Singapore Top Picks for 2017 - RHB Invest 2017-01-03: Look For Quality Amidst A Lacklustre Outlook


Singapore Top Picks for 2017 - Look For Quality Amidst A Lacklustre Outlook

  • Despite Singapore’s lacklustre macroeconomic outlook, our covering analysts believe that the country offers some strong investment ideas. We classify the identified stocks under following four categories: 
    1. Stocks that offer quality and sustainable growth in earnings; 
    2. Stocks that may do well in 2017 subject to certain key criteria being met; 
    3. Bottom up stock selection in the Singapore REITs space; 
    4. Quality names in the small cap space that can deliver strong earnings growth.

Quality and sustainable growth 

  • Dairy Farm (DFI SP, BUY, TP: USD8.60), the largest retailer in Asia ex-Japan, has a strong market presence in China, Hong Kong, Taiwan, India and ASEAN. Its retail categories are mainly in groceries, convenience and personal care – which are likely to see less disruption from e-commerce. Its food division’s margins have lagged its peers and the group’s recent investments in fresh food distribution in Singapore and Malaysia should drive margin expansion in the medium term. Rationalisation of unprofitable stores post recent country-level changes in management may also support higher profitability in 2017. The market seems to be undervaluing the stock, despite its strong cash flow generating capability and steady >3% dividend yield. We believe the stock would re-rate once the company starts delivering consistent improvement in earnings during 2017.
  • City Developments (CIT SP. BUY, TP: SGD9.36), which has demonstrated a strong ability to monetise assets via the profit participation securities (PPS) structures, has witnessed improvement in its gearing levels to below 20%. We believe this would allow the Singapore-based property developer to engage in more sizeable acquisitions during 2017, thereby capitalising on the current market weakness. Strong sales at its new launches in 2016 also demonstrate its excellent project management capabilities amid tough market conditions. We believe that the current share price grossly undervalues its diversified market presence, steady recurring income portfolio and its established platforms to recycle capital.
  • ComfortDelGro (CD SP, BUY, TP: SGD3.24), Singapore’s leading public transport operator, is a company that we have renewed conviction on, especially post its recent share price correction. After assessing the likely threats from rising competitive intensity in Singapore’s taxi industry, we believe that while there are still some lingering risks for ComfortDelGro, the stock has already priced in most of the risks. Moreover, its core bus operation in Singapore, which was originally loss-making, should start generating 7-8% EBIT margin in 2017 under the new government contracting model (GCM) for public buses. ComfortDelGro’s well-diversified business and geographic presence should shield the group from a slowdown in the Singapore economy. With a net cash balance sheet and strong cash flow generation, ComfortDelGro also offers a likely case for an increase in dividend payout in the medium term. We estimate its 2017 yield at 4.9%.

Probable themes for 2017 

  • Although Keppel Corp (KEP SP, BUY, TP: SGD6.52) has had a tough 2016 amidst the sharp decline in oil prices, we believe a reversal in the oil prices trend during 2017 should support gradual recovery in the company’s earnings in the medium term. We expect crude oil prices to average USD60 per bbl in 2017, and going forward. This price level should incentivise oil majors and upstream players to kick-start long-delayed exploration activities and renew demand for exploration and production vessels that are manufactured by Keppel. Keppel seems to be well covered for the risks related to Sete Brasil and we assess that the SGD230m provision for Sete Brasil taken in 4Q15 is adequate. We also see value in its property and infrastructure businesses, which would continue to provide earnings support. At its current share price levels, we estimate that investors are valuing Keppel only on its property, infrastructure and investment segments.
  • Raffles Medical (RFMD SP, BUY, TP: SGD1.76), Singapore’s largest private healthcare service provider, should continue to benefit from the rising healthcare requirements of a rapidly ageing Singapore population, and the ongoing shortfall of public healthcare services in the country.
  • However, we see 2017 as a key year for Raffles Medical, as it is set to deliver strong 27% net profit growth aided by: 
    1. Improved rental income, as the majority of the tenants at its Holland Village Medical Centre would have moved in by early 2017; 
    2. Turnaround in operating profits of the medical centres for International SOS, Raffles Orchard and Raffles Holland V;
    3. Higher patient load factor for its Singapore hospital operations by end-2017, once Raffles Hospital extension is completed in 2H17.


  • We believe that an uncertain macroeconomic environment and slow growth phase should support investments in Singapore REITs during 2017. While some investors may be concerned about the impact from expected rise in fed fund rate in 2017, an yield spread of 430bps over 10 year government security, which is above the average levels, seems to suggest that Singapore REITs have largely factored in the impact of a 50bps fed fund rate hike next year. 
  • In the REIT space we prefer exposure to following stocks: CapitaLand Commercial Trust (CCT SP, BUY, TP: SGD1.68). Despite headwinds facing Singapore’s office sector, we expect CapitaLand Commercial Trust to do well in 2017 as the following growth catalysts are now in place for the company: 
    1. Potential redevelopment of Golden Shoe Car Park (GSCP) into prime Grade-A office space; 
    2. Potential stake sale in One George Street allowing it to recycle capital; 
    3. Yield accretion from AEI works at Raffles City shopping centre.
  • We estimate that the sale of the 50% stake in One George Street could raise SGD550- 600m in proceeds, which in turn could be deployed for the redevelopment of GSCP without the need for any equity issuance. CapitaLand Commercial Trust’s portfolio occupancy stands at 97.4%, and only about 1%, 6% and 13% of office leases (as a percentage of net lettable area) are due for renewal in 2016, 2017 and 2018 respectively. This ensures that the company would be able to well navigate the challenging office market in 2017.
  • Manulife REIT (MUST SP, BUY, TP: USD0.96) is the only listed REIT in Asia offering the best proxy to the rebounding US economy and strengthening USD via its three office properties in the USA. Its yields are well above those of its Singapore peers and its leases have inbuilt rent escalation clauses averaging 3% pa, providing strong visibility on DPU growth. While the US Fed Funds rate hike generally has a negative impact on yield instruments like REITs, we believe the impact on Manulife REIT may be mitigated, as it would coincide with a pick-up in the US economy and office demand.
  • With a 97% portfolio occupancy rate, the REIT has a long weighted average lease to expiry of 6.1 years. We believe there is scope for more assets to be acquired, as its sponsor, Manulife Group, has total assets under management of USD718bn – of which US office assets account for > USD6bn.

Quality names in the small cap space 

  • RHB has been the pioneer in small cap research. Our award winning research team has been well recognised by investors as the top small cap research team for multiple years. Jarick Seet, our head of Singapore small-and-mid-cap research, expects the following two stocks to generate strong returns for investors in 2017.
  • Spackman Entertainment Group (Spackman Entertainment) (SEG SP, BUY, TP: SGD0.32), which is a top-tier South Korean movie producer, should deliver 180% earnings growth in 2017 amidst: 
    1. Resounding success of its recently released movie Master; 
    2. The unlocking of value from the sale of its stake in Spackman Media Group (SMG) – the largest entertainment talent agency in South Korea; 
    3. About a 70% reduction in operating costs post divestment of its loss-making Opus Pictures division.
  • We estimate Spackman Entertainment’s 27.2% stake in SMG at USD45m, which is about 85% of the former’s current market cap. The sale of stake in SMG could lead to share buybacks or payment of special dividends.
  • Singapore Medical Group (SMG SP, BUY, TP: SGD0.63), a private healthcare service provider in Singapore, has recently acquired Astra Women’s Specialists group, which offers five years of net profit guarantee and six years of service agreement. The acquisition, which bumps up the post-tax net profit by SGD4.6m pa over five years, would enable SMG to deliver 290% net profit growth in 2017. We believe SMG is capable of undertaking many more such acquisitions in Singapore, as the firm continues to consolidate the specialist medical private fields in Singapore.

Shekhar Jaiswal RHB Invest | http://www.rhbinvest.com.sg/ 2017-01-03
RHB Invest SGX Stock Analyst Report Singapore Stocks To Buy

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