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DBS: 3 Temasek-Linked Stock Picks
Aspire, Hot Picks | 31 March 2015
By: Lim Si Jie
Articles (169) Profile

The Singapore government recently announced in the 2015 budget that spending is expected to reach 19 to 19.5 percent of GDP on average over the next five years. There were also a lot of focus on the tax exemptions of Singapore REITs. But here’s something you might have missed.

Temasek’s New Contribution Framework

Temasek Holdings is currently employing a Net Investment Income (NII) framework in its contribution to Singapore’s sovereign funds, which allows its investors to enjoy dividends and interest income.

Temasek will subsequently switch to the Net Investment Returns (NIR) framework, which is already used by the MAS (Monetary Authority of Singapore) and GIC (Government Investment Corporation). This will allow the government to spend up to 50 percent of expected long term realised and unrealised capital gains on assets managed by Temasek, in addition to actual dividends paid by Temasek to the government.

Top Temasek-Linked Stock Picks

In view of the change, DBS notes that Temasek linked companies will now have additional impetus to achieve higher returns for shareholders through:

a) Optimal use of capital structure

b) Seeking inorganic earnings growth

c) Ways to sustain long term competitiveness in the global arena, and

d) Higher dividend payout for cash rich companies

SIA: Turnaround From Low ROE

Hit by high fuel costs, low yields and intense competition within the industry, SIA‘s RoE (Return on Equity) has been averaging at a low 3.5 percent over the last five years. However, with its net cash holdings of $3.5 billion, there is potential upside to RoE (Return on Equities) through optimisation of its capital structure. Short term savings because of lower fuel costs would drive SIA’s earnings performance in future quarters, boosting RoE to 7.3 percent in FY16.

DBS projects SIA to pay out dividends of about $0.50 for FY16, given the “improved profit outlook and its strong cash position.”

Verdict: BUY, TP $12.90

ST Engineering: Significant Acquisitions Could Spur LT Growth

ST Engineering’s (STE) RoE ranks among the highest in Temasek’s list of companies. To increase its RoE, STE will need to find ways to boost this through faster growth or increase dividends to shareholders again. Apart from organic growth, faster growth may be possible through significant acquisitions ($1 billion market cap), to drive longer term growth.

According to DBS, a stronger US Dollar is “positive to STE’s earnings”. Secure dividend yield of around 4.3 percent remains the key positive support for the stock, and is underpinned by strong operating cash flows and a healthy balance sheet (net cash of $571 million as of end-FY14).

Verdict: BUY, TP $3.80

Capitaland: Undervalued Stock With Growth Options

Having streamlined the groups’ operations through the sale of its stake in Australand and the privatization of CapitaMalls Asia (CMA), DBS foresees a more nimble CapitaLand (CAPL) emerging with “financial flexibility to execute on growth initiatives”. CAPL’s management has also highlighted opportunities within its integrated developments across its key markets in China and Singapore. CAPL’s ongoing retail mall developments will also establish a steady growth in recurring earnings.

DBS values CapitaLand as an undervalued stock with “upside to its RoE from value unlocking and asset recycling.”

Verdict: BUY, TP $3.84

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.


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