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DBS analysts positive on Singapore outlook in 2022, although market swings expected

Felicia Tan
Felicia Tan12/1/2021 11:46 PM GMT+08  • 9 min read
DBS analysts positive on Singapore outlook in 2022, although market swings expected
The analysts have pegged Singapore’s benchmark Straits Times Index (STI) at a year-end target of 3,550 points for the FY2022.
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DBS Group Research analysts Yeo Kee Yan, Chung Wei Le, as well as their colleagues Janice Chua, Dennis Lam, Byron Lam and Chanpen Sirithanarattanakul say investors should expect market swings in the Asian region amid the ongoing Covid-19 pandemic.

Sentiment in 2022 will swing between the optimism of a recovering economy versus the uncertainty over timing, as well as the pace of rate hikes.

“Investors will have to contend with uncertainties over near-term unknowns about Omicron that can swing either way, rising inflation, pace of rate hikes, China policy risks and geopolitical tensions,” write the analysts in a Dec 1 report.

On this, the analysts say they are positive on the outlook for Singapore and Thailand, with both countries likely to outperform in 2022 due to accelerating growth on the reopening of borders.

They have also pegged Singapore’s benchmark Straits Times Index (STI) at a year-end target of 3,550 points for the FY2022.

“Singapore stocks offer a firmly positive 17.7% earnings per share (EPS) growth potential next year that comes after a solid 58.5% EPS recovery for FY2021. The yield is relatively attractive at 3.8%,” write the analysts.

See also: Singapore’s February NODX falls by 15.6%; NODX to top 10 markets drop on a y-o-y basis

“The country is at the leading edge of the regional attempt to reopen international borders. The government’s drive to re-establish Singapore as an aviation and financial hub should give the customer-facing services sector a much-needed revival. Recovery momentum for the manufacturing sector much depends on the outlook for China, Singapore’s largest trading partner. Inflation may head higher as wages firm and taxes possibly increase.”

They are also positive on Hong Kong as its market offers “good risk-reward” as uncertainties over Evergrande and the regulatory risks are now priced in.

They also remain “neutral” on Indonesia due to its lower vaccination rate and rising interest rates.

See also: Business sentiment drops further in 2Q2023, making this the fifth straight quarter of moderations

Meanwhile, the analysts have given Malaysia an “underweight” recommendation with the one-off prosperity tax and uncertainty over a possible general election.

In this report, the analysts have identified four themes that’ll show up in 2022

Beneficiaries from a tighter monetary policy

On the back of a tighter monetary policy, the analysts have identified their top stock picks as UOB Bank, AEM Holdings and UMS Holdings among the Singapore counters.

“Technology and financials outperformed in the last taper and rate hike cycle. We see a similar trend in 2022 as technology benefits from structural demand while banks gain from both better net interest margin (NIM) and rising net interest income,” state the analysts.

On AEM, the analysts explain that AEM’s latest earnings for the 3QFY2021 ended September “s points to the start of its anticipated volume ramp-up of the next generation of handlers”.

“This ramp-up is expected to continue into FY2022, and our analysts are expecting earnings to grow by 32% in FY2022. AEM’s key customer, Intel, has significantly increased its capex in FY2021and FY2022 by 27% and 43% respectively and we expect this to flow through to AEM,” they write.

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

The analysts also like UOB as a recovery play “as its return on equity (ROE) rebounds on track with improving profitability”.

“In our view, there is further room for UOB’s share price to re-rate as we continue to expect economic recovery, looking ahead to a higher interest rate environment,” say the analysts.

“UOB is looking towards some NIM improvement into FY2022 as it gears up on regional loans, which typically have higher NIMs, amidst continued momentum in loans, wealth management, and other fee income,” they add.

Finally, the analysts are buoyant on UMS as it continues to ride on the strong demand for global chips.

“The recent chip shortage is another shot in the arm for the chip equipment maker. Driven by digital transformation and other secular technology trends, global semiconductor equipment investments for front-end fabs in 2022 are expected to reach nearly US$100 billion, after topping a projected US$90 billion investment in 2021,” they write.

The analysts have kept “buy” on UOB with a target price of $31. AEM Holdings and UMS Holdings have also been given “buy” calls with target prices of $6.04 and $1.80 respectively.

Living with Covid-19

Despite the introduction of a new Covid-19 variant, the analysts see reopening as an “inevitable process” in the longer run as global vaccination rates improve.

“If reopening is a two-step forward, one step back process, the best time to position into this theme is during that step back. Near term uncertainties over Omicron will add pressure on re-opening plays,” they say.

To this end, Singapore’s SATS, Ascott Residence Trust (ART), Suntec REIT, CDL Hospitality Trusts (CDL HT) are identified as their top picks.

As Singapore is at the forefront of reopening air borders for international travel with a total of 21 countries under the vaccinated travel lane programme (VTL) as at mid-November, the analysts “project non-travel revenue to grow at a 15- 20% compound annual growth rate (CAGR) over the next three years, driven by robust demand for air cargo, coupled with its pivot to non-aviation food channels”.

“SATS has an enviable net cash position of $147 million (as of 1HFY2022) that enables it to capture M&A opportunities. Management indicated that they have a strong pipeline of targets and could share good news on this front soon,” they note.

SATS has been given a “buy” call by DBS Group Research with a target price of $4.90.

“ART is seeing strong sequential growth in revenue per average unit (RevPAU) on the back of robust travel demand. Its UK and France properties are expected to see further acceleration in performance. Acquisitions in the student accommodation space will bring resilience to the company,” say the analysts.

“Out of ART's eight key markets, Australia and Japan saw Covid-19 measures easing in recent months (August 2021 - October 2021), while some form of restrictions remains in three markets (Singapore, China, Vietnam). Its master leases are in check with none expiring this year while two are currently in negotiation process for 2022,” they add.

It’s also a “buy” for ART with a target price of $1.20.

As Singapore starts to look towards reopening its economy, Suntec’s office, retail and convention centre assets will benefit from the move.

“Asset recycling strategy to enhance shareholder value yet to be priced in. The recent acquisitions in UK diversify and stabilise earnings base while sale of its selected assets in 9 Penang Road and Suntec City office strata crystallise net asset value (NAV). Suntec currently trades at 0.76 times P/NAV vs peers’ average of 1 times P/NAV. It is the most undervalued commercial S-REIT, given its two-year distribution per unit (DPU) CAGR of 12% that is the highest among peers, which makes it an attractive acquisition/privatisation target,” write the analysts.

Suntec REIT has been rated “buy” with a target price of $1.90.

Lastly, CDL HT is seeing a strong uptick in performance as travel resumes for most overseas markets, with the UK, Europe and Maldives expected to lead recovery. In Singapore, W Singapore – Sentosa Cove remains the top “staycation” destination for residents in the country.

“Going forward, we expect a strong NPI performance underpinned by staycation demand for prominent hotels in the portfolio such as W Hotel Singapore and Maldives hotels across the festive period. Japan and Europe markets should lead performance as key measures to restart domestic travel in Japan after a prolonged state of emergency,” write the analysts.

CDL HT has been rated “buy” with a target price of $1.35.

Sustainability drive and structural changes

As environmental, social and governance (ESG) policies continue to grow in importance, renewables counters are set to benefit from the trend.

The analysts’ top picks are Sembcorp Industries and Singapore Technologies Engineering (ST Engineering) from Singapore.

Sembcorp is a leading renewable energy play and it should continue to see its share price rerate on its green transformation strategy, declare the analysts.

“Coupled with urban business, sustainability solutions are expected to contribute 70% of the group’s earnings by 2025,” they add.

Sembcorp has received a “buy” recommendation with a target price of $2.40.

With ST Engineering, the successful integration of TransCore should help the group plant “a firm foot into the smart city market in the US, as well as cross sell technologically advanced smart mobility solutions in Southeast Asia”.

“While the deal may not immediately be accretive and ST Engineering’s aerospace business will take a longer time to recover, we expect strong growth momentum in its smart city, satcom, cybersecurity, and defence business to drive earnings recovery over the next few years,” write the analysts.

It’s a “buy” for ST Engineering with a target price of $4.60.

They are also positive on Singapore’s UMS Holdings as digital transformation looks set to stay amid the “increased adoption of 5G, IoT, AI, EVs, and AVs”, which will continue to drive the structural trends in the technology sector.

Oil sector

National oil companies (NOCs) will reinvest in oil exploration and equipment in 2022 amid the underinvestment in the sector and improving oil demand, note the analysts.

“Besides upstream players, asset owners and oil service providers should see earnings recover,” they write, with CSE Global and Keppel Corporation being their top counter picks from Singapore.

“We remain positive on CSE’s recovery as new order wins continue to pick up and has surpassed $100 million [in] the last three quarters. We are also optimistic on CSE’s small acquisitions to enhance and strengthen its operations and recurring revenue stream as well as its pivot towards renewable energy projects (solar and wind),” they write.

“There is also potential for large contract wins in its Energy segment in FY2022. We are projecting an FY2021- 2023 earnings CAGR of 33% and an attractive dividend yield of 5.4%,” they add.

Keppel Corporation’s Offshore & Marine (O&M) segment is benefitting from the trend of cold-stacked rigs and completed and, or half-built rigs as rig utilisation has improved above 80%, note the analysts.

“Keppel’s stranded rigs and floating accommodation platforms should see higher utilisation ahead. Enquiries for production platforms should also pick up, translating into stronger order flow next year,” they add.

The analysts have rated CSE Global and Keppel Corp at “buy” with target prices of 60 cents and $6.20 respectively.

Photo: Bloomberg

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