2019 Singapore Stock Picks & Investment Themes - RHB Invest 2018-12-14: Buy Selectively & Stay Defensive

2019 Singapore Top Stock Picks ~ RHB Investment Research | SGinvestors.io ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) CAPITALAND LIMITED (SGX:C31) DBS GROUP HOLDINGS LTD (SGX:D05) GENTING SINGAPORE LIMITED (SGX:G13) DELFI LIMITED (SGX:P34) CDL HOSPITALITY TRUSTS (SGX:J85) FU YU CORPORATION LTD (SGX:F13) HRNETGROUP LIMITED (SGX:CHZ) MANULIFE US REIT (SGX:BTOU) SINGAPORE EXCHANGE LIMITED (SGX:S68) SHENG SIONG GROUP LTD (SGX:OV8) SILVERLAKE AXIS LTD (SGX:5CP) SINGTEL (SGX:Z74) SINGAPORE MEDICAL GROUP LTD (SGX:5OT) SINGAPORE TECH ENGINEERING LTD (SGX:S63) STARHILL GLOBAL REIT (SGX:P40U) UNITED OVERSEAS BANK LTD (SGX:U11) VENTURE CORPORATION LIMITED (SGX:V03) WILMAR INTERNATIONAL LIMITED (SGX:F34)

2019 Singapore Stock Picks & Investment Themes - Buy Selectively & Stay Defensive

  • While stocks could certainly move lower-to-sideways from here, we believe this is not a time for investors with long-term horizons to abandon risk assets. We view the current sell-off in the Singapore market as an opportunity to buy into defensive sectors – we define defensive stocks as ones with strong balance sheets, stable earnings growth, high but stable dividend yields, and low historical propensity for big price declines.
  • Our study of performance in previous economic cycles reveals that while the magnitude of outperformance may have varied, industrials and consumer sectors have consistently outperformed the broader market during the six-month period after the peak of economic growth in Singapore.



2019 Investment Themes


Rotate Into Defensive Sectors


a) Prefer consumer stocks with earnings visibility.

  • Based on The Conference Board Global Consumer Confidence Survey in collaboration with Nielsen, consumer confidence in Singapore rose in 3Q18 to its highest level since entering pessimistic territory three years ago. However, at 98 points, up from 94 points the previous quarter, consumer confidence has yet to take a turn into optimism. The index for Singapore has been in pessimistic territory – and also below the global index level – since 4Q15, when it dipped from 101 to 94 points.
  • The index is driven by three indicators, which are consumers’ perception of the state of their personal finances, local job prospects, and their spending intentions. Singapore saw improvements in all three indicators on both y-o-y and q-o-q basis – 57% believe that the state of their personal finances in next 12 months will be excellent or good (vs 53% in 2Q18, 52% in 3Q17). 48% have a positive view on job prospects in the next 12 months (vs 44% in 2Q18, 42% in 3Q17) and 39% said that now is the time to buy the things they want and need (vs 36% in 2Q18, 31% in 3Q17).
  • Singapore has seen a gradual improvement in its retail sales growth (excluding auto) since late 2016. Although at a slower pace amidst slowing economic growth, we expect the growth in retail sales to sustain into 2019. We have an OVERWEIGHT rating for the consumer sector and favour exposure to companies where we see more clear signs of earnings growth.
  • Our preferred consumer sector picks are Sheng Siong (SGX:OV8), Wilmar International (SGX:F34), Genting Singapore (SGX:G13) and Delfi (SGX:P34).
  • Sheng Siong is our Top Pick for the consumer sector. In view of macroeconomic uncertainties, we believe Sheng Siong, with its defensive retail groceries business, will continue to outperform the broader market. We expect it to deliver +15% earnings growth in 2019 driven by higher earnings growth from the maturing of its 10 new stores opened in 2018, as well as gross margin expansion after the commencement of the distribution centre extension. The stock also offers a stable dividend yield of 3.5-4%.
  • Despite expectations of an unexciting year for CPO prices, we think Wilmar will outperform the broader market on more favourable palm processing margins, strong biodiesel demand, and continued growth in its consumer pack products. Potential listing (A-shares) of its China operations is still on the plate, and is expected to take place by the end of FY19. We believe the IPO of its China operations could unlock some latent value in the stock and lead to potential special dividends.
  • Delfi is a play on improving consumer sentiment in Indonesia. 70% of its sales are derived from Indonesia. We expect Delfi to deliver +15% earnings growth in 2019 led by strong sales momentum in its core brands. Growth in the premium products range should also help to hold up margins. On the macroeconomic side, we are overweight the Indonesian consumer sector as consumer sentiment in Indonesia has been upbeat. With the election coming in 2019, we believe consumer spending will be boosted by higher government stimulus and subsidies.

b) Defensive industrial stock: ST Engineering.

  • ST Engineering (SGX:S63) has been amongst the few STI stocks that has delivered positive share price returns in 2018. We expect ST Engineering’s share price to do well in 2019, in line with the revival of its profit growth, which will be aided by increased capacity and capabilities at its Aerospace division – the delivery of smart city-related contracts in and outside Singapore, and defence-related contracts.
  • ST Engineering has an outstanding orderbook of SGD13.3bn that offers 2-year revenue visibility. With more than 4% yield on offer, we see limited downside to its share price. In addition to continuing order wins at its Aerospace and Electronics operations, the recent revival in Marine order wins and completion of MRAS acquisition in 1Q19 could be key re-rating catalysts.


BUY banks for steady earnings growth and consistent dividends

  • With an impending economic slowdown in 2019, investors are concerned about slowing loan growth, lower-than-expected NIM expansion, and likely escalation in non-performing loans for Singapore banks. However, we believe the recent price corrections have priced in negatives for banking stocks, and there exists limited downside to their share prices.
  • Valuations have moderated to more reasonable levels as UOB (SGX:U11) and DBS (SGX:D05) are now trading closer to historical average 1-year forward P/BVs.
  • While the outlook for 2019 loan growth has moderated since the beginning of 2018, it is still in positive territory. We expect loan growth for the three Singapore banks to moderate to 6.2% in 2019 from an estimated 8.2% in 2018.
  • On net interest margins, banks have witnessed gradual quarterly improvements in 2018. We expect this momentum to carry into 2019. With strong balance sheets and healthy ratios, we expect two banks under our coverage to deliver 8-12% earnings growth in 2019 and offer sustainable dividend yield of over 5%.
  • We are OVERWEIGHT the banking sector and have BUY ratings on DBS and UOB. However, we prefer UOB over DBS for its relatively lower valuations and industry leading capital adequacy ratio, which creates scope for higher dividend payouts in 2019.


REITs that have visibility on DPU growth

  • While we do not expect a broad-based outperformance from the REIT sector, stock-specific catalysts should find favour with investors – especially for those REITs that are direct beneficiaries of improving economic activity, have strong balance sheets, and can undertake accretive acquisitions that could offer DPU growth.
  • The 2019F demand-supply outlook for most of the sub-segments of REITs is positive and will help mitigate the threat of rising interest rates. Moreover, balance sheets for most REITs are in a better position to mitigate any risk from rising interest costs.
  • On average, close to 80% of REITs’ debts are hedged, with only < 20% of total debt due for renewal up until 2020. Overall, sector gearing also remains modest at 36%, well below the 45% maximum threshold.
  • We see REITs trading at reasonable valuations. On average, REITs are trading at a 390bps yield spread to the MAS’ 10-year bond yield. This compares with the 10-year average mean spread (ex-Global Financial Crisis) of 400bps.
  • We prefer industrial and hospitality REITs mainly on favourable demand-supply dynamics and attractive valuations. Both sectors offer one of the best yield spreads over 10-year bond yields. While growing tourist arrivals, moderating hotel room supply, and 3-7% expected growth in RevPAR should support growth for hospitality REITs, tapering of oversupply situation, gradual pick-up in demand, and 1-5% increase in rents should support DPU growth for industrial REITs.
  • Our preferred industrial and hospitality REITs are Ascendas REIT (SGX:A17U) and CDL Hospitality (SGX:J85).
  • While office segment rental rates have been on a steady uptrend, the positive effects will likely only be seen in DPU in late-2019. As such, we believe the office sub-sector will be more of a 2H19 play.
  • The retail segment remains challenging, with many key shopping malls adding to the supply in 2019 and rental rates likely to stay flattish. We recommend investors buy on dips for retail and office REITs. Starhill Global REIT (SGX:P40U) is our preferred office REIT exposure.
  • We like Manulife US REIT (SGX:BTOU) as a play on continuing improvement in the US office market. Manulife US REIT should benefit from organic DPU growth via inbuilt rental rate escalation and a strong sponsor offers it the ability to grow via quality acquisitions.
  • See also Share Price Performance of S-REITs.


Opportunistic Small Mid Cap Ideas

  • Although small and mid-cap (SMID cap) stocks in Singapore have underperformed large cap stocks, we believe selective opportunities exist for investors to invest into SMID cap companies that offer either strong visibility on earnings growth, sustainable high dividends, and/or are trading at compelling valuations.
  • In the SMID cap space, our preferred picks are Silverlake Axis (SGX:5CP), HRnetgroup (SGX:CHZ), FuYu (SGX:F13) and Singapore Medical Group (SGX:5OT).
  • We like Silverlake for its strong earnings growth as it draws down on its existing orderbook, HRnetgroup for its ability to offer earnings upside from earnings accretive acquisitions, FuYu for its attractive +8% dividend yield, and Singapore Medical Group for its lowest valuation amongst healthcare players in Singapore.



2019 Singapore Top Stock Picks


2019 Top Stock Picks & Company Reports





2019 Top Picks Valuation


Company Name Market
Cap
(USDm)
Rating Target
Price
Upside
(%)
1FY
Year
P/E (x) P/BV (x) Yield (%) ROE (%)
1FY 2FY 1FY 2FY 1FY 2FY 1FY 2FY
Large Cap
ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) 5,917 BUY 2.90 13.3 2019 12.8 12.8 1.2 1.2 6.6 6.6 9.1 9.3
CAPITALAND LIMITED (SGX:C31) 9,624 BUY 4.00 27.0 2018 12.6 11.5 0.7 0.7 4.1 4.1 6.0 6.3
DBS GROUP HOLDINGS LTD (SGX:D05) 44,515 BUY 29.80 25.2 2018 10.7 9.6 1.3 1.2 5.0 5.0 12.3 12.9
GENTING SINGAPORE LIMITED (SGX:G13) 8,961 BUY 1.23 26.8 2018 13.9 13.6 1.5 1.4 3.6 3.6 11.0 10.7
SINGAPORE TECH ENGINEERING LTD (SGX:S63) 7,918 BUY 3.97 15.4 2018 19.7 17.0 4.7 4.4 4.4 4.5 23.6 26.1
UNITED OVERSEAS BANK LTD (SGX:U11) 30,294 BUY 30.80 25.0 2018 9.9 9.3 1.2 1.1 4.7 5.1 11.9 12.2
VENTURE CORPORATION LIMITED (SGX:V03) 3,158 BUY 19.00 29.6 2018 11.7 10.8 1.8 1.7 4.8 4.8 15.3 15.4
WILMAR INTERNATIONAL LIMITED (SGX:F34) 14,535 BUY 3.58 14.0 2018 11.3 12.0 0.9 0.8 3.5 3.5 7.6 6.9
Small & Mid Cap
CDL HOSPITALITY TRUSTS (SGX:J85) 1,336 BUY 1.80 18.4 2018 12.1 11.4 1.0 1.0 6.1 6.4 8.1 8.4
DELFI LIMITED (SGX:P34) 611 BUY 1.59 16.1 2018 24.9 23.7 2.8 2.7 2.0 2.5 10.1 11.3
FU YU CORPORATION LTD (SGX:F13) 104 BUY 0.23 21.7 2018 13.2 12.4 0.9 0.9 8.5 8.5 6.5 7.1
HRNETGROUP LIMITED (SGX:CHZ) 580 BUY 1.18 49.4 2018 14.6 13.9 2.3 2.1 3.2 3.4 16.0 15.4
MANULIFE US REIT (SGX:BTOU) 977 BUY 0.92 21.9 2018 11.6 10.5 0.9 0.9 7.3 7.8 7.9 8.6
STARHILL GLOBAL REIT (SGX:P40U) 1,066 BUY 0.80 19.4 2019 10.1 9.3 0.7 0.7 7.2 7.5 7.1 7.5
SILVERLAKE AXIS LTD (SGX:5CP) 802 BUY 0.65 60.5 2019 15.2 14.0 6.1 5.9 4.9 4.9 37.2 36.1
SINGAPORE MEDICAL GROUP LTD (SGX:5OT) 142 BUY 0.56 36.6 2018 15.8 14.5 1.4 1.3 - 1.4 8.9 9.0
SHENG SIONG GROUP LTD (SGX:OV8) 1,184 BUY 1.27 16.5 2018 23.3 19.9 5.7 5.2 2.8 3.7 24.3 26.6







Singapore Research RHB Securities Research | https://www.rhbinvest.com.sg/ 2018-12-14
SGX Stock Analyst Report BUY MAINTAIN BUY 2.900 SAME 2.900
BUY MAINTAIN BUY 4.000 SAME 4.000
BUY MAINTAIN BUY 29.800 SAME 29.800
BUY MAINTAIN BUY 1.230 SAME 1.230
BUY MAINTAIN BUY 1.590 SAME 1.590
BUY MAINTAIN BUY 1.800 SAME 1.800
BUY MAINTAIN BUY 0.230 SAME 0.230
BUY MAINTAIN BUY 1.180 SAME 1.180
BUY MAINTAIN BUY 0.920 SAME 0.920
BUY MAINTAIN BUY 8.200 SAME 8.200
BUY MAINTAIN BUY 1.270 SAME 1.270
BUY MAINTAIN BUY 0.650 SAME 0.650
NEUTRAL MAINTAIN NEUTRAL 3.220 SAME 3.220
BUY MAINTAIN BUY 0.560 SAME 0.560
BUY MAINTAIN BUY 3.970 SAME 3.970
BUY MAINTAIN BUY 0.800 SAME 0.800
BUY MAINTAIN BUY 30.800 SAME 30.800
BUY MAINTAIN BUY 19.000 SAME 19.000
BUY MAINTAIN BUY 3.580 SAME 3.580





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