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SINGAPORE (THE BUSINESS TIMES) – Despite deep cuts in recent quarterly earnings for Singapore-listed companies and trusts, the worst is over, DBS Group Research said in a market strategy report on Monday (Sept. 7). ).
The second-quarter earnings season had suffered the full impact of global Covid-19 locks, with a sharp 14.9 percent cut in expected financial year 2020 earnings for stocks under DBS coverage.
Investor interest in travel or leisure stocks is likely to rise, fueled by progress on Covid-19 candidate vaccines that are in third-phase trials, said DBS analysts Yeo Kee Yan and Janice Chua.
DBS picks are Hutchison Port Holdings Trust (HPH Trust), ST Engineering, SIA Engineering Co (SIAEC), Wilmar International, UMS and Venture Corp, among counters with a positive earnings review of more than 5 percent or an update recommendation.
“Looking beyond the ashes of declining second-quarter earnings, we looked for opportunities in the list of companies that saw upward revisions to earnings or improvements in recommendations,” said Mr. Yeo and Ms. Chua. These are companies that have emerged positively from the second quarter.
While the exact timeline for a vaccine to become widely available is uncertain, DBS believes that the recovery in air travel will be swift once this materializes. Analysts pointed to empirical evidence showing that China’s domestic air travel had quickly recovered to levels close to Covid-19 in a pre-vaccine setting in five months.
Therefore, DBS recommends that investors look beyond the short term to accumulate travel and leisure related stocks in anticipation of the industry possibly recovering next year.
Their picks in the travel and leisure space are SIAEC, China Aviation Oil, ComfortDelGro Corp, Ascott Residence Trust, and Far East Hospitality Trust.
In terms of names related to manufacturing and trade, DBS highlighted the strengthening of purchasing manager indices in the United States and China, as well as the strong increase in transportation stocks since the third quarter.
These point to a broader manufacturing recovery and a revival of business activities, DBS analysts said.
DBS’s picks in these areas are semiconductor component maker UMS Holdings, consumer equipment and capital services provider Frencken Group, and Venture Corp, which provides contract manufacturing services to electronics companies.
DBS also favors HPH Trust, which the research team sees as a substitute for improving global business activity, offering a return of around 11 percent.
On the other hand, analysts like Yangzijiang Shipbuilding, given the improvement in order flow and the attractive valuation of the Chinese shipbuilder that trades on the motherboard.
Meanwhile, Maybank Kim Eng has raised its target for the benchmark Straits Times Index (STI) to 2,995, from 2,200 previously, under a new methodology that takes into account fundamentals and massive market liquidity.
The higher STI target implies a 17.9 percent increase, the brokerage said in a report last Friday, adding that its equity strategy requires a balance between defense and growth by weighting stocks with structural growth, visibility of dividends and diversification.
Maybank Kim Eng’s top “buy” ideas are Wilmar, Ascendas Reit and ComfortDelGro, as the research team noted that worst-case-scenario fears appeared to have “overcome the reality of the lockdown, with fewer losses. earnings and higher earnings per share (EPS) in the second quarter 2020 earnings season. “
“Despite the worst of the regional closings in the second quarter, only 29 percent of the combined hedging shares of STI and Maybank Kim Eng fell short of Street’s expectations,” wrote its analysts.
DBS on Monday maintained its year-end target for the STI at 2,850, with technical support at 2,440.
With the sharp earnings cut in the second quarter, the STI is now trading between 13.2 times (average) and 13.8 times (+0.5 standard deviation) of its 12-month price-to-earnings (PE) ratio.
Although the index’s PE valuation no longer looks attractive, investors will likely look beyond constituent gains in financial year 2020, DBS said.
This is because the worst of earnings is probably over, with world economies reopening, manufacturing activity picking up and Singapore’s reversing of its June breaker, the research team added.
The STI should continue to trade at an above-average PE in the current recession year, when earnings forecasts take into account Q2 global lockdowns, while Singapore’s gross domestic product is expected to rebound in the future. Yeo and Chua said.
The price-to-book ratio of the index is attractive “at just 0.84 times, which is slightly lower than the global financial crisis,” they added.
“While US markets should pause to take a breather in the coming weeks, we believe stocks will stay in favor amid optimism in vaccine development, a broader recovery and lower rates for longer.”
In the second quarter of this year, five stocks disappointed for every three stocks that beat expectations.
The main culprits behind the Singapore market’s profit drag in the second quarter were travel and leisure such as Genting Singapore and Singapore Airlines, as well as telecom company Singtel, along with a one-time cut for property developers CapitaLand, UOL and City. Developments Limited, DBS. said.
By contrast, tech names (UMS, Frencken, and Hi-P International) and healthcare counters saw upward revisions in earnings.
The EPS contraction anticipated by the STI has deepened to 36.1% for fiscal 2020. That said, there will be an equally sharp jump of 35.4% for EPS in fiscal 2021, driven by the anticipated recovery. 5.5% of GDP at a minimum -Base effect, the analysts wrote.
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