• A more resilient reopening and earnings recovery above pre-COVID  supports end-2022 STI target of 3,550 
  • Go for reopening beneficiaries and earnings recovery while diversifying into structural growth themes
  • Eventful year ahead for value unlocking and M&A 

Broadening services recovery Singapore’s 2022 GDP is expected to grow 3.5% while inflation averages 2.4%. 2022 is the year where investors juggle between a more resilient transition to living with COVID while the economy faces uncertainties from inflationary pressure, higher interest rates, uncertainty about China’s growth, and domestic policy risks. Growth in the manufacturing sector should normalize while that for the services sector broadens as the economy reopens. Policy risks beyond the latest property cooling measures are GST hike and a possible wealth tax. 

Earnings to recover above pre-COVID Stocks under our coverage are expected to register strong +17.7% y-o-y EPS growth in FY22F as both domestic and international borders restrictions ease. The high teens earnings growth comes despite the higher-base from the snap back +58.5% y-o-y FY21E EPS recovery. FY22F earnings is 12% above the FY19A pre-COVID level. While the FED now sees 3 interest rate hikes next year, we observe that equities tend to perform positively at the start to middle phase of a rate hike cycle so long as it is supported by growth. Our end-2022 target of 3550 is pegged to 13.2x (ave) FY23F PE and implies a 13% upside.

Reopening, recovery, and structural growth The Omicron setback is temporary, reopening is inevitable. Most reopening stocks have priced in up to a 6-month delay. Our picks are SATSARTCDREITFEHTCICTFCT, and CD. We see earnings turnaround going beyond the reopening related sectors. Downstream technology firms Venture and Nanofilm will benefit from the gradual easing of the semiconductor shortage from 2Q22. AEM is the only upstream technology player that should register stronger y-o-y growth for FY22. We advocate that investors diversify to include structural trends such as digital transformation and sustainability drive. Semiconductor stocks UMS and Frencken are supported by demand for electronics, 5G transition and new-tech developments. SCI plans to quadruple its renewable energy portfolio by 2025 while ST Eng expects its smart city revenue to more than double by FY26.

Restructuring trend catches on 2022 looks to be an eventful year for value unlocking with companies such as ThaiBevYZJ ShipbuildingSingTELCity Dev and Tuan Sing planning spinoffs or listings for their units. M&A activities could be brisk starting with Keppel Corp’s O&M business and SMM possibly completing their merger. ST Eng is seeking to acquire TransCore Partners for c.US$2.7bn that will position the Group as a market leader in Smart Mobility. The potential listing of SPACs on the Singapore Exchange could drive increased trading volume for SGX. Singapore banks (UOBOCBC) may seek to acquire Citi’s consumer businesses. SREITS could see a year of bustling M&A activity with CDREIT expanding its investment mandate and Lendlease REIT potentially upping its stake in JEM.