· Expect gradual ascend for STI, re-rating depends on earnings upgrades

· Big caps – go for earnings resilience or yield plays

· Bright spots in SMC, raising earnings growth to 14%

 

Expect gradual ascent for STI towards 3450 by end June and 3600 by year end, re-rating depends on earnings upgrades. We believe the Singapore market has shifted into a more gradual ascend compared to the fast paced climb that lifted the STI by 13% in mid Nov to reach 3320 in early February. Liquidity has pushed STI’s forward PE up to its average of 14.1x, and has the potential to lift the index closer to 3600 by year-end based on FY14F earnings. While temporary choppiness is expected in the near term, we maintain our view that equities will rise further in 2013, with momentum picking up in 2H. Earnings have stabilized in 4Q12, pointing to potential for earnings upgrade, ending a two-year downgrade trend. FY13F earnings growth of 4.9% for STI stocks and 8.9% for stocks under DBS coverage indicate a low base for big caps.

Big Caps – go for earnings resilience or yield plays. Pending earnings upgrades which favour cyclicals in 2H, we are selective on big caps, preferring stocks which offer earnings stability, visibility or backed by attractive yields. We like Global Logistics (offers acquisition growth with potential dividend upside), ComfortDelgro (stability and yield play), Hutchison Port (accretive acquisition raises yield potential), and Keppel Corp (Value unlocking enhances yield payout).

Sifting for growth –earnings upgrades for small caps. We expect interest in small mid caps to continue, lifted by stronger earnings growth. Post the reporting season, we raised FY13F earnings growth for small mid caps from 12% to 14.3%, widening the gap with big caps’ growth at 7.8%.

Capital goods, small cap REITS sparkle in earnings. Key sectors within the SMC sector which outperformed big caps’ earnings growth were capital goods (within the industrial sector) – oil and gas equipment and construction equipment sectors, while small cap REITS outperformed its large cap counterparts with 16% earnings rise, mainly from acquisitions boosting its low base. We expect the recovery momentum in the offshore services vessel sector to gain traction, as contract backlog has been building up momentum in 1Q13. Top picks are Ezion and Kreuz, niche players in a global market. Construction equipment and supply players will benefit from robust demand for infrastructure projects in this region but will be less affected by curbs on foreign labour – our picks are Tat Hong, Pan United, Tiong Woon and Sin Heng. Rise in bond yields has not deterred investors’ appetite for REITs, and the focus is on S-REITs’ potential to deliver accretive acquisitions which will more than compensate for the tightening of yield spreads, currently at 380bps. We picked REITs that offer superior growth prospects - Fraser Commercial Trust (2 yearCAGR of 19%), Mapletree Commercial Trust (CAGR of 6%) or REITS with a strong acquisition pipeline– Cache Logistics and Far East Hospitality.