Singapore stocks are providing decent total returns, says OCBC Investment Research (OIR) Singapore strategist Carmen Lee, while valuations remain inexpensive.
Among the key Asian markets, the Straits Times Index (STI) offers the highest dividend yield of 5.8%, compared to a range of 1.5% to 5.0% for the rest.
This boosted total returns, giving a fairly decent return of 8.0% so far this year, versus a range of -2.9% to +30.1% for the rest of the region.
“Singapore remains an attractive market, especially for the ease of doing business. This pertains to [the] regulatory framework for contract enforcement and dispute resolution. With rising geopolitical risks elsewhere in the world, this region being comparatively more stable will continue to attract companies,” says Lee in a June 25 note.
Singapore is inexpensive, she adds. Aside from dividend yield, the STI is trading at 10.5 times FY2024 price-to-earnings (P/E) and 10.2 times FY2025 P/E.
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Earnings growth is projected at the single-digit level for this year and next, but this is decent for a stable economy, says Lee.
In terms of price-to-book (P/B), the STI is trading at 1.1x P/B. This is also at the lower end versus regional peers and below historical 10-year average, Lee adds.
“We hold an ‘overweight’ position on the Singapore market,” writes Lee. “Our preferred picks include banking, tourism related, domestically focused and certain industrial stocks.”
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Investment ideas
Among the most popular names on the Singapore Exchange S68 , Lee highlights UOL Group Limited U14 , Thai Beverage Y92 (ThaiBev), CapitaLand Investment (CLI) 9CI and Frasers Logistics & Commercial Trust BUOU (FLCT) for their potential upside, according to OIR’s fair value estimates.
Units in FLCT, for one, traded at 96 cents on June 24, down 16.5% year to date (ytd). Compared to OIR’s fair value of $1.35, however, the REIT could see a 40.6% upside.
Meanwhile, CLI shares traded at $2.66 on June 24, down 15.8% ytd. CLI shares could see a 45.1% upside if OIR’s $3.86 fair value materialises.
Next, ThaiBev shares may have slipped some 10.5% ytd to close at 47 cents on June 24, but OIR sees 46.8% upside towards its fair value of 69 cents.
Finally, UOL shares have fallen 17% ytd to trade at $5.21 on June 24. But OIR believes the developer’s shares could soar 58.2% to a fair value of $8.24.
Among Lee’s table of 14 “selective stock investment ideas”, two are not STI constituents. They are CapitaLand Ascott Trust HMN , with a 27% upside to OIR’s $1.13 fair value; and Sheng Siong Group OV8 , with a 26.2% upside to OIR’s $1.88 fair value.
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Banking is a bright spot
Financial stocks have boosted gains for the STI ytd, but property and property-related companies remained a major drag on market sentiment, says Lee.
The “higher for longer” interest rates environment has proven to be conducive for financial companies but posed several challenges for companies with high gearing or extensive loans or stocks offering higher yields.
Like a “tale of two cities”, the FTSE ST All-Share Financials Index (FSTFN) generated strong gains of 11.4% so far this year, excluding an attractive dividend yield in the region of 5%-6%. However, in comparison, the FTSE ST All-Share Real Estate Investment and Services Index (FSTREH) shed 13.5% over the same period, notes Lee.
Lee notes that DBS Group Holdings D05 posted record net earnings of nearly $11 billion in FY2023 ended Dec 31, 2023, while United Overseas Bank U11 (UOB) generated net earnings of $6.06 billion.
For 1QFY2024, DBS delivered net earnings of $2.95 billion, up 15% y-o-y or 24% q-o-q. Lee says there is a “strong likelihood” that DBS’s FY2024 earnings will exceed FY2023. UOB, meanwhile, posted 1QFY2024 earnings of $1.56 billion, down 1% y-o-y and up 5% q-o-q.
Apart from margin, other contributing factors included higher fee income, notes Lee. “One of the main drivers was the strong growth in credit card income, as a result of the pick-up in tourism and mega concerts throughout the region.”
As an indication, DBS saw a 22% increase in credit card income in FY2023, while UOB enjoyed a significantly higher 65% jump in credit card income owing to its pre-sale tie-up with Taylor Swift’s Singapore concerts, among others.
Wealth management income also boosted bottom-line profits, notes Lee. DBS saw a 13% rise in wealth income in FY2023, while UOB reported a 4% improvement.
However, loan growth is likely to moderate under the current high rates environment and this will result in muted low single-digit loans growth, she adds.
“Going forward, with more intra-regional trades and growing interconnectivity, Singapore banks should be able to leverage on their regional footprints to continue to expand their business reach and embark on more cross-selling opportunities,” writes Lee. “We continue to like the banking sector and hold an ‘overweight’ position.”
As at 3.17pm, shares in DBS are trading 3 cents lower, or 0.08% down, at $35.62; while shares in UOB are trading 6 cents higher, or 0.19% up, at $30.96.
