STI heading to 1200?

While we could be 80% through on earnings downgrades, the focus is on cuts in dividend payouts and potential cash calls, capping equity markets. We would look for sectors with sustainability of dividends mainly in Telecoms and Consumer Services sectors, while awaiting an inflexion point for the market to bottom in 2Q09.

4Q08 earnings plunged by 44% yoy, earnings to decline by 22% in 2009. A dire set of 4Q08 earnings coupled with Singapore entering into its worst recession in history, led us to cut earnings by 13% for 2009. We believe we are 80% through in terms of earnings downgrades. We expect a 35% decline for 2009 if we include further impairment charges from property companies this year.

Raising cash…. Despite cheap valuations, the two key impediments to the market are cash calls and corporates cutting back dividends. Over the past two months, the amount of liquidity sucked from the system via cash calls in Singapore totaled S$7.4bn. We expect further recapitalisation exercises to put added pressure on equity markets. The property and REITS sectors, shipping companies and business trusts are the most vulnerable due to the impact of asset devaluation hitting its balance sheets. Other sectors which may require funding are oil and gas companies and shipyards in the event of defaults in payments or request for balloon payments.

…and cutting back dividends : Singapore corporates cut dividend payout ratios from 62% in 2007 to 54% in 2008, resulting in a 14% decline in market DPS. The cuts came mainly from the shipyards, S chips, property companies, shipping and oil and gas companies. Even if we assume payouts are sustained, forward DPS will decline by 20% due to declining EPS, translating into a lower dividend yield from 6.7%(2008A) to 5.6% in 2009.

STI heading for 1200 With GDP growth expected to hit its low in 1Q09, 2Q09 could be the inflexion point for the market. Our downside target for STI has been stressed to 1200 based on bottom-up bear targets of key component stocks. Our buys are either stocks trading at bombed out valuations ( SembCorp Marine and SPH) or stocks with sustainable dividend yields(Starhub and ST Engineering). We will continue to sell asset plays on recapitalisation needs (STX, Swiber, Jaya, Keppel Land) and late cyclicals (Keppel Corp, Cosco Corp) while SPC is a sell on weakening refining margins.

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