Amid the uncertainties due to the ongoing war in Ukraine, DBS Group Research analysts Yeo Kee Yan and Janice Chua have identified seven counters that investors can use as a hedge.
These are: UOB, Yangzijiang, Singapore Technologies Engineering (ST Engineering), CapitaLand Investment (CLI), AEM, CapitaLand Integrated Commercial Trust (CICT), and Far East Hospitality Trust (FEHT).
“We pick companies that meet these criteria: Benefits from the inflationary environment, structural trend or in a recovery industry able to ride out current uncertainties, positive corporate developments, no direct negative impact from rising oil/commodity prices, no severe impact from supply chain disruption, and less than 20% revenue exposure to Europe,” they write in their report dated March 15.
The analysts have also kept their year-end Straits Times Index (STI) target of 3,550 points.
The target is pegged to slightly below a 13.2x average FY2023 P/E.
The way Yeo and Chua see it, the three Singapore banks, which are index heavyweights with a combined 42% within the STI will benefit from improving net interest margins (NIMs) in a rising rate environment.
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“Singapore Telecommunications or SingTel (6.5% weight) is resilient to current uncertainties,” write the analysts. Singapore Airlines (SIA) and ComfortDelgro (CDG), which are negatively affected by the oil price, have small index weights of 2.3% and 0.6%, respectively, they add.
To date, companies under the brokerage’s coverage have seen a 1.8% downward revision to their FY2022 earnings.
“The anticipated delay of China’s reopening timeline till end-2022 affected Genting Singapore and China Aviation Oil (CAO). The industrial sector was impacted by lower Covid-19 relief and higher energy cost for CDG,” note the analysts. “This was offset by positive revisions for banks UOB and OCBC, on an accelerated rate hike cycle.”
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Despite the cut in the brokerage's earnings estimates, earnings growth for the constituents under the STI remain strong at 10% for the FY2022, accelerating to 13% for the FY2023, say the analysts.
“Earnings recovered to 98% (ex-property) of the pre-pandemic level in end-2021 and could rise 9.5% above FY2019 results by year end,” they estimate.
To this end, Yeo and Chua expect strong earnings per share (EPS) and distribution per unit (DPU) growth for beneficiaries on the reopening. Counters mentioned include Genting Singapore, SATS, SIA Engineering, CDG, CDL Hospitality Trusts (CDLHT) and Ascott Residence Trust (ART).
“AEM leads the technology sector’s double-digit EPS growth over the next two years, but healthcare’s EPS contraction will come from Riverstone’s lower average selling price (ASP) assumption and delayed expansion plans,” add the analysts.
In their report, the analysts note that the recent 4QFY2021 results season had not factored in the rising prices in oil and commodities, as well as supply chain disruptions due to the Ukraine war.
“If uncertainties are prolonged, transport-related stocks such as SIA, CDG, Hutchison Port Holdings Trust (HPHT) and SBS Transit are vulnerable to oil prices that stay high for longer,” they write.
“Technology could see supply disruptions, e.g., a possible palladium impact on Frencken and Valuetronics. REITs with all-Europe exposure e.g., Cromwell European REIT and IREIT Global may also be affected. Resilient sectors are telcos, healthcare and consumer staples,” they add.
As at 3.57pm, the STI is trading 0.58 points lower or 0.02% down at 3,231.45 points.
