We rate DBS Buy/Low Risk, with a target price of S$14 (from S$12). We are positive on all of the Singapore banks given our view that the Singapore economy is passing its point of worst contraction, and our strategist views that Singapore STI could recover to the 2400 level. Past market cycles suggest that banks tend to lead an STI recovery as valuations normalize from trough levels, P/E multiples expanding in anticipation of earnings recovery. DBS is typically viewed as the most operationally leveraged of its peers to economic recovery and interest rates, and conversely it has the highest operating risk to a deteriorating macroeconomic outlook.
Our target price for DBS is S$14. (1) Using a dividend discount model (DDM), assuming a 2009E net DPS of S$0.54, cost of equity of 10.9% and 7% long- term growth rate, gives a fair-value P/E of 16.6x 2009E, which when applied to our 2009E EPS of S$0.84 derives a fair value of S$14. This equates to a 2009E P/B of 1.3x (vs. 9% ROAE). We use DDM as a primary valuation tool, as we view it reflects sustainable earnings, dividend growth and excess returns relative to cost of equity, and also factors in liquidity/sentiment impact on valuations. It is also consistent with the methodology underpinning our P/E investment cycle analysis framework. (2) Using our P/E cycle analysis, which suggests an average trough-peak P/E range for the Singapore banks of 11-18x (for DBS 10.6-16.7x, average 13.6x) on one-year forward consensus estimates, our target price P/E is above the cycle mean for DBS.
We rate DBS shares Low Risk to reflect the capital strength and financial regulation of the Singapore bank sector. This is in line with our quantitative risk-rating system, which tracks 260-day historical volatility of the shares. Possible downside and upside risks to our target price include: 1) the impact of the US/global economy on Singapore and Hong Kong's domestic economy and job growth; 2) the level of short-term interest rates and shape of the yield curve (generally low S$ SIBOR and high HIBOR are negative for DBS net interest margins, and conversely); 3) changes to the asset quality position of the bank and in turn provision charges; 4) capital position and potential regional M&A; and 5) the long-term strategy and direction for the bank. These risks could cause the stock to deviate from our target price.
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Itresting post.Your target price is reasonable.
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