As famous investor Warren Buffett once said: Never invest in a business you cannot understand. It is important for investors to remember that to be committed to an investment for the long haul, we need to be able to understand the business itself. Therefore, we will be highlighting three stocks that most readers will know and understand, and may want to add to their portfolios.
1. Singapore Airlines
Singapore Airlines (SIA) must be one of the most well-known national brands of Singapore with its excellent service and the iconic “SIA Girl”. In the latest report by UOB-Kay Hian, SIA has been upgraded to Buy with an expected slowdown in capacity growth in the industry which will help to drive up margins.
According to International Air Transport Association, capacity is expected to grow by 6.8 percent growth Asia Pacific carriers, signalling a 2.5 percent slowdown in growth rate which will help to increase pax yields. This has already been observed in some North Asian carriers which have been able to achieve more than 5 percent pax yield growth for 4Q17.
UOB-Kay Hian analysts believe that “markets have yet to price this positive inflexion point” which means that the current price may be a good entry point for investors to make some capital gains as yields continue to improve in 2018. Analysts are predicting a 2.7 percent increase in pax yields in 2H18.
Also, as mentioned in the news lately, SIA is changing its pricing structure. It has just announced and retracted the very next day its plans to implement credit card fees in Singapore.
Despite that, the rest of the restructuring in pricing is expected to carry on as planned with one of the main changes being the introduction of three different type of tickets for Economy class, namely “Lite”, “Standard” and “Flexi”.
Other changes include “revisions to its advanced seat selection, frequent flyer mileage accrual, baggage allowance and ticket refund or change flexibility”. All in all, the changes are expected to boost revenue, and it is expected that just the changes in advanced seat selection will result in a $6 million to $9 million increase to topline.
Also, there has been an increase in volume and yields coming from the cargo operations of SIA Cargo. This has been attributed to an increase in volume of pharmaceutical exports, higher e-commerce transactions, and the strong Asia Pacific to North American rates. Overall, the growth in Cargo operations is expected to continue in 2018 which will help to increase the profitability of the group.
As of now, analysts are drawn to the possibility of an increase in core net profit, drawing indications from the improved cargo volumes and passenger yields, along with lower uncertainties such as oil prices.
UOB-Kay Hian has rated SIA as a Buy with a target price of $11.90, representing a potential gain of 10.3 percent from the current share price of $10.79.
2. Far East Hospitality Trust
Far East Hospitality Trust (FEHT) has also been upgraded to “Add” by CIMB Research due to an anticipated distribution-per-unit (DPU) accretive acquisition of Oasia Hotel Downtown. Also, higher organic growth is expected to be pushed up by an improvement in the room rates and occupancy rates.
CIMB analysts are predicting that the potential acquisition of Oasia Hotel Downtown will go through, financed fully by using debt which will likely cost the group 2.5 percent in interest, based on the trust’s weighted average cost of debt. This prospective acquisition will likely give DPU a boost of 6 percent to 8 percent.
The hospitality industry has been seeing a healthy increase in occupancy rate and it is assumed that FEHT’s occupancy rate will continue to stay in the high 80 percent. Average room rate is expected to increase by 5 percent which will result in a 5 percent increase in revenue per room. This will be combined with a forecasted 2 percent year-on-year increase in occupancy rate.
Overall investors should look out for the progress in the acquisition process as indication that the acquisition deal falling through could be a key downside risk. Currently, CIMB has an “Add” call on FEHT with a target price of $0.84, representing a 15.9 percent potential gain excluding dividends!
3. OUE Hospitality Trust
For investors who have not heard of OUE Hospitality Trust (OUEHT), it is likely that you would have heard of Mandarin Orchard Singapore (MOS) and Crowne Plaza Changi Airport which are both owned by the trust.
CIMB Research has identified MOS to be the leading powerhouse that will boost the performance of the trust. The hotel has proved to be a market leader amongst the hotels in Orchard Road as they saw a 3.2 percent increase in revenue per available room (RevPAR) for the consecutive nine months results for 2017. It is expected that such great performance will continue to 2018 with a 4 percent year on year increase in RevPAR.
On the other hand, Crowne Plaza Changi Airport (CPCA) has been forecasted to see a significant increase in occupancy rate, rising from 75 percent to an anticipated 85 percent in 2018. Revenue per available room is also expected to increase by 13 percent for this new year. Forecasting for the few years ahead with an assumed continuous increase in occupancy rate and RevPAR, analysts at CIMB are project that CPCA will hit a target rent revenue of $29 million to $30 million per annum by FY21.
However, not all is great for OUEHT as Mandarin Gallery seems to be lagging behind due to “high negative rental reversion” which means that renewing of expired contracts have led to lower rents. Furthermore, CPCA has completely fully drawn down its income support in 3Q17 which have helped to prop up DPU.
Nonetheless though, CIMB analysts believe that overall, the rising contributions from MOS and CPCA, along with lower interest costs, should help offset the absence of income support and lower contributions from Mandarin Gallery. CIMB Research has placed an Add call on OUEHT with fair value of $0.89. OUEHT is now trading near the target fair value at $0.87.