re-rating if there are no major earnings cuts in 1HFY2023.”

While gaming, telco, consumer and healthcare will continue to serve as proxies to further China reopening, Lock notes that all sectors have seen earnings surpass their respective pre-Covid levels amidst strong commodity and power prices, hikes in the FFR and pent-up demand. Overall earnings of all Singapore companies under our coverage have turned out stronger than the pre-Covid-19 level ytd, and Lock is projecting an aggregate net profit growth of 30% for 2022 from 2019.

“Going into 2023, we expect most catalysts that spurred the recovery in corporate earnings over the past two years to wane off, including banks’ net interest margins (NIMs) peaking, strong commodity prices and general demand recovery,” says Lock.

“Amidst a slower economic growth environment, unabated high cost pressures as well as potential belt tightening by corporates should lower the likelihood of positive earnings surprises in the quarters ahead. This is especially true after two years of EPS upgrades since 4QFY2020,” she adds.

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