Singapore Stock Alpha Picks - UOB Kay Hian 2018-02-02: Strong Start To 2018; Reflation And Cyclical Recovery Plays Stand Out


Singapore Stock Alpha Picks - Strong Start To 2018; Reflation And Cyclical Recovery Plays Stand Out 

  • Our alpha picks performed well in January, particularly the reflation and recovery picks. We see further potential upside in our target prices for these stocks.
  • Otherwise, we add DBS and remove Thai Beverage.


Reflation and cyclical recovery picks outperformed in January. 

  • Our reflationary and cyclical recovery picks such as Keppel Corp, SIA, CDLHT, Wing Tai and City Developments delivered solid returns (+6-18%) compared to the 3.9% m-o-m rise in the FSSTI in January 2018. However, Thai Beverage (0% m-o-m) and Singtel (-0.8% m-o-m) underperformed. 
  • For Thai Beverage, the market did not view its investment in Sabeco positively while SingTel was relatively flat as the market opted for higher beta and recovery plays to ride the bullish sentiment.


Add DBS and remove Thai Beverage; current picks could also see a rise in target prices. 

  • DBS is our latest addition to our Alpha Picks. While OCBC remains our top banking sector pick, we think DBS could offer more tactical upside being the beneficiary of rising interest rates as well as a potential positive surprise from a review of its dividend policy. 
  • We remove Thai Beverage from our list as its near-term performance could be hampered by sentiment overhang from the Sabeco acquisition. Otherwise, we are sticking to our reflation and cyclical recovery plays as we expect our target prices for these stocks could stretch upwards as corporate earnings pick up momentum or asset prices continue to rise. 
  • Our key picks are City Dev, Wing Tai, Keppel Corp, SIA, GL and CDLH-T.

DBS – BUY (Jonathan Koh)

  • A second review of dividend policy. We expect management to review DBS’ dividend policy, given that Basel III reforms were already finalised in Dec 17. DBS has a robust fully loaded CET-1 CAR of 13.6%. We expect management to disclose the new dividend policy when DBS announces 4Q17 results on 8 Feb 18. 
  • Beneficiary of rising interest rates. While the Fed has maintained the federal funds rate at 1.25%, the FOMC now expects inflation to move up in 2018 (previous statement: remain below 2% in the near term) and stabilise at around the medium-term objective of 2%. The odds of a rate hike in March have increased to above 90%. The recent rally in crude oil prices could also put the FOMC on guard against a rise in inflationary expectations.

Share Price Catalyst

  • Event: Results announcement on 8 Feb 18 and FOMC meeting on 20-21 March.
  • Timeline: 3 months.

Keppel Corp – BUY (Foo Zhi Wei/Andrew Chow)

  • Resolution of legal uncertainties over its involvement in corrupt payments in Brazil.
  • Infrastructure and investments are expected to drive growth in the next few quarters. Recurring profits will be underpinned by rising AUM at Keppel Capital.
  • Keppel is the cleanest proxy to the O&M recovery, with solid financials (2018F net gearing of 55%)
Share Price Catalyst
  • Event: Positive newsflow from contract wins and further de-leveraging from O&G assets.
  • Timeline: 6-12 months.

SIA – BUY (K Ajith)

  • Early signs of pax yield improvement. While SIA has yet to release data on yields, Taiwanese carriers have reported 4-6% yoy increase in pax yields for Oct-Dec 17, which underscores an improving yield environment for Asia Pacific carriers
  • SIA’s 3QFY18 load factors were the highest in eight years, underscoring strong demand. Ongoing cargo recovery will aid profitability. Cargo load factors in 3QFY18 were at the highest in 12 years. This coupled with a recovery in cargo yields should lead to strong 3QFY18 earnings. In comparison, Taiwanese carriers reported 15-22% yoy increase in cargo yields over the same period.
  • Potential headwinds include a proposed 30% increase in airline parking and landing charges at Changi Airport, and a strong Singapore dollar.
  • Valuing SIA on an SOTP basis, with SIA-ex SIAEC valued at 0.9x FY18 book value, we have a target price of S$11.90.

Share Price Catalyst

  • Event: 3QFY18 results and improving yields.
  • Timeline: Release of 3QFY18 results on 13 Feb 18.

City Development – BUY (Vikrant Pandey/Loke Pei Hao)

  • Proxy to ride on the Singapore residential recovery (40% of GAV), with the largest residential landbank of more than 2,090 attributable units.
  • Beneficiary of stock rotation in the real estate space as GLP was privatised in Jan 18.

Share Price Catalyst

  • Event: Rotational interest from GLP privatisation in Jan 18.
  • Timeline: Positive newsflow on Amber Park launch and projects within the vicinity next year.

CD REIT – BUY (Vikrant Pandey/Loke Pei Hao)

  • CDREIT’s Singapore hotel operations (accounting for 56.8% FY17 NPI) to benefit from:
    1. a recovery in corporate travel; b) Chinese visitor growth; and c) tight supply pipeline. Hotel room supply is limited beyond 2017, with only 769, 1,664 and 392 new rooms coming on stream in 2018, 2019 and 2020 respectively (2017: 2,868).
  • Its Singapore hotels saw a 1.2% yoy increase in ADR to S$186 in 4Q17, despite a 0.1ppt drop in occupancy, resulting in 1.1% increase in Singapore RevPAR.

Share Price Catalyst

  • Event: Positive data points on visitor arrivals, ALOS, ADR, RevPAR and supply pipeline.
  • Timeline: 1H18.

GL – BUY (Edison Chen/Yeo Hai Wei)

  • BUY with a SOTP-based target price of S$1.185.
  • Owner of prime hospitality assets, with over 4,700 hotel rooms in London.
  • Potential streamlining of assets, including disposal of non-core businesses.

Share Price Catalyst

  • Event: Sale of non-core businesses including Clermont Casino (UK) and Molokai, Hawaii land. Another potential catalyst is privatisation.
  • Timeline: Potential asset disposals in the next 6-12 months.

Singtel – BUY (Jonathan Koh)

  • Telkomsel continues to maintain double-digit growth in subscriber base and revenue growth from voice and data. Bharti should start to recover in FY19 due to industry consolidation (Bharti merged with Tata Teleservices’ consumer mobile business).
  • The group is least affected by a fourth mobile operator in Singapore as overseas businesses account for about 70% of its bottom line. BUY with DCF-based target price of S$4.53 (6.1% required rate of return, 1.5% terminal growth).

Share Price Catalyst

  • Event: Fund flow into laggards, including Singtel which offers good dividend yield.
  • Timeline: Better-than-expected 3QFY18 results on 8 Feb 18.

Wing Tai – BUY (Vikrant Pandey/Loke Pei Hao)

  • BUY with target price of S$2.78, pegged at a 20% discount to RNAV of S$3.48/share. Wing Tai is trading at 0.54x 2017F P/B (lowest within our coverage) and a deep 39% discount to RNAV.
  • At a net gearing of 2.4%, Wing Tai is well positioned to deploy its sizeable debt headroom of S$1.5b (assuming comfortable net gearing level of 50%). We believe Wing Tai will further deepen its footprint in Singapore, Malaysia (post privatisation completion) and Australia.

Share Price Catalyst

  • Event: Launch of the recently-acquired Serangoon North Avenue 1 site. We also see potential for Wing Tai to buy more landbank given its S$1.5b acquisition headroom.
  • Timeline: Potential 6-9 months for landbank acquisition or launch of its Serangoon North Avenue 1 site.

Citic Envirotech – BUY (Edison Chen/Nicholas Leow)

  • Placement of 83.2m new shares at a 14.8% premium reaffirms our view that Citic looks undervalued.
  • Recent contract win of Rmb4.2b should provide investors more assurance over its medium-term prospects as well as earnings visibility.

Share Price Catalyst

  • Event: Potentially more contract wins that could underpin FY18 earnings growth.
  • Timeline: 3-6 months, as clean water is a high priority for the Chinese government. This would benefit the company, which has an impressive track record and technology.

Singapore Research UOB Kay Hian | http://research.uobkayhian.com/ 2018-02-02
BUY Maintain BUY 29.500 Same 29.500
BUY Maintain BUY 4.530 Same 4.530
BUY Maintain BUY 2.780 Same 2.780
BUY Maintain BUY 1.090 Same 1.090
BUY Maintain BUY 1.185 Same 1.185
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.950 Same 1.950
BUY Maintain BUY 15.300 Same 15.300
BUY Maintain BUY 9.300 Same 9.300
BUY Maintain BUY 11.900 Same 11.900

* Alpha Picks denotes a timeframe of 1-3 months and not UOBKH’s usual 12-month investment horizon for stock recommendation.