Inflation has not been brought down to desired levels of around 2%. Central banks are therefore expected to keep rates higher for longer, which will extract a cost from earnings by businesses and cause a drag on economic growth. According to a Phillip Securities’ research team at a recent webinar on July 15, for Singapore’s economy, which is heavily reliant on exports, the slowdown means it makes sense for investors to try and “seek shelter” in counters giving relatively high dividend yields while looking for pockets of recovery, or new growth, such as hospitality.
Given the relatively bleak outlook, the biggest worry for investors is whether the three local banks, which together account for nearly half the weight of the Straits Times Index, can maintain their high margins given the compression widely seen. As such, the Straits Times Index (STI) is trading at a multiple that is at its lowest in a decade. “Nobody likes to buy low, everybody likes to buy high,” laments Paul Chew, the brokerage’s head of research.
In its latest quarterly 10-stock portfolio, Phillip Securities has dropped DBS Group Holdings, given the limited prospects of further earnings growth in the near term, adding instead Thai Beverage, on a bet that the counter, trading at a valuation lower than before the pandemic, will benefit from a broader rise in disposal income across Asean, where consumer wages have gained by around one-sixth to just below US$950 ($1,255) per month.
ThaiBev, another STI component stock, is now trading at just 12x earnings. In contrast, many other Thailand-based consumer stocks trade at more than 20x earnings, which Chew believes is because of investors worrying that the new Thai government might introduce new laws removing some of the existing curbs on selling alcohol, thereby causing further competition to the seller of Chang Beer and other drinks.
However, Chew is sceptical about this argument, as he believes ThaiBev, one of the largest food and beverage conglomerates in Thailand and other Asean markets, has already built up an extensive distribution network that makes it difficult for the competition to ramp up as and when they want. He has a target price of 80 cents on this stock.
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Chew is steadfastly keeping ComfortDelGro in the 10-stock portfolio, despite multiple quarters of relative underperformance of the stock. At current levels of $1.20 or so, the land transport operator is trading at its lowest level in around two decades and is seen to have a reasonable upside to its $1.57 target price.
Chew believes that investors were caught off guard at how big a hit ComfortDelGro had to take in operating buses in markets like the UK. Under current operating arrangements, the company has to fork up the additional costs first — specifically higher wages for its local workers — before negotiating with the UK authorities for “repricing” of the operating contract at one of the regular reviews.
Yet, ComfortDelGro has steadily built up its net cash from around $70 million in FY2019 ended December 2019 to around $700 million. Besides this cash hoard, which ought to function as a strong base for the share price, Chew sees changing consumers’ behaviour in booking than hailing cabs as a way for the company’s taxi fleet to generate higher earnings. Chew notes that the taxi fleet has dropped over the past few years as private hire cars steadily supplant taxis. Yet, ComfortDelGro is seeing some stability in its fleet numbers. It is also reducing rental rebates given to its taxi hirers while raising so-called “platform fees” for bookings, which is a growing and recurring income stream.
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Higher treasury income
Despite worries over how net interest margins are likely to see limited growth prospects, Glenn Thum of Phillip Securities still likes OCBC given its “extremely” high dividend yield which has further prospects of increasing. Among the three, OCBC has built up the highest CET1 capital ratio, which is highest above the optimal level of 12.5% and has not given any hint of making acquisitions. The bank is seen to enjoy recovery in fee income following not-so-ideal market conditions. It has recently announced a $3 billion incremental revenue target from its extensive presence in southern China as well. Thum, whose target price for this stock is $14.96, expects OCBC to give a yield that reaches 6% for FY2023 ending December, up from 5.5% now, and to further hit just below 7% come FY2024 if its share price stays at current levels.
Another stock favoured by Thum is Singapore Exchange (SGX). While trading volume is not exactly at its highest because of market sentiment, its relatively unknown treasury income generator should give SGX a boost to its overall earnings. According to Thum, who has an $11.71 target price on this stock, SGX is earning a growing interest income stream by holding some $14 billion in collateral balances. Thum points out that its treasury income reported for 1HFY2023 ended December 2022 reached $73 million, which is more than the whole of FY2022. Judging by how interest rates have moved, Thum estimates SGX’s treasury income for the coming FY2023 to be at least 20% higher than the previous year’s.
Phillip Securities has kept the same two REITs in its portfolio. The first, CapitaLand Ascott Trust (CLAS), with a target price of $1.26, is favoured for its upside from further recovery in travel. According to analyst Darren Chan, its RevPar has doubled since the depths of the pandemic and two major markets could see further strong recovery. China, which used to contribute 10% of the REIT’s revenue before the pandemic, now contributes only 2%, and Vietnam, which used to contribute 9% but is only 5% now. CLAS is trading at a forward yield of 5.8% and it has on its books some $300 million in divestment gains that have not been distributed. Chan believes part of this money will be used to maintain a consistent if not growing level of distribution.
The second REIT favoured is Frasers Centrepoint Trust (FCT), which has a target price of $2.35. Chan does not foresee significant appreciation in its unit price given its already all-time-high occupancy level amid this high interest rate environment. Furthermore, sales of its tenants might slow because of a gloomier economy. Nonetheless, Chan notes that FCT’s costs of operations have been very stable, translating into resilient distributions.
Property-linked plays
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A somewhat related play is City Developments (CDL). Although it has been hurt by the recent property cooling measures, its hospitality business, which constitutes around 30% of its assets, has been recovering. CDL, with a target price of $8.33, is also trying to grow a bigger recurring income stream with recent moves into private rental and accommodation for students. And CDL, of course, is trading at an attractive valuation of around half the revalued NAV in its books.
Chan believes that investors do not quite like CapitaLand Investments (CLI) given its heavy exposure to China, whose property sector remains in the doldrums. Chan expects new retail leases to be inked at lower levels although so-called “new economy” assets are seen to still do well. Nonetheless, CLI, with a target price of $4.12, has built up steady streams of income from managing the assets, which are worth around $89 billion although this is still below its earlier stated target of $100 billion.
Another property-related counter liked by Phillip Securities is property agency PropNex. From Chew’s perspective, while the number of new residential units to be launched this year is not as vibrant, it is still double from the whole of last year. The company holds some $150 million in cash and has no issue giving out dividends amounting to some $50 million, which translates into a yield of around 7%. Chew’s target price for this stock is $1.20.
Last but not least, the team has included Keppel Corp in the portfolio, whose share price enjoyed a strong lift year to date from its ability to capture better margins selling energy. Meanwhile, it is trying to be a “mini-me” CapitaLand by transforming itself from an asset owner into an asset manager and aiming to collect a bigger proportion of recurring fee income. Research manager Peggy Mak notes that Keppel now generates 38% of its earnings from asset management and should enjoy a re-rating if valuation is done using a P/E method, instead of RNAV, which always carries a discount. The asset management fee portion includes what Keppel can generate from its four existing REITs, which are under stress from higher interest rates but should recover when rates stop increasing. “We like to buy things when cold and sell when hot,” says Mak, who rates this stock $7.01.
