Singapore Market Strategy - RHB Invest 2022-10-26: Stock Themes For 4Q22


Singapore Market Strategy - Stock Themes For 4Q22

  • Themes for 4Q22 Singapore stock picks include:
    1. Buying shares of firms with resilient and defensive earnings/dividends;
    2. buying banking stocks as a proxy to rising interest rates;
    3. continued selective exposure to economic reopening plays;
    4. buying REIT counters that are defensive, and those that will benefit from the economic reopening.

SG stocks with resilient and defensive earnings

  • Both developing and emerging economies are at increased danger of undergoing a sharp slowdown in growth. Despite slower GDP growth of +3.7% y-o-y for 2022F and +3% for 2023F, Singapore's base case continues to indicate that there will not be a recession. Equity markets are likely to continue to be volatile. We believe investors should prioritise surviving through these uncertain times.
  • Companies with strong financial sheets, pricing power, captive customer bases, recurrent demand, and the capacity to pass through increasing costs should be key considerations when choosing stocks. We support a fundamentally defensive stance that emphasises on investing in companies that have sturdy earnings or dividend profiles.
  • We believe companies with resilient earnings, as well as the ability to pass on costs and maintain strong cash flow should outperform in the current environment. We have looked for businesses that can maintain profitability despite slowing growth and rising inflation.
  • Our stock picks for this subject are ST Engineering (SGX:S63), City Developments (SGX:C09), Kimly (SGX:1D0) and Sheng Siong (SGX:OV8).
    • We expect ST Engineering to record a sustained recovery in earnings beyond 2022, driven by the gradual improvement in its Commercial Aerospace unit. ST Engineering’s defensive business model should allow it to sustain y-o-y higher dividends amid resilient earnings and positive FCF generation.
    • Meanwhile, Kimly and Sheng Siong are set to benefit from the recent rise in inflation.
      • Kimly operates coffee shops, which we believe would be the preferred cheaper alternative for meals amidst higher food prices. Moreover, it has the ability to pass on the rise in costs by increasing rental rates.
      • Sheng Siong’s defensive business model gives it the ability to preserve margins by passing on the cost increases consumers. We expect growth to come from consumers seeking cheaper options amidst rising inflation.
    • For City Developments, we expect earnings recovery in 2022 to come from a rebound in the hospitality segment and healthy locked-in sales of its residential projects.

Riding the rising interest rate cycle

  • In a context of rising interest rates and inflation, the banking sector offers intriguing options. The disparity between rates on loans and deposits allows banks to make money, and stronger nominal GDP growth may also result in an increase in credit card and transaction fees. The main area of optimism for Singaporean banks will be the NIM expansion as a result of the US Fed's aggressive rate hikes. Even while waning investor confidence is starting to reduce credit demand, this should offer some relief.
  • In 2H22, non-II is anticipated to stay soft, as fees from loans and trade flows reflect the reduction in credit growth and the income from volatile capital markets affects wealth management.
  • Banks are actively repricing loans, and NIM is probably going to improve. This should provide some comfort even as declining investor confidence is starting to lower lending demand.
  • According to banks' forecasts, every 25bps increase in interest rates would increase FY22F NIM for DBS (SGX:D05) by 7-8 bps, OCBC (SGX:O39) by 4-5 bps, and UOB (SGX:U11) by 3-4 bps. This would result in a 5% increase in DBS' earnings and a 3% increase for OCBC and UOB.
  • DBS Share Price and OCBC Share Price are still trading at modest valuation levels, and are well supported by their respective FY22F dividend yields of 4.5% and 5.0%.
  • DBS and OCBC are our Top Picks, while we rate SG Banks as OVERWEIGHT.

Continued selective exposure to economic reopening plays

  • Singapore has started living with treating COVID-19 as an endemic. The country has taken a significant step to reduce domestic and international COVID-19 related restrictions, which has coincided with the wider regional reopening of ASEAN. On the strength of a pick-up in travel, service sectors like hotel, food and beverage, aviation, healthcare, and tourism-related services industries have started to rebound robustly.
  • By the end of 2024, International Air Transport Association (IATA) expects aviation travel to have reached pre-pandemic levels, once China and Japan have both opened their borders. As a result, there is still plenty of room for the recovery to continue.
  • Within our coverage, Centurion Corp (SGX:OU8), ComfortDelGro (SGX:C52), HRnetGroup (SGX:CHZ), Raffles Medical (SGX:BSL) and SingTel (SGX:Z74) should be the key beneficiaries of this theme.
    • Centurion Corp should benefit from increased demand for worker accommodations as construction activities have now resumed.
    • HRnetGroup should be able to ride on growth in hiring volumes and salaries.
    • Raffles Medical should benefit from the return of elective procedures and pent-up demand from medical tourism.
    • ComfortDelGro should see sustained earnings recovery amid the normalisation of Singapore rail and taxi businesses operations.
    • The resumption of international travel should drive a recovery in roaming revenue and sale of starter packs for SingTel.

Selectively positive on industrial and office REITs

  • Despite rising macroeconomic risks and inflationary pressures, we expect S-REITs to register positive DPU growth in 2022. Key catalysts:
    1. We expect DPU growth (for stocks under coverage) at 4.9% and 3.0% for 2022-2023 on the back of positive economic growth;
    2. Valuations are looking attractive, with 13 out of the 14 REITs under our coverage trading below book value, while all REITs are now offering > 6% yields;
    3. Singapore’s growing status as an Asian financial hub, with a good number of sovereign and pension funds as well as family offices of high net worth individuals (HNI) setting up regional offices.
  • The key risk remains the economy tipping into a deep recession and persistent inflationary pressures (our base case assumption remains that there is no recession in 2022-2023 for Singapore).
  • Industrial demand remains strong, mitigating supply concerns.
    • We expect industrial rental rates to continue rising, while occupancy rates are expected to remain relatively flattish. Among the sub-sectors, we like logistics, hi-tech, and good-quality business parks, as these sectors continue to benefit from changing market dynamics brought about by COVID-19 and the Government’s longer-term push to transform Singapore into a smart nation.
  • We expect overall office rental rates to rise up to 5% in 2022 and occupancy levels to remain stable.
    • Despite the positive rental outlook and external factors supporting Singapore’s office market, office REITs have been trading at a discount to book value – which are a sharp contrast to transactions in the market. We believe this is mainly due to investor concerns on the impact arising from interest rates and uncertainty over the long-term office demand outlook due to prevailing work-from-home (WFH) trends.
    • We remain relatively more bullish in our outlook for long-term office demand.
  • Our preferred exposure in the S-REITs sector are AIMS APAC REIT (SGX:O5RU), CapitaLand Ascendas REIT (SGX:A17U), ESR-LOGOS REIT (SGX:J91U) and Suntec REIT (SGX:T82U).

Shekhar Jaiswal RHB Securities Research | https://www.rhbgroup.com/ 2022-10-26
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