From the high of 3,615 on 2 May to 2 July, the Straits Times Index (STI) tumbled 10.4% to 3238.94 on fears of rising interest rate and the ongoing trade war. In view of the above, UOBKH believes that the STI may head towards 3,100 at a worst-case scenario.

Despite the recent pullback, UOBKH remains optimistic that the local bourse would trend higher in the 2H18 and estimates STI to end the year at 3,270 level.

There are 15 constituent stocks have underperformed the STI. Most stocks have been oversold and this provides tactical trading opportunity for patient investors. Following are the three underperformers in the big cap space:

City Developments

City Developments is a good proxy to ride on the residential upcycle as a third of its gross asset value is from residential sector. In addition, the stock could enjoy further upside with the outlook for office market continues to improve.

City Developments closed at $10.88 on 2 July, UOBKH sees this as a good entry price and reiterates its “buy” rating with RNAV-based target price of $14.03.

Keppel Corp

Keppel Corp remains the preferred pick to ride the oil & gas recovery with its strong balance sheet. The property segment makes up 70 percent of the value of $9.00 that UOBKH has ascribed to the company while, at the current share price, the offshore & marine segment is valued at zero. This suggests much more upside potential for Keppel Corp given the gradual pick up in oil and property sectors.

UOBKH maintains its “buy” call with target price of $9.00. Keppel Corp closed at $7.01 on Monday and was trading at forward-FY18 price-to-earnings (P/E) of 15.8 times.

Oversea-Chinese Banking Corp

Oversea-Chinese Banking Corp is well capitalised with an expected improvement of 0.7 percentage point in Common Equity Tier 1 capital adequacy ratio (CET-1 CAR) for 2018 due to two sizeable planned divestments and implementation of internal ratings based approach (IRBA) for OCBC Wing Hang. Coupled with reinstatement of scrip dividend, UOBKH estimated risk-weighted assets (RWA) will move up six to seven percent, total assets to grow by 10-12 percent and dividend increases to $0.44 trading at a forward FY18 distribution yield of 3.8 percent.

The bank is rated “buy” by UOBKH with a lower target price of $14.28 to factor in the uncertain global economic outlook. OCBC closed at $11.51 on 2 July indicating a 24.1% potential upside.

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