Singapore Strategy 2019 ~ Small & Mid-Caps - RHB Invest 2018-12-14: Pick Selectively From Bottom-up

Singapore Strategy 2019 ~ Small & Mid-Caps - RHB Research | SGinvestors.io SILVERLAKE AXIS LTD (SGX:5CP) HRNETGROUP LIMITED (SGX:CHZ)

Singapore Strategy 2019 ~ Small & Mid-Caps - Pick Selectively From Bottom-up

  • Markets have been impacted by a challenging 2018, especially on the technology-and property-related fronts, as they have corrected significantly. We believe the outlook of these two sectors, as well as the market sentiment, depends on the outcome of the trade talks between the US and China.
  • If the situation continues to worsen, a further correction is likely. As a result, even after the selldown, we remain NEUTRAL on the sector and stay upbeat only on selected counters.
  • Our Top Picks for 2019 are HRnetgroup (SGX:CHZ) and Silverlake Axis (SGX:5CP).

Worsening trade war impacts sentiment.

  • Since US President Donald Trump initiated the possibility of a trade war against China and other key deficit trading partners in March, Singapore stocks – especially those in manufacturing – have been significantly impacted. With the trade war yet to be resolved (and could potentially worsen or drag on), this will weigh on the market and impacting sentiment negatively.
  • A cooldown in business sentiment will also likely affect business activities globally, resulting in a potential slowdown or negative growth as we have already witnessed. As a result, we remain NEUTRAL on the sector and focus on a bottom-up approach in stock selection.

Expansion into China to provide growth for HRNetgroup.

  • We believe HRnetgroup will likely make more acquisitions in the near future, and focus on new markets while growing its presence in North Asia. We also expect a better FY19, on stronger growth in North Asia and Singapore across all segments while the effect of the 88GLOW Plan on PATMI will take full effect for 2018.
  • In addition, management is likely to continue its share buyback scheme to reward productive sales employees, as well as for further acquisitions. As a result, we maintain BUY with an unchanged DCF-based Target Price of SGD1.18.
  • See report: HRnetGroup - Extending Reach Across China.

Silverlake Axis riding on banks’ capex cycle.

  • Silverlake Axis reported a stellar 1Q19, with revenue and PATMI surging 36% and 70% y-o-y to MYR166.6m and 57.9m due to the implementation of contracts secured few months ago. The next few quarters should likely be stronger, as it continues to draw down from its existing MYR320m orderbook – with both licensing and project services revenue projected to deliver strong growth.
  • Earnings from the acquisition of Xinfotech will also kick in 2H19. With a stellar year ahead, we maintain BUY with an unchanged DCF-backed Target Price of SGD0.65, accompanied by an attractive 5.5% dividend FY19F yield. 
  • See report: Silverlake Axis - V-Shaped Recovery Ahead.

Focus on bottom-up approach on stocks with strong fundamentals.

  • As we expect the markets to be challenging in 2019, coupled with rising interest rates, we will still prefer a bottom-up approach in our stock selection.
  • We prefer companies with good growth and strong fundamentals, on top of a net cash balance sheet to buffer against any impact from the rise in interest rates, as well as attractive dividends to reward shareholders. As a result, our Top Picks for 2019 will include HRnetgroup and Silverlake Axis.

Jarick Seet RHB Securities Research | Lee Cai Ling RHB Invest | https://www.rhbinvest.com.sg/ 2018-12-14
SGX Stock Analyst Report BUY MAINTAIN BUY 0.650 SAME 0.650