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Singapore Market Strategy - UOB Kay Hian 2022-07-06: Turbulence Ahead But Stay The Course

Singapore Market Strategy - UOB Kay Hian Research | SGinvestors.io CIVMEC LIMITED (SGX:P9D) SINGAPORE MEDICAL GROUP LTD (SGX:5OT) FRENCKEN GROUP LIMITED (SGX:E28) CDL HOSPITALITY TRUSTS (SGX:J85) SEMBCORP MARINE LTD (SGX:S51)

Singapore Market Strategy - Turbulence Ahead But Stay The Course

  • As Singapore is a relatively defensive market, we believe the Straits Times Index (STI) will perform well in 2H22 on the back of our 14% EPS growth forecast for this year.
  • Our year-end 2022 target for the STI is 3,390 (3,500 previously), which implies a 10% upside from current levels.
  • Importantly, STI’s valuations are not stretched at present, trading at 2022F P/E and P/B of 12.4x and 1.0x respectively, and paying a yield of 4.5%.



A flat year thus far.

  • With a 0.7% decline in 1H22, the Straits Times Index (STI) was the second best performer in the Asia Pacific region after the Jakarta Composite Index (JCI).
  • The STI also easily outperformed the MSCI Singapore index (-17.0%) in 1H22, which was dragged down by the significant underperformance of Sea Ltd, while the MSCI Asia ex-Japan index (-17.3%) was negatively impacted by the weakness in the Hong Kong and China markets.
  • The MSCI World index (-21.2%) did not fare well either due to the underperformance of a number of developed markets, especially the US.


Staying constructive for 2H22.

  • While the post-COVID-19 economic recovery has been bumpy, newer concerns such as inflation and higher interest rates have come to dominate the market’s attention. However, we believe inflation concerns should subside in the latter half of 2022 and STI should be able to perform due to the prevalence of quality, value and dividend stocks relative to its regional peers. Since there will no longer be a synchronous global cycle, country risk will return and our view is that Singapore presents a lower risk vs other countries in the region.
  • 14% EPS growth for 2022. We forecast an aggregate 14% EPS growth in 2022 for the Singapore market with most sectors, with the exception of aviation and healthcare, contributing to 2022 EPS growth. By our estimates, financials and telecommunications are the two largest contributors to this earnings growth, but it should be noted that the latter sector is coming off a low base in 2021.
  • We forecast the STI to reach 3,390 by end-22 using a top-down methodology, implying about 9% upside from current levels. We have lowered our target for the STI from 3,500 previously as we have moderated our EPS growth estimates for 2022. Our new 2022 STI target is based on 14% earnings growth for 2022, and target multiples of 13.5x and 1.3x respectively, both of which are at about a 10% discount to the past five-year average for the index. We believe this is fair given moderating earnings growth and potential risks to the economy and thus our forecasts.
  • 2022 valuations for the STI appear inexpensive, with the STI trading at a forecast 2022 P/E and P/B of 12.4x and 1.0x respectively, and paying a yield of 4.5%. We highlight that these multiples are meaningful discounts to the STI’s long-term averages.


Reasonably strong economic performance for Singapore in 2022.

  • UOB Global Economics and Market Research (UOB GEMR) forecasts Singapore GDP growth of 3.5% y-o-y in 2022 after a solid rebound of 7.6% in 2021. Despite the relatively high base in 2021, we have seen that the export and manufacturing sectors have continued to do well this year, benefitting from the recovery of Singapore’s key trading partners regionally and globally.


Moderating our EPS growth estimates for 2022.

  • Compared with 6 months ago, we have moderated our 2022 growth forecast from 29% y-o-y to 14% y-o-y for our coverage universe of the Singapore market. This takes into account more realistic assumptions regarding the inflationary effects that will likely impact the market and the economy this year and thus we believe that our earnings estimates are not overly optimistic.
  • All sectors, with the exception of aviation and healthcare, will contribute to the 14% y-o-y EPS growth in 2022, with financials and telecommunications being the two largest contributors. However, it should be noted that the latter sector is coming off a low base in 2021.
  • Potential downside risk in 2022 earnings could arise if:
    1. Singapore and the broader Asian region experience a more deadly variant of COVID-19,
    2. higher-than-expected commodity prices, especially oil, throttle the nascent economic recovery, and
    3. the US Fed raises interest rates too aggressively to contain inflation and causes a recession as a result.


Interest rate increases – What does this mean for our stocks?

  • In general, we believe that the debt levels for the stocks under our coverage are manageable with only 5 companies (ST Engineering, Sembcorp Industries, City Developments, mm2 Asia, Wilmar) exhibiting net debt/equity ratios above 100% for 2022 and 2023.
    • For ST Engineering (SGX:S63), we point out that while its high debt levels are high as a result of its recent acquisition of Transcore in the US, its interest cover remains high at over 10x for 2023 and thus is manageable in our view.
    • For Sembcorp Industries (SGX:U96), we highlight that 34% of its debt is project finance while another 21% consists of bonds and thus is safe in our view. Importantly, its sustainability-linked bonds have attracted significant demand in the past six months and thus we do not view refinancing as an issue.


For some S-REITs, we believe that the gradual easing of inflationary pressure provides some respite.






Adrian LOH UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2022-07-06
SGX Stock Analyst Report BUY MAINTAIN BUY 1.080 SAME 1.080
BUY MAINTAIN BUY 0.530 SAME 0.530
BUY MAINTAIN BUY 1.630 SAME 1.630
BUY MAINTAIN BUY 1.420 SAME 1.420
BUY MAINTAIN BUY 0.156 SAME 0.156



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