CFA Society Singapore
SINGAPORE (Nov 30): OCBC Investment Research is maintaining “neutral” on the Singapore industrials sector, indicating a preference for ST Engineering and Singapore Airlines (SIA) due to their earnings resilience and low valuations, respectively.
Both stocks have been rated “buy” with fair value estimates of $3.95 for ST Engineering and $10.71 for SIA, which was upgraded in mid-Oct on valuations after it closed at $9.15 to imply a price-to-book value of 0.8 times, which is near 2008 crisis levels.
In a Thursday report, lead analyst Low Pei Han says she sees the offshore oil and gas (O&G) sector continuing its gradual recovery, underpinned by cost deflation across the industry as well as lower break evens.
“We believe a clear point of realisation for some erstwhile bulls came in mid-July when Sembcorp Marine’s management said that the group’s transformation efforts to move up the value chain has resulted in new business opportunities, but they require significant time and effort in project co-development with potential customers. Such new-build EPC projects have a detailed engineering and construction planning phase, which may take as long as six to 12 months,” says Low.
She highlights that among the conglomerates and yards, only ST Engineering is up in the year to date (YTD).
Meanwhile, transport-related stocks are all down in the YTD save for ComfortDelGro (CDG), rated “hold” with a fair value estimate of $2.29, due to a rally in the April to May when Uber exited Singapore.
Low nonetheless notes that the stock has softened in recent months with the impending entry of Go-Jek, along with weakness in the broader market.
In Low’s view, transport has been a “rather stable sub-sector with relatively less volatility” – although SIA Engineering saw a 15% fall over two weeks post its 2Q19 results and OCBC’s rating downgrade.
“As for SIA Engineering, it has broadly tracked the market so far this year, except for a recent fall in share price… Headwinds for the company remain and we see few catalysts for now, except for less pricing pressure from airlines under a lower oil price environment, or a possible privatisation by SIA,” she adds.
Post a 9.1% correction, the analyst is now upgrading SATS to “buy” with a fair value of $5.34.
“Recall that results were in line with our expectations, with 1H18 net profit accounting for 51% of our full year figure. We had downgraded our rating for the stock due to the limited upside potential post share price appreciation, but now with the recent correction, value is emerging again,” says Low.
Shares in ST Engineering, CDG, SIA Engineering, SATS and SIA last traded at $3.52, $2.13, $2.49 and $4.78 and $9.59 prior to the midday trading break.