In the last earnings season, around 20 percent of companies reported earnings that fell below RHB’s estimates. Going into 1Q19 and beyond, RHB recommends some quality counters that investors would not have to lose sleep over.
Big Names Falling Prey To Earnings Downgrade
Among them, Dairy Farm, Genting Singapore and Golden Agri-Resources were some of the big names that missed earnings expectations. Given the moderation of growth in 2019, RHB has downgraded the outlook in its coverage universe.
A Sign Of More To Come
Prior to 4Q18, downgrades eased during 3Q18. However, as the 4Q18 earnings season progressed, the pace of downgrades started picking up. Since September 2018, the telecom, transport, consumer staples and banking sectors have seen the most downgrades to consensus earnings.
RHB: Investment Strategy To Counter Downgrade Blues
Given the uncertain external environment, RHB recommends investors to stay selective and focus on buying stocks that offer stable earnings, strong balance sheets, and sustainable dividends.
Investors Takeaway: Investing In These 4 Stocks Will Counter Your Earnings Downgrade Blues By RHB
- ComfortDelgro Corporation: It’s Time For A Comeback
ComfortDelgro Corporation was one of the stocks that saw its recommendation upgraded by RHB after the recent earnings season. After delivering 11 percent returns in 2019, ComfortDelgro is now trading close to 5-year average forward price-to-earnings.
According to RHB, further re-rating could come from expectations of strong profit contribution from new acquisitions, continuing organic growth in public transport business and lack of material rise in competition from private hire car players in its taxi business. Despite the launch of Go-Jek’s operations in Singapore, ComfortDelgro saw a slight improvement in margin. RHB is forecasting ComfortDelgro to deliver 12 percent profit growth in 2019F.
- Starhill Global REIT: A Bargain REIT You Can’t Miss
RHB has singled out Starhill Global REIT as its top pick in the office REIT sub-segment. One of the most compelling reason for investing in Starhill Global REIT is its valuation. Starhill Global REIT is one of the cheapest S-REITs with a yield of 160 basis points higher than the sector average and low PB of 0.8 times (vs sector average of 1.1 times). Its new Malaysian master lease extensions of nine to 19.5 years provide income certainty for investors at the slight expense of upfront capex for asset enhancement initiatives.
Starhill Global REIT will also be undertaking asset enhancement initiatives for its Malaysian asset Starhill Gallery with the conversion of top three floors into hotel as an extension of the adjoining JW Marriott, revamp mall entrance and refresh interior spaces.
- ST Engineering: Gathering Growth On Various Fronts
ST Engineering is RHB’s top industrial stock pick that packs a lot of growth potential for investors. RHB is confident that ST Engineering is going to continue to register a profit growth revival, with 2019F growth to exceed the nine percent registered in 2018. The profit growth will be largely aided by ongoing contributions from Aerospace, delivery of smart city-related contracts in and outside Singapore by Electronics, and defence-related contracts and improvement in earnings for Marine.
- HRnetGroup: M&A To Drive Earnings Growth
Besides the large cap, RHB believes that selective opportunities exist for investing into small/mid cap companies that offer either strong visibility on earnings growth, sustainable high dividends, and/or are trading at compelling valuations. Among the small/mid-caps, RHB likes HRnetGroup for its continued pursuit of growth.
According to RHB, HRnetGroup’s management has revealed that it is in talks for a potential M&A with a company size similar to that of REForce (its previous acquisition). The company will likely be from Vietnam. The management believes that the target company is profitable and RHB estimates that it will be accretive to its HRnetGroup’s profits and contribute to its earnings growth.