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DBS: Top Sectors and Picks amidst Slowing Economy
Aspire | 23 July 2015
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By: Chen Xushuang
Articles (26) Profile

The signs for the Singapore economy are not looking bright. Against the backdrop of external events including a more volatile China equity market and China’s economic slowdown, worries of “Grexit”, oil price fluctuations, and shifts in expectations for timing of US rate hikes, there is a possibility of slower growth and further earnings downgrades for Singapore companies in 2H. Excluding external factors, 3Q is already a seasonally volatile quarter, as major corrections in the past ten years tended to take place in August/September.

In view of that, below are a few sectors and the top picks that investors might want to consider, based on DBS Group Research’s recommendations.


DBS Group only sees potential earnings upgrade in the transport sector, given that oil prices continue to hover around current levels (WTI Crude: $67.31/barrel; Brent Crude: ~$76.63/barrel) for the rest of the year.

With Singapore Airlines’s (SIA) net cash of $3.9 billion, there is potential upside to Return on Equity (ROE) from optimisation of its capital structure. In the short term, DBS Group expects fuel savings to kick in and drive SIA’s earnings performance in future quarters, raising ROE to 5.8 percent in FY16.

Its share price is likely to re-rate as benefits from the lower cost of fuel flows through its earnings. DBS Group also foresees a $0.40 Dividends Per Share (DPS) payout for Fiscal Year-End (FYE) Mar 16, which translates to a decent dividend yield of 3.4 percent. SIA is also one of Temasek’s 12 Major Investments listed on Singapore Exchange (SGX).

China Merchants Holdings Pacific (CMHP), as a pan-China toll roads operator with strong parentage, is recommended by DBS Group for its stable earnings outlook. The recently completed Jiurui Expressway acquisition and the proposed acquisition of three toll roads in Guangxi should help propel the Group’s top and bottom lines in the medium to long term, and possibly pave the way for CMHP to seek a dual-listing in Hong Kong in the future. The stock offers an attractive dividend yield of 6.5 percent.

As fuel price assumptions are above current price levels, this could mean bigger cost savings for airlines, shipping liners and land transport companies. Top picks recommended are Singapore Airlines (TP: S$12.80), China Merchant (TP: S$1.54).

Property and Real Estate

Property-wise, most developers have locked in sales to support 2015-2016 earnings, but revenues are expected to decline year-on-year (yoy) due to lack of substantial new launches in recent months. For the case of Singapore Real Estate Investment Trusts (S-REITs), growth will mainly come from acquisitions.

However hospitality REITS are believed to face potential downside risks in earnings, as recovery is slower than previously anticipated, due to weak travel demand from main markets of Indonesia and Malaysia.

Frasers Commercial Trust’s (FCOT) portfolio enjoys high occupancy of 96.5 percent. With no debt expiring until FY17, and close to 80 percent of interest costs hedged into fixed rates, the Trust is well positioned to ride out the economic downturn in Australia, as well as near-term interest rate volatility. FCOT offers investors compelling dividend yields of 6.6 to 6.9 percent.

CapitaLand, with 45 percent of its assets in China, is a clear proxy to benefit from the easing monetary policy in China. Its ongoing retail mall developments should underpin a steady growth in recurring earnings.

DBS Group believes that 2015 is an appropriate time for the company to look at asset recycling of some of the stable assets to optimise capital values and lock in gains. It also considers that stock as undervalued, with upside to its ROE from value unlocking and recycling.

Top picks recommended are Frasers Commercial Trust (TP: S$1.79) and CapitaLand (TP: S$4.11).


One new operator may emerge in Singapore’s mobile market, and upon the entry of a fourth telco, companies like M1 and Starhub are expected to be affected despite their high earnings visibility and high dividend yield. However, DBS Group still lists M1 (TP: S$3.60) as one of their top ten stock picks.

That is because mobile data re-pricing is expected to benefit M1 as 61 percent of its postpaid customers are on tiered data plans with 22 percent of users exceeding their data bundles. The continued adoption will be crucial in supporting M1’s postpaid average revenue per user.

On the other hand, upon the almost certain entry of a fourth telco, DBS also foresees a 10 percent adverse impact on M1’s revenue in 2022. In fact, UBS Wealth Management expects M1 to be the most affected, and states that Singtel is likely to be less affected due to its strong corporate customer base. Singtel is also one of the major Temasek investments listed on SGX.

In conclusion, DBS Group Research advocates a safe and defensive stance, and recommends a “flight to safety” for investors, which is to stick to stocks with high dividend yields, high earnings, and cheap valuations with respect to history.

On top of that, companies that have earnings recovery and those that have demonstrated an ability to raise returns via asset recycling are recommended.

As a Communications Studies graduate specialising in journalism, Xushuang is keen to observe and explore issues that readers want to know more about, and to deliver quality content through engaging writing.

Please click here for more information about this author.

Singapore Airlines  9.110 -0.04 -0.44%   
Business: Co provides air transportation services to destinations spanning a network spread over 6 continents. [FY19 Turnover] SIA (80%), Budget Aviation (10.5%), SilkAir (6.2%), SIAEC (3.1%), others (0.2%).

Insight: May-19, FY19 revenue edged up 3.3% to $16.3b. Pass... Read More
Frasers Commercial Trust  1.610 -0.020 -1.23%   
Business: Co invests in a diverse portfolio of real estate and real estate related assets, primarily focusing on office and retail assets.

Insight: Apr-19, 1H19 gross revenue declined 9% to $61.9m, ... Read More
CapitaLand  3.540 -0.06 -1.67%   
Business: Co develops, owns, and manages real estate properties. [FY18 Geographical] China (41.2%), S'pore (38.5%), Europe & others (18.6%), Vietnam & Others (1.7%).

Insight: Apr-19, 1Q19 revenue fell 23.8% while net profit d... Read More
StarHub  1.320 -0.010 -0.75%   
Business: [FY18 Turnover] Mobile (34.9%), sale of equipment (22.4%), enterprise fixed (21.6%), pay TV (13.2%), broadband (7.9%).

Insight: May-19, 1Q19 total revenue rose 6% to $596.8m attr... Read More
Singtel  3.180 -0.03 -0.93%   
Business: Asia's leading communications group. [FY19 Turnover] Mobile Comm (31.1%), Data & Internet (19.2%), Infocomm Technology (17.5%), Sale of Eqmt (16.5%), Digital Biz (7.2%), Fixed Voice (5.2%), Pay-TV (2.1%), Leasing (0.8%), others (0.4%).

Insight: May-19, FY19 operating revenue remained flat at $1... Read More

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