With the US Fed continuing to fight inflation by setting higher rates for longer, equity markets are not likely to see the relief investors have long awaited. As a result, Phillip Securities recommends that investors stay put in counters that can give them a decent level of yields and also those relatively insulated from the cycles.
This is what many in the market are already doing. “The bulls were sleeping, the bears were sleeping too. Everyone’s sleeping,” observes Paul Chew, head of research at the brokerage, at a presentation on Oct 7, referring to how the Straits Times hardly budged in the third quarter of the year that just ended.
Chew remains upbeat that STI will get to enjoy some gains. The Singapore market is trading at just 10 times forward earnings versus just below 15 times average over the past decade. “Either the share prices go up, or earnings will come down. Of course, we hope valuations will go up,” says Chew. However, catalysts are needed to get things going. “Valuation’s attractive now,” he adds.
For the latest quarterly 10-stock model portfolio put together by Chew’s team, they have dropped Singapore Exchange Group and City Developments. In their place, Singapore Telecommunications (Singtel) and Singapore Technologies Engineering have been added. Chew reasons that the telco is seeing some recovery in mobile revenue with higher price plans and further resumption of roaming revenue.
In addition, its sprawling portfolio of regional associates, especially India and Indonesia, is seeing better earnings because those two economies are doing well, and discretionary spending, including mobile services, is improving. Reduced competition following rounds of industry consolidation is also helping. Singtel holds stakes in mobile operators in Thailand and the Philippines, and these two markets see varying stages of reduced competition.
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Lastly, Singtel has committed to a divestment target of $6 billion, and some $2 billion has been divested so far. Singtel is putting proceeds from the divestments into capex for new growth and increasing its dividend payout. Chew’s call on the stock is “buy”, and a target price is $2.80.
Another new inclusion to the ten-stock portfolio is Singapore Technologies Engineering, rated “buy” and given a $4.50 target price by research manager Peggy Mak. Amid the slowdown in the global economy, companies with stronger balance sheets and strong cash flow will be in favour.
As a sign of its steady cash-generating ability, the company has been dishing out a quarterly dividend of four cents each. “ST Engineering fits these criteria very well,” says Mak. The company enjoys very steady earnings visibility, given its order book of some $27 billion, with a big proportion from its defence and security customers, in line with growing geopolitical uncertainty. In line with the recovery of the global aviation industry, its commercial aerospace business is also on an uptrend. Recently, ST Engineering announced the breaking ground of its $170 million facility near Changi Airport, adding around 10% to its total capacity in this segment. SIA Engineering, the separately listed subsidiary of Singapore Airlines C6L , is in the same business and is now just around half the size.
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Keppel in right direction
Eight stocks have been retained in the portfolio for 4Q. One of which is Keppel Corp. As Mak notes, a significant chunk of its earnings came from meeting the power needs of the Singapore economy. Capacity has not been increasing as quickly as demand, she observes. More interestingly, Keppel Corp has an ongoing asset monetisation strategy, selling assets and stakes into funds jointly invested with third-party investors. Keppel can enjoy higher and recurring fee income by managing the funds and operating some of these assets. This might inspire analysts to value the company using price-earnings valuation instead of via sum-ofthe-parts valuation applied now, given its traditional structure as a conglomerate. The target is to build up an asset under management base of $100 billion come FY2026. “Keppel is trying to copy CapitaLand Investments; they are going in the right direction,” says Mak, who has a “buy” call and a $7.70 target price.
CapitaLand Investments (CLI) has also been retained in the portfolio. Analyst Darren Chan acknowledges that the company, which has positioned itself as a property assets manager rather than a traditional developer, has suffered in line with the industry-wide trend of a dip in real estate investment deals. “Interest costs have made it quite difficult to recycle assets. We will see lower divestment gains, which will affect fees they get,” says Chan. Bright spots include its lodging business, which has contributed more to CLI. Chan, who has a “buy” call and $3.68 on the stock, estimates that CLI’s fee-related business will grow at around 10% CAGR between FY2023 and FY2025.
Within the CapitaLand group, Chan favours CapitaLand Ascott Trust HMN . This hospitality and lodging-focused REIT faced declines along with the broader REIT sector due to higher rates. From its recent rights issue priced at $1.025, the unit price has dropped to around 90 cents, in line with the overall weakness suffered by REITs. At this level, the negatives should have been priced in. However, the REIT’s operating metrics are improving, with record-high revenue per average room night. Further growth, Chan believes, will come from higher occupancy. The stock now trades at a forward 2023 yield of 6.9%, and Chan’s call is to “accumulate” and a target price of $1.20.
Another REIT favoured by Chan is Frasers Centrepoint Trust J69U . This REIT, which trades at a forward yield of 5.7%, specialises in holding suburban malls such as Waterway Point, and Chan’s target price is $2.35. With a bleaker macro picture, Chan believes that FCT should continue to perform, as most of its tenants are in relatively resilient businesses such as supermarkets and more accessible F&B. Given tenant sales that have already exceeded pre-pandemic levels, Chan believes FCT has the potential to raise rental further. In contrast to some REITs with overseas assets, whose income and costs are thus exposed to currency fluctuations, FCT is dominantly Singapore-focused. Recently, it managed to divest Changi City Point at 4% above its valuation, which suggests that a Singapore-based asset commands better stability than overseas assets.
Glen Thum, Phillip Securities’ analyst who focuses on banks, maintains his preference for Oversea-Chinese Banking Corp (OCBC). The key reason he likes this bank compared to the other two local banks remains the same: The stock trades more cheaply and has a higher CET1 ratio. Unlike United Overseas Bank U11 , which recently acquired Citi’s consumer business in several regional markets, OCBC has stuck to organic growth. This means that OCBC has the most potential to raise its dividend further, which is already at a high yield of 6.5%. OCBC is seen to enjoy further growth in its fee income, especially from its wealth management businesses. The upside might come from its growth in southern China and Hong Kong. Thum rates this stock a “buy” and has a price target of $14.96.
Rare market share
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Despite the various rounds of property cooling measures, Chew likes PropNex. Singapore’s largest real estate agency by number of salespersons commands a market share of around half of the total transactions here, notes Chew, and it is rare for a Singapore company to have this kind of market position. The company’s 1HFY2023 earnings are down, but there are signs of a pickup in the number of transactions in July and August, says Chew. “Second half could see a recovery,” adds Chew, basing his view on how 4,000 private residential units were launched for sale last year versus around 11,000 estimated for this year. Propnex OYY has a strong operating cash flow, which is being used to pay out a dividend that is now yielding 7%. Chew, who rates this counter “accumulate” and gave it a price target of $1.16, believes the company can maintain this level of payout just on operating cash flow alone without touching its existing net cash of $140 million.
Phillip Securities continues to like Thai Beverage Y92 , with a “buy” call and 75 cents price target. Chew points out that the stock has seen some recent weakness because of higher rates in Thailand and a weaker-than-expected economy and Thai baht. Yet, the new Thai government is actively implementing numerous measures to revive its economy, including a $21 billion package for consumers next year. The handouts of around $400 per adult to be used over the coming six months are not meant for alcohol, but the cash handout will help lift consumers’ sentiment, reasons Chew.
He remains steadfast in his preference for ComfortDelGro C52 , humorously acknowledging that he has faced criticism for sticking to this stance over the past few years. He highlights the promising outlook for a robust rebound in the second half of this year, coupled with an increased dividend commitment from the company. For one, rail passenger traffic in Singapore has continued to recover. ComfortDelGro has managed to generate higher usage of its Zig booking app, which allows it to collect higher fees. Fare competition dynamics have turned as well. “Suddenly, Grab has decided it wants to be profitable, and so it cannot be giving out so many subsidies,” says Chew, without explicitly referring to the higher fares Grab charges for comparable trips. Its two long-suffering overseas business segments, buses in the UK and taxis in China, are set for recovery. Chew rates ComfortDelGro a call and has given it a target price of $1.57.
