With the local market dipping following the 2Q earnings reporting season, DBS Group Research is suggesting that investors start to bargain hunt when the Straits Times Index reaches the support level of between 3,115 and 3,155 points.
"STI component stocks are expected to register a strong earnings growth of 19.7% in FY23F before moderating to 3.6% next year," according to analysts Yeo Kee Yan and Foo Fang Boon.
They believe that the current market correction should find support "soon" as the forward PE for the coming year has dropped "well below" 10.8x, which is 2 sd below the average.
"We see a rebound trade towards 3230 to 3265 in September, supported by the low valuation, oversold technical readings, and past seasonal trend," write Yeo and Foo in their Aug 24 note.
Amid this market, they recommend investors to look at "heavyweights" of the industrial sector, such as Seatrium, Keppel Corp, Yangzijiang Shipbuilding and ST Engineering, to "ride out the period of slower earnings growth."
According to estimates by the DBS analysts, these stocks are set to enjoy double-digit earnings growth for the coming FY2024, thanks to capex cycles seen to last several years, leading to strong order books.
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DBS has also identified three counters with good visibility of a better second half. UMS Holdings, for one, is riding on above-expectation guidance of its key customer, Applied Materials, leading on recent contract wins and renewals.
ComfortDelGro, meanwhile, is seeing recovery in its various public transport segments ranging from buses, to trains to taxis and or private hire cars. Recent introduction of platform fees for booking of rides, plus improvements in key overseas operations in UK and China, are also positives, notes DBS.
DBS is seeing a better second half for Digital Core REIT, which has been dogged by the on-going restructuring of a key tenant Cyxtera. The pure-play data centre REIT's balance sheet, also, is sound with gearing at just 34.2%.
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However, DBS reminds investors to be more selective when investing in other REITs, no thanks to the higher borrowing costs which has hit the whole sector.
"With rates staying higher for longer, we prefer REITs that are less vulnerable to further DPU cuts on higher interest costs," note Yeo and Foo. Their picks include Keppel REIT, CapitaLand Ascendas REIT and Far East Hospitality Trust.
