In its 2022 outlook strategy report dated Jan 6, PhillipCapital’s head of research Paul Chew has listed four themes he expects to see during the year.
These are: inflation peaking and the easing of supply chain constraints; vaccines to bend mortality [rates]; modestly higher interest rates and a rebound in tourism.
That said, Chew expressed his concern that equities may struggle in the 1HFY2022, as a “stagflation head fake of slower economic growth and rising inflation will worry investors”.
Due to the rising number of Omicron cases and renewed lockdowns, Chew notes that global growth will face near-term risks.
“The yield curve is flattening with expectations of slower growth,” he adds. “PMIs and industrial commodities are rolling over.”
Even with slower growth, interest rates are expected to rise, following the Fed’s hawkish plot. The Fed is likely to increase interest rates in March, according to US economists.
See also: How will the Fed rate cuts affect me?
To this end, the futures market is pricing three rate hikes by December 2022, notes Chew.
“After this period of volatility, we expect equities to recover in 2HFY2022,” he predicts. Driving the rally will be two tapers – which are a decline in Covid-19 infections and inflation.
“Omicron is more contagious but early indications suggest less deadly. In South Africa, where Omicron accounts for 98% of all Covid-19 cases, infections underwent a parabolic rise but mortality rates were stable. The situation in the UK mirrors this, where even hospitalization numbers are low. The current pandemic scenario is unlike the 2020 abyss,” explains Chew.
See also: MAS set to hold monetary policy as inflation persists
“We have mass vaccinations, including for the children, and anti-viral drugs are being introduced. After this terrible wave, our base case is a major tapering off in cases. Ironically, immunity from infection is building up with Omicron,” he adds.
On the second taper of inflation, Chew notes that supply bottlenecks will persist with the current spate of lockdowns getting worse.
“But we believe supply constraints and inflation have peaked but not normalised. Freight rates are starting to roll over. Semiconductor capacity is responding to the shortage with a US$240 billion ($325.07 billion) spending in foundry capex over two years, a 40% jump. Companies have started to get accustomed to the tight supply chain and long lead times,” he continues.
PhillipCapital’s recommendations
In 2022, Chew is positive on building materials, consumer and services sectors.
“We expect construction to recover sharply with the return of the foreign workforce. The industry has lost 67,000 workers since the pandemic. Beneficiaries of the rebound in construction are building material stocks Pan-United and BRC Asia,” he writes.
Earnings may also normalise against a low base for consumer names such as Dairy Farm and Thai Beverage, which have suffered on the back of severe lockdowns in Southeast Asia in 2021.
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Chew also remains positive on the recovery theme moving into 2022, with Ascott Residence Trust (ART) as one of his preferences.
Borders may re-open further after the current wave of infections, which means hospitality will gain from the pent-up demand.
HRnetGroup is also set to benefit from the record number of job vacancies for permanent and flexible staffing. “We expect volume and pricing growth to fuel bumper earnings in the coming year,” says Chew.
Phillip Absolute 10
In its 2022 model portfolio, Chew recommends ART and Asian Pay TV Trust (APTT) as counters to generate dividend yields.
“Realistically, our exposure to Ascott is to ride on the return of business and leisure travel globally. APTT pays an attractive yield of 7.5%. Annual dividend of $18 million is well supported by free cash-flows of $70 million,” he adds.
In terms of dividend yields and, or earnings growth, Chew recommends DBS as he expects its dividends to expand with its earnings growth from higher interest margins and a recovery in loans growth.
For consumer stocks, Chew deems Del Monte valuations as “cheap”.
“US operations will drive earnings growth from new product portfolio, higher product prices and reduced exposure to low margin private labels,” he says.
Del Monte is also Chew’s preference in the consumer sector.
“US operations are turning around with new products, higher product prices and restructuring of sales channels and factories. Balance sheet improvement is a bonus,” he adds.
Fraser Centrepoint Trust (FCT) may see an improvement in dividends, which will come from its recent acquisitions and the normalisation of mall traffic, notes Chew, while HRnetGroup is expected to report record earnings from the spike in job demand.
Finally, shares that may see re-rating in 2022 include City Developments Limited (CDL), ComfortDelGro (CDG), Keppel Corporation and Q&M.
CDLmay see a re-rating in its share price from the potential REIT listing of its UK assets and a recognition of its development profits in Singapore.
Despite its disappointing performance on the back of lockdowns, taxi rebates and poor rail traffic, CDG has a sturdy balance sheet, which makes it Chew’s preferred transport proxy to recovery in work and social activities.
Meanwhile, Keppel Corporation’s re-rating path may continue with further divestments of its non-core assets, particularly its marine portfolio.
“Q & M is aggressively expanding its Singapore leadership in dental services by the aggressive expansion of its network by around 20% per annum,” writes Chew.
To this end, Chew’s target for the Straits Times Index (STI) as at end-2022 remains at 3,400 points.
Chew’s target is based on 16 times price-to-earnings (P/E), which is a slight premium to the 10-year average of 14 times P/E.
“Premium is warranted as earnings are on an upswing led by banks, consumer and telcos as economic activity and interest rates normalise. STI last traded at 3,400 in April 2019,” he writes.
Looking back at PhillipCapital’s performance, its Phillip Absolute 10 underperformed the STI in 2021, dragged by its exposure to Yoma.
Recovery names like ART and CDG, as well as FCT and Thai Beverage also took a toll on the portfolio, notes Chew.
“The winners for us were CapitaLand Investment (CLI), PropNex and DBS. CLI enjoyed the re-rating from volatile development earning to a recurrent fee earner. PropNex earnings surged following the jump in property transactions. DBS gained from the turnaround in provisions and normalisation of dividends,” he writes.
Sector review
In the same report, Chew has rated the conglomerate sector “overweight” with Keppel Corporation being his top pick.
“Catalysts are expected from a definitive agreement for its offshore and marine (O&M) unit,” he says.
“The proposed divestment of Keppel’s O&M unit and logistics unit is expected to be earnings accretive for Keppel in the current financial year on a pro-forma basis, although there is no guarantee of completion by this year,” he says.
Meanwhile, Chew expects the outlook for Sembcorp Industries to “remain challenging due to persistent uncertainties surrounding the recovery from Covid-19, intense competition from other global utility companies and the expiry of long-term contracts”.
“The expiry of long-term contracts is expected to affect PATMI by around $100 million in the next five years,” he says.
The consumer sector has also received an “overweight” recommendation, although a full recovery in retail is likely only to happen in 2023, when borders re-open and leisure travel resumes.
“The foundation for consumer spending in Singapore is healthy. Singapore households are enjoying a rise in net wealth, income levels, and recovery in jobs,” says Chew.
“We expect regional consumer stocks Thai Beverage and Dairy Farm to enjoy a recovery in revenue following a pandemic-disrupted 2021. Other revenue drivers for regional consumer stocks are the overall improvement in economic conditions boosting income levels. Following aggressive cost cuts in 2021, operating leverage will offset any negative headwinds in higher raw material costs,” he adds.
Within the consumer sector, Chew has recommended “buy” on Sheng Siong with a target price of $1.69, as it gains market share in fresh food from wet markets. He has recommended “accumulate” on Thai Beverage with a target price of 76.5 cents as its recovery post-lockdown is under way. Del Monte has also gotten a “buy” from Chew with a target price of 62 cents, with its expected 39% spike in FY2022 earnings on the back of the turnaround in its US operations.
Chew has rated the Singapore banking sector “overweight” due to the economic recovery being underway and with earnings returning to pre-pandemic levels.
“With total allowance coverage being over 30% above the Monetary Authority of Singapore’s (MAS) regulatory limit, we believe there is further room for GP reversions in 2022 which would boost earnings. The banks’ dividend yields are attractive with upside surprise due to excess capital ratios. Furthermore, improving economic conditions and rising interest rates remain tailwinds for the banking sector,” he says.
Chew’s top pick within the sector is DBS, with an “accumulate” recommendation and a target price of $35.90. This is “due to its strong loans and transaction pipelines and better credit quality outlook, which may lead to higher earnings in FY2022,” says Chew.
The healthcare sector has, too, gotten an “overweight” call from Chew, with iX Biopharma, Q&M Dental and Hyphens Pharma being his top picks.
iX Biopharma, which received a “buy” call and a target price of 35.5 cents, “has secured out-licensing agreement for its Wafermine drug worth more than $300 million (excluding royalties). Based on its proprietary Waferix sublingual drug delivery system, iX Biopharma can proceed to develop other products in its pipeline such as Xativa (medicinal cannabis) and Wafersil (erectile dysfunction)”.
Q&M Dental has also received a “buy” recommendation with a target price of 82 cents. “[A] record number of new clinics, or a 20% rise in FY2021 would be a major revenue growth driver”.
Hyphens Pharma has gotten “accumulate” with a target price of 34.5 cents. “Hyphens is undertaking a long-term investment and journey to build a leading portfolio of proprietary skin health products and brands”.
The property developers’ sector has gotten an “overweight” call from Chew with CDL being his top pick.
CDL has a “buy” recommendation with a target price of $9.19. Its valuations are currently attractive, trading at a 51.3% discount to its revised net asset value (RNAV). “While CDL has some 2,000 units in unsold inventory, 23% are executive condominiums (ECs) while 35% are part of redevelopment projects with high margins owing to below-market land cost. CDL should also benefit from the recovery in its retail and hospitality business segments”.
REITs have also gotten an “overweight” recommendation from PhillipCapital with catalysts expected from the economic reopening and acquisitions.
Chew says he prefers the industrial and retail sub-sectors, while his top picks are Ascendas REIT (A-REIT), FCT and ART.
A-REIT, FCT and ART have “buy”, “buy” and “accumulate” calls with target prices of $3.65, $2.83 and $1.19 respectively.
For the time being, PhillipCapital is “neutral” on Singapore’s technology sector. “The average upcycle over the past 15 years has been 23 months. The current semiconductor cycle is already at historical averages. With the longest upcycle at 29 months, we worry that a downturn in the cycle will occur in 2HFY2022”.
It is also “neutral” on the telecommunications sector, although Chew expects earnings in the sector to recover in 2022 on the back of border re-openings, improving economic conditions and a steady growth trajectory in the enterprise business.
The transportation sector has received an “overweight” recommendation on expectations of a gradual recovery in traffic volume amid easing restrictions.
As at 1.20pm, the STI is trading 23.93 points higher or 0.75% up at 3,229.19 points.
Photo: Bloomberg
