The Edge Singapore Thu, Jun 09, 2022
Come November, there should be some respite for rising interest rates for stock markets and investors, says Paul Chew, head of research at Phillip Securities.
Chew expects the US Federal Reserve to continue hiking up rates till September to tackle inflation because the Fed seems to be guiding a “neutral rate” of 2.25%–2.5%, which, based on the current pace of hiking 50 basis points (bps) at each meeting, should be achieved four months from now.
Add to this a couple of months before the Fed signals it is shifting to “neutral” the month in question would have been reached. “November is very critical,” says Chew in an interview with The Edge Singapore.
More importantly, the clear winners in Singapore in this higher interest rate environment will be the three local banks, and to a lesser extent, Singapore Exchange (SGX).
This will be achieved because of higher market volatility and also higher contribution from SGX’s treasury income, which contributes about 30% to the exchange’s earnings.
Of the three banks, Chew’s top pick is Oversea-Chinese Banking Corp (OCBC) as it has the right combination of a bigger and cheaper deposit base, allowing the bank to enjoy better margins from higher interest rates.
While OCBC’s share price has been underperforming compared to the two other banks Chew says this is because the bank has been too ambiguous in guiding the sensitivity of its earnings to higher rates.
OCBC prefers to err on the side of caution and this is interpreted by some quarters in the market that the bank is “nervous”, says Chew. DBS Group Holdings will be a close second when it comes to potential upside, adds Chew.
Chew is unfazed about the competitive threat that pure-digital banks might bring. Although the five licence winners are poised to begin operations later this year, he isn’t convinced they will make a significant difference to the market. “There’s very little innovation in fintech,” says Chew.
However, one market segment that might be of interest is consumer financing. Specifically, Singapore Telecommunication’s (Singtel) digital bank joint venture with Grab Holdings might undertake activities such as helping Singtel customers finance their smartphones as well as other electronic devices.
Indeed, Singtel has started selling a variety of other consumer electronics ranging from Harman Kardon soundbars, Samsung TVs, ErgoTune chairs and even Thermomix “super kitchen machine” on its website. This means if digital banks like Grab-Singtel can build a significant regional presence, there will be more market opportunities for fund transfers and other financial transactions.
Chew is upbeat on Singtel for other reasons as well. First and foremost, with the resumption of travel, roaming revenue is set to recover. He estimates that up to half the earnings from mobile operations pre-Covid came from roaming fees.
There is also Singtel’s ongoing asset recycling strategy, with some $3 billion identified for disposal, such as mobile towers in Australia. The gains can then be reinvested in other areas such as capital expenditure for 5G networks.
Singtel recently refuted reports coming out from India that it is looking to sell shares in its associate Bharti Airtel but Chew says he isn’t surprised that Singtel would want to crystalise a bit of the value in Bharti.
Another stock pick for Chew is recruitment agency HRnetGroup, which has an extensive presence across the region including China and Japan. It has two key business segments: recruitment for permanent postings and hiring for temporary staffing. With economic activity picking up after the pandemic, many businesses are finding it difficult to fill positions. The company also has a cash balance of some $300 million, equivalent to 40% of its market value, extensive reach and long-term ties with companies.
Recently-listed Yangzjiang Financial Holding (YFH), an investment firm spun off from Yangzijiang Shipbuilding Holdings, is another counter on Chew’s radar. The stock was listed on April 28 at 69.5 cents but dropped to a low of 39 cents on May 19. However, the stock has recovered to 53 cents as at June 8 although this is still a significant discount to its book value of $1.08 per share.
Since its listing, YFH, which has articulated a plan to invest part of its short-term loan book in a portfolio of funds and investments outside China, is moving ahead with a $200 million share buyback programme after shareholders gave the nod at an EGM on June 8. “It is very clear they want to regain the shareholders’ confidence,” says Chew.
YFH has also improved its dividend policy from paying out at least 30% of its earnings, as indicated during its listing, to at least 40%. This is because bigger China state-owned banks trading at similar or bigger discounts to book values are offering generous dividend yields of 6% or so, says Chew.
Elsewhere, software company Silverlake Axis is poised to put behind a relatively dry spell of the last two years, as financial services firms, its main customers, held back their spending. “Right now, we’re seeing a bit more pent-up demand,” says Chew, referring to the digitalisation plans of companies which were put on hold.
Silverlake Axis has also been refining its business model to try and win over a bigger proportion of its earnings in the form of recurring income.
Chew has his eye on resources-related stocks too — specifically for coal miners. The embargo on Russian oil and gas by European countries and the lack of renewable energy sources mean that the out-of-favour fossil fuel will still be in demand for the time being.
“There’s no choice and they have to stock up on coal. So, there’s all this new demand coming that will help sustain,” he says. This will benefit two of the more actively-traded coal stocks on SGX: Geo Energy Resources and Golden Energy and Resources, which have appreciated by 28.8% and 153.3% respectively year to date.
Within the S-REIT universe, Chew has in mind Ascott Residence Trust, which has a large footprint with accommodation properties across major markets especially Asia and Europe. Chew sees upside for the stock from the reopening of China, which is maintaining a zero-Covid policy for now. “We think the Big Bang hasn’t happened yet,” says Chew, referring to the expected explosion of inbound and outbound tourists to and from China. “There’s pent-up demand of two years. So, there’s a lot of upside for hospitality,” he adds.
Chew also has his eye on very low-profile names too, such as A-Sonic Aerospace. Struggling for years, the company has been on the SGX Watch-List since June 2017. However, its freight-forwarding business has picked up amid the overall logistics boom, which has helped the company report revenue of $459.6 million for FY2021 ended December 2021, up 74.8% over FY2020, while earnings were up 4.6% to $6.62 million from the previous year.
As at Dec 31, 2021, A-Sonic has a cash balance of $39.4 million compared to its current market value of around $50 million, which meets a key requirement of having at least $40 million to apply for exit from the Watch-List, which the company has done so on May 12.