RHB, citing a potential recovery of the broader economy in the last quarter of the year, sees the Singapore market enjoying a re-rerating by the end of the year.
Besides a revival in the manufacturing sector, the potential positive ingredients for Singapore equities include a resilient service sector and a likely pause in interest rate hikes.
RHB’s Shekhar Jaiswal in his Sept 8 note says: “We continue to recommend investors hold a core defensive portfolio of higher quality companies or REITs that offer secular earnings growth or defensive dividends, with selective exposure to topical names and small, or mid cap stocks that have strong earnings tailwinds.”
Given the macroeconomic concerns regarding China’s economic slowdown and US rates being kept higher for longer, Jaiswal expects the Straits Times Index (STI) to remain volatile. “Nevertheless, the STI’s forward P/E remains cheap when compared to the historical valuation, with the STI trading close to –2 s.d. (standard deviations) from its historical average since January 2008,” he says. Using a top-down approach and a target P/E multiple of 11.5x applied to 2024 earnings estimates, Jaiswal predicts the STI, which closed at 3,218.28 points on Sept 11, will hit 3,340 points by the end of the year.
Even as investors await the recovery of the manufacturing sector, they can expect better showing from the other key portion of the economy, the services sector.
Specifically, RHB expects retail sales momentum to improve in the current second half of the year, thanks to seasonal factors such as the Formula One night races that are taking place on Sept 15–17, the Black Friday sale, Single’s Day sale, and the more traditional Christmas shopping. In addition, consumers here might front-load big-ticket items ahead of higher GST rates of 9% starting next year from 8% now. “We maintain our view that discretionary demand should outperform essential spending,” says Jaiswal.
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To tap this potential growth, RHB suggests investors add DFI Retail Group Holdings and CDL Hospitality Trusts (CDLHT) to its current list of top picks, which already includes Food Empire Holdings, Sheng Siong Group, Thai Beverage, United Overseas Bank, GGR, Wilmar International, Raffles Medical Group, Singapore Technologies Engineering, Marco Polo Marine, CapitaLand Investments, Centurion Corp, CapitaLand Ascendas REIT, ESR-LOGOS REIT, Keppel REIT, Singapore Telecommunications and ComfortDelGro. Referring to DFI and CDLHT, Jaiswal says: “The decline in share price brought the respective stocks’ valuations to more attractive levels. This, along with our expectation of a recovery in FY2024, supports our positive outlook for the share price of both stocks.”
Consumption recovery
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DFI Retail, more than any consumer stock listed on the Singapore Exchange, is seen to hinge its fortunes on the prowess of consumers from China. The Hong Kong-based company, itself a subsidiary of the Jardine Matheson conglomerate, not only operates various speciality shops selling cosmetics and healthcare and wellness products. Its supermarket brands are deemed daily essentials and so is its stake in local franchises of Starbucks coffee, a favourite of many office workers.
When China finally reopened its borders earlier this year, DFI Retail’s share price surged by more than twothirds in three months to as high as US$3.33 ($4.53) in February. However, it has since dropped by more than 10% year-to-date to trade at US$2.54 as of Sept 8.
“We believe this decline is due to less-than-impressive macroeconomic data from China and Hong Kong, in line with the recent weakness of China’s market indices and because of DFI’s exposure to China,” writes RHB analyst Alfie Yeo in his Aug 28 note, adding that North Asia accounts for 70% of DFI’s total revenue.
The most recent economic data out of China isn’t too cheery though. In particular, retail sales, industrial production and fixed asset investment for July all trailed market expectations. Both visitor arrivals from mainland China to Hong Kong and domestic supermarket sales also declined q-o-q in the latest June data.
“That said, China — in response — has implemented an 11-point plan to boost the domestic consumption of goods and services and stimulate the economy even while consumer confidence is cautious at present,” says Yeo.
He adds that while his colleagues at the economics desk acknowledge that China’s GDP is trending below expectations, they also expect China’s GDP following its re-opening to accelerate from 3% in 2022 to 4% and 4.5% in 2023 and 2024 respectively.
Nonetheless, Yeo is upbeat about DFI, on the premise of earnings growth driven by “sturdy” domestic consumption and a pick-up in tourism in Hong Kong. The additional lift will come from the continued post-pandemic reopening and recovery of Asean economies, where DFI has a substantial presence too, such as the Cold Storage and 7– Eleven chains in Singapore.
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On July 28, DFI reported earnings of US$8 million in 1HFY2023 ended June, reversing from a loss of US$58 million in the year earlier. “We are confident that the group is well positioned for growth in the remainder of the year and beyond,” says chairman Ben Keswick.
According to DFI, the recovery was driven by its convenience store and health & beauty segments in key Asean and North Asia markets. “Together with China’s accelerating economic growth and consumption stimulus measures in place, we expect its China unit — along with Yonghui Superstores — to improve next year, on the domestic demand recovery,” says Yeo, who expects outlet expansion, new products, and investment in back-end efficiency systems will supplement DFI’s overall growth and margins to help drive 18% CAGR in its FY2023 and FY2025 earnings.
Yeo notes that DFI is now trading at a more attractive valuation of 14x FY2024 earnings compared to its closest SGX-listed peer Sheng Siong’s 16x FY2024 earnings, and at –2 s.d. from its 10-year pre-pandemic historical mean. He has upgraded his call from “neutral” to “buy” while keeping the target price unchanged at $2.92.
Downside risks, the way Yeo sees it, include a slower-than-expected recovery in consumer spending and higher-than-expected costs, which should ultimately lead to lower margins and earnings.
Buying opportunity
Over August, CDLHT’s share price has dropped by more than 10% to $1.05 as at Sept 8, amid wider concerns over the impact of higher interest rates. From the perspective of Yeo’s colleague Vijay Natarajan, this recent drop is a buying opportunity for investors looking to re-enter the Singapore hospitality sector. Natarajan is upgrading the counter from “neutral” to “buy”, with an unchanged target price of $1.25 as he has revised his distribution per stapled security forecast for FY23–FY25 by –4% to 0% by fine-tuning RevPAR and interest cost assumptions.
As at June 30, CDLHT has an AUM of $3.1 billion and a portfolio across eight countries with a total of 19 operating properties and one under development. The portfolio consists of six hotels in Singapore, such as Grand Copthorne Waterfront Hotel, Orchard Hotel and W Singapore — Sentosa Cove, plus a retail mall, Claymore Connect, which adjoins Orchard Hotel.
In his Sept 5 note, Natarajan points out that there are signs that visitor arrival numbers have been showing signs of a rebound, with a month-on-month rebound of 26% in July, reaching 79% that of July 2019, just months before the pandemic started.
In particular, visitors from China, traditionally a leading market, doubled m-o-m in July to reclaim their position as the largest overseas visitor market from the Indonesians. “While the strong surge in Chinese visitors comes as a slight surprise amid China’s weakening economic outlook, it augurs well for Singapore’s tourism outlook,” says Natarajan, noting that Chinese visitors accounted for around 20% of total visitors before the pandemic.
On July 28, CDLHT reported net property income in 1HFY2023 ended June increased by 23.3% y-o-y to $62.9 million, on the back of a 20.9% increase in revenue to $119.2 million. Distribution per stapled security was 2.51 cents, up 23% over the 2.04 cents paid in 1HFY2022.
CDLHT’s revenue per available room or RevPAR hit a new high of $261 in July, up 20% over June, with a surge in island-wide hotel occupancy levels of 90% and persistently high room rates.
According to Natarajan, the outlook for the rest of 2023 and the first half of 2024 remains promising, driven by the full resumption of direct flights from China, the F1 races, and a strong pipeline of events including the Air Show 2024 and concerts such as Coldplay and Taylor Swift. “CDLHT is poised to ride the recovery with a high-quality portfolio of upscale hotels across the island,” he adds.
In addition, Natarajan expects CDLHT’s overseas properties to continue to do well. It owns hotels and other properties in the UK, Germany and Italy, where there is a recovery of travel as well as a robust event and exhibition pipeline. On the other hand, the REIT’s Maldives and New Zealand assets are expected to remain weak on the back of increased supply as well as cost pressures.
Natarajan notes that CDLHT has committed to forward the purchase of the upcoming Moxy hotel, Singapore, which is the redevelopment of Novotel Singapore Clarke Quay, for $475 million, or 110% of hotel development costs, whichever is lower. “We believe this hotel, which is expected to be completed by 2025, will be a good addition amid scarce market opportunities to acquire locally.”
While CDLHT’s low fixed-debt position of 48% makes it susceptible to high interest rates, Natarajan believes this is already priced-in at current share price levels of around 30% discount to book value of $1.41 per stapled security. He points out that with the gearing position “comfortable” at 37.9%, there is no imminent need for equity fundraising.
