Phillip Securities bets on banks and property; calls HRnetGroup a 'rare gem'

To make matters worse, and due to the lag effect, the real impact of inflation has yet to be felt. Thus, central banks are likely to turn to their tried and tested tool: Raising interest rates.

Paul Chew, head of research at Phillip Securities, reckons the way for investors here to better position themselves in this environment is via property and banking stocks. “Inflation is creeping up everywhere, it is going to be higher than markets’ expectation,” says Chew at the brokerage’s 4Q 2021 investment outlook webinar for Singapore market on Oct 9.

Higher NIM, higher dividend

With interest rates likely to trend up, Glenn Thum, the Phillip Securities analyst covering banks, has an “overweight” call on the sector. He sees earnings set for continued recovery and come FY2022, will likely to exceed the pre-pandemic FY2019.

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The strong economic recovery momentum will help generate broad-based earnings growth from both interest income, as well as fees and commissions. For example, loans are seen to grow at 5% this year. “That’s a conservative estimate, I think there’s upside to this,” adds Thum.

There are additional positive factors from writing back of allowances, and a lower level of new allowances made. Thum says that all three Singapore bank stocks did not exactly outperform in recent couple of months.

He believes it was caused by investors fretting about the banks’ exposure to China, which is seeing a general slowdown in retail spending, a negative pall over the regulatory crackdown on the high-flying technology sector and the China Evergrande crisis.

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He also notes that for 1HFY2021 ended June 30, China loans accounted for less than 14% of the total loans made by the three Singapore banks. The banks and the government have assuaged the concerns. “Their customers are primarily state-owned enterprises or large overseas corporations,” says Thum.

He also notes that Singapore’s central bank, the Monetary Authority of Singapore (MAS), has removed its dividend cap on the banks. Given projected earnings growth, the banks are expected to adjust their dividend payouts accordingly. Shareholders can look forward to payouts equivalent to 4.5% for FY2021 and 4.9% for FY2022.

Thum singles out DBS Group Holdings, to which he has accorded a price target of $32, as a stock to own. He sees the largest Singapore bank enjoying a tailwind from rising interest rates, with net interest income following suit.

DBS enjoys an advantage in the form of its huge excess deposit base from which it can extract better margins. He is forecasting DBS to report a FY2021 NIM of 1.47% and for FY2022, 1.48%. The bank is likely to see broad-based loan growth, further writebacks on general provisions, and fee income as well. With the bank’s relatively high CET ratio of 14.2%, there’s more room for a higher dividend payout, adds Thum.

Multiple factors in CDL’s favour

Analyst Natalie Ong, who covers developers and REITs, notes that the private residential market has largely worked through the big inventory of unsold units, which hit 37,000 at its peak in 1Q2019. With constant marketing by the developers, the unsold pipeline is now down to 16,000 units, which can be moved within two years.

Meanwhile, under the half-yearly land sales programme, the government has made available enough land for just 2,000 residential units via the confirmed list, and another 4,900 units in the reserve list. “The situation has reversed, there’s a chance that we might not have the inventory.

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Coupled with construction delays, it has spurred the residential market,” says Ong, who has an “overweight” call for the sector. “We prefer developers with high recurring cash flow, and reasonable development pipeline,” adds Ong, who gave City Developments (CDL) the most airtime at the webinar — and a target price of $9.19.

Over the past year, CDL was dogged by its ill-fated acquisition of Sincere Property, a China-based developer. The deal turned sour and instead of landing a strong foothold into China, CDL found itself in an open dispute with Sincere’s original management.

“CDL’s management has acknowledged it was a hasty decision, a mistake,” says Ong, noting that CDL has both sold off its equity stake in the company for a token US$1, and has also earlier written off the entire value of its exposure of some $1.7 billion. “They’ve closed the chapter on this,” she says.

As such, CDL should turn back its attention on projects with much better prospects. For example, the redevelopment of Fuji Xerox Towers, and also its joint venture at Clarke Quay CDL has with CapitaLand. Ong is projecting CDL to earn margins of around 30% from these two projects.

Meanwhile, there’s a pipeline of around 1,700 units to be sold — amid a “relatively strong property upcycle,” says Ong. CDL is also poised to list with its co-sponsor its yet-to-be-named REIT which focuses on the UK commercial markets.

Assuming that CDL will retain a stake of between 15% and 25% of this REIT, and gear up to a typical level of around 38%. That means CDL can potentially encash some $526 million and $633 million. “This will allow them to replenish their dry powder,” says Ong.

Furthermore, there is the draw of CDL’s valuation: Its per share RNAV is at $14.14 — significantly more than the currently-trade price of around $7.29 at close of Oct 12. “This is a very compelling value proposition,” says Ong.

Finally, there is also the impending recovery of CDL’s hospitality business, which will be a further catalyst if and when international travel resumes.

Keppel’s restructuring

With oil prices likely to stay high, it is obviously good news for the whole string of companies down the offshore and marine industry chain here in Singapore.

Chew notes that the order books of the yards — notably those run by the likes of Keppel Corp and Sembcorp Marine (SembMarine) — tend to move along with the capital expenditure of the oil majors. This sector might “see a bit of bounce” next year for its order books.

While Sembmarine will benefit directly from higher oil prices, there is a worry that it might need to raise further funding to make good its portion of the $500 million to be paid to a joint venture it is forming with Keppel Corp, says Chew.

In contrast, what makes Keppel even more interesting — on top of the oil angle — is its next phase in the on-going restructuring story.

Back in August, Keppel announced a $2.2 billion offer to privatise Singapore Press Holdings (SPH), following the carving out of the former core media assets out of the listed entity. Assuming the acquisition of SPH goes through, Keppel gets its hands on a list of property assets it can monetise, says Chew, who is presenting Phillip Securities’ case for this stock on behalf of his colleague Terence Chua, who has a target price of $6.28.

SPH now owns a portfolio of student dormitories worth more than $1 billion, which can be “listed immediately”. There is also a data centre which can be better fitted out and injected into Keppel DC REIT at higher valuations, says Chew.

This series of deals might help drive Keppel towards its own stated target ROE of 15%, which if achieved, would be a marked improvement from the minus 4.5% managed for FY2020 and 6.6% for FY2019.

HRnetGroup on an upswing

Another notable pick made by Phillip Securities is HRnetGroup, a leading recruitment agency with operations across the region. “We seldom use the word ‘gem’ but this is really a very rare one,” says Chew, who has a “buy” call and $1.05 price target.

He has a list of metrics which helps analysts see the company in a favourable light. For one, HRnetGroup has a net cash balance of some $300 million. It is also able to generate a very high ROE of more than 100% — a point that needs to be seen against the company’s value of fixed assets worth just over $1 million or so.

“That’s like 20 laptops, 20 desktops and five printers, and they can make $70 million a year,” says Chew, referring to earnings of $35.9 million enjoyed by the company for 1HFY2021 ended June, up 70% y-o-y.

Chew says that it is easy to set up a recruitment firm but they will not have the same scale the incumbent players such as HRnetGroup are enjoying. Not everyone can just start a business like this overnight — a contrast to HRnetGroup that has spent years cultivating and winning over major corporate clients.

Citing government data, Chew notes that for every 100 unemployed persons, there are 163 job vacancies opening. The shortage is more pronounced for the professionals, managers, executives and technicians (PMETs) segment. “We think there’s going to be an upswing for volume, and an upswing in salary,” he adds.

Photo: Adeline Sim (second from left), executive director of HRnetGroup leading her colleagues on a daily workout. The staffing agency is deemed by Phillip Securities to have a strong ability to generate returns for shareholders. / Albert Chua of The Edge Singapore