Small Mid Caps Stocks Singapore - RHB Invest 2018-06-27: Top Picks For 2H18

Small Mid Caps Stocks - RHB Invest 2018-06-27: Singapore Top Picks For 2h18 Top Stock Picks 2018 H2 Singapore Small Mid Cap Stocks KIMLY LIMITED SGX:1D0 HRNETGROUP LIMITED SGX:CHZ SILVERLAKE AXIS LTD SGX:5CP GSS ENERGY LIMITED SGX:41F MOYA HOLDINGS ASIA LIMITED SGX:5WE

Small Mid Caps Singapore Stocks - Top Picks For 2H18

  • Maintain OVERWEIGHT with HRnetgroup, Silverlake, Kimly, GSS Energy and Moya as Top 5 Picks.
  • The markets have experienced a turbulent 1H18. Technology, oil & gas and property-related stocks have corrected significantly, especially in 2Q18. 
  • We believe that technology/manufacturing stocks should likely continue to suffer de-rating of valuations from slower-than-expected growth and potential trade war implications, which have impacted them since March. Thus, even after the selldown, we are NEUTRAL on the technology sector and are only positive on a few stocks.

Manufacturing Stocks Rout

Trade war and slower growth lead to de-rating

  • Since Donald Trump initiated a possible trade war against China and its other key deficit trading partners in March – commencing with a 10% tax on all aluminium imports and a 25% tariff on steel – there has been downward pressure on share prices, especially manufacturers in the Singapore technology space.
  • There was a slight reprieve in May, when both China and the US met for talks with the aim of avoiding a trade war and reduce the Chinese trading deficit with the US. However, talks were inconclusive, which led to a further escalation of a potential trade war.
  • The US imposed a 25% tariff on USD50bn worth of Chinese goods, which was reciprocated on the same scale by China on 15 Jun.

Manufacturing stocks corrected 30-60% since March

  • Since the 10% tax on all aluminium imports and 25% tariff on steel was implemented, manufacturing stocks in Singapore have corrected about 30-60% from March highs. 
  • The average sector P/E has also decreased from 11x in 2017 to about 8x FY19F

The worst is not over

  • With the trade issue still unresolved and potentially worsen, especially with other countries including China, it is possible for a further de-rating before bottoming out. This is especially when the average sector P/E was just 4-5x in 2016 before the massive tech surge in 2017. 
  • Most of the manufacturing players are also experiencing a slower growth rate, as 2017 was an exceptional year. Their earnings might also be impacted by global events and the trade war worsening.
  • As a result, we are NEUTRAL on the sector and prefer Valuetronics in the small-mid cap manufacturing space, especially if there is any uplift in the sector. Investors can take comfort in 6% FY19F yield, which should help to provide some downside cushion. In relation to the proposed additional Section 301 tariffs on products imported into the US from China, only a very small portion may apply to Valuetronics amounting to only 2-3% of revenue.

Strong Singapore Economic And Employment Data

Provide a strong basis for HRnetgroup’s continued outperformance

  • We remain bullish on HRnetgroup’s organic growth this year and we think that it should easily beat consensus PATMI targets. This is also supported by the strong economic and employment data coming out from Singapore.
  • According to a labour market report quoting the Ministry of Manpower Singapore, 1Q18 layoffs plunged to a 5-year low, with 2,320 workers asked to go compared to 4,000 in the same quarter last year. The seasonally adjusted unemployment rate dipped in March to 2% vs 2.2% a year earlier, representing a 5-year low in the first quarter, as the economy grew faster than forecasted.
  • The Ministry of Trade and Industry also announced that Singapore’s GDP grew 4.4% in 1Q18, with full-year growth expected to come in at 2.5-3.5% this year. Growth was primarily supported by the manufacturing sector, – rising 9.8%, from 4.8% the previous quarter – the finance and insurance as well as wholesale trade sectors.
  • It was also reported even though the Singapore Business Federation SME Index dipped marginally from 51.8% to 51.5% on 19 Jun, small and medium enterprises (SMEs) are still upbeat for the rest of 2018.
  • As a result, we expect flexible staffing business in Singapore to perform well into 2Q18, with professional staffing likely to hold up as well.

Rising Oil Prices

Provide a positive outlook for GSS

  • The rising oil prices are positive for GSS Energy, as it is in the midst of finding an off taker for the gas discovered in the first well. It is also awaiting the results of the second well, which it has re-entered. If oil is discovered, it should be able to produce and sell the oil in 3Q18 and would benefit from the rising oil prices, which we believe, will be positive to margins and profitability.
  • Despite OPEC’S agreement to hike output by 1mbpd, our house view is that the additional barrels will be required to provide global markets with a security of supply and stability of oil prices. We remain bullish on oil prices, as global crude oil demand remains robust, with International Energy Agency expecting additional global crude oil demand to average 1.5mbpd for 2018, with peak demand in 4Q18 at 1.7mbpd.
  • Our oil price projection is USD73.3 for FY18.

Top 5 Singapore Small Mid Cap Picks 

HRnetgroup – riding on strong hiring in Singapore and M&A.

Silverlake – banking on the recovery of bank spending.

Kimly – defensive cash rich business with an M&A angle.

GSS – inflection point on oil discovery and monetisation.

Moya – key catalysts upcoming after rights issue.

Also Read:

2018H2 Small Mid Cap Top Pick #1 ~ HRnetGroup: Riding On Strong Singapore Employment

2018H2 Small Mid Cap Top Pick #2 ~ Silverlake Axis: Riding On Banks’ Spending Recovery

2018H2 Small Mid Cap Top Pick #3 ~ Kimly: Organic Growth And M&A Are Catalysts

Jarick Seet RHB Invest | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2018-06-27
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