1Q17 results season was a disappointing one for most companies as companies saw a resumption of the downward earnings revision trend. In particular, the Oil & Gas (O&G), commodities, consumer goods and services sectors suffered earnings cuts.

The Singapore stock market has been rallying year-to-date, led by banking, property and technology stocks while defensive sectors such as telco and consumer goods/staples underperformed.

DBS also noted that there were more upside surprises than downside surprises in the results announcement.

Following its quarterly review of its recommendations, DBS Research (DBS) highlights three stocks that investors could consider as we head into 2H17.

Genting Singapore PLC

Genting Singapore

More value to be unlocked from Genting

Genting Singapore PLC (Genting) has been rallying for the past nine months by over 40 percent. Despite its rally, DBS believes that Genting still has value to be unlocked for shareholders. Genting is currently trading at 10.1x FY17F EV/EBITDA (enterprise value/earnings before interest, taxes, depreciation and amortisation).

That is is in line with its -1.0 standard deviation mean of 10.1x. On a peer comparison basis, Genting still roughly trades at a 30-percent discount to its Macau peers regarding EV/EBITDA.

Building strong base for recovery

Moving forward, DBS foresees a continued improvement in earnings, Genting’s transition towards a “more efficient capital structure”, a “refresh of Resort World Sentosa” and a successful bidding for a Japanese casino next year as the key factors that will underpin the performance of Genting.

While most analysts are concerned about the sustainability of its earnings, DBS highlights that Genting managed to grow its earnings despite weakening VIP rolling chip and mass business volumes.

Cost reduction initiatives have been well executed to provide a stable base for Genting to recover its profits when gambling volume eventually returns.

According to DBS, if Genting is able to turnaround its gains and win the Japanese casino bid in the medium-term, there is room for Genting to re-rate back to its average EV/EBITDA multiple of ~13x.

DBS Research: Genting Singapore PLC (SGX: G13) – BUY; Target Price $1.35

Singapore Technologies Engineering Limited

Regarding forward Price/Earnings (PE) ratio, Singapore Technologies Engineering Limited (ST Eng) is near its 10-year high. Despite that, DBS believes that it is still not the time to take profit on ST Eng.

ST Engineering

The tailwind that is in ST Eng’s favour justifies a valuation premium for the stock. ST Engineering managed to secure an order book of $13.3 billion, which is near its all-time high.

Smart city focus and the USA are key drivers of growth

One significant growth segment is ST Eng’s focus on smart city solutions. According to market estimates, the smart city market could grow at up to approximately 20 percent CAGR from US$600 million in 2015 to US$1.5 trillion in 2020. The potential market size is “almost three times as large as the global aerospace MRO (maintenance, repair and overhaul) market”.

Another positive catalyst for ST Eng is the proposed tax cut from President Trump’s administration. Given that majority of ST Eng’s sales is to the US from its US-based facilities, the tax cut could drive sales of ST Eng.

Moreover, President Trump’s push for higher defence budget should also benefit ST Eng.

DBS Research: Singapore Technologies Engineering Limited (SGX: S63) – BUY; Target Price $4.12

Sembcorp Industries Limited

Sembcorp Industries

Opportunity to realise true value of utilities business

Among the offshore and marine (O&M) stocks, DBS singles out Sembcorp Industries as it offers a unique value proposition to shareholders.

With its foot in both the O&M and utilities business, Sembcorp Industries acts as a proxy to ride the cyclical O&M upturn while supporting the short-term downcycle in O&M with defensive qualities from its utilities business.

Under the new CEO’s leadership, Sembcorp Industries will proceed to undertake a “complete review of its businesses and strategic direction”, with the primary focus on performance, sustainability and value creation.

While we are still six months early, DBS speculates that there is a possibility of merger(s) between the three home-grown O&M plays, i.e. Sembcorp Industries, Sembcorp Marine and Keppel Corporation. The spin-off of its marine arm could aid Sembcorp Industries to re-rate its undervalued utilities business.

DBS Research: Sembcorp Industries Limited (SGX: U96) – BUY; Target Price $3.80

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