Felicia Tan Mon, May 30, 2022
CGS-CIMB Research analysts Lock Mun Yee, Lim Siew Khee, as well as the Singapore research team are advocating investors stay defensive in the near-term.
“We expect the market to remain volatile with increased external risks,” the analysts write in their strategy note dated May 26.
With this, the analysts are recommending investors keep or increase their positions in REITs and high dividend yield stocks.
The way the analysts see it, the results season for the 1QFY2022 was a “relatively muted event” with the number of earnings surpassing expectations outnumbering earnings that’ve missed expectations by a narrow margin.
“Inflationary cost pressures have dragged on operating margins across most sectors and led us to cut our earnings by 1.1%-32.7% for FY2022 and by 1.3%-10.5% for FY2023,” write Lock and Lim.
“That said, we raised our projections for sectors that benefit from reopening and higher commodity prices, such as air transport and commodities on demand-led recovery, and banks on net interest margin (NIM) upgrades,” they add.
In addition to the defensive portfolio strategy, CGS-CIMB’s Lim and Lock are recommending domestic reopening plays amid the relaxing of measures as well as the reopening of borders.
“We like construction plays as a reopening laggard, as this sector has benefited from the easing of the labour crunch due to the reopening of travel borders,” they write.
“We believe building materials players (BRC Asia, Pan United) have room for earnings surprises this year in view of steady recovery of construction activities in Singapore, and faster-than-expected rise in building material prices,” they add. “We also see potential upside surprises for recovery names (Thai Beverage, ComfortDelgro, SingPost) in view of the significant relaxation of Covid-19 measures post the Omicron wave.”
As the markets move into the second half of the FY2022 and begin to focus on the outlook and earnings in FY2023, the market could “start to look for inflexion points in inflation and interest rate trends and seek sectors with attractive valuations and robust earnings growth prospects”.
“We note that the tech and bank sectors have reverted to mean valuations and priced in some of the slower growth expectations,” the analysts write.
While earnings may still have some downside risk and with valuations not at trough levels yet, the analysts are looking out for inflexion point indicators, such as the peaking of inflation outlook, which could provide improved visibility on costs, pricing strategy and margins particularly for manufacturers, and assess demand outlook under a new normal of higher rates and inflation environment.
“For banks, a clearer interest rate outlook and improved economic activity could translate to better NIM or growth outlook,” they write.
Counters to look out for in the 2QFY2022
For the 2QFY2022, the analysts are looking at companies that could turn in better q-o-q and y-o-y performance.
“In our view, this could be Venture Corp in the big cap space and UMS Holdings in the small cap space,” they say.
Top picks for the 2HFY2022
Going into the 2HFY2022, Lim and Lock are adding OCBC and Venture Corporation to their list of top picks.
They are also keeping their eyes on Yangzijang Shipbuilding for yield and its high net cash position, as well as Singapore Technologies Engineering (ST Engineering) for earnings recovery.
In addition, they continue to “like” Sembcorp Industries for its potential earnings upside surprise on the back of high energy prices, as well as OCBC as it offers attractive risk/reward profile at 1.04x P/BV.
REITs CapitaLand Integrated Commercial Trust (CICT) and Lendlease Global Commercial REIT (LREIT) are also being favoured as reopening plays.
“We like ThaiBev for potential better than expected earnings while PanUnited is a construction sector laggard,” the analysts add.
Keeping FY2022 STI estimates unchanged
In their report, Lim and Lock are keeping their FY2022 target for the benchmark Straits Times Index (STI) unchanged at 3,475 points, which is midway between -1 standard deviation and -1.5 standard deviation.
Despite the upward tweak to their projections in the FY2022 to FY2023, the unchanged target is due to the heightened market uncertainty over slower earnings growth. The slower growth, in turn, is attributable to the geopolitical tensions and China’s slower growth outlook due to its Covid-Zero policy and lockdowns.
“However, in the near term, we think the STI will trade rangebound as inflation is likely to continue to escalate and market sentiment is likely to be driven by expectations on the quantum of interest rates hikes,” they write.
“The STI has fallen by more than 8% since the start of April. While the index has rebounded from the lows of 3,166 support, the dominant trend of STI remains sideways between 3,166-3,440,” they add.
“The short-term upside is likely to return after the relative strength index has displayed an oversold signal and successfully closed above the 200-day exponential moving average. However, the upside will likely be capped at [the] 3,309-3,385 resistance [level] by the end of 2QFY2022. Major support remains at the 3,112 level.”
Sector outlook
On the back of the updates from 1QFY2022, Lim and Lock are “overweight” on the capital goods, commodities, consumer, construction, financials, healthcare, property, REITs, telco, and transport sectors.
Within the capital goods sector, the analysts’ top picks are Sembcorp and Yangzijiang Shipbuilding with “add” calls and respective target prices of $2.96 and $1.63.
In the consumer sector, the analysts are expressed their preference for consumer brands over retailers, with ThaiBev and Delfi as their top picks. ThaiBev has been rated “add” with a target price of 91 cents, while Delfi has also been rated “add” with a target price of $1.09.
Among the construction counters, Lim and Lock like BRC Asia and Pan United. They have given both counters “add” calls with respective target prices of $2.50 and 56 cents.
Within the financials sector, OCBC is the analysts’ top pick with an “add” call and a target price of $14.20.
Among the property counters, Lim and Lock count City Developments Limited (CDL) and CapitaLand Investment (CLI) as their top picks with “add” calls and respective target prices of $8.97 and $4.59.
The analysts’ top picks among the REITs sector are CICT, Ascendas REIT (A-REIT) and LREIT. They have given all three REITs “add” calls with respective target prices of $2.57, $3.20 and $1.05.
The analysts’ top telco pick is Singtel with an “add” call and target price of $3.30.
Within the transport sector, ComfortDelGro (CDG) is the analysts’ preferred pick with an “add” call and target price of $1.80.
“We prefer CDG over SBS as CDG has potential for stronger earnings recovery in FY2022,” they write.
Meanwhile, they are “neutral” on the gaming, gloves and technology sectors.
The analysts’ top picks for the glove sector is Riverstone Holdings with an “add” recommendation and target price of $1.10.
The STI closed 8.37 points higher or 0.26% up at 3,238.92 points on May 30.