Following the first part of our two-part series on “7 Stocks To Rotate Into In An Uncertain 2H18”, we continue to highlight five other stocks that DBS has identified as the go-to defensive play for an uncertain 2H18.
5 Defensive Stocks You Should Own Amidst The Volatility
- Sheng Siong Group
Sheng Siong Group (Sheng Siong)’s expansion of its distribution centre will continue to bring margin improvements to the company and drive growth. DBS notes that the expansion will help to sustain its gross margins moving forward. The increase in direct sourcing, bulk handling, and fresh mix is also supporting margins and contributing to earnings growth. Sheng Siong is currently trading attractively at 21.9 times forward-FY18 earnings, compared to its historical average of 23 times.
BUY, TP $1.21; Current share price: $1.06
- ST Engineering
After its final dividend payout, ST Engineering’s share price retreated to a more attractive level, providing investors a good buying opportunity. There are a few factors that DBS thinks will drive interest in ST Engineering in 2H18.
ST Engineering has been vying for some large contracts like the US Postal Service vehicle contract and US Marine Corps contract, which are expected to be announced in 2018. Success in clinching those projects will provide upside catalysts. There is also improved visibility from ST Engineering’s target to more than double smart city revenues by 2022.
Lastly, DBS notes that the aerospace segment is also on a rebound with margins improving this year on stronger maintenance, repair and overhaul (MRO) for CFM engines. In the longer run, sizeable contribution is expected from passenger-to-freighter (P2F) programmes that are currently in ramp-up phase.
BUY, TP $4.10; Current share price: $3.41
- SIA Engineering
According to DBS, SIA Engineering is a value buy at its current valuation. SIA Engineering’s forward price-to-earnings and price-to-book ratios are both below -1 standard deviation levels. DBS views this as a good buy-in opportunity as there are some positive earnings drivers ahead like an upswing in the engine MRO cycle and cabin retrofitting work on SIA’s A380 fleet.
The new facility with GE Aviation turning operational in 2019/2020 also has the potential to be a large contributor to SIA Engineering’s joint venture income. DBS also notes that the expansion of the line maintenance segment in Japan could help drive revenue.
BUY, TP $3.92; Current share price: $2.95
- Singapore Telecommunications
Driven by the potential earnings recovery of Bharti, DBS foresees Singapore Telecommunications (Singtel)’s earnings to rebound by FY20. Based on its current valuation, DBS thinks that it is a buying opportunity to ride on the potential earnings recovery. Excluding market cap of its associates, Singtel’s core business is trading at only 5.5 times forward-FY19 EV/EBITDA. This is at 15-20 percent discount to its local peers. With a 5.7 percent yield, the risk to reward ratio is around five times: Potential risk of 4 percent vs potential reward of 26 percent.
BUY, TP $3.70; Current share price: $3.19
- NetLink NBN Trust
NetLink NBN Trust (NetLink)’s current yield of 6.4 percent mains highly attractive given the low volatility in its share price. DBS thinks that NetLink’s business environment is less volatile as 92 percent of its businesses are regulated. NetLink’s projected forward-FY19 total debt-to-EBITDA ratio of 2.7 times is also much lower than the 5.3 times average for Business Trusts in Singapore/Hong Kong, which implies room for higher growth by optimising its capital structure.
Thus, DBS feels that its share price should increase to reflect the lower earnings volatility and ample debt headroom for future growth.
BUY, TP $0.87; Current share price: $0.775