• 2Q results to reflect weak quarter; 2013’s 14% earnings growth on weak footing.
• Technology sector - Macro headwinds derailing recovery; downgrade Venture to Hold, TP reduced to S$8.15 and World Precision to Fully Valued, TP cut to S$0.43.

·        Cutting FY12/13 earnings by 13%/20 % with strength seen as elusive and growth, uncertain

·        Downgrade Venture to Hold, World Precision to Fully Valued, retain Buy on Amtek for imminent dividend payout  

Q2 rebound lack strength.Following our recent channel checks, we estimate Q2 profits may inch up only 3% q-o-q, vs our earlier projection of a 10% rebound. This weaker than expected recovery reflects a slowdown in overall economic activity, especially in June.

H2 pickup might not live up to expectations. US tech bellwethers have signaled flat demand in a traditionally strong Sep quarter, citing slowdown in Europe and even China. The HDD sector is particularly affected by OEMs over-booking post the Thai flood. Seagate’s shipments were also hit by quality issues. With more negative data points building up and companies turning more cautious on very low order visibility, we are doubtful that corporate earnings will show any material growth for the rest of the year. For one, HDD de-stocking will surely dampen related component suppliers.

Risk is on the downside, estimates cut. Corporate earnings are at risk because a falling top line negates margin improvement and limits profit growth. We have therefore cut growth expectations for our tech basket to
-2% in 2012 and 12% in 2013. Consensus is higher at 15% and 11% respectively.

Valuations below mean but headwinds to cap growth and stock gains.Tech stocks in our coverage are trading below mean but we believe stock gains are likely to Underperform the broader market due to the sector’s higher earnings risks. Following our earnings and/or target prices adjustment for all stocks, we have downgraded Venture to Hold and World Precision to Fully Valued because of limited upside to their new target prices. For trading-oriented investors, we recommend a Buy on Amtek. The stock is trading closest to -1SD valuation on conservative estimates. More importantly, we expect the company to announce final DPS of 2 S cts, which would translate to an attractive yield of 3.2%, in the upcoming full year results.  

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·        2013’s 14% earnings growth on weak footing

·        4 themes to beat range bound index

Macro uncertainties persist. The Eurozone crisis is far from resolved and could get worse before getting better. The US economy is slowing down. Against such an uncertain macro-economic backdrop, Asian economies have shown great resilience in the past 9 months with Asia-10 GDP actually picking up on a q-o-q basis in 4Q11 and 1Q12.  For Singapore, 2Q GDP’s advanced estimates were below expectations, contracting 1.1% q.o.q. Despite this, our economist held on to  his 3.5% GDP growth forecast for 2012 while noting that downside risk has emerged.  

2Q earnings outlook, weak pillars of growth in 2013.  FY13’s earnings growth of 14% is largely driven by rebounds in cyclical sectors where growth is dependent on external economies.  With expectations of more downgrades in the upcoming 2Q reporting season, this could derail earnings growth for 2013. Upside could come from banks, airlines if oil price weakens while cuts in earnings could come from Real estate, technology on destocking trend, gaming, supply chain managers, offshore and marine on margins concern and shipping. We believe it’s too early to turn positive on cyclical sectors with global exposure – shipping, supply chain managers, and technology. Recent rebound trades in NOL, Olam and Venture offer opportunities to top slice these names.  

Raising the bar till capitulation.  We have raised the trading range for STI by rolling forward the valuation peg to FY12/13 earnings. We expect the STI to range trade from 2800 (-1 SD blended FY12/13F PE) to 3100 (-0.5 SD blended FY12/13F PE) for 3Q12, with re-rating potential towards the average blended FY12/13F PE level (STI target of 3300) only if macro uncertainties ease.

Four themes to beat the index.   1. High conviction growth stocks with highly visible, sustainable earnings growth of at least 10% and minimal risks to earnings downgrades.  These are stocks with growth backed by medium term charters (Ezion), or earnings at inflexion point from past investments (Bumitama and CMA), companies with steadily growing businesses – OCBC and SembCorp Industries.  Stocks riding on Asian consumption theme are CMA, Capitaland, OCBC, and SembCorp Industries. 2. Beneficiaries of China’s fiscal stimulus– Hyflux, Sound Global and Midas. 3. Steady and sustainable yield plays with growth.  Yield plays have outperformed. We are now more selective in picking yield stocks, focusing on those which generate growth(>5%) and offer dividend yield of at least 6%. 4. Unloved fallen angels. We spot deep value stocks (Midas, Tiger, China Fishery and BIG) which have fallen out of favour with upcoming catalysts to spur recovery.