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Brokers' take

This article is more than 12 months old

Compiled by Navin Sregantan

SINGAPORE BANKS

DBS Group Research, Dec 4

Sustainability of net interest margin (NIM) expansion and asset quality will determine Singapore banks' valuations.

We are projecting that NIM will be on an uptrend next year and expect credit costs to trend higher year-on-year.

Asset quality stability and higher earnings growth in FY2019-20F should drive the banks' valuations towards 10-year average price-to-book ratio multiples.

Loan growth should continue to be supported by drawdowns from property development projects and regional corporate loans in 2019.

Although we have "buy" ratings on both United Overseas Bank and OCBC Bank, we prefer UOB due to its strong capital position and the building up of its liquidity buffers; continuous growth in loan book and NIM expansion expected; and it being a defensive pick as it has a smaller exposure to China and more defensive wealth management franchise.

Our "buy" rating on OCBC is premised on ongoing NIM expansion on full impact of loan repricing; stronger capital position post scrip dividend issue; and potentially higher dividends as a price catalyst.

Risks include NIM failing to deliver, worsening US-China trade relations and less firm macroeconomic outlook to pose downside risks to loan growth, deteriorating credit environment and a sharp slowdown in the Singapore property market.

GEO ENERGY RESOURCES

| HOLD (DOWNGRADED)
TARGET PRICE: $0.21
DEC 4 CLOSE: $0.173
KGI Securities, Dec 4

Indonesian coal miners may feel the largest impact from a potential cut to China's coal imports next year. Total coal inventory at China's major power plants increased to 34 days of consumption recently, the highest in at least three years, according to Bloomberg data. China's demand is typically slower in Q1 due to Chinese New Year.

With the added pressure of China's power plants' high inventory levels, import from China may see a slowdown in Q1 next year and possibly carry over into Q2 next year. Geo Energy generated 72 per cent of its Q3 revenues from China.

Therefore, the slowdown in China import demand is a key risk to Geo Energy at least until H2 next year.

Geo Energy's US$300 million (S$409 million) bond is currently trading at 11.7 per cent yield to maturity and may offer a better risk-reward profile for investors comfortable investing in the coal sector.

We adjust our discounted cash flow-backed valuation long-term average selling price to US$38 from US$40 per tonne and long-term higher cash cost of US$29.8 per tonne.

Risks to the rating include a decline in thermal coal prices due to weaker demand and increased production from China and regulatory risks in Indonesia.

Disclaimer: All analyses, recommendations and other information herein are published for general information. Readers should not rely solely on the information published and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.