2019 Outlook & Strategy - DBS Research 2018-11-26: Part 3 ~ Stock Picks


2019 Outlook & Strategy - Part 3 ~ Stock Picks

1Q19 – bearing the brunt of trade war and earnings downgrades

  • In our base case scenario, we expect the STI to head lower first before consolidating. In our view, 1Q19 will continue to pose challenges, with the downgrades in GDP growth and earnings cut working its way through the final results of FY18.
  • With more corporates sounding the caution bell, the earnings recession trend, which started two quarters ago when Trump started the US/China trade war, will continue for at least 2 more quarters. In addition, headline PMI and export numbers from China could weaken as trade tariffs of 25% hit China come January 2019.
  • Front loading of exports to USA in 4Q18 could pose downside risks to China in 1Q19.
  • Near term, we will stay defensive, preferring stocks which offer:
    1. earnings visibility,
    2. yield plays with growth,
    3. stocks trading on depressed valuations or,
    4. seek trade diversion beneficiaries.
  • Bargain hunting opportunities should emerge when the STI hits a support level of 2850. With the index at -2SD, this should unlock opportunities to buy deep value blue chips in the banking, oil and gas, and industrial sectors.

1) Order book with earnings visibility

SINGAPORE TECH ENGINEERING LTD (SGX:S63)  ST Engineering (SGX:S63) Share Price  ST Engineering (SGX:S63) Target Price  ST Engineering (SGX:S63) Analyst Reports  ST Engineering (SGX:S63) Corporate Actions  ST Engineering (SGX:S63) Announcements  ST Engineering (SGX:S63) Latest News  ST Engineering (SGX:S63) Blog Articles (Rating: BUY; 12-mth Target Price: S$4.15)

  • ST Engineering’s (STE) record order book of S$13.3bn provides earnings visibility into FY19/20, with a 1.9x book-to-bill ratio. The group has been able to replenish its order book in the last few years with new projects and initiatives, keeping order book at record levels for the last 2 years.
  • We like STE for a combination of factors:
    1. strong inorganic growth potential from the acquisition of MRA Systems (Nacelle manufacturer),
    2. growing smart city revenues,
    3. rebound in Aerospace segment revenues, driven by recovery in engine maintenance, repair and overhaul (MRO) demand and in the longer term, sizeable contribution from Airbus P2F program,
    4. remaining in the hunt for potential large contract awards in the US in the future, ranging from postal service trucks to army tanks and,
    5. good progress in the fields of logistics automation and systems integration for electric and autonomous vehicles.

YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)  Yangzijiang (SGX:BS6) Share Price  Yangzijiang (SGX:BS6) Target Price  Yangzijiang (SGX:BS6) Analyst Reports  Yangzijiang (SGX:BS6) Corporate Actions  Yangzijiang (SGX:BS6) Announcements  Yangzijiang (SGX:BS6) Latest News  Yangzijiang (SGX:BS6) Blog Articles (Rating: BUY; 12-mth Target Price: S$1.82)

  • Order book stood at US$4.0bn as at end-Sep 2018, implying a healthy book-to-bill ratio of c.2x, providing revenue visibility for the next two years. Yangzijiang is now ranked no.1 in China and no.4 in the world by order book. Contract wins grew 155% y-o-y to US$2.1bn in 2017. Management targets to secure new orders of ~US$1.8bn this year to maintain a revenue coverage of c.2x, a healthy level for order book replenishment and optimisation of operational activities.
  • YTD, Yangzijiang has clinched US$1.2bn worth of new contracts.

2) Yield plays with growth

COMFORTDELGRO CORPORATION LTD (SGX:C52)  ComfortDelGro (SGX:C52) Share Price  ComfortDelGro (SGX:C52) Target Price  ComfortDelGro (SGX:C52) Analyst Reports  ComfortDelGro (SGX:C52) Corporate Actions  ComfortDelGro (SGX:C52) Announcements  ComfortDelGro (SGX:C52) Latest News  ComfortDelGro (SGX:C52) Blog Articles (Rating: BUY; 12-mth Target Price: S$2.56)

  • We project earnings to resume its growth trend from 4Q18 onwards, and into FY19F (+7.7%) after two years of earnings decline due to the disruption of Grab/Uber. This is on the back of:
    1. bottoming out in taxi fleet contraction in Singapore;
    2. earnings contribution from recent acquisitions;
    3. public transport fare increase of 4.3% effective 29 December 2018.
  • As seen in ComfortDelGro’s 3Q18 results, while still registering y-o-y declines in profits, this was of a smaller magnitude compared to 1Q/2Q18, indicating sequential improvement. While there are concerns on increased competition from the private-hire car companies with the impending entry of Go-Jek, we believe that a strong escalation of competition and reversion to high incentives and discounts (where participants incur sustained losses) is unlikely.
  • ComfortDelGro also provides a yield of 5.0%/5.4% for FY18F/19F, which we believe is relatively attractive.

CAPITALAND MALL TRUST (SGX:C38U)  Capitaland Mall Trust (SGX:C38U) Share Price  Capitaland Mall Trust (SGX:C38U) Target Price  Capitaland Mall Trust (SGX:C38U) Analyst Reports  Capitaland Mall Trust (SGX:C38U) Corporate Actions  Capitaland Mall Trust (SGX:C38U) Announcements  Capitaland Mall Trust (SGX:C38U)Latest News  Capitaland Mall Trust (SGX:C38U) Blog Articles (Rating: BUY; 12-mth Target Price: S$2.45)

  • Anchored by resilient yields, CapitaLand Mall Trust (CMT) has been a safe harbour for investors and is starting to emerge as a growth play. As the retail sector bottoms out, 2019 could be the year for CMT to shine as full contributions from Westgate and the return of Funan takes DPU back on a multi-year growth path.
  • CMT’s share price should re-rate as earnings growth returns to an upward trajectory of c.4% p.a. (vs SREIT’s average of c.2%) and offers dividend yield of 5.4%.

MAPLETREE LOGISTICS TRUST (SGX:M44U)  Mapletree Logistics Trust (SGX:M44U) Share Price  Mapletree Logistics Trust (SGX:M44U) Target Price  Mapletree Logistics Trust (SGX:M44U) Analyst Reports  Mapletree Logistics Trust (SGX:M44U) Corporate Actions  Mapletree Logistics Trust (SGX:M44U) Announcements  Mapletree Logistics Trust (SGX:M44U)Latest News  Mapletree Logistics Trust (SGX:M44U) Blog Articles (Rating: BUY; 12-mth Target Price: S$1.50)

  • After its recent announcement to acquire a portfolio of modern logistics properties in Singapore, we remain excited about Mapletree Logistics Trust’s (MLT) growth prospects. The recent S$375m equity issuance infuses Mapletree Logistics Trust with greater financial capacity to grow. The group has a diversified portfolio with assets in key markets Hong Kong, Singapore, Japan and Australia driving growth.
  • Coupled with a stronger balance sheet post recapitalisation, improving organic growth outlook and a myriad of acquisitions, we believe that Mapletree Logistics Trust’s improved earnings prospects will translate into higher valuations going forward.

NETLINK NBN TRUST (SGX:CJLU)  NetLink Trust (SGX:CJLU) Share Price  NetLink Trust (SGX:CJLU) Target Price  NetLink Trust (SGX:CJLU) Analyst Reports  NetLink Trust (SGX:CJLU) Corporate Actions  NetLink Trust (SGX:CJLU) Announcements  NetLink Trust (SGX:CJLU) Latest News  NetLink Trust (SGX:CJLU) Blog Articles (Rating: BUY; 12-mth Target Price: S$0.87)

  • NetLink designs, builds, owns and operates the fibre network infrastructure which is the foundation of Singapore’s Next Generation Nationwide Broadband Network. NetLink Trust is trading at c.6.6% FY19F yield, similar to large-cap industrial S-REIT’s average yield. We argue that NLT should trade at a tighter spread than S-REITs as
    1. NetLink Trust’s distributions, due to the regulated nature of its business, are largely independent of the economic cycle
    2. NetLink Trust’s gearing is less than half of S- REITs’ with an ample debt headroom to fund future growth.
  • We believe that NetLink Trust’s current FY19F dividend yield of c.6.6% is attractive versus our target yield of 5.8%

UNITED OVERSEAS BANK LTD (SGX:U11)  UOB (SGX:U11) Share Price  UOB (SGX:U11) Target Price  UOB (SGX:U11) Analyst Reports  UOB (SGX:U11) Corporate Actions  UOB (SGX:U11) Announcements  UOB (SGX:U11) Latest News  UOB (SGX:U11) Blog Articles (Rating: BUY; 12-mth Target Price: S$29.50)

  • UOB is poised to benefit from higher net interest income in the rising rates cycle as we continue to see NIM expansion into FY2019. On the non-interest income front, UOB is also less exposed to volatility in wealth management fees (affected by market volatility) as its customers invest mostly in non-leveraged products.
  • UOB’s strong capital position continues to provide opportunities to tap quality loan growth as broad-based loan growth outlook for the year continues to stand tall, with mid-to-high single-digit growth expected next year. Higher dividends are possible on its higher capital levels with
  • UOB’s new dividend policy as the bank continues to deliver sustained growth. The stock offers growth of 8% for 2019 and dividend yield of 5%.

3) Bombed out value buys

GENTING SINGAPORE LIMITED (SGX:G13)  Genting Singapore (SGX:G13) Share Price  Genting Singapore (SGX:G13) Target Price  Genting Singapore (SGX:G13) Analyst Reports  Genting Singapore (SGX:G13) Corporate Actions  Genting Singapore (SGX:G13) Announcements  Genting Singapore (SGX:G13) Latest News  Genting Singapore (SGX:G13) Blog Articles (Rating: BUY; 12-mth Target Price: S$1.55)

  • Genting Singapore’s (GENS) share price has corrected by 25% since July, in line with a de-rating of Macau gaming plays, on the back of slowing gross gaming revenues (GGR) in Macau and fears over a potential slowdown in China which in turn will negatively affect GENS’ VIP business. China accounts for about 50% of VIP volumes (40% of sales). Nevertheless, we believe the majority of these concerns have been priced in given that GENS now trades on a EV/EBITDA of 5.5x, below - 2SD EV/EBITDA of 5.8x and attractive dividend yield of 4.2%. Genting has c.S$3bn in net cash so c.30% of its S$10bn market cap is in cash and free cash flow (FCF) each year is c.S%$1-1.2bn, leaving room for upside in dividend payout.
  • Re-rating catalyst: Despite the turnaround in profitability after the challenging period in 2015-16, some investors remain sceptical over the sustainability of GENS’ earnings recovery. We believe that as we progress throughout 2019, as GENS selectively extends credit to its VIP customers that should translate to higher y-o-y increase in earnings, this scepticism should subside, resulting in a re-rating of GENS’ share price.
  • We believe there is upside potential to GENS earnings as its VIP rolling chip only stands at c.US$6bn a quarter versus a peak of c.US$14b-15n.

STARHUB LTD (SGX:CC3)  StarHub (SGX:CC3) Share Price  StarHub (SGX:CC3) Target Price  StarHub (SGX:CC3) Analyst Reports  StarHub (SGX:CC3) Corporate Actions  StarHub (SGX:CC3) Announcements  StarHub (SGX:CC3) Latest News  StarHub (SGX:CC3) Blog Articles (Rating: BUY; 12-mth Target Price: S$2.45)

  • Starhub’s share price has been on a downtrend since mid- 2015, the stock de-rated on fears of new competition from a fourth player in Singapore mobile segment, losses in its PayTV business due to high fixed content cost and lower margin due to migration from cable broadband to fibre broadband. The stock reversed its downtrend in September 2018, after the company announced a restructuring and cost savings package of S$210m over the next 3 years.
  • We expect the rebound in earnings for FY20 to be even stronger now, with earlier than expected recognition of ~S$30m annual savings in operating lease expenses. The street’s FY19F earnings are edging up and we expect to see more upward revisions going forward. StarHub’s valuation is attractive, trading close to -2SD of its historical EV/EBITDA and PE average and offers sustainable yield exceeding ~5.6%.
  • Potential catalyst: News on TPG’s launch, network sharing and the transformation programme. Official confirmation of delay in TPG’s commercial launch to 2Q19, more clarity on network sharing and quarterly updates on the transformation programme could rekindle more interest in StarHub.

THAI BEVERAGE PUBLIC CO LTD (SGX:Y92)  Thai Beverage (SGX:Y92) Share Price  Thai Beverage (SGX:Y92) Target Price  Thai Beverage (SGX:Y92) Analyst Reports  Thai Beverage (SGX:Y92) Corporate Actions  Thai Beverage (SGX:Y92) Announcements  Thai Beverage (SGX:Y92) Latest News  Thai Beverage (SGX:Y92) Blog Articles (Rating: BUY; 12-mth Target Price: S$0.94)

  • We believe the 28% YTD drop in share price has largely factored in the weak financial performance in FY18F; and, we maintain our view that we are near or at the bottom of its operational performance.
  • Post 4Q18, we expect operational performance pick up in FY19. This is on the back of the expected Thailand elections (est. 24 Feb 2019) and the King’s coronation. Shares are below -2SD of its 5-year historical average. It recently refinanced its USD loans, removing foreign exchange (FX) risks.

SEMBCORP INDUSTRIES LTD (SGX:U96)  Sembcorp (SGX:U96) Share Price  Sembcorp (SGX:U96) Target Price  Sembcorp (SGX:U96) Analyst Reports  Sembcorp (SGX:U96) Corporate Actions  Sembcorp (SGX:U96) Announcements  Sembcorp (SGX:U96) Latest News  Sembcorp (SGX:U96) Blog Articles (Rating: BUY; 12-mth Target Price: S$3.70)

  • SembCorp Industries (SCI) offers a unique value proposition as a proxy to ride the cyclical offshore & marine (O&M) upturn, and is supported by a defensive utilities business. We expect operational improvement in India for 2019. Assuming our fair value for Sembcorp Marine (SMM) at S$2.40, SCI’s Utilities segment is way undervalued at 0.37x P/BV and 4.4x PE against 6% ROE.
  • At Group level, SCI is trading close to its historical trough of 0.6x PB (implied share price of ~S$2.40) saw in Jan-2016. We believe continuous improvement in India will re-rate SCI’s utilities business, which is undervalued at 0.66x P/BV and 7.8x PE against 6% ROE.

4) Trade diversion beneficiaries

  • The ongoing trade disputes between the US and China will affect export dependent economies such as Singapore. Singapore’s manufacturing base is largely focused on high value-added intermediate products, and a large proportion is shipped to China for subsequent processing. As a result, a decline in US demand for Chinese goods could indirectly hit Singapore’s exports. Note that China is Singapore’s largest export market, accounting for 18.2% of total non-oil domestic exports (NODX).
  • However, as the trade war is largely bilateral in nature, there could be some degree of trade diversion, which could benefit Southeast Asia’s economies. Essentially, the trade flows could be “diverted” from China to other competing suppliers in Vietnam, Cambodia, Thailand, Malaysia and even Singapore. These countries could potentially see more inflows of foreign investment as companies reassess their global supply chains in the medium term.
  • Singapore a key beneficiary. Singapore is in a unique position given its regional hub status, a comprehensive FTA network and higher level of innovation and business sophistication. According to a Global competitiveness report (2018) by World Economic Forum, Singapore was rated the most competitive country due to its strong infrastructure and enabling environment, highly skilled human capital, access to markets and an innovative ecosystem. These characteristics would enhance Singapore’s appeal as a strategic investment destination for multinational companies hoping to diversify their operations to Southeast Asia.
  • A case in point is Dyson’s decision to set up an electric vehicle manufacturing facility in Singapore. Dyson announced that it would build its electric car in Singapore, with a new automotive manufacturing facility to be completed in 2020. It targets to roll out its first model by 2021. The electric car plant is part of Dyson's £2.5 billion (US$3.3 billion) global investment drive to expand into the lucrative world of upmarket zero-emission vehicles.
  • Being a regional shipping and financial hub, Singapore could see positive spin-offs in terms of demand for its re-exports, shipping, logistics and financial intermediation services. Companies which could benefit are those with production facilities in Singapore, Malaysia and logistics companies as Singapore will rise in importance as a logistics hub for the ASEAN region.

Venture Corp (Rating: BUY; 12-mth Target Price: S$21.30)

  • Venture Corp has benefited with order outflow from China, as a result of the trade war, with the bulk of manufacturing based in Malaysia – Johor Bahru and Penang. Venture Corp could benefit from diversification out of China with its global group of companies. In recent years, Venture Corp has also been beefing up its facility outside China, for example the new facility in Batu Kawan, Penang. It has also acquired a freehold site in Milpitas (California) within the Silicon Valley.

Logistics companies to benefit from the shift in supply chain.

DBS Group Research 2019 Stock Picks Valuation | SGinvestors.io

Janice CHUA DBS Group Research | Kee Yan YEO CMT DBS Research | https://www.dbsvickers.com/ 2018-11-26
SGX Stock Analyst Report BUY MAINTAIN BUY 4.150 SAME 4.150