The consensus is becoming wary of weaker-than-expected GDP growth and slower EPS growth. RHB thinks that investors should readjust their portfolio to seek shelter in plays that will do well in a weaker economic environment. Using a top-down strategy, RHB identified two investment themes to help investors identify which stocks to look at.
Investors Takeaway: 2 Top Down Investment Themes To Position For 2H18
Investment Theme 1: Riding On The Macro Trend Of Rising Interest Rates
With an expectation of four rate hikes this year, RHB thinks that SIBOR will continue to be pushed higher by US Federal Funds Rate. This bodes well for Singapore banks and should drive net interest margins up in banks. Thus, RHB highlights banks as one of its top-down investment themes.
Prior to the cooling measures, RHB liked UOB for its greater share of housing loans. However, with optimism in the domestic residential property market slightly dampened due to the cooling measures, lower loan growth is expected of UOB in the coming quarters. That being said, UOB’s high Capital Adequacy Ratio should help UOB to deliver on the dividend end.
BUY, TP $33.30; Current share price $26.19
While banks are a crowded trade, RHB opines that banks remain the best sector for exposure to rising interest rates. In particular, DBS has high earnings sensitivity to rising interest rate. During the previous Federal Funds Rate upcycle during 2003-2007, DBS’ price-to-book value rose as high as 1.9 times from 1.04 times. As such, RHB recommends adding DBS as one of the rising interest rate plays for 2H18.
BUY, TP $30.30; Current share price $24.83
Investment Theme 2: Focus On Defensive Late Cycle
- Wilmar International
Wilmar International’s downstream margin turned around in 2Q18 as demand for biodiesel rose on the back of a positive spread between gasoil and crude palm oil. Moving forward, the Indonesian Government is pushing for higher biodiesel blending while discretionary demand from EU has also picked after removing anti-dumping duties. These factors will continue to support the demand momentum for crude palm oil in the next few quarters.
Wilmar’s management also indicated that interim and full-year dividend will be higher than last year despite an unexpectedly high final dividend announced in 4Q17. This signals the management’s confidence in 2H18. Moreover, with the IPO of its China operations on track for completion in 2Q-3Q19, some value could be unlocked in Wilmar.
BUY, TP $3.69; Current share price $3.19
- Moya Holdings Asia
Moya Holdings Asia (Moya) had an outstanding quarter in 2Q18 with revenue surging 130 percent and profit after tax and minority interest growing 537 percent. It also underwent a rights exercise where majority of shareholders showed strong confidence in the company by subscribing for excess rights. Moya will be using a portion of the proceeds to fund M&As. RHB expects the acquisitions to be accretive and further boost the group’s earnings.
BUY, TP $0.13; Current share price $0.084
- Sheng Siong Group
As a net cash company with no debt, Sheng Siong is one of the defensive plays with a strong presence in Singapore’s consumer staple sector.
Recently, Sheng Siong completed the signing of two new leases in Woodlands, adding to the total store wins to eight this year. With a much larger space in these two new stores, RHB expects the two new stores to contribute strongly when they become operational this year. Moving forward, six more sites are up for tender and up for grabs for Sheng Siong.
BUY, TP $1.30; Current share price $1.12
- ST Engineering
ST Engineering is one of RHB’s top picks for 2H18. While ST Engineering underperformed expectations due to lower profits from Land Systems, its Aerospace and Electronics segments delivered strong growth in 2Q18. RHB notes that ST Engineering has a strong $13.4 billion order book that provides revenue visibility for two years with $2.7 billion expected to be delivered in 2H18. Together with order wins, earnings growth will remain strong and drive a re-rating for ST Engineering. ST Engineering also has an implied yield of 4.3 percent.
BUY, TP $3.97; Current share price $3.52