Risks from a resurgence in Covid-19 cases and a possible tightening of measures both locally and abroad has not derailed RHB Group Research’s optimism on Singapore’s equity market.
“For 4Q2021, market outlook will continue to depend on how well stocks and sectors can con- tend with the current Covid-19 constrained growth [and] elevated inflation amidst supply chain disruptions, expectations of an early interest rate hike and corporate efforts to maximise operational efficiencies,” the brokerage’s research head, Shekhar Jaiswal, explains in an Oct 20 report.
From his perspective, there are a number of Singapore stocks that continue to offer opportunities to accumulate stocks that leverage on an economic re-opening. Counters that offer better earnings visibility either from business restructuring or structural and inorganic growth, look promising too, reckons Jaiswal. Jaiswal has taken a liking to banks as well as the consumer, healthcare, industrial, telecom and transport sectors, based on “expectations of a better 2022”, as he holds the view that Singapore’s economic reopening as an eventuality will sustain them over the next 12 months.
His comments come as the Covid-19 cases here are typically seen amongst patients who are either asymptomatic or have mild symptoms. The resultant simplification of testing protocols and the expansion of Vaccinated Travel Lanes (VTLs) to 11 countries are also a few steps closer to Singapore’s reopening.
However, the government prefers to remain cautious. On Oct 20, the government announced that measures under the so-called “Stabilisation Phase” will continue for another month from Oct 25 till Nov 21.
This phase kicked in on Sept 27 and was originally scheduled to last until Oct 24 to ease the strain on the nation’s healthcare system. Key measures include a cap on social gatherings to two, while work-from-home will remain the default arrangement for most office workers.
This will be reviewed at the two-week mark and adjusted based on the prevailing community situa- tion, the Covid-19 multi-ministry taskforce revealed on Oct 20. Later in the day, the government announced that there were 3,862 new cases confirmed and 18 deaths be- cause of various causes and complications linked to the virus, bringing the total death toll thus far to 264.
“There is no sign of the cases going down — this will take time,” health minister Ong Ye Kung said at a virtual press conference. Finance minister Lawrence Wong also stressed that the measures “will not last indefinitely”.
Compelling valuations
Meanwhile, Jaiswal observes that market valuation is compelling again. The benchmark Straits Times Index — which is at 12.8x forward P/E — is trading below its historical average and remains the cheapest market in Asean. His target is that the STI will end the year at 3,420 points, down from his previous 3,410 point prediction. This is based on 14.0x forward P/E.
Jaiswal likes the banking sector, given how the lenders are among those cyclical stocks expected to continue to benefit from economic recovery and higher interest rates. He projects banks to grow their earnings by another 9% for their FY2022, following a strong 40% rebound he is pencilling in for FY2021.
“Asset quality for Singapore banks under our coverage is expected to re- main solid despite the re-imposition of mobility restrictions in regional countries, improving the prospects of banks writing back pre-emptive Covid-19 provisions in FY2022. This would be a key earnings driver before rising interest rates start to lift NII [net interest income] from late-2022 or early-2023,” writes Jaiswal. He qualifies that his FY2022 sector earnings growth does not take into account the potential writeback of provisions.
There’s another key reason why investors should like the banks. “The resumption of cash dividend payout in August signals the Singapore banks’ confidence in asset quality and capital strength,” Jaiswal notes. As such, he is keeping his “buy” call on all three Singapore banks. His preference is in this order: United Overseas Bank, Oversea-Chinese Bank Corp and DBS Group Holdings. His target prices for them are $30.20; $14.30 and $35.50, respectively.
Riding on the same broad theme, RHB has a favourable view on certain consumer, healthcare, industrials, telecom and transport stocks as well. “We expect a gradual recovery in consumption in 2022 — with the better containment of Covid-19 and vaccination plans allowing for a wider reopening of the global economy,” notes Jaiswal.
A total of 11 countries are now part of the VTLs, where vaccinated visitors from these countries need not go through quarantine. He sees additional countries being added to this list, going forward. “This will bring back some of the tourist inflows to the country hence providing a further boost to the business sentiment and consumer spending,” he says.
To this end, RHB’s picks for the consumer sector are Thai Beverage (target price 94 cents), Genting Singapore (92 cents), and Food Empire ($1.23). Raffles Medical Group stands out among the various healthcare sector stocks, given how the medical group remains an exclusive provider of RT-PCR test at Changi Airport, where all tourists fly in to. RHB’s target price for this stock is $1.65.
RHB also likes China Aviation Oil (target price $1.08), as the leading jet fuel supplier in Shanghai stands to gain from the gradual return of international air travel in China. ComfortDelGro, which operates trains, buses and taxis, is already witnessing sequential improvement in earnings, and should see material improvement in its public transport and taxi businesses in Singapore once the country opens up, notes Jaiswal, who has a $2.10 target price on this stock.
RHB is positive on Singapore Telecommunications (Singtel) as well. The country’s largest telco has been weighed down in recent years in various ways. Its associate company in India was mired in a brutal price war and regulatory woes; its domestic mobile market faces stiff competition, and its otherwise fast-growing regional associates face signs of saturation in their previously fast-growing turfs.
Under new group CEO Yuen Kuan Moon, the company has taken bold steps to rein in earnings decline and make smarter use of its capital to fund new growth. Most recently, Singtel announced a deal to sell a majority stake in its mobile tower infrastructure in Australia, with plans to re-channel the proceeds to fund the deployment of
5G mobile networks and other new growth areas.
“Our positive view on Singtel is premised on earnings rebound in FY2022 following four consecutive years of decline and potential re-rating catalysts from its strategic business reset announced in May 2020,” notes Jaiswal, who believes Singtel is worth $3.37.
Similar to Singtel, ST Engineering is another government-linked company viewed positively by RHB. For one, ST Engineering is poised for earnings recovery over the coming year, as higher vaccination rates help stir air travel recovery, and thereby, giving aircraft repair and overhaul service providers like ST Engineering more business.
RHB estimates that a gradual but ongoing recovery in aviation maintenance, repair, and overhaul (MRO) business and contributions from passenger-to-freighter (P2F) conversions should continue to support earnings recovery during FY2022–2023. Under CEO Vincent Chong, the company is also in an acquisitive mood. It recently announced its largest ever deal: the US$2.7 billion ($3.6 billion) acquisition of US-based traffic management and technolo- gy provider TransCore, giving it a leg up as it goes after more Smart City contracts. Jaiswal, who has a $4.85 target price on this stock, estimates this acquisition could lift ST Engineering’s FY2023 earnings by 9%, assuming the acquisition is entirely funded by debt.
Refocus
Among the property counters, RHB’s preference is for City Developments (CDL), given how the property giant, having put it best-forgotten investment in China’s Sincere Group behind, is now trying to “refocus” back on Singapore.
CDL already has a steady pipeline of projects to be launched, including one at Northumberland Road and another at Tengah. “We believe this is a right step, considering its strong track record, brand presence, strong residential momentum and falling supply levels in Singapore,” writes Jaiswal.
As a bonus, there is the potential recovery in the hospitality sector that will help lift CDL’s earnings as well. And the most compelling reason of all: CDL is trading at mere 25% and 55% discounts to book value and revalued net asset value — levels that are at –1SD from its long-term average. RHB’s target price for CDL is $8.50.
Outside the big cap universe, RHB’s research team has kept its regular coverage of small and mid- caps as well. From within this field, RHB has flagged Marco Polo Marine as one to watch, for its 9MFY2021 (September) revenue has already exceeded that of FY2020, driven by strong growth in its ship-chartering and repair business.
The recent rise in energy prices has put a layer of support under the oil and gas and marine-related stocks that were in the doldrums for the better part of the last decade.
“As oil prices are rising, oil and gas activities and projects will likely ramp up, so we are upbeat on the company going back to the black by end-FY21F, with the expectation of strong earnings growth in 2022. It could also likely secure more contracts in renewable energy, where it is pivoting towards,” notes Jaiswal.
Cover image of Shekhar Jaiswal: RHB
