Singapore Market Strategy - DBS Research 2019-07-01: ‘Risk On’ vs ‘Risk Off’ Top Picks


Singapore Market Strategy - ‘Risk On’ vs ‘Risk Off’ Top Picks

Volatility to persist.

  • The temporary truce from the G20 summit of not imposing new tariffs on US$300bn of Chinese goods ‘for now’ while allowing US firms to resume sales to Huawei is a near term positive for rebound trades on cyclicals. However, trade negotiations are still ongoing with regards to more tariffs on the remaining US$300bn of Chinese goods. As such, markets will remain choppy, driven by twists and turns in the US/China trade war, and geopolitical tension in Iran.
  • 3Q could be volatile, and we expect better clarity come year-end, with next year’s US elections in mind.

‘Risk on’ vs ‘risk off’.

Growth stocks with catalysts

Wilmar International (SGX:F34) (BUY, Target Price $3.86)

  • Although Wilmar International's share price has gained 17.5% YTD, we believe there’s more upside. See
  • The potential listing of Wilmar International’s China operations will be a strong catalyst to drive its share price as we move closer to the potential listing date (likely end 2019 or 2020). Meanwhile, earnings will continue to be driven by stronger performance in tropical oils division although there is some pressure from soy crushing margins given the ongoing swine flu situation.

CapitaLand (SGX:C31) (BUY, Target Price $4.00)

  • The merger of CapitaLand and Ascendas-Singbridge (ASB) heralds a new growth era for the group. We see a myriad of positives for the combined entity to emerge stronger financially and with an operational scale that puts it among the largest real estate managers globally.
  • We forecast CapitaLand-ASB to be able to deliver a return on equity of between 8.9% and 9.4% over FY19- FY21F, driven by an efficient mix of
    1. higher proportion of recurring income derived from ASB’s higher-yielding properties,
    2. projected continued asset revaluations on the back of higher operating income, and
    3. projected gains on S$3bn of planned asset divestments annually.
  • CapitaLand has been active in achieving those targets with S$1.3bn worth of assets divested to date, with the momentum expected to continue in 2H19 and in the following years. Our RNAV, post-merger is revised upwards to S$5.42, Target Price raised to S$4.00.

Keppel Corporation (SGX:BN4) (BUY, Target Price: S$9.20)

  • Keppel Corporation is benefiting from both property (c.60% of RNAV) and O&M (c.20% of RNAV) recovery. The China market, which accounts for approx. half of its property segment, is seeing improving sentiment with rising demand and ASP on the back of loosening liquidity YTD, especially in the tier 2 cities. Land sales in Tianjin Eco-City should also pick up.
  • For O&M, YTD wins of ~S$1.8bn has already surpassed S$1.7bn secured the whole of last year. We expect stronger orders for production and gas related solutions to drive a recovery in earnings for the O&M segment from current near breakeven levels.
  • Keppel Corporation has demonstrated earnings resiliency during the industry downturn, on the back of its multi-business strategy which includes providing robust solutions for sustainable urbanisation. The stock offers ~3% yield.

Yangzijiang Shipbuilding (SGX:BS6) (BUY; Target Price S$1.82)

  • Yangzijiang Shipbuilding is among the prime proxies for recovery in the shipping and shipbuilding sectors as one of the world’s best-managed and profitable shipyards. It has remained profitable throughout the cycles, delivering 22% average ROE and 3-4% dividend yield over the past 10 years. Core shipbuilding revenue ahead is backed by its healthy order backlog of US$3.5bn (~2x revenue coverage) as at end-March 2019.
  • Steady returns from the investment segment generates recurring income stream that supports dividend payout. Its strategy to move up into the LNG/LPG vessel segment, which is expected to see robust newbuild demand next few years, strengthens the longer-term prospects of the company.
  • In addition, Yangzijiang Shipbuilding is a beneficiary of stronger USD as revenue is denominated in USD and only half is naturally hedged. Every 1% USD appreciation could lead to up to 2% increase in earnings.
  • Yangzijiang Shipbuilding’s valuation remains undemanding at 1x P/BV, at a c.10% discount to global peers, notwithstanding its more attractive 11% ROE, 3% yield and solid balance sheet with 99 Scts net cash per share (62% of BVPS).

UOB (SGX:U11) (BUY; Target Price: S$29.20)

  • While the entry of new digital banks could impact incumbents in the longer term. UOB is still poised to deliver mid-single-digit earnings growth, backed by stable lending and provisions. We believe that UOB’s current valuations near 10-year historical mean valuation remain undemanding.
  • UOB tends to outperform in weaker market conditions and has a defensive franchise which is less exposed to volatility in wealth management fees. We believe UOB will continue to leverage on its strong capital position to capture cross-border loan growth opportunities, though overall loan growth is expected to moderate to c.5- 6% from c.11% y-o-y in FY18. The stock continues to be supported by a high dividend yield of c.4.5%.

Venture Corporation (SGX:V03) (BUY; Target Price $21.70)

  • The whole technology supply chain has been affected by the trade war, which has evolved into a technology war. Margins have been hit and visibility remains low as customers are less willing to commit to orders in view of the cloudy outlook.
  • Venture Corporation, with its exposure to a broad-based of technology domains including printing & imaging, computer peripherals, networking and communications and also retail store solutions & industrial components technology, has not been pared from the trade war. However, the impact could be partly mitigated by Venture Corporation’s exposure to the relatively more stable Life Science, Test, Measurement segment. Venture Corporation has a strong reputation in this area and could benefit from more value creation opportunities as this segment broadens out.
  • Furthermore, shipment out of Venture Corporation’s China plants to the US only accounts for less than 2% of its total revenue. With its diversification of plants outside China, Venture Corporation could also benefit from new business opportunities on the back of the US-China trade diversions.
  • In terms of financials, Venture Corporation’s above average net margins is a key differentiating factor from its peers. Its strong net cash of S$711m as at end-FY18, represents 15% of its current market cap and should support expectations of a repeat of the higher DPS of 70cts in FY19F, which works out to a yield of c.4%.

Stocks with high earnings visibility, yield and growth

ST Engineering (SGX:S63) – record high order book. (BUY, Target Price $4.50)

  • With a record S$14.1bn orderbook at the end of 1Q19, ST Engineering’s earnings growth potential looks exciting once again after a few tepid years; recent acquisitions in the Aerospace and Electronics divisions puts it on course to achieve close to double digit earnings growth in FY19/20, coupled with dividend yield of c. 4%.
  • We continue to like ST Engineering for:
    1. strong inorganic growth potential from recent acquisitions plus
    2. organic growth that will be driven by workload increase at Aerospace MRO shops from ongoing issues with new generation aircraft and engines, as well as ramp up of Airbus Passenger-to-Freighter programmes; and medium to long-term growth from leveraging on smart city and IOT related products and contracts, as well as robotics and automation solutions in transport, logistics, healthcare and hospitality domains.

Ascendas REIT (SGX:A17U) (BUY, Target Price: S$3.21)

  • Ascendas REIT remains one of the must-haves among Singapore REITs. While valuations are at a premium, we believe that investors have comfort on the REIT’s ability to deliver consistent returns across market cycles and remains a key stock in one’s portfolio. We believe that the Manager is likely to execute on growth plans to deepen Ascendas REIT’s exposure in its key markets of Singapore, UK, and Australia with potential equity fund raising to support these initiatives.
  • In addition, we see ample opportunities for the Manager to deliver earnings surprises which include
    1. Ascendas REIT’s ability to re-let close to 12% of vacant space in its portfolio, and
    2. acquisitions which the street has not priced in.

Frasers Centrepoint Trust (SGX:J69U) – More acquisitions in the pipeline. (BUY, Target Price $2.85)

  • We are positive on Frasers Centrepoint Trust’s moves to acquire stakes in PGIM’s AsiaRetail fund and Waterway Point, which have transformed the Trust’s growth profile entirely, in our opinion. DPU is now projected to grow at a 2.8% CAGR over FY18-21F vs c.1% p.a. previously – which places Frasers Centrepoint Trust among the fastest-growing REITs.
  • Going forward, FY20F DPU could boost by another 4-5% if Frasers Centrepoint Trust enlarges its stake in Waterway Point to 50% from its current 33%, and fully funds this with debt.
  • Frasers Centrepoint Trust could also build an additional pipeline of dominant and resilient suburban retail assets, which is hard to come by in Singapore, apart from its Sponsor’s ROFR (Northpoint South Wing).

Sheng Siong (SGX:OV8) – Steady as she goes. (BUY, Target Price: $1.25)

  • Growth will continue to be led by new stores. Ten new stores opened in 2018, and these will contribute for the full 12 months this year, while three new stores (Bukit Batok, Anchorvale and Sumang Lane) will contribute from 2Q19. A second store in Kunming, China will also open in 2H19.
  • We believe that Sheng Siong with its decent store network and logistics chain could be a takeover target for online players eventually. Online players such as Alibaba’s Hema (盒马鲜生) and Amazon (Wholefoods) are taking the online-to-offline route and are operating physical stores. We see scope for higher dividend payout if there is excess cash on its books.

Koufu Group (SGX:VL6) – operational turnaround to drive earnings growth. (BUY, Target Price: $0.85)

  • We expect earnings growth of 9% for FY19F, driven by the turnaround of its foodcourt and kiosk businesses. We impute
    1. positive contribution of the Supertea and R&B kiosk business;
    2. better foodcourt sales efficiency; and
    3. lower depreciation in our FY19-20F earnings forecasts.
  • Valuation is now more palatable at 13.1x FY20F PE with visible growth drivers. Potential catalysts will stem from reaping the benefits of economies of scale over the long term and special dividends from sale of its existing central kitchen property before moving into the new integrated facility.
  • Longer-term drivers include the setting up of an integrated facility aimed at delivering economies of scale, and overseas growth from Macau. Stock offers attractive yield of c.4%.

See Also:

Kee Yan YEO CMT DBS Group Research | Janice CHUA DBS Research | https://www.dbsvickers.com/ 2019-07-01
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