BT: Be defensive on stocks, say analysts (04 Jul 2008)

Be defensive on stocks, say analysts

'Overweight' calls on banks and telcos

By OH BOON PING

THE stock market valuations here remain reasonable, even though some analysts recommend a defensive investment strategy ahead. Some called for overweights on banks and telcos.

In a report, CLSA forecast FY09 price-earnings (PE) multiple at 13.5 times, adding that 'we are still at 10 per cent premium to regional peers and about one standard deviation below the 5 year average and significantly higher than the lows witnessed during 9-11 and Sars period'.

Similarly, UOB-Kay Hian estimated the stock market's PE multiples at 13.3 times and 12.1 times for this year and next year - marginally higher than Asia ex-Japan & China's average PEs of 12.7 and 11.2 respectively.

However, analysts at CLSA are cautious on second-half prospects in Singapore as the economy could weaken, while higher inflation exerts pressure on profit margins. 'We expect year-on-year GDP growth of 3.6 per cent, decelerating to 2.7 per cent in 2009.'

UOB-Kay Hian believes the reporting season for 2Q08 will be closely watched for further earnings downgrades, following those seen early this year.

Specifically, 'the sectors that saw significant earnings downgrades were aviation (on high oil prices), conglomerates (weak earnings guidance), media (lower investment income), property (weak sales), S-chips (rapidly rising costs) and land transport (high fuel cost)'. The sectors that saw earnings upgrades were finance, plantation and supply chain and shipping.

Overall, the brokerage cut its forecast growth in market core earnings per share from a double-digit level in 4Q07 to 2 per cent.

In its note, CLSA said it has already downgraded growth expectations over the last two quarters, and now estimates earnings growth of 4.2 per cent and 13.7 per cent for 2008 and 2009 respectively. Also, it sees 'some 2 to 4 per cent earnings risks in property and offshore & marine (O&M). Property risks lie in the overseas operations and cost overruns for O&M'.

CLSA advocates a defensive investment strategy, and has an 'overweight' on UOB, OCBC, SingTel and StarHub.

Among the conglomerates, it prefers SembMarine and ST Engineering. 'We think crude palm oil will be resilient in this environment; Golden Agri is our top pick here.'

UOB-Kay Hian noted the strong loan growth in May, adding that the banks' Q2 results should not surprise on the downside. 'However, the simultaneous correction of bond markets in Singapore and Malaysia does not augur well for Great Eastern's earnings contributions to OCBC.'

The analysts added that property developers' results could surprise on the downside due to slow construction progress, but said this resulted mainly from a timing difference in the recognition of pre-sold projects. 'While this should not have a major negative impact on property developers' share prices, it could delay investor interest in these stocks despite their deep discount to our worst-case revised net asset values.'

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