SINGAPORE (March 17): Rising interest rates on the back of US Fed rate hikes should favour banks, property developers, and stocks with yield backed by net cash, says DBS Group Research.
In line with expectations, the US Federal Reserve raised Fed funds rate up 25 basis points to 1%, and continued to project two more increases this year.
(See also: Fed raises benchmark rate as inflation approaches 2% target)
Banking on rate hikes
According to DBS analysts Janice Chua, Yeo Kee Yan, Derek Tan, and Lim Sue Lin in a Friday report, this “re-affirms the catalyst for banks,” with positive impact on net interest margins expected to roll in from the second half of this year.
“Sensitivity analysis points to an increase in net profit by close to 2% for UOB and OCBC for every 25-bp hike in SIBOR/SOR, HK$ and US$ loan rates collectively,” says DBS.
While both banks are expected to grow loans at mid-single digits, the research house says its preferred pick is UOB Bank for its more optimistic asset quality outlook and its larger provision reserves buffer.
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“Every additional one percentage point in loan growth would add to 0.7-0.8% to earnings,” DBS says.
DBS has a “buy” call on UOB with a target price of $22.70.
As at 3.21pm, shares of UOB are trading 17 cents higher at $21.95.
See also: UOB Kay Hian keeps ‘buy’ on Yangzijiang but sees capital management as the group’s major issue
Favouring yield and net cash
In addition, DBS believes that stocks that offer both yield and net cash could benefit amid interest rates rising at a controlled pace.
Screening through stocks under it coverage that are in a net cash position and have at least 3% yield, DBS highlights Genting Singapore, SGX, and ComfortDelGro as its large-cap picks.
DBS has “buy” recommendations on all three, with target prices of $1.20, $8.30, and $2.94, respectively.
As at 3.21pm, shares of Genting Singapore are trading half a cent lower at 99.5 cents, shares of SGX are trading 1 cent higher at $7.64, and shares of ComfortDelGro are trading 1 cent lower at $2.52.
Among the small- and mid-cap companies, DBS says it favours Sheng Siong, China Aviation Oil, Singapore O&G, Sunningdale Tech, Fu Yu, and OKP.
DBS has “buy” calls on Sheng Siong, China Aviation Oil, and Singapore O&G with target prices of $1.13, $1.85, and $1.60, respective. Sunningdale, Fu Yu, and OKP are not rated by DBS.
“Among these, Genting Singapore and Singapore O&G further offer double-digit EPS growth for both FY17F and FY18F,” DBS says.
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As at 3.21pm, shares of Sheng Siong are trading half a cent higher at 94 cents, shares of China Aviation Oil are trading 1.5 cents higher at $1.49, and share of Singapore O&G are trading flat at $1.25.
Meanwhile, shares of Sunningdale Tech are trading 4.5 cents higher at $1.61, shares of Fu Yu are trading half a cent higher at 22 cents, and shares of OKP are trading 1.5 cents higher at 42.5 cents.
Bane or boon for property?
Singapore’s property market is expected to take a hit as a result of rising mortgage rates on the back of Fed rate hikes.
However, DBS says this will be mitigated by improved sentiments after the government recently stepped in to tweak the property cooling measures.
Singapore on March 10 announced a reduction of Seller’s Stamp Duties (SSD) and changes to the Total Debt Servicing Ratio (TDSR).
While the tweaks were minor and expected to have a marginal impact, the surprise easing of property cooling measures lifted sentiment for the property market and sent property developer stocks soaring to the highest in more than 20 months.
(See also: Govt relaxes SSD, TDSR rules for residential properties; introduces new stamp duty for property-holding entities)
However, DBS believes property stocks are now “more vulnerable to profit taking” after having performed well so far this year.
The research house advocates a “buy-on-pullback stance” on the back of further upside expected for the sector.
DBS says it prefers developers with a pipeline of launches in 2017.
Its picks for property developers are UOL Group as a deep value stock, and Frasers Centrepoint as positive sell-through rates for upcoming new launches could drive share prices.
DBS has “buy” recommendations on UOL and Frasers Centrepoint, with target prices of $7.64 and $2.00, respectively.
As at 3.21pm, shares of UOL are trading 2 cents higher at $7.00 and shares of Frasers Centrepoint are trading 1 cent lower at $1.73.
However, DBS cautions that investors should “stay selective” when it comes to real estate investment trusts (REITs).
“With Singapore’s GDP growth revised upwards, our S-REITs team recommends positioning into the more cyclical office and industrial REITs – specifically the business parks and hi-tech segments,” DBS says.
Meanwhile, retail REITs could see a relief rebound, but upside is likely to be capped.
Hospitality REITs, on the other hand, continue to face downside risk to revenue per available room (RevPAR) expectations, according to DBS.
DBS says its top picks among the Singapore REITs are Ascendas REIT, Croesus Retail Trust, Frasers Logistics & Industrial Trust, Keppel DC REIT, and Mapletree Commercial Trust.
The five REITs are rated “buy” with target prices of $2.65, 99 cents, $1.10, $1.30, and $1.62, respectively.
As at 3.31pm, units of Ascendas REIT are trading 1 cent lower at $2.49, units of Croesus Retail Trust are trading half a cent lower at 88 cents, units of Frasers Logistics & Industrial Trust are trading flat at 95 cents, units of Keppel DC REIT are trading half a cent lower at $1.19, and units of Mapletree Commercial Trust are trading flat at $1.49.