The Straits Times Index (STI) is likely to stay rangebound between 3,150 points and 3,300 points amid ongoing “sideways volatility” which is in line with seasonal trends, says DBS Group Research. The three banks, which make up nearly half of the index’s weight, will lend near-term support to the STI at 3,155 points and 3,200 points, given how they will benefit from the “higher for longer” interest rates regime.
However, there is near-term resistance in the coming weeks at 3,300 points ahead of the 3Q2023 results reporting season, as investors keep an eye on inflation trends and also weigh how effective China’s latest policies can be in dragging the world’s second-largest economy out of its doldrums.
Meanwhile, valuation remains attractive at between 10.2x 12-month forward earnings as investor sentiment stays cautious, says DBS. This is because of the economic slowdown in China, which partly led to a 20% y-o-y drop in non-oil domestic export numbers for both July and August. A poll of economists by Bloomberg indicates a consensus of 3Q2023 growth of 1% q-o-q.
“Against this backdrop, we advocate positioning into selected stocks that we believe can buck the trend through good earnings visibility or encourage investors to look beyond 3Q2023 as outlook improves beyond that period,” says DBS.
Yangzijiang Shipbuilding is one such counter where over 70% of its US$14.7 billion ($20.14 billion) order book is made up of containership orders that command higher value and margins. DBS expects further uplift in its order book, boosted by the potential order of a large LNG carrier. With both revenue growth and margin expansion, DBS expects Yangzijiang to enjoy an earnings CAGR of 15% over the next three years.
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Next is Singapore Technologies Engineering S63 , which has built up a record order book of $27.7 billion as at the end of June. Besides its commercial aerospace segment, which is seeing
a recovery in the maintenance, repair and overhaul (MRO) market after the pandemic, the company has also made gains in its US-based transport management unit TransCore. DBS estimates ST Engineering will deliver a CAGR of 12% over FY2022 and FY2024.
SIA Engineering is another pick by DBS that is recovering from the pandemic. According to DBS, the street has yet to price the latest revision to US engine maker Pratt & Whitney’s fleet
management plan for the GTF PW1100 engines which will impact 3,000 engines, versus a previous estimate of 1,200 engines. This means SIA Engineering’s engine and component joint venture with P&W is poised to experience a surge in activity in the coming years. “The JV, which accounted for around 20%–25% of SIA Engineering’s net profit last year, should see a stronger contribution from the latest development. SIA Engineering also benefits from higher MRO demand as airlines will be forced to keep older aircraft in service to cope with this sudden capacity shortfall,” says DBS.
The semiconductor industry is mired in a slump now but DBS has singled out UMS Holdings 558 , whose key customer is capital equipment maker Advanced Materials, as a proxy to ride
the recovery despite weak order momentum in the near term. DBS acknowledges that the 20% y-o-y drop in electronics exports for both July and August paints a weak picture for technology stocks heading into the 3Q2023 results season.
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However, the leading August electronics purchasing managers’ index increased to 49.5, the highest level in a year. “The nascent upturn supports our view that the slowdown is tapering off and end demand is bottoming out,” says DBS. “Our analyst is hopeful of a stronger 2H2023 versus 1H2023, and recovery in 2024,” says DBS. As part of this turnaround, UMS Holdings also benefits from China+1 with its main production facilities in Malaysia and the new Penang plant ramping up production this year.
Another turnaround play is Seatrium, which was formed from the merger of Sembcorp Marine and Keppel’s offshore and marine unit. As at August, Seatrium has built up an order book of more than $20 billion and additional contract wins may be in the pipeline from the third Tennet high-voltage direct current contract platform that could be worth between $1.6 billion and $1.8 billion.
Furthermore, Seatrium has emerged as a front-runner for two floating production storage and offloading platforms to be contracted out by Petrobras at about $4 billion each. “While
one-off potential integration hiccups and costs could pose some downside risks this year, we expect Seatrium to reap synergies on both the cost and revenue front and turn profitable by
FY2024,” says DBS.
Separately, Singapore might enjoy some spillover effects from Thailand’s temporary visa waiver for Chinese tourists, which will be in effect from Sept 25 to Feb 29 next year. Although the peak Chinese visitor arrival months in July and August that coincides with the summer school holiday period have passed, investors ought to keep a close watch for October arrival
numbers, says DBS.
“The 10-day “mid-autumn+golden week” holiday period from Sept 29 to Oct 8 provides a heads-up on the effectiveness of Thailand’s visa waiver. A pick-up in Chinese arrivals bodes
well for the upcoming winter school holiday period that falls within Thailand’s visa waiver period,” says DBS, adding that potential beneficiaries of higher Chinese visitor arrivals to Singapore are Far East Hospitality Trust Q5T , Genting Singapore G13 and CDL Hospitality Trusts J85 , which trades at dividend yields of 6% in FY2023 and 6.4% in FY2024, and at 0.73x P/B.
