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Credit Suisse's bottom up top picks for 2020: SingTel, ST Engineering, Wilmar and CDL

Chan Chao Peh
Chan Chao Peh • 7 min read
Credit Suisse's bottom up top picks for 2020: SingTel, ST Engineering, Wilmar and CDL
On Jan 8, when investors were spooked by the assassination of an Iranian general by the US, most Singapore stocks turned red. Among the key heavyweight counters, ST Engineering was the standout, closing higher that day instead.
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SINGAPORE (Jan 23): On Jan 8, when investors were spooked by the assassination of an Iranian general by the US, most Singapore stocks turned red. Among the key heavyweight counters, ST Engineering was the standout, closing higher that day instead.

As one of the very rare defence plays across the region, ST Engineering is a natural stock for investors to load up when geopolitics turn hairy. The company, incidentally, is one of the top picks by Credit Suisse for this year. Others include wellknown blue chips Singapore Telecommunications (SingTel), Wilmar International and City Developments (CDL).

Now, picking these big names isn’t because Credit Suisse is being conservative and recommends investors to seek safety in these stocks. “Generally, we are still expecting significant volatility in the market. And I think that really explains why we have a stock selection process that is skewed towards some of the safer stocks within the entire Singapore market,” says Credit Suisse’s Gerald Wong in an interview with The Edge Singapore.

“But more importantly, there is also a certain thematic around our stock selection in that all of the stocks in our top picks, actually have some bottom up restructuring angle, which would effectively immunise investors against a lot of the macro uncertainties,” adds Wong, who heads the Singapore research team.

Thus, while ST Engineering happens to be in the defense business which is perceived to benefit escalation in geopolitical tension, the bigger reason why Credit Suisse favours this stock is because in the past couple of years, the company has done plenty of restructuring. It also made its largest acquisition in a decade – the $868 million deal to buy aircraft engine nacelle maker MRAS. Combined with its other businesses building tanks and electronics systems, ST Engineering is now sitting on a record order book of some $16 billion. Regardless of how the broader environment pans out, Wong says it is going to enjoy accelerated earnings growth.

On Jan 17, ST Engineering closed at $4.20, which implies a historical price earnings ratio of 24.41 times, and a forward P/E of 22.83 times. At this level, the company is worth $13.1 billion and based on the 15 cent full year dividend expected for FY2019, trading at a yield of 3.57%. Credit Suisse has a target price of $4.50 for ST Engineering.

Wilmar International

Another of Credit Suisse’s top Singapore picks is palm oil giant Wilmar International. Wong agrees that Wilmar’s share price has come down significantly from its heydays when it was as high as $6.90 around a decade ago. However, with growing attention to sustainability issues, plantation owners like Wilmar find itself abandoned by many funds with mandates to be green. At 1.1 times price to book value now, Wilmar is seen to be trading at an attractive valuation.

Then, there are several factors driving the re-rating of Wilmar, says Wong. First, crude palm oil prices are likely to rise to some RM2,800 ($929) per tonne this year versus some RM2,500 in 2019. Also, while higher CPO prices will benefit the industry as a whole, Wilmar has significant “downstream” business which makes the company’s earnings more diversified, and more resilient compared to other palm oil companies more focused on owning and running plantations.

Besides its strong position in the palm oil industry, Wilmar also has a significant processing business for soya in China as well, which is also seeing improved industry fundamentals this coming year. “We’ve already started seeing some form of improvement in the crush margins and that should continue,” he adds.

Finally, Wilmar will spin off its China businesses for its own listing. The IPO of Yihai Kerry Arawana (as the China subsidiary is called) is likely to happen this year and could help unlock value for Wilmar shareholders. Wilmar’s chairman and CEO Kuok Khoon Hong had earlier indicated chances of a “good special dividend” when the IPO is done. “So, I think it is a combination of these factors and that valuation isn’t really very expensive after the de-rating over the past few years,” says Wong.

With China’s economy slowing down and no longer chalking the double-digit growth of the past, what Wilmar has in China – edible oil – is deemed as a consumer staple and won’t suffer much from any cut down in discretionary spending in bad times. “They are the largest seller of vegetable oil in China, and that really enables them to deliver on the earnings, even with any potential slowdown in economic growth,” says Wong. Credit Suisse has a price target of $4.40 on Wilmar, which closed at $4.25 on Jan 17.

City Developments

Among the various major developers, Credit Suisse’s top pick is City Developments (CDL). Singapore developers tend to suffer from a drag on their share price as the government has steadfastly kept its long list of cooling measures intact – including a particularly surprising round in July 2018.

“Both (sales) volume and prices did not come off as much as what the market was fearing; even at this point in time, we think that the valuation for the property developers’ not expensive against the backdrop of expectation that physical property prices can go up by another 1 to 3 % this year and volume up by 10% y-o-y,” says Wong.

Specifically for CDL, Wong sees the developer likely able to milk better returns from its hotel chain subsidiary, Millennium & Copthorne. It used to be listed in the UK and was fully privatised by CDL with an offer of 685 pence for the remaining one-third stake in M&C it didn’t already own. The offer price valued M&C at some $3.8 billion.

“It is a portfolio with significant potential for improvement in the returns it can generate. I think this was not something they could have done previously but now they have the 100% stake, that definitely increases the potential for them to be able to improve the returns from the portfolio,” says Wong.

Market observers have been speculating when CDL might inject the M&C hotels into another listed entity. In a sense, the CDL Hospitality Trust is an existing vehicle to list the hotel assets, if the Kwek family – who runs this group of companies – so wish.

“Even if not spun off into any REIT or business trust, just by being able to do more to enhance the quality of the assets, increase the RevPAR relative to the peers, I think that itself will be able to add value to the asset value,” says Wong. CDL closed on Jan 17 at $11.34, just 2.2% below Credit Suisse’s price target of $11.60.

SingTel

Credit Suisse’s optimism on SingTel this year – among the Singapore-listed stocks – is that the former teleco monopoly is poised to enjoy a turnaround from its associate Indian company Bharti Airtel.

For years, the Indian mobile market was the scene of a brutal price war as a deep-pocketed new entrant Jio slashed prices to the rock bottom, pleasing consumers but dismaying shareholders of the telcos.

In late 2019, the industry – recognising that the price war has caused too much bloodshed – reached a truce of sorts with a coordinated increase in tariffs which brought back sanity to the market. “The increase in tariffs should be sustainable, and then be able to drive more upside for SingTel,” says Wong.

Many investors are enthusiastically supporting Bharti. On Jan 9, it announced plans to raise some US$3 billion ($4.03 billion) – and attracted more than US$10 billion in subscription money.

To be sure, SingTel’s other regional associates and its Australian subsidiary Optus had suffered slower growth as well but that’s all largely priced into the stock already, says Wong. Therefore, improvement in India – even marginal ones – will soon be reflected in the form of higher share prices.

As for the Singapore mobile industry, the key event this year is the introduction of detailed 5G next-generation network licensing obligations to be followed by the rolling out of the infrastructure.

With the industry here facing saturation, market observers believe smaller players M1 and StarHub will put in a joint bid for the 5G license. In contrast, SingTel –with its much deeper pockets and stronger balance sheet – will almost certainly go along alone, says Wong. Credit Suisse’s price target on SingTel is $3.85.

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