Balancing act
? We advocate a risk-off approach in the near term by positioning in REITs (yield and stability) but also watching for tactical entry for banks (for hikes).
? We are also positive on commodities and capital goods sector which may benefit from high CPO and energy prices. Finally, reopening hope remains.
? We lower our end-2022 FSSTI target to 3,475 pts, pegged at -1s.d. forward P/E of 12.5x to factor in potential prolonged near-term uncertainties.
? Our top large cap picks include SCI, WIL, AEM, YZJ, UOB, STE, CICT, AREIT, THBEV, SPOST
Keep some REITS for yield, tactically accumulate banks for hikes
The 4Q21 reporting season ended with higher number of beats qoq — 27 beats vs. 12 in 3Q21 — 11 misses and 29 companies within expectations. Post-results, we have raised our FY22F earnings for companies under our coverage by 2.2-9.7%. This will translate into a 16.6% yoy earnings growth for FY22F and a further 14.8% growth in FY23F. We lower our end-FY22F STI target to 3,475 pts (from 3,506 pts), pegged to a lower P/E target of 12.5x, based on -1 s.d. (vs -0.5 s.d. previously), in view of heightened macro uncertainty. We believe the current volatility warrants taking a more cautious stance. In terms of strategy, we advocate investors to maintain a risk-off approach in the near term by positioning in REITs, for yield and income stability, and tactically accumulating banks for the interest rate upcycle in the medium term. Despite recent geopolitical turmoil, what has not changed is that economies are looking for opportunities to establish post-Covd19 normalcy. As more borders reopen, we believe the travel, retail and even telco sectors will be the main beneficiaries.
Positive on commodities and capital goods
We take a closer look at the sectors that are likely positively and negatively impacted by the Russia-Ukraine conflict. Commodity prices have moved up significantly and are expected to remain elevated due to geo-political tensions and added pressure from potential protracted supply chain shocks. Commodity plays, such as FR, GGR and WIL, are likely beneficiaries of rising CPO prices. Other beneficiaries include SCI, as its power plants are fuelled by gas and on cost-plus terms. The consumer, construction, technology, airlines and property sectors could be more adversely impacted as higher commodities prices directly affect input costs. Meanwhile, the impact on financials, healthcare, REITs, telco, gaming and land transport segments are assessed to be more neutral, with less direct effect from these factors.
We add CICT, AREIT and SPOST into top picks
Going into 1H22F, our preferred picks are CICT and AREIT for attractive yields and potential acquisition catalysts. Despite recent outperformances, we anticipate CPO price to remain on an uptrend, and we retain our Add rating on WIL. We like SCI for earnings upside potential from a tight energy market and STE for its defensiveness from a diversified business model and attractive 4% dividend yield. We also like UOB as our pick in the financials segment; we believe it offers a better risk-return profile at an attractive
1.1x FY22F P/BV. We favour SPOST as a proxy to reopening plays. Other big-cap picks include YZJ for its strong orderbook of US$8.5bn (as at end Dec 2021) and the spin-off of debt investment as a near-term catalyst. We retain THBEV and DELFI (small-cap pick) in our preferred stock list as both companies could potentially enjoy sequential GPM expansion in 1QCY22F, from cost pass-through (THBEV) and product mix optimisation (DELFI). We continue to like AEM and keep HRnet and SILV in our preferred small-cap
picks. Key risk to our view is a protracted Ukraine-Russia tension that would continue to put pressure on the supply chain and commodity prices.