RHB Bank Singapore is recommending investors to “stay defensive” on Singapore equities, given the struggle to find a clear direction amidst broader macro uncertainties.

Official forecasts of Singapore’s GDP growth outlook this year have dimmed. RHB’s economists, separately, have downgraded their 2023 forecast from 3% to 2%. Economists have started warning that a technical recession might ensue.

Traditionally, the GDP numbers have a positive correlation with expected EPS growth for the Straits Times Index (STI) component stocks. However, this relationship seems to have broken down recently.

“We believe there could be a downside risk to STI’s corporate earnings growth, especially for the banking sector,” writes RHB analyst Shekhar Jaiswal in his April 26 strategy note. “It will be difficult to build a case for strong positive STI returns in 2023.”

Jaiswal believes that the STI is still at inexpensive levels, with a forward P/E of just 10.8 x. However, there is a lack of near-term catalysts, with the unfavourable macroeconomic environment, uncertain interest rate outlook and even a potential index earnings downgrade weighing on investors’ sentiment and therefore making embedding any improvement in the P/E multiple difficult.

Jaiswal’s year-end target for the index, 3,440 points, is pegged to 11.5x 2023F P/E, which is an upside of around 4% from current levels. This target point lies between –1 standard deviation (s.d.) and –2 s.d. of its forward P/E mean since January 2008. “We believe our target P/E, which is well below its historical average, reflects the risks of an unfavourable macroeconomic outlook,” says Jaiswal.

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For this current 2Q2023, RHB suggests that investors focus on companies that are higher quality in nature, backed by more secular growth, and/ or can offer better relative value.

RHB’s investment themes for Singapore include buying shares of firms with resilient earnings and dividends; buying industrial; and taking on selective exposure to China’s economic reopening plays.

The Sheng Siong Group, with growth supported by government support measures for Singaporean consumers to aid inflationary pressures, is one of the top picks by RHB. The supermarket chain operator is set to open more new stores, which traditionally has a direct bearing on better revenue and earnings. Its business model is such that it generates strong cash flow and is sitting pat on a net cash balance sheet while giving shareholders a dividend yield of around 4%.

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Other consumer sector picks are Thai Beverage, which is seen as the proxy to capture “robust” alcohol consumption in Thailand and Vietnam. Furthermore, the potential reopening of China and the ensuing resurgence in tourism should catalyse earnings prospects as well. The company faces cost pressure but is seen to have the pricing power to defend its margins by increasing its selling prices.

Among the healthcare plays, RHB likes Raffles Medical Group, whose Singapore hospital and healthcare operations are seen recovering back to pre-pandemic levels, which will help offset the drop in Covid-19 related revenue. RHB expects China, which accounts for around 7% of Raffles Medical’s revenue, to see higher turnover beyond this year. The company’s net cash position might inspire inorganic growth opportunities. Last but not least, Raffles Medical is trading at just multiples below its peers.

For industrial stocks, RHB likes ST Engineering, which will likely ride on sustained earnings recovery as its commercial aerospace segment is back in business with the worst of the pandemic over. To date, the company has built up an order book of $23 billion, which will give earnings visibility at least two years down the road. The early 2022 acquisition of TransCore has raised ST Engineering’s debt levels but has also boosted its earnings profile, says RHB. Overall, ST Engineering is liked for its defensive business model that makes it capable of sustaining quarterly dividend payouts of 4 cents each.

RHB likes two REITs: AIMS APAC REIT and CapitaLand Ascendas REIT. The former, according to RHB, owns a quality industrial portfolio with a focus on logistics properties that are in demand following the pandemic. RHB expects earnings recovery to be driven by acquisitions, improved occupancy rates and higher rental rates.

AIMS APAC, according to RHB, has untapped potential to lift its portfolio value from asset enhancements and the REIT itself is potentially a M&A candidate in the medium term.

As for CapitaLand Ascendas REIT, which also focuses on industrial properties, it has been creating organic growth from the redevelopment of assets, higher occupancy rates and better rental. On top of being the largest industrial REIT listed here, it is also backed by a “strong and experienced sponsor”, says RHB.

ComfortDelGro is languishing at a multi-year low but RHB believes the transport operator will see “sustained” earnings recovery with the normalisation of its train and taxi businesses in Singapore, which will be further boosted by the return of tourists, especially those from China. Furthermore, valuation is “compelling”, says RHB.

The return of Chinese tourists should, too, benefit Singapore Telecommunications, with higher high-margin roaming revenue seen. More mobile users are expected to take up more expensive 5G mobile plans. Its regional associates, especially India, should see “continued robust growth” and the on-going asset recycling moves should unlock more value, says RHB.

Other stocks flagged by RHB include DBS Group Holdings, Oversea-Chinese Banking Corp, Wilmar International, Golden Agri Resources, City Developments and Food Empire Holdings.

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