DBSV: Market Outlook: Earnings on limbo rock

(CAUTIOUS) 2008/11/21
By: Janice Chua +65 6398 7954 / Singapore Research Team

Earnings to decline by 17% for 2008 and 6% for 2009: In 3Q08, the earnings
for Singapore listed companies under our coverage dropped 7% yoy and 22%
qoq, of which 32% were below expectations. Dismal outlook for 4Q08 led us
to further cut estimates, and we expect 25% qoq decline in 4Q08. We have
cut our earnings for 2008F and 2009F by 5% and 19% respectively. This
resulted in earnings decline of 17% for 2008F and 6% for 2009F for STI
stocks.

Earnings downgrades have yet to bottom – earnings risk for property and
banking sectors. The sharper than expected drop in October NODX implies
there is downside risk for GDP, pushing the economy into recession next
year. MTI has cut its GDP growth forecasts to –1% to +2% for 2009 and 2.5%
for 2008, on the back of weak 3Q08 GDP growth of –0.6% yoy and –6.8% qoq.
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 write downs take centrestage due to asset devaluation. In
1998, net earnings decline by 40%.

12-month STI target upside cut to 2010 (base case) : At 1613, the STI is
trading at PE of 8.5x(08F) and 9x(09F) with dividend yield of 7.1%(08F).
Our bottom-up target has been cut from 2983 to 2010 on revised earnings and
de-rating, translating to 11.2x on FY09 earnings.

Bear target of 1250 on STI : Given the deterioration in earnings, and
assuming a recession scenario of –2% in GDP growth next year, the STI could
test a low of 1250 if we apply 1998’s valuation metrics. As we are still
in the early phase of a recession, we will pick stocks whose earnings are
more resilient, such as consumer staples, media, telecoms, and utilities.
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 its toll on asset plays including Properties,
REITS, Shipping and Hotels. (SPH, Mobile One, ST Engineering)
(See attached file: sgstrategy211108.pdf)