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From 'lockdown losers' to 'vaccine winners', small-mid caps to play catch up in 2021: DBS

Jovi Ho
Jovi Ho1/6/2021 12:01 PM GMT+08  • 4 min read
From 'lockdown losers' to 'vaccine winners', small-mid caps to play catch up in 2021: DBS
The hospitality and retail sectors, in particular, will be the primary beneficiaries of the reopening of economies.
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The upcoming rollout of Covid-19 vaccines here will accelerate the rebound of small- and mid -cap stocks (SMC) and they are expected to catch up with larger caps on attractive valuations, says DBS Group Research analyst Ling Lee Keng in a Jan 5 note.

The hospitality and retail sectors, in particular, will be the primary beneficiaries of the reopening of economies.

Ling cites the 17% rebound of the Straits Times Index (STI) in the last two months for her optimistic outlook, while acknowledging that the FTSE ST Small Cap Index (FSTS) had only gained 10% during the same period, underperforming the STI.

“Given the relative attractive valuation at 12.4x FY2021F (price-to-earnings ratio) PE for the FSTS vs 13.8x for the STI, we expect the rebound in smaller cap stocks to accelerate and catch up with the larger caps,” says Ling.

Ling highlights four key themes for SMCs in the year ahead.

Hospitality and retail

Firstly, the hospitality sector is at an early cyclical upturn, she says. “We see a ‘V-shaped’ recovery taking shape as early as 2HFY2021.”

“The aviation, hospitality and retail sectors are among the worst hit by the Covid-19 pandemic. But there is light at the end of the tunnel now as the vaccines become available. These ‘lockdown losers’ could emerge as ‘vaccine winners’ in 2021.”

See: Compelling value in Ascott Residence Trust despite new rental restructure: DBS

Ling’s picks in this sector are Ascott Residence Trust (ART) and CDL Hospitality Trust (CDLHT).

In addition, Ling notes that the retail REITs sector is trading at attractive valuations and a robust 2-year distribution per unit (DPU) growth of 13%. “We like Lendlease Global Commercial REIT (LREIT) in the SMC space among the Singapore landlords and CapitaLand Retail China Trust (CRCT), a premier China proxy.”

Mergers and acquisitions

The mergers and acquisitions (M&A) and privatisation wave is gaining momentum, says Ling. “With the ongoing pandemic, small-to mid-size businesses with less robust cash positions are likely to struggle as government support dries up.”

Ling foresees that bankruptcies and the number of distressed companies may rise, presenting opportunities for M&A as companies look for both shelter and new opportunities.

In addition, offers are growing increasingly attractive, says Ling, with companies that were privatised or acquired now transacting at a higher premium compared to previous years. “In 2016 to 2018, average premium over the last transacted price before the deal was announced was about 10% to 20%. However, in 2019 and 2020, the premium has increased to about 38% to 40%.”

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Potential targets in the tech space include Spindex, Fu Yu and Valuetronics; while on REITs: AIMS APAC; Delfi; QAF; Yangzijiang; Hutchison Port Holdings Trust (HPH Trust); and China Aviation Oil (CAO).

New technologies

The technology sector was the best performing sector in 2020, up 8.1% while all other sectors, other than healthcare, were in negative territory.

The sector lost some lustre and underperformed the broader market in the last few months as vaccine news led to profit-taking of technology stocks into cyclical and value plays, says Ling. However, despite the rotational shift, tech stocks remained resilient.

The re-rating of tech stocks are expected to continue post Covid-19, says Ling. “The technology sector shone in 2020 as the pace of adoption of new technologies was hastened by the Covid-19 pandemic. We expect this structural change to sustain demand in the long term.”

Ling remains positive on semiconductors AEM Holdings, UMS Holdings and Frencken Group.

See also: RHB maintains 'buy' on Frencken, says impairment loss 'does not impact positive outlook'

Steady earnings growth

Finally, Ling highlights companies with steady earnings growth and clear catalysts to sustain firm growth momentum ahead. SMC stocks in this space include iFAST Corporation, Delfi, First Resources and Bumitama Agri.

“We see opportunities to position into companies that are on the cusp of an earnings turnaround. Koufu, CAO and HPHT are in this space, while Tuan Sing is an undervalued property play,” she says.

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