CGS-CIMB Research analysts Lim Siew Khee and Jeremy Ng deem the Straits Times Index (STI) as currently “oversold” following its sharp selloff in November, resulting in a 4.91% dip.
This means the index could be bottoming out soon, write the analysts in a Nov 30 Singapore strategy report.
“The last time the STI was oversold, a rebound happened almost immediately in October 2020, leading to a 14% rebound over the next four weeks,” note the analysts.
To this end, they expect the STI’s support area of 3,000 to 3,050 points to “hold once again” and eventually bring the index back into an uptrend.
“Watch out for bullish price action near the 3,000–3,050 support area to signal the bottom and the next leg higher will likely see a retest of the 3,250 resistance. However, if the 3,000–3,050 fails to hold, the next support to watch for a rebound would be near the 2,870 level,” they write.
In November, Singapore’s gross domestic product (GDP) was back to pre-Covid-19 levels, till the markets went “risk-off” as Omicron was introduced into the world.
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“Much is yet unknown about this new(er) variant apart from increased transmissibility; hence, the severity of the impact is still undetermined,” say the analysts.
Amongst the sectors, the analysts add that recovery remains uneven. “Manufacturing, Finance and IT [have shown] resilience, while tourist-oriented sectors [such as] Accomodation and F&B have languished,” they say.
In a separate report on Dec 3, Lim writes that a domestic lockdown amid the Omicron variant is “unlikely” for the time being.
The STI had declined some 6% over the week after news of the new variant broke, mimicking the Delta variant trend in March 2021.
However, Lim feels that “in the very short term, market momentum is likely to lose steam.”
“The period ahead calls for selective stock-picking, in our view, rather than over-hyping the gloom. We want to play the bounce in market and also look for outperformers in a sell-down market,” she adds.
That said, Lim sees the reopening of the economy as “inevitable” albeit it may be a “slow grind”. On this, investors should be prepared to position themselves for a “bounce in [the] market”.
While timing the markets during the period is “utterly impossible” this season given the intermittent stop-start border reopenings, the base case will not be as bad as the levels seen during the January to March 2020 period.
This is given that governments and corporates have been dealing with the outbreak for almost two years and are now more prepared to deal with the spread of the new variant, notes Lim.
In their Nov 30 report, Lim and Ng have kept their STI target for end-FY2022 at 3,752 points, based on 14 times price-to-earnings (P/E), with a historical mean supported by 12% earnings per share (EPS) growth. However, in her Dec 3 report, Lim says her base case target for the STI as at end-2022 now stands at 3,506 points (or -0.5 standard deviation of its 10-year mean).
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This is due to the possibility of new variants being introduced.
In 2022, investors should focus on the following themes: oversold reopening stocks, “survivor of the fittest against inflation”, stocks with earnings growth and value picks, says Lim.
Oversold reopening stocks
In her Dec 3 report, Lim has identified five counters that may be oversold.
That said, she cautions that these reopening stocks are “on the mend for a rally” at present, although it is still an “opportunity to bottom fish reopening stocks that have been punished in the past week”.
“In particular, sectors that are direct proxies for general domestic and border reopening hope such as airlines, airport services, land transport, and gaming,” she says.
The five counters are (in order of preference): Genting, SIA Engineering, SIA, ComfortDelGro (CDG) and SATS.
Lim was previously sanguine on Genting in her last strategy note as it was trading at 8 times FY2022 EV/EBITDA, close to its 2015 valuations. Now, the counter is trading at 7 times FY2022 EV/EBITDA, which is a “more palatable entry price” with a “big upside in a normalised situation”. Genting has an “add” call with CGS-CIMB and a target price of 95 cents.
SIA Engineering was Lim’s reopening laggard pick that did not perform as well as SIA, she says.
“We believe this could be due to its liquidity and limited corporate access issues. Our thesis on SIA Engineering remains, i.e. that the recovery in air traffic, and return of mothballed aircraft to service would lead to increased need for SIA Engineering’s maintenance, repair and overhaul (MRO) services,” she writes.
“Our FY2023 net profit forecast is conservatively based on 38% of its pre-Covid level in FY2020, with potential upside from positive surprises,” she adds. SIA Engineering has an “add” call with a target price of $2.92.
SIA was recently upgraded by CGS-CIMB to “add” after the Omicron-driven sell-off. Lim also notes that the take-up rate for vaccinated travel lanes (VTLs) have been strong since its launch in September, which is another plus for the counter.
“Potential re-rating catalysts for SIA include the rapid expansion of the VTL scheme and strong year-end airfreight markets, as that should result in SIA delivering a strong 3QFY2022. The stock trades at a low 0.7 times FY2023 price-to-book (P/BV), close to -2 standard deviation from its 10-year mean,” she says. SIA has an “add” call with a target price of $5.86.
CDG’s near-term potential re-rating catalysts include the removal of its STI exclusion overhang as well as faster border and economic reopenings for the UK and Singapore, says Lim. CDG has an “add” call with a target price of $1.80.
SATS is currently trading above its 15-year average P/BV, which is its pricing in a pre-pandemic environment. “We believe this could be due to over-optimism of travel recovery and underestimation of its high handling costs. Nevertheless, we would keep SATS in our watchlist to buy on dip,” says Lim. SATS has an “add” call with a target price of $4.32.
Survival of the fittest in a rising cost environment
Amid inflation risk and high input cost, certain non-banking corporates preserved their margins in 2021 due to stronger demand growth and partial government handouts.
“There are pockets of hope for margin expansions for corporates which have the pricing power or have embarked on some structural changes in the past two years,” says Lim.
Among the large caps, Lim is positive on Keppel Corporation for its accelerated monetisation of its assets; AEM on stronger orders and City Developments Limited (CDL) for its “favourable product mix with higher margin from rental income”.
In addition, Lim also highlighted the potential of Boustead Projects seeing normalisation in its margins as more pre-pandemic contracts are executed.
“Credit Bureau Asia could also see margin expansion on continued volume of bulk risk reviews for financial institutions (FIs) as well new digital banks,” she says.
Sectors that have enough growth to buffer for earnings cuts
Despite the expectations that Singapore’s corporates would see their earnings growth taper in FY2022, Lim has estimated that they would register a “decent” 14% y-o-y growth.
The growth is at the higher end of corporates’ normalised growth in the past 10 years, with the exception of “shock years”.
“Other than [the] pandemic-stricken Transport sector that could see 100% y-o-y growth in earnings, we stay ‘Overweight’ on sectors that post double-digit earnings growth, with room to buffer earnings miss, if any,” she writes.
On this, Lim is buoyant on the Tech sector, estimating that we could see a “three-year super-cycle” with three-year average growth of 14% through to FY2023 on the back of strong demand orders.
Telco is another sector, which could emerge as the “underdog” in FY2022, with earnings swings of 24% in FY2022 from 5% in FY2021.
“This is on the back of expectations of a continued turnaround for Singtel’s associates, Bharti and Telkomsel on easing competition, as well as a gradual recovery in roaming revenue in Singapore,” says Lim.
“Downside to our preference is the allocation of funds to Sea Ltd (same communication sector categorisation in MSCI Singapore) which could have higher weightage of up to 30% in the next review as its free-float adjusted market capitalisation rises to 100% by March 1, 2022 vs. Singtel’s 6%,” she adds.
Finally, a 14% earnings growth in the Consumer sector is achievable in FY2022, mainly thanks to Thai Beverage (ThaiBev), which has seen a “good recovery” on the back of easing social restrictions in September 2021.
“The key downside risk is if the Omicron variant of the Covid-19 virus turns out to be more virulent and dangerous than expected. We believe that a reopening of domestic pubs, bars and karaoke is likely by 1QFY2022. The other factor that could benefit ThaiBev is continued price hikes over the next two quarters,” notes Lim.
The STI closed 9.82 points higher or 0.32% up at 3,101.93 points on Dec 3.
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