Global issues like the Russsia-Ukrainian War and supply chain disruptions continue to affect markets around the world. RHB Group Investment Bank CEO Ganesh Sabaratnam observes that central banks today are treading a fine line between attempting to cap inflation without impacting economic growth — a daunting task amid the highest prices ever seen in decades and challenges to major economies like the European Union (EU) and China.
Despite a more challenging market environment, the easing of Covid-19 restrictions in Singapore could see winners emerge in the tourism and F&B sectors. At the same time, RHB Group Investment Bank’s Regional Equity Research head Alexander Chia is also optimistic about several oil and gas (O&G) players who could benefit from the soaring oil prices, driven higher by Russia’s invasion of Ukraine, EU sanctions on Russian oil and the likelihood of tighter supply.
He is also positive on the tech sector, as its valuations are now more reasonable after the correction made earlier this year, particularly within the manufacturing space as the supply shortage should ease in 2H2022, removing the barriers for players facing strong order demand.
Taking these issues into consideration, RHB has unveiled its 12th edition of its Top 20 Singapore Small Cap Companies Jewels 2022. Of these, consumer names make up the largest portion of 30%, followed by REITs at 20%, O&G and commodities at 15% and the technology sector at 15%, while including some construction-related names.
The RHB Top 20 features specially selected companies — or “jewels” — covering industry segments like construction, consumer products and services, O&G and the REIT space. Jarick Seet, head of small-mid caps research at RHB Singapore, notes that while last year’s recovery was delayed due to setbacks from the Delta and Omicron variants of the pandemic, opportunities are growing. This is especially so after April 26 when Covid-19 measures were eased, a situation Prime Minister Lee Hsien Loong said will bring the republic to “almost all the way to how things were” before the “circuit breaker” lockdown.
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Consumer sector to grow
Dominating this year’s list is the consumer sector as RHB expects consumer spending, mass events and tourism to resume. As such, RHB likes Delfi Limited, GHY Culture & Media, HRnetGroup, Hotel Grand Central, Japan Foods Holding and SBS Transit. RHB has “buy” calls on HRnetGroup and Japan Foods Holding, while the rest are unrated.
For HRnetGroup, Seet sees a better FY2022 ending December ahead for the Asia-based recruitment agency firm, with the company’s FY2021 performance exceeding its pre-pandemic (FY2019) results. He has a target price of $1.01 on the stock. Management has remained bullish for both its recruitment segments across all geographical areas and still sees strong demand for its services ytd. Seet echoes the same sentiment, adding that such strong performance will likely continue and benefit from a higher margin.
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“We believe HRnetGroup is an efficiently run company compared to its global peers, many of whom are running at a loss during this tough period. This counter is also trading at 11.2x FY2022 P/E, which is lower than its global peer average,” says Seet, adding that the group is likely to continue dishing out attractive dividends. He expects a 5.6% dividend yield for FY2022 using a 60% payout ratio.
For Japan Foods Holding, RHB Singapore analyst Shekhar Jaiswal has a fair value estimate of 55 cents and likes the stock for its strong market presence and brand recognition, as well as its efficient cost control measures and strong balance sheet.
Jaiswal also notes that the pandemic has Japan Foods in a better position because of lower competition as many players were forced to shut down or scale back operations. They have also kept a healthy financial standing with cash and bank balances of $18.2 million and no borrowings in its 1HFY2022 ended September last year.
During that period, Japan Foods also saw revenue growth of 14.5% y-o-y despite fewer restaurants of 52, compared to 59 the previous year. This reflects higher sales brought in by certain existing restaurants, as well as contribution from its new halal concept Tokyo Shokudo, which offers an extensive selection of popular Japanese fare like ramen and rice sets.
While the group’s plans to open new restaurants in Japan — under its joint venture with Minor Food Group — were disrupted by Covid-19, Jaiswal sees current conditions as a good opportunity to resume its expansion plans and develop a new revenue stream in the medium-term. Japan Foods operates 24 restaurants in China, Hong Kong and Indonesia through its associates.
In its 1HFY2022 results presentation, Japan Foods announced plans to revise its dividend policy to distribute at least 100% of net profits as dividends from FY2022. Jaiswal estimates a dividend yield of 4% to 5% for FY2022-FY2023.
REITs a safe bet
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REITs remain to be a safe play in the market and under this segment, RHB has highlighted Prime US REIT, Daiwa House Logistics Trust, United Hampshire REIT and Starhill Global REIT. RHB has “buy” calls on Prime US REIT and Starhill Global REIT, while the others are unrated.
Analyst Vijay Natarajan has a target price of $1.02 on Prime US REIT, as he believes that the stock is a high-yield proxy to the US office sector rebound. He notes that the REIT boasts a high-quality and diverse under-rented high-quality portfolio, with properties located in strong growth markets and a good-quality tenant base.
The office leasing momentum was improving in 1QFY2022 ended March despite the Omicron wave. This momentum continues and is further spurred by the reopening, as the REIT is seeing a doubling of leasing volume in 2HFY2022 on a h-o-h basis. “With leasing activity expected to see a further pick-up in 2HFY2022, we expect the portfolio occupancy rate to improve slightly by end-FY2022,” says Natarajan, adding that office supply in its sub-market has remained quite limited.
With a healthy balance sheet, the analyst is also expecting the REIT to perform acquisitions in 2HFY2022 worth US$100 million ($138 million) to US$200 million, giving the REIT a modest gearing of 37.9%.
As for Starhill Global REIT, Natarajan sees this counter as a reopening play at a bargain. He has a target price of 68 cents and is upbeat on the REIT’s recovery prospects after adding two landmark properties on Orchard Road into its portfolio.
While the REIT has seen operating metrics in Singapore improve in the past few quarters, rental reversions are expected to remain under pressure in FY2022 ending June at –10% to –20%, albeit mitigated slightly by the fact that only 14.8% of leases are pending renewal in FY2022.
In Australia, the market is showing signs of a turnaround and Natarajan expects minimal rental assistance ahead, with the Australian government relaxing most Covid-19 restrictions. Leasing activity for the REIT has also picked up, with the 10,000 sq ft space for Japanese clothing chain Uniqlo’s launching in Brisbane’s Myer Centre, as well as the expansion of existing tenant CDW Studios.
Over in Malaysia, luxury shopping mall The Starhill has just completed an asset enhancement exercise, and is under a long master lease until 2038, with a rental step-up of 4.75% every three years. Lot 10 shopping centre in Kuala Lumpur also enjoys a long master lease, which expires in June 2028, with a 6% rental stepup clause every three years. “These two assets account for 15% of portfolio value and offer income stability, despite concerns over Malaysia’s challenging retail market conditions,” adds Natarajan.
Optimistic on plantations, oil and gas
Meanwhile, oil and gas prices are at an all-time high because of the ongoing conflict in Ukraine. “This has made us take a more optimistic view on several oil and gas names as we believe the supply chain downstream will likely benefit from high oil prices, and the same goes for other commodity players,” says Seet.
Bumitama Agri, Civmec and Sembcorp Marine are the ones to watch (Bumitama Agri has a “buy” rating, while the rest are unrated). With a fair value estimate of 90 cents, RHB believes that Bumitama Agri, a pure upstream planter, will benefit from a prevailing high crude palm oil (CPO) price environment.
Furthermore, climate conditions this year are expected to improve compared to the previous two years. This should push fresh fruit bunches (FFB) growth to recover somewhat to 5% to 10% y-o-y for 2022. Bumitama Agri believes that crop patterns have normalised so far this year, with the FY2022 ending December crop expected to come in at 48% in the first half and 52% in the second half. Meanwhile, the group’s plantation is in the prime age profile of 11.6 years. This bodes well for the long-term, as yields will continue to improve as the trees mature, driving costs down and earnings up.
For the upcoming FY2022, the analyst notes that the group has some minimal forward sales locked in a year ago, which has yet to be realised. Compared to FY2021 — where the average selling price of INR9,852 ($0.93) was lower than the market price for forward sales in 1HFY2021 — FY2022’s amount is not significant. The group is also not engaging in any more forward sales, and would therefore be able to benefit from the current higher CPO price environment.
Indonesia’s ban on exports of CPO and its derivatives would pose a risk however, to all Indonesian players. Should the ban remain in place for the longer-term, domestic Indonesian average selling prices would decline further and not be reflective of global CPO prices, as there would be a surplus of CPO domestically, with not enough demand.
Strong demand for technology
Technology and manufacturing stocks have also had a place in RHB’s Top 20 Jewels and this year, Aztech Group, Broadway Industrial Group and Frencken Group have made the list with Frencken Group having a “buy” call and a target price of $2.10. Frencken is also RHB’s top pick in the semiconductor space.
Seet expects the stock to benefit from the global supply chain and secondary sourcing. With a positive outlook, the stock is also poised to ride the semiconductor uplift. Management expects higher revenue from its semiconductor segment, which has performed well in the past two years.
He adds: “As global companies are still spending heavily on capex, and the chip shortage continues, we expect the semiconductor sector to stay robust. Strong demand from this sector should continue to benefit Frencken positively until 1HFY2022 ending June, before softening in 2HFY2022.”
Meanwhile, management also expects higher revenue from its industrial automation and automotive segments. However, the speed and magnitude of sales growth in these areas would depend heavily on its key client in industrial automation. The automotive segment should continue to see a recovery, as the chip shortage is expected to ease throughout the year.
Construction sector recovery
While companies in the construction and industrial segments represent a small portion of the Top 20 list, Seet explains that they “share a common DNA”, as the companies are all fundamentally sound and have a great probability of generating good returns.
BRC Asia and Pan-United take the stage under the construction segment, while LHN Limited and Vicom are the two shortlisted under the industrial segment. All four stocks are unrated, but have caught the attention of RHB.
For BRC Asia, it is expected to be a proxy to the recovery in Singapore’s construction sector, which should continue as backlogs get cleared and labour supply improves. In the meantime, Pan-United is expected to ride on the construction upcycle, as the Building and Construction Authority (BCA) has upgraded its forecasts of construction demand for 2022 to $27 billion to $32 billion per year, from $25 billion to $32 billion per year.
As for LHN, RHB sees this stock as an attractive play on the rental and logistics boom, while Vicom is expected to enjoy tailwinds for the stable vehicle inspection business as recent policy changes mandate annual inspection of licenced ride-hail and street-hail service vehicles.
