Singapore has been dealing with the Covid-19 pandemic for over a year now and several new trends have risen in the market amid the “new norms”. In RHB Securities Singapore’s 20 Jewels 2021 Edition, the research house notes that while Covid-19 caused a steep correction in global markets, especially in 2020, it also presented several opportunities in the small-mid-cap space.
While there is recent news of spikes in cases and reports of new virus variants in countries like India, the global markets are enjoying a strong rebound as vaccination programmes widen.
Overall, the companies featured this year have market capitalisation ranging from as small as $70 million to just over $3 billion, and are from six different industry segments, with largest representations coming from the technology and manufacturing, consumer and property/REITs sectors. The selection of these “jewels” takes into consideration factors including the companies’ liquidity spread and size, managements’ track record, industry fundamentals, earnings growth potential, the long-term sustainability of the industry and their commitment to environmental, social and governance (ESG) principles.
“This year, over 60% of our stock picks in this book are new companies, not seen in the previous editions. Global equity markets have rebounded strongly with positive news on vaccines and vaccination programmes being implemented around the world, and we are on the road to recovery, especially in Singapore,” says Jarick Seet, RHB Singapore’s head of smallmid caps research.
“With global equity indices inching towards new highs and valuations seeming rich for most of the listed equities, we remain positive on smallmid-cap companies that have been neglected by most investors,” adds Seet, while noting that small-mid-cap companies are mostly correlated to the global recovery in consumer spending and tourism. And as more people get vaccinated and worldwide travel resumes, he believes these sectors will continue to pick up and show growth.
“We also remain bullish on the technology space despite it performing well this year, particularly in the semi-conductor space, as we believe it will continue to perform even better in 2021,” says Seet.
When asked how he chose the 20 stocks, Seet tells The Edge Singapore: “We look for fundamentally good companies that have a story that fits our investment angle ... We have identified them to be undervalued and able to deliver further returns this year.”
Consumer recovery
As the world starts to recover from the pandemic and spending sentiment recovers, RHB has its eyes on the consumer sector to ride on improving consumer sentiment. In this segment, RHB has picked seven stocks to look out for this year — BRC Asia, Banyan Tree Holdings, Food Empire, HRnetGroup, Riverstone, SBS Transit and Straco.
Among the stocks, Food Empire is the research house’s top pick for consumer stocks, as it is among the cheapest consumer staples with a proven track record, compared to its peers that are trading at about 20-30 times P/E. As at May 5, Food Empire shares are trading at 88 cents, giving them a FY2021 P/E of 11 times.
“With the company being a market leader in Russia and Ukraine, we remain bullish and maintain our ‘buy’ call with a target price of $1.27,” he says.
Meanwhile, Seet also believes that privatisation may be a possibility, given the stock’s undervalued status. Already, Food Empire’s management has been buying back shares aggressively since December last year. It recently resumed another round with the latest buyback at 94 cents, as management thinks that the share price is deeply undervalued compared to peers and acquisition targets. Seet believes that management will continue its share buyback purchases.
On the other hand, Riverstone is RHB’s top pick for the glove sector due to its unexpected 49% earnings growth in FY2021, unique 30% revenue exposure to cleanroom gloves (which is a more niche product category), and its strong balance sheet with a net cash of RM641 million ($207.7 million). RHB has a “buy” call on Riverstone with a target price of $1.85. The stock’s current share price of $1.37 is down about 41% from its peak in August 2020.
RHB notes that the stock is trading at 6.8 times FY2021 P/E, which is unprecedentedly low.
Technology boom
One thing that the Covid-19 pandemic has placed a spotlight on globally is the importance of digitalisation for businesses to stay relevant.
In the technology and manufacturing sector, RHB likes Frencken, Fu Yu Corp, ISDN Holdings, MC Payment and Multi-Chem.
Fu Yu is RHB’s top pick within the sector. “With the ramp-up in existing projects expected to continue in the quarters ahead — coupled with further new projects in the medical, consumer, and automotive fronts — we expect net profit to continue climbing. Also, an appreciating US dollar should also benefit Fu Yu,” says Seet.
Meanwhile, with Fu Yu ceasing its factory operations in Shanghai and redeveloping its Singapore facility, Seet believes that margins for Fu Yu will continue to strengthen. With that, he has a “buy” rating on the stock with a target price of 37 cents.
Furthermore, Seet sees this company as an attractive target for privatisation or acquisition, as the new investor holds 29.8% of the company, which is close to the mandatory takeover threshold of 30%. But this may not happen in the near term, as the new management team will have to settle in the company first.
An undiscovered gem within the sector is cyber-security and network performance product value-added distributor, Multi-Chem. In its results for FY2020 ended December 2020, Multi-Chem saw earnings surge 127% y-o-y to $17.8 million from $7.8 million, bringing earnings per share (EPS) to 19.7 cents, compared to 8.7 cents last year. This increase was mainly due to a 120% y-o-y increase in other income to $6.3 million. Revenue for the period was 5% higher y-o-y at $479.7 million. A dividend of 6.6 cents per share was distributed.
“As at FY2020, Multi-Chem’s net cash stood at $72.9 million — which is equivalent to 53% of its current market cap. Management owns about 80% of the company, and has a good track record in rewarding shareholders with dividends. The company enjoyed stable earnings over FY2015-2020, and is likely poised for further growth in FY2021,” says Seet. He notes that the stock, with a FY2020 P/E of 6.5 times, is trading below its peer average of 10- 12 times P/E.
Property plays
According to Seet, the yields from the REIT and property sector reflect an attractive risk-reward at current level, as valuations of large-cap listed equities have shot up while undervalued opportunities remain in the small-mid cap REIT space.
“While property and asset valuations have been lowered due to lower income in 2020, we remain bullish on a rebound in 2021 and have 25% of our picks in the property/REIT segment, which are backed by attractive dividends and a sound balance sheet for further growth through acquisitions,” says Seet. He has picked four REITs — AIMS APAC REIT (AA REIT), ARA LOGOS Logistics Trust, Elite Commercial Trust and Keppel Pacific Oak US Trust — to focus on, as well as real estate agency APAC Realty.
One of the beneficiaries of the Covid19 pandemic is the logistics sector, as online shopping surged amid lockdown measures that saw physical retail stores closed and people being forced to stay at home. Demand for warehouse and logistics space in Singapore continues to rise, as a result of increased stockpiling, e-commerce trends and the vaccine roll-out.
With that, RHB analyst Vijay Natarajan likes AA REIT as he believes the counter is “an undervalued and overlooked industrial REIT with 28 high-quality industrial assets in Singapore and Australia”. Since AA REIT derives half of its income from its logistics assets, the strong demand for such assets amid the pandemic has boosted its portfolio occupancy by 6.3 percentage points YTD to 95.7%.
“One of the REITs’ core strengths is that — despite the relatively small size — it has an established record of extracting value from existing assets via redevelopment, built-to-suit developments, and asset enhancement initiatives (AEIs),” says Natarajan. “The REIT has so far embarked on nine such major initiatives, which has yielded an attractive return on investment of 8-10% on its investment cost. There is potential untapped gross floor area of about 502,707 sq ft in its current portfolio, which we believe will be unlocked at an opportune time.”
ARA LOGOS Trust is another beneficiary of the rising logistics demand. With the trust’s strategically located 27 assets in Singapore and Australia, Natarajan sees a positive outlook for this pure-play logistics trust. “The stock offers an attractive yield of 7%, and its strong sponsor pipeline offers growth visibility in the medium term,” he adds.
Separately, APAC Realty deserves to be in the list due to it being a good proxy for the strong surging residential market transaction volumes in Singapore. Property sales momentum continued to be robust in 2021 with March’s new sales hitting 1,296 units — double that of February’s, and the highest March monthly sales since 2017, with a similar trend seen in the resale market.
APAC Realty is among the largest real estate agencies in Singapore, with about 33% of market share of total transactions. As at end-2020, APAC Realty, through its franchisee network ERA Realty, has one of the largest brand footprints in Asia, with over 18,000 salespersons.
“The business asset-light model and non-brokerage income (of around 22% of total) provide resilience across market cycles. The move to strengthen its overseas presence and enhance its digital capabilities should help with earnings diversification and benefit the group over the long term,” says Natarajan, who has a “buy” call on the stock with a target price of 55 cents.
Overall, RHB has a positive outlook on the stock market as vaccines are being progressively rolled out globally, while the economy is on its way towards a recovery.
“We do expect hiccups along the way, like Singapore’s recent announcement on the tightening of social distancing measures, but we do think that the long-term trend will still be towards a recovery/rebound as vaccinations have proven to work and reduce the symptoms and effects of Covid-19,” says Seet.
“However, we are also wary as the valuations in the stock market are on the high side. Hence, in our book, we have selected 20 undervalued companies that have more room to outperform their peers,” he adds.
