In their March 8 report, CGS-CIMB Research analysts Lock Mun Yee and Lim Siew Khee say they advocate a risk-off approach in the near term by positioning in REITs for their yield and stability.
At the same time, the analysts recommend that investors should watch for a tactical entry into banks for the interest rate upcycle in the medium term, as the US Federal Reserve looks to raise their rates in March.
Following the reporting season for the 4QFY2021, Lock and Lim have upped their FY2022 earnings estimates for the companies under their coverage by 2.2%-9.7%.
“This will translate into a 16.6% y-o-y earnings growth for FY2022 and a further 14.8% growth in FY2023,” write Lock and Lim. “We lower our end-FY2022 Straits Times Index (STI) target to 3,475 points (from 3,506 points), pegged to a lower P/E target of 12.5x, based on -1 standard deviation (vs -0.5 standard deviation previously), in view of heightened macro uncertainty. We believe the current volatility warrants taking a more cautious stance.”
Despite recent geopolitical turmoil due to the Russia-Ukraine conflict, economies continue to look for opportunities to establish post-Covid-19 normalcy, say the analysts. “As more borders reopen, we believe the travel, retail and even telco sectors will be the main beneficiaries,” Lock and Lim say.
However, commodity prices regardless have moved up significantly and are expected to remain elevated due to geo-political tensions and added pressure from potential protracted supply chain shocks, the analysts explain.
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“Commodity plays, such as First Resources (FR), Golden Agri Resources (GAR) and Wilmar International, are likely beneficiaries of rising crude palm oil (CPO) prices,” say Lock and Lim. “Other beneficiaries include Sembcorp Industries, as its power plants are fuelled by gas and on cost-plus terms.”
“The consumer, construction, technology, airlines and property sectors could be more adversely impacted as higher commodities prices directly affect input costs,” they add.
Picks for the 1HFY2022
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Moving into 1HFY2022, Lock and Lim have identified CapitaLand Integrated Commercial Trust (CICT) and Ascendas REIT (A-REIT) as their top picks for attractive yields and potential acquisition catalysts.
“Despite recent outperformances, we anticipate CPO prices to remain on an uptrend, and we retain our ‘add’ rating on Wilmar,” say the analysts.
In addition they “like” Sembcorp for its earnings upside potential from a tight energy market, as well as Singapore Technologies Engineering (ST Engineering) for its defensiveness from a diversified business model and attractive 4% dividend yield.
“We also like UOB as our pick in the financials segment; we believe it offers a better risk-return profile at an attractive 1.1x FY22F P/BV. We favour Singapore Post (SingPost) as a proxy to reopening plays. Other big-cap picks include Yangzijiang for its strong orderbook of US$8.5 billion ($11.57 billion) as at end-December 2021 and the spin-off of debt investment as a near-term catalyst,” write the analysts.
They have also kept Thai Beverage (ThaiBev) and Delfi in their preferred stock lists as both companies could potentially enjoy growth in their gross profit margins (GPMs) in the first quarter of 2022 from cost pass-through (for ThaiBev) and product mix optimisation (for Delfi).
“We continue to like AEM and keep HRnetGroup and Silverlake Axis in our preferred small-cap picks,” they add.
Amongst their highlighted companies, Lock and Lim have rated HRnetGroup at “add” with a target price of $1.15.
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They have also given Sembcorp and Wilmar “add” calls with target prices of $2.96 and $5.69 respectively.
Some key risks the analysts see include a protracted Ukraine-Russia tension that would continue to put pressure on the supply chain and commodity prices.
As at 3.39pm, the STI is trading 44.38 points higher or 1.39% up at 3,239.76 points.
