UOB Kay Hian’s analyst Adrian Loh as well as the Singapore research team has maintained their earnings per share (EPS) estimates for the FY2022 on all of the constituents in the Straits Times Index (STI) that are under their coverage.
The team has given “buy” calls to all the counters, which include Oversea-Chinese Banking Corporation (OCBC), Singapore Telecommunications (Singtel), CapitaLand Investment (CLI) and Genting Singapore.
In a Singapore strategy note on March 22, the team writes that it has not made any changes to their forecast despite China seeing a resurgence in the number of Covid-19 cases, as they believe that the current impact would be mild.
That said, the brokerage believes that the current Covid-19 outbreaks are “testing China”, with sustained outbreaks in two-thirds of the country’s provinces. “China’s zero-tolerance policy towards Covid-19 is now facing its toughest test yet since the coronavirus first emerged more than two years ago in Wuhan,” writes the team.
This is in contrast to many countries around the world, which have eased restrictions and Covid-19 measures.
The ongoing uncertainties – including the current geopolitical tensions in Ukraine, inflation concerns, as well as the Fed rate increases and increased policy risks in the Chinese tech sector – may lead to an underperformance in share prices, as investors tend to “sell first and ask questions later”, notes the team.
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UOB Kay Hian has eight STI companies under its coverage with over 70% in their revenue exposure to China.
Companies with above 70% of revenue derived from China include China Sunsine, Jiutian Chemical, Sasseur REIT, Trans-China Automotive, Yangzijiang, Innotek, Dairy Farm and Nanofilm.
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With the companies having meaningful exposure to China, the current situation in the country could see their profitability for the FY2022 come under pressure should the country’s zero- Covid policy result in business stoppage or interruption, says the team.
“For 2022, we forecast 10.7% y-o-y earnings growth for the combined large cap and REITs sectors, excluding the aviation sector,” write the analysts
But, they do warn that some downside risks to their earnings estimates include new variants of the coronavirus which are more lethal and infectious than expected.
On a broader perspective, the analysts note that the economic data from China is “surprisingly strong” from Jan and Feb.
However, they add that “the Russia-Ukraine conflict and the worsening domestic pandemic may warrant a more cautious outlook as the country’s “dynamic zero-Covid” policy will impose significant costs to the economy.”
In addition, UOB’s Global Economics and Markets Research (GEMR) team has lowered its growth forecast for China to 4.9% for 2022 from its previous forecast of 5.2%.
“[The GEMR team] expects the impact of the lockdowns and higher commodity prices to affect 1H2022 GDP and thus is forecasting 4.5% y-o-y growth for 1H2022 before picking up to 5.2% y-o-y growth in 2H2022.”
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The brokerage’s top large-cap picks for the Singapore market are Ascott Trust, Capitaland Investment, Genting Singapore, Lendlease REIT, Mapletree Industrial Trust, OCBC, Singtel, Sembcorp Industries, Thai Beverage, Venture Corp, Wilmar and Yangzijiang.
UOBKH points out that despite being the region’s best performing index, the STI’s current valuations remain undemanding, trading at an FY2022 P/E and P/B of 13.5x and 1.1x respectively, while distributing the region’s highest yield at 4.1%.
As seen in the chart below, the STI is trading at 0.5x below its long-term average P/E while on a P/B basis, it is 1 standard deviation below the long-term average.
As at 3.37pm, the STI is trading at 3,354.70 points, 0.81 points down or 0.02% lower than its previous close.
