Companies with high cash piles or in net cash positions are likely to benefit should interest rates remain “higher for a lot longer”, says UOB Kay Hian analyst Adrian Loh and the Singapore research team.
“While GENS and YZJ both increased their respective dividends on a y-o-y basis when announcing their financial results for FY2023, Valuetronics and China Sunsine chose to embark on aggressive share buybacks while RH Petrogas has retained its cash for its 2H2024 drilling programme,” he adds.
Loh’s report dated April 8 comes after recent comments by US Federal Reserve (US Fed) offices raises the possibility of zero interest rate cuts should the country’s economy remain robust.
On April 5, Lorie Logan, the president of US Fed Reserve Bank of Dallas, said it was “much too soon” to think about cutting rates.
“I will need to see more of the uncertainty resolved about which economic path we’re on,” said Logan at an event at Duke University.
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At the same time, Fed Governor Michelle Bowman stated that it was “still not yet” time to lower borrowing costs.
On April 10, the US’s core CPI topped forecasts for the third straight month, coming in at 3.8% y-o-y in March, and 0.4% higher m-o-m.
Even if the Fed decides to cut its rates in 2024 and 2025, the Fed’s key benchmark borrowing rate would stay at the highest level since 2007, which could impact Singaporean companies, notes Loh.
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Companies with higher net debt to equity ratios may see margin erosion
Meanwhile, companies with higher net debt to equity ratios could see their interest expenses mildly eroding their profit margins for the FY2024.
Among the companies covered in UOB Kay Hian’s universe, Singapore Technologies Engineering S63 (ST Engineering), StarHub CC3 , Sembcorp Industries U96 , Wilmar and City Developments Limited C09 (CDL) have the highest net debt to equity ratios at above 1x as at end-2023, although Loh believes that their debt is manageable for now.
Among the brokerage’s coverage, Loh has identified Bumitama, CapitaLand Investment (CLI), ComfortDelGro C52 (CDG), GENS, Mapletree Industrial Trust ME8U (MINT), Oversea-Chinese Banking Corporation (OCBC), SATS, Seatrium, Sembcorp Industries and Venture Corp as his large-cap top picks.
Small- to mid-cap picks include CDL Hospitality Trusts J85 (CDLHT), Far East Hospitality Trust Q5T (FEHT), Food Empire, Frencken Group E28 and Valuetronics.
S-REITs ‘medium-term play’
As investors look to position themselves in the current interest rate cycle, Loh sees that Singapore REITs (S-REITs) can be a “medium-term” play.
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“Many S-REITs saw a material reflation in their share prices in late-4Q2023 as expectations of early interest rate cuts by the US Fed rose. However, in 1Q2024, the sector saw a sell-off as these expectations proved entirely too optimistic,” notes Loh.
“On a fundamental basis, we would focus on blue-chip S-REITs with resilient balance sheets to weather external uncertainties,” he adds.
He likes CapitaLand Ascott Trust HMN (CLAS) and FEHT among the hospitality REITs and Frasers Centrepoint Trust J69U (FCT) and Lendlease Global Commercial REIT JYEU (LREIT) among the retail REITs.
For S-REITs with a high proportion of Euro-denominated borrowings, Frasers Logistics & Commercial Trust BUOU (FLCT) and Keppel DC REIT (KDC REIT) are his choices.
“Given the interest rate sensitivity of the sector, investors with a ‘higher-for-a-lot-longer’ interest rate view may understandably be wary of REITs. The 10 non-REIT stocks – most of which are small/mid-caps – with the highest yields in Singapore are shown on the chart [below],” says Loh.
“Outside of these, we highlight other large-cap stocks with high yields for 2024 including: Singapore Airlines C6L or SIA (5.8%), CDG (5.5%), SIA Engineering (5.3%), Venture (5.2%) and Singtel (5.2%),” he adds.
