Monday, 24 November 2008

Published November 24, 2008

Brokers pare forecasts, ratings further

Major downgrades for financial sector with risks of higher provisions, weaker fees, poor equities turnover

By LYNETTE KHOO

EARNINGS forecasts and ratings for Singapore companies and their Straits Times Index (STI) targets have been further marked down by several brokerages in view of the third quarter results out so far.

Although there has already been a slew of downgrades this year, analysts say that earnings downgrades are expected to continue for the next few quarters, and the biggest risk lies in the property and banking sectors.

CIMB-GK analyst Kenneth Ng said in a report last week that he has slashed the earnings per share (EPS) forecasts for the STI component companies by 8 per cent for this calendar year and 27 per cent for 2009 calendar year.

He now expects earnings to contract by 6.3 per cent year-on-year in 2008 and 13.7 per cent in 2009.

'We expect the next three months to be particularly difficult for banks, property and consumer discretionary,' Mr Ng said.

The major downgrades were for the financial sector, given risks of higher provisioning and weak market-related fees and subdued equities turnover. And CIMB-GK's rating for the sector was cut to 'underweight' from 'overweight'.

Disappointed with third-quarter results and expecting a weaker fourth quarter, DBS Vickers cut its corporate earnings forecasts by 5 per cent for this year and 19 per cent for 2009.

The brokerage now expects earnings among the STI stocks to slump 17 per cent this year and 6 per cent next year.

It noted that the sharper-than-expected fall in non-oil domestic exports in October implies a downside risk for gross domestic product, which could push the economy into a recession next year.

'Against this backdrop, we expect earnings downgrades to continue for the next few quarters, the biggest risk lies in property and bank earnings, as provisions and writedowns take centrestage due to asset devaluation,' DBS Vickers said in its report.

'We will sell on strength asset plays, as we expect more downside in asset values next year, as the effects of recession, job cuts and financial deleveraging exercises take their toll on asset plays including properties, Reits, shipping and hotels,' the brokerage said.

Its bottom-up target for STI fell from 2,983 to 2,010 after factoring in the revised earnings and derating, which translate to 11.2 times FY09 earnings.

DMG & Partners Securities analyst Leng Seng Choon pegged the worst-case STI target at 1,560 points. Given a downside of about 10 per cent and difficulty of pinpointing the exact bottom, he recommends investors 'start nibbling at stocks that will survive this crisis'.

He believes that these 'survivors' would be companies with strong balance sheets that will ensure continued support from banks for their working capital and capital expenditure needs.

After recent reports of corporate insolvencies and credit tightening by banks, investors are now closely scrutinising companies on their borrowings and operating cash-flow.

Citi has the lowest STI target of 1,500 points, a level that has priced in a recession worse than the 2001 tech and 2003 Sars recessions, but above the valuation troughs of the 1998 Asian financial crisis.

'We find that bear markets typically do not bottom until the economy is at, or past, the worst quarter of a recession, which is likely to be some time in the first half of 2009,' Citi analyst Chua Hak Bin said in a recent note.

'We recommend raising stakes as the STI falls back and retests the 1,500 levels.'

Given the dark outlook, analysts say their preferred stocks are still the defensives.

CIMB-GK's Mr Ng said he would pick telcos, S-Reits and Media. He lifted the rating on telcos to 'overweight' from 'underweight' on the belief that the worst of competition here and currency depreciation in their overseas markets is over.

DBS Vickers prefers the consumer staples, media, telcos and utilities, whose earnings are seen as more resilient.

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