SINGAPORE (Dec 25): From the en bloc craze to meteoric spikes in tech stocks, 2017 has been coloured by significant asset price gains. Driven by the rally in blue chips, the Straits Times Index is up 18.5% in the year to Dec 18, a notable improvement from its 0.7% dip in 2016. With a recovery in commodity prices seemingly underway and persistent bullish sentiment in spite of geopolitical risks, the past year has been an upbeat one for investors.
Will 2018 bring sunnier skies for locally listed players? The Singapore equity market could deliver about 10% in returns next year with an “earnings recovery story”, says Suresh Tantia, assistant vice-president and investment strategist for Asia-Pacific at Credit Suisse. “In Southeast Asia, Singapore is the only market that offers cyclical exposure to a synchronised global recovery, because we are such an open economy and mostly dependent on exports. After two years of struggle, finally this year the Singapore economy is growing very rapidly.”
In 3Q2017, the Singapore economy grew 5.2% y-o-y — the fastest pace in nearly four years. The Ministry of Trade and Industry is forecasting growth of 3% to 3.5% for 2017. Selena Ling, head of treasury research and strategy at OCBC Bank, says 2017 kicked off with a recovery in manufacturing and electronics. Going forward, she believes the growth should extend to the services sector. “If you look at the Business Expectations surveys, the services sector was lagging for quite a period of time. Finally, in the last quarter or so, it has overtaken manufacturing. That gives us a bit of comfort [that] next year’s growth may be better than this year’s. Among the services, financial services and tourism-related services will be the front runners.”
Betting on the banks
This year, the US Federal Reserve hiked the benchmark federal funds rate three times. Another three hikes are expected next year. The Monetary Authority of Singapore (MAS) may now have to “play a bit of catch up”, given the global rising interest rate environment, says OCBC’s Ling. “We have already started to see the Sibor [Singapore Interbank Offered Rate] start to move up coming into the year-end, fairly close to our 1.25% forecast. And we think that next year, it can move easily another 30 basis points,” she says.
Given the expectation for higher interest rates, analysts are optimistic about local banking stocks. The sector is the top pick of Phillip Capital head of research Paul Chew. In his report, he says: “A genie could not have granted Singapore banks as many wishes. The five wishes are rising margins as interest rates improve, better asset quality, loan volumes’ rebound, a possible special dividend and new revenue stream from wealth management.” He reckons DBS Group Holdings will produce earnings growth at an attractive valuation after a “spring clean of its oil and gas (O&G) exposure in 3Q2017 to eliminate as much uncertainty as possible in its balance sheet”. He also expects Oversea-Chinese Banking Corp and United Overseas Bank (UOB) to clean up their balance sheets by the start of next year.
RHB Research Institute Singapore analyst Leng Seng Choon is slightly more cautious. In a report, he notes that Singapore banks’ strong share price performance this year could limit upside. But he does expect the banks to benefit further from rate hikes, with DBS’s earnings being the “most sensitive” to the uptrend in Sibor. His top pick, however, is UOB, due to its “large exposure to the residential mortgage market and strong balance sheet”.
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Within the financials sector, RHB’s Leng also likes the Singapore Exchange. The bourse has seen 19 IPOs as at Nov 30, which have raised about $4.6 billion. Leng expects the strong IPO activity to continue next year. He also forecasts SGX’s FY2019 securities daily average value rising to $1.39 billion.
Going for yield
Interestingly, the prospect of steeper interest rates has not quenched optimism for defensive yield plays. Singapore Telecommunications (Singtel), Venture Corp and Singapore Technologies Engineering (ST Engineering) remain the top picks for 2018.
Although the telecommunications space faces increased competitive pressures from the entry of a fourth telco, DBS Group Research analyst Sachin Mittal remains sanguine about Singtel’s prospects. He notes that the stock is trading at 5.6 times its projected FY2018 enterprise value to earnings before interest, taxes, depreciation and amortisation. This is an “unsustainable” 20% to 40% valuation discount to its peers, Mittal says. While investors may be deterred by the losses at Singtel’s digital businesses, Mittal says the core and digital businesses should be valued separately. “In our view, robust digital offerings on top of network access will be a major competitive advantage in the Internet of Things era,” he adds.
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DBS also likes Venture, which the research house reckons is at “the forefront of innovation”. “Fuelled by a positive industry backdrop and excellent execution, Venture’s share price has gained over 95% year to date in 2017, but we believe there is still room to run as it continues to deliver superior earnings performance,” the research house says in its report. Carmen Lee, head of OCBC Investment Research, also sees Venture as one of the “clear winners” of 2017.
RHB analyst Shekhar Jaiswal says ST Engineering’s combination of commercial and defence work is a “defensive model that is tough to beat”. In his report, he says: “We believe rising demand for [passenger to freighter] conversions and spending on Smart Nation initiatives should support the aerospace and electronics growth in the near term. ST Engineering’s investment in robotics would lay the foundation for sustained growth for land systems in the long term.”
Property a clear favourite
Collective sales hit a peak of 21 deals worth $6.8 billion as at Nov 30. Private residential property prices inched up 0.7% in 3Q2017, after 15 consecutive quarters of decline. Now, analysts are predicting an uptick in rentals next year. Eli Lee, senior investment analyst at OCBC Investment Research, says: “For the first time in over four years, the physical addition of the number of units being completed in Singapore — both [Housing Development Board] and private — is going to be below the growth of the population’s needs. This is what’s going to be driving rentals up.”
After MAS issued a note of caution this month about rising property vacancy rates, there has been some speculation that the government may move to cool the property market. But Eli thinks this is unlikely. “Housing prices in Hong Kong, China and the US have appreciated over the last few years, while Singapore has had falling home prices. We have really been going against the market in terms of housing trends. So there is some scope for housing prices to go up, without too much intervention from the government next year.”
Eli sees City Developments as a beneficiary. “It is very strong in the domestic market with an abundant landbank. Despite diversifying into overseas markets in the last few years, which is a great move, they still have more than half of their exposure in Singapore. They have been careful to retain this.” He also likes UOL Group for its active acquisition of new land. “They have been very disciplined in acquiring land over the last few years of the downcycle. Unlike some of the other developers that are dry on landbank, UOL has [about] 1,000 units ready to be launched over the next two to three years.”
Among the real estate investment trusts, Phillip Capital analyst Richard Leow likes office and industrial property owner Ascendas REIT. “The current oversupply of industrial space is a concern, but supply is tapering in 2018,” he says in a report. “Taking the tapering supply in context with the uptick in industrial activity leads us to believe that rents will bottom by the end of 2018.”
RHB analyst Vijay Natarajan favours Manulife US REIT, a pure-play on US office properties. The stock was trading at 92 US cents as at Dec 20, up 10.8% from its IPO price of 83 US cents — suggesting that interest may have picked up since its lacklustre debut last year. He says the REIT is a good proxy to US economic growth and rising office demand. “[Distribution per unit] growth for 2018 would be driven by contributions from recent acquisitions and positive rent growth. We expect rent reversions to stay positive in the mid-single digits,” he says in his report.
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OCBC Investment Research analyst Andy Wong remains positive on mall owners like Frasers Centrepoint Trust, despite the competition that physical retailers are facing from e-commerce. “These REITs own good-quality assets that are located near transport nodes and local catchment areas within the residential space, like Causeway Point,” he says. Wong points out that Chinese e-commerce giant Alibaba Group Holding has pumped US$2.9 billion ($3.9 billion) into Chinese hypermarket operator Sun Art Retail Group. “[Alibaba] believes that both physical and retail can co-exist; it doesn’t have to be a zero-sum game. We agree with that,” he says.
Good omens for commodities
The O&G sector has been beaten down since mid-2014, as oil prices tumbled following a boom in US shale production. But a rebound in oil prices is now projected. OCBC’s Ling is forecasting that both WTI and Brent crude prices will recover to US$65 a barrel by the end of next year. And analysts believe the worst may be over for Keppel Corp and Sembcorp Marine (SembMarine).
OCBC analyst Low Pei Han believes SembMarine has adjusted well to the lower oil price environment. She cites the company’s sale of nine jack-up rigs to Borr Drilling for US$1.3 billion in October as cause for confidence. “We see SembMarine being able to offload its nine rigs as very supportive. Finally, this burden on the balance sheet will be removed and you get the cash flow from those rigs,” she says. Low does not expect new contracts for drilling rigs, as there is still an overcapacity. But she is expecting orders related to the liquefied natural gas sector.
UBS research analysts Cheryl Lee and Rachael Tan like Keppel, given its diversification into property and infrastructure. “Keppel’s sensitivity to order book changes is small at the net profit level, because of the high growth from the property and infrastructure contributions in recent years,” they say in a report. They also comment: “Valuations have moved above one times price-to-book value for Keppel and SembMarine. But there could be upside to consensus estimates if order momentum is strong, and we think the market will focus on this as a share price driver.”
Also in the commodities space, RHB is recommending Golden Energy and Resources. The coal miner has lost 19.1% of its value this year, but RHB is confident that GEAR’s prospects will improve as the company increases its production. GEAR is targeting to produce 18 million tonnes of coal next year. For FY2017 ended Dec 31, its production target is 14 million tonnes.
Small-cap gems
While focusing on the big names, analysts are also watching out for small-caps with hidden potential for upside next year. One is APAC Realty, which operates a real estate brokerage. DBS sees it as a good proxy to the real estate rally next year, but analyst Yeo Kee Yan cautions that the business model of real estate agents may be disrupted by technology over the long term. “There is a risk that transactions could be done without an agent being involved. With the younger generation, there may be a trend that they could just go online and try to buy and sell property themselves,” he says.
With the middle class growing in Southeast Asia, RHB analyst Juliana Cai has an “overweight” call on consumer names with regional exposure. Her top pick is convenience food manufacturer Food Empire Holdings. As oil prices rise, the Russian economy is expected to do better. Food Empire’s largest market is Russia. An improvement in Russia’s economy could also prop up the Russian ruble, which could help Food Empire’s margins. “Margin expansion would also arise from the increased profitability of upstream projects, while new markets such as Myanmar and China would continue to fuel volume growth. Currently, the valuation is still undemanding at 12 times,” she adds.
RHB’s head of small- and mid-caps Jarick Seet is bullish on newly listed HRnetGroup, which was trading at 76.5 cents as at Dec 20 — 15% below its IPO price of 90 cents. He reckons the regional growth potential of the recruitment firm may be underappreciated by investors. On Nov 9, the company signed a binding term sheet to acquire Indonesian recruiter Rimbun Job Agency, as part of its expansion plans in Southeast Asia. “With the first [memorandum of understanding] announced on HRnet Rimbun and $280 million of net cash, we expect more acquisitions to follow in 1Q2018 to 2Q2018... which would likely boost [earnings] significantly,” Seet says in a report.
