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Phillip 2Q22 Singapore Strategy - Phillip Securities 2022-04-05: A Stagflation Shelter

Singapore Strategy - Phillip Securities Research | SGinvestors.io ASCOTT RESIDENCE TRUST (SGX:HMN) ASIAN PAY TELEVISION TRUST (SGX:S7OU) DBS GROUP HOLDINGS LTD (SGX:D05) DEL MONTE PACIFIC LIMITED (SGX:D03) FRASERS CENTREPOINT TRUST (SGX:J69U) HRNETGROUP LIMITED (SGX:CHZ) OVERSEA-CHINESE BANKING CORP (SGX:O39) CITY DEVELOPMENTS LIMITED (SGX:C09) COMFORTDELGRO CORPORATION LTD (SGX:C52) KEPPEL CORPORATION LIMITED (SGX:BN4)

Phillip 2Q22 Singapore Strategy - A Stagflation Shelter

1Q22 Market Review:

  • The STI was up 9.1% in 1Q22. This was its best performance since an 11.3% rally in 1Q21. Banks and conglomerates led the gainers. Rising interest rates was the dominant theme in the quarter. Banks rallied as higher interest rates will lift margins.
  • On the flip side, REITs retreated as higher rates can affect dividend growth and lower the attractiveness of their leveraged dividend yields.
  • Conglomerates were the major outperformers from higher electricity spreads, increased dividends and aggressive share buybacks.



2Q22 Market Outlook:

  • The global economy is facing stagflation (i.e. high prices but lower incomes) shock. Inflation has been made worse by the Russia-Ukraine conflict, which has driven up crude oil prices to their highest in 13 years. Global growth is expected to decelerate as interest rates continue to climb.
  • The yield curve has recently inverted, placing the market back on recession watch. The debate rages as to whether the Fed can orchestrate a soft landing for the economy. We are more upbeat. In the recent six rate-hiking cycles, two led to a soft landing (no recession) and three were followed by recessions that were not entirely triggered by the hiking cycle.
  • The Singapore market stands out as a shelter in the current stagflation environment. We will say this - it is an alpha generator in global equities. Almost every sector in the STI enjoys a tailwind:
    • Bank earnings will enjoy a huge lift as we enter an interest-rate cycle. A 100 basis point rise in rates can increase earnings by around 18%. We believe the three domestic banks have excess deposits or float totalling S$160bn that can immediately benefit from the rise in short-term rates. Banks are well represented, with a 45% weighting on the STI.
    • The reopening of borders and relaxation of social restrictions will be a further boost for corporate earnings. Primary beneficiaries are transport, telecommunications, retail and hospitality. They make up a combined 20% of the STI. Tourism accounted for 5% of GDP in 2019. So, it becomes a huge economic driver over the next 12-18 months.
    • Singapore has not been dragged down by the current de-rating of tech stocks from stretched valuations, regulatory risks and supply-chain disruptions. Tech is only 2% of the STI; and
    • Another 6% of the STI are rerating candidates due to share buybacks, restructuring and defence-related spending.
    • Finally, the Singapore dollar is expected to stand firmer against regional currencies with the MAS tightening bias.


2Q22 Market Recommendation:

  • The Ukraine conflict has long-term implications for several sectors, most notably defence. An unfortunate arms race has developed due to this conflict. Germany kick-started the race with a one-off EUR100bn fund to upgrade its defence budget. It will be investing more than 2% of its GDP in defence. We worry every country will now look to outdo one another in military spending. The 2 stocks with defence-related revenue are ST Engineering (SGX:S63) and Civmec (SGX:P9D).
  • Another repercussion is the diversification of energy sources away from Russian energy and the volatility (or unreliability) of renewable energy. Renewable is still dependent on the weather. Last year, renewable energy production in the UK fell 15%. A repricing of energy is underway after years of underinvestment in fossil fuels. Coal looks interesting, as even the German Chancellor mentioned the need to build a reserve for coal.
  • In Singapore, we favour the financial, construction and reopening sectors. Financials will ride the rise in interest rates. The Fed funds rate is expected to rise by more than 2 percentage points this year, producing a two-year tailwind for the banks and exchanges. Construction, namely building materials, will gain from a return of foreign labour and construction activity.
  • Following the government’s relaxation of border controls and group activities (aka “Near Freedom Day”) on 29 March, reopening stocks look attractive to us. ComfortDelGro (SGX:C52) is down 48% from pre-pandemic levels despite generating S$905mil of FCF over the past two pandemic years. Telcos are another reopening sector. Roaming is around 15% mobile revenue and almost pure profit. We estimate roaming is around 50% of StarHub (SGX:CC3)’s 2019 PATMI.


Phillip Absolute 10 Portfolio


Strategy commentary:


Deletions from our model:

  • We removed Q&M Dental (SGX:QC7) due to slower earnings momentum from the decline in COVID-19 PCR test revenue.





Phillip Absolute 10 Stock Picks for 2Q22


  1. Ascott Residence Trust (SGX:HMN): Our proxy for the tourism recovery with added stability from a growing portfolio of extended-stay assets which currently accounts for 16% of AUM.
  2. Asian Pay TV Trust (SGX:S7OU): Current dividend yield of 7.5% or S$18mil is well-supported by the annual free cash flow of S$70mil to S$80mil.
  3. DBS (SGX:D05): Largest beneficiary of rising interest rates and improving economic conditions. Benign provisioning cycle with credit cost guidance of 12bps below pre-pandemic levels.
  4. Del Monte Pacific (SGX:D03): US subsidiary DMFI enjoys a market leader position, while DMPI holds dominant market shares in certain segments in the Philippines. Valuation is attractive at 8x P/E.
  5. Frasers Centrepoint Trust (SGX:J69U): Necessity-driven purchases by surrounding households have kept tenant sales high throughout the pandemic, demonstrating the resilience of suburban malls. Rental reversions already turning positive.
  6. HRnetGroup (SGX:CHZ): One of the largest recruitment agencies in the region benefiting from a rise in hiring activities.
  7. OCBC (SGX:O39): OCBC is our preferred pick amongst the three banks due to attractive valuations, upside in dividend from the 15% CET 1 buffer and lower provisioning as Indonesia and Malaysia economies recover.
  8. City Developments (SGX:C09): Healthy inventory of 3k units to capture the peak of the property cycle and beneficiary of a recovery in hospitality. UK commercial properties and hotel portfolios carry monetisation potential.
  9. ComfortDelGro (SGX:C52): Share price remains 37% below pre-pandemic levels despite the surge in cash flows over the past two years.
  10. Keppel Corp (SGX:BN4): The re-rating catalyst is the disposal of its loss-making offshore & marine business and related assets and the successful disposal of its logistics business.









Paul Chew Phillip Securities Research | https://www.stocksbnb.com/ 2022-04-05
SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 1.230 SAME 1.230
ACCUMULATE MAINTAIN ACCUMULATE 0.150 SAME 0.150
ACCUMULATE MAINTAIN ACCUMULATE 41.600 SAME 41.600
BUY MAINTAIN BUY 0.630 SAME 0.630
BUY MAINTAIN BUY 2.640 SAME 2.640
SGX Stock Analyst Report BUY MAINTAIN BUY 1.180 SAME 1.180
BUY MAINTAIN BUY 14.220 SAME 14.220
BUY MAINTAIN BUY 9.190 SAME 9.190
BUY MAINTAIN BUY 1.800 SAME 1.800
BUY MAINTAIN BUY 7.070 SAME 7.070



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