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UOB Kay Hian favours counters with strong earnings growth and those with majority of earnings outside Singapore

Felicia Tan
Felicia Tan5/21/2021 12:01 PM GMT+08  • 6 min read
UOB Kay Hian favours counters with strong earnings growth and those with majority of earnings outside Singapore
Singapore Airlines (SIA) remains the brokerage’s key “sell” call as they see travel resuming only after 3QFY2021.
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The impact of the heightened Phase 2 restrictions will be short-lived for now, given that it is slated to end in mid-June, says UOB Kay Hian analyst Adrian Loh and the Singapore research team.

This is also based on the assumption that the number of community infections in Singapore be brought under control, travel loopholes have been fixed, and that strict travel restrictions from highly infected South Asian countries remain in place.

To Loh and team, he believes the share price declines on May 14 following the announcement of the tighter community measures are a “knee-jerk reaction”.

As such, he has identified key stocks to focus on – all of which have strong business franchises with continued earnings growth in 2021, or those with majority of its earnings coming from outside of Singapore.

Counters Loh has identified include OCBC, Singapore Exchange (SGX), Sembcorp Industries, Yangzijiang Shipbuilding, Netlink NBN Trust, Thai Beverage, Food Empire, Frencken, iFast, Innotek and Propnex.

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He adds that Singapore Airlines (SIA) remains the brokerage’s key “sell” call as they see travel resuming only after 3QFY2021.

For more stories about where the money flows, click here for our Capital section

In the same report dated May 17, UOB Kay Hian analyst Jonathan Koh has kept “overweight” on the Singapore banking sector as it sees business as usual during the heightened measures.

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The strong digital capabilities displayed by Singapore banks have also contributed to enabling them to proceed with business despite changes in restrictions.

To Koh, Singapore banks also benefit from the steadfast recovery in developed countries.

“US banks continued their rally with Bank of America, Citigroup, Goldman Sachs and Morgan Stanley gaining 1.2%, 1.7%, 2.8% and 2.9% respectively [on May 14],” Koh writes.

“While the Fed has kept interest rates near zero and viewed the recent rise in inflation as transitory, many investors feared that the Fed could be forced to hike interest rates earlier than expected. This would have a positive knock-on effect on SIBOR and SORA in future,” he adds.

Koh’s top pick for Singapore banks is OCBC followed by DBS. He has given both banks “buy” recommendations with target prices of $15.50 and $35.45 respectively.

For retail REITs, Koh sees the food & beverage (F&B) sector being the worst hit by the new measures. To him, suburban malls are positioned to benefit from the increase in necessity consumption at their locations.

“Suburban malls have proven their resiliency during the Covid-19 pandemic and are well positioned to weather the upsurge in new daily cases in the near term,” he writes.

For more stories about where money flows, click here for Capital Section

While he sees retail REITs to weather selling pressure, he has identified Frasers Centrepoint Trust (FCT) as his pick for its exposure to the resiliency of suburban malls. Koh has kept “buy” on FCT with a target price of $3.06.

He also sees the opportunity to accumulate Lendlease Global Commercial REIT (LREIT) on the current weakness. He has given a target price of 97 cents on LREIT.

For Food Empire, analyst John Cheong says its key markets of Russia and Vietnam have seen the worst of the Covid-19 pandemic and performed well even during the lockdown period.

Its current valuation of 11 times FY2021 price-to-earnings (P/E) is “attractive” compared to its consumer peers which trade at 20 times.

To Cheong, Innotek should continue to enjoy strong growth in China’s auto market as its key manufacturing plant and customers are based in China.

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“Current ex-cash FY2021 P/E of [less than] 5 times makes it the cheapest manufacturing stock in Singapore. Innotek has just penetrated the EV market, which exposes it to upside from this sector,” writes Cheong.

To Loh, 100% of Yangzijiang’s revenues and profit come from China, which is one of the countries that are most unaffected by Covid-19 at the moment. The company has seen a strong orderflow this year, which has brought its current orderbook to a record high of US$6.6 billion ($8.79 billion) with deliveries stretching into 2023.

“While the stock has risen 17% in the past month, the company’s strong order flow in 1QFY2021 should underpin earnings for the next few quarters,” Loh says.

To Loh, Sembcorp Industries has resilience in its earnings, attributed to the fact that its revenue and profit comes from essential services such as the provision of energy, water, waste and wastewater treatment.

Propnex is also one of the team’s picks, as the Singapore market saw record property transactions in the 1QFY2021.

“Given the usual revenue- recognition time lag, this will only be recognised in 2Q and 3QFY2021,” says Loh.

In addition, the return to Phase 2 may delay the likelihood of property cooling measures, he adds.

For Frencken, the current chip shortage situation in the semiconductor industry is likely to benefit the counter.

“Industry sources and outlook of key customers in the semiconductor industry have maintained that demand for equipment is likely to be sustained at reasonably high levels in 2021,” writes analyst Clement Ho.

Frencken is also classified as an “essential service” in its markets, which means there should not be any operational disruptions at this point.

iFast is well-positioned for the potential spur in a further shift towards digitlisation in the wealth management industry, says Ho.

“We continue to await further details on the Hong Kong eMPF platform which could see upside in our and street’s FY2021-22 earnings forecasts, in our view,” he adds.

To analyst Lucas Teng, he remains positive on SGX as the renewed stay-home measures may spur heightened retail trading, “which enhances volumes and clearing fees for cash equities”.

He also sees that spirits volumes will remain resilient due to off-trade sales, which is a good thing for Thai Beverage.

“Spirits consumption from home will be unaffected by enhanced stay-home measures if any were to materialise in Thailand,” Teng adds.

For counters like ComfortDelGro, Teng expects weakness from lower rail ridership and taxi rental rebates, while analyst K Ajith believes shares in SIA have “potential downside” to $4 assuming a target price to book (P/B) of 1.0 times FY2022/2023 average book value.

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