Heading into 2H19, MBKE expects a choppy year for markets given that Singapore is highly exposed to trade flows. Forward looking profit growth expectations have fallen over the past six months with the weakening macro outlook.

Among the sectors, there are four particular sectors that MBKE thinks will be able to help investors ride out the choppy markets. In the first part of this 2-part series, we will highlight two of the sectors that MBKE thinks investors should be watching out for: Financial and industrials.

Investors Takeaway: Watch Out For The Financial And Industrial Sectors Maybank Kim Eng

  1. Financial: Best Place To Seek Quality Growth Plays

Years Of Structural Change Coming To Fruition

Following not so successful attempts to transform into universal banks, the financial sector has been returning to basics as the big three banks renewed its focus on commercial banking. The structural change to the financial sector has seen interest income generate two-thirds of total income.

Volatile trading income has also been replaced by more sustainable sources of non-interest income, such as wealth management. Overall, these structural changes have improved the quality and visibility of earnings for the sector, according to MBKE.

Among the banks in Southeast Asia, the three Singapore banks are the only ones that are compliant with the BASEL III regulatory standards. In addition, the local banks have some of the strongest capital ratio (13.9 percent CET1) and provisioning coverages (94 percent) in the region.

Moving forward, MBKE foresees the sector to grow at six percent in terms of loan growth. This forecast comes amidst a period where Singapore is expected to experience slower economic growth. MBKE notes that the growth will be driven by the banks’ exposure to higher growth overseas markets in SE Asia and Greater China. The sector should also see net interest margin improve even without any further interest rate hikes as existing loan yields are catching up to past hikes. These drivers should help keep earnings momentum positive going forward and provide better dividend visibility for the sector.

According to MBKE, the sector is now trading at eight percent below its historical mean price-to-book value. This is a steep discount given that the banks’ return-on-equity (ROE) is set to expand to 11.9 percent by 2021, which is the highest level since the global financial crisis. Additionally, the sector is likely to provide a highly defensible 4.5 percent dividend yield in 2019, which is amongst the highest in the Southeast Asia.

Rating: Overweight

  1. Industrials

Aviation Services: Multi-Factor Growth Driving Industry Outlook

The industrial sector has not been seeing much positivity in the past quarters. The dampened outlook of the O&M (Offshore & Marine) sector and aviation industry has seen the industrial sector take a dip. However, moving forward, MBKE thinks that the outlook for the industrial sector is brightening up.

For the aerospace MRO (Maintenance, Repair and Overhaul) industry, there are multiple factors at play to buoy the sector. Firstly, a tight freighter market and availability of midlife and older generation aircraft triggering passenger-to freighter conversion work will drive the orderbook for aerospace MRO players.

Secondly, strong growth in the global commercial aircraft fleet with deliveries from OEMs (Original Equipment Manufacturer) Airbus and Boeing at record levels of over 1,500 annually will drive demand for aerospace MRO services.

Thirdly, there are increasing investments in secondary and tertiary cites airport infrastructure in APAC combined with growth in low cost carrier fleets expanding flight frequency and the roster of destinations. This bodes well for catering, ground handling, cargo management, refuelling, aircraft conversions and other peripheral aviation services.

Based on company briefings over the past few quarters, it appears that the worst of the customer order cancellation risk and provisions (ex-Sete Brazil) are now likely to be over for the O&M industry. This is also evident from Keppel Corp and Sembcorp Marine having successfully sold off the rigs resulting from customer defaults in 2015/2016.

In addition, a combination of marketed rig supply shrinking (with the scrapping of older rigs) and a gradual increase in contract work has driven offshore fleet utilisation levels. While there is still excess capacity in the E&P (Exploration & development) drilling equipment segment, the gradual increase in contract work is still good sign that the market has bottomed.

Rating: Overweight

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