Singapore Stock Strategy - Reflections 2022 & Sector Picks For 2023
- 2022 was bad, it also had silver linings – For many investors, 2022 was an annus horribilis. Dislocations brought about by invasion, interest rates and inflation drove volatility and torpedoed valuations.
- Nevertheless, underneath these headlines there were notable positive developments that promise to drive long-term earnings and valuations higher. These largely fell into three categories:
- enablement through technology;
- reorganization amidst deglobalisation; and
- constructive policy shifts.
- In the long term, we believe the following SG stocks could be key beneficiaries from these trends.
- AEM (SGX:AWX),
- Bumitama Agri (SGX:P8Z),
- ComfortDelGro (SGX:C52),
- CapitaLand Investment (SGX:9CI),
- DBS (SGX:D05),
- Frasers Centrepoint Trust (SGX:J69U),
- First Resources (SGX:EB5),
- Raffles Medical (SGX:BSL),
- Sembcorp Industries (SGX:U96),
- SingTel (SGX:Z74),
- ST Engineering (SGX:S63),
- UMS (SGX:558),
- Venture Corp (SGX:V03).
Pivotal developments through the year of 2022…
- The banking sector’s investments in Artificial Intelligence and Big Data has reached a point of commercial deployment with use cases in hyper-personalised services being offered to customers at scale. The first industrial deployment of 5G mmWave technology – critical for the development of smart cities, IoT and other high bandwidth uses – was completed by SingTel (SGX:Z74) ushering in a new stage of sector development.
- Amidst pressures of deglobalisation and supply chain reorganization, the technology manufacturing sector emerged with larger market share wins and new capacity additions.
- Elsewhere, the shift of Singapore’s policy towards preventative care vs the current reactive care following the introduction of the Healthier SG whitepaper promises to remake the healthcare landscape going forward.
- In real estate, a dramatic reversal of fortunes took place in retail sales surpassing pre-COVID levels and property prices remaining supported despite cooling measures and higher rates.
…with positive long-term upside potential in 2023
- The scaling of AI/Big Data could enable banks to enjoy the dual tailwinds of broadening revenues, while also avoiding costs. This may also blur the differentiation between banks and platform players leading to broadening of addressable markets for the sector. In telecoms, the deployment of 5G technologies increases upside risks to ARPUs and volumes, while also having beneficial impacts across industries through driving efficiencies and reducing costs.
- With increasing demand for friend-shoring and establishing supply chain security, the capacity additions in Singapore technology manufacturing could become a critical competitive advantage, in our view.
- Separately, the reorganization of healthcare could likely support the growth of primary care networks in terms of volumes and margins. Singapore real estate could likely remain supported with the populations expected to surpass pre-COVID levels (through increased inflows), large levels of liquidity in the banking system and unsold housing inventories at hovering at cycle lows.
Pick winners of Singapore stocks by sector
- We filter for Singapore stocks that have the strongest gearing towards emerging developments and those that can deliver potential upside surprises to ROEs for longer term in 2023 for each sectors.
Banks and Financials sector
- Singapore banks are at an acceleration point in deploying AI and Big Data. Quantification of revenue upside and opex savings is becoming increasingly clearer vs being known-unknowns earlier.
- Increasing deployment of hyper-personalisation in banking services could drive material EPS upgrades in the medium term. Longer term, the ‘deterministic’ data advantage of the sector could open new revenue sources and non-traditional partnerships.
- We believe DBS (SGX:D05), UOB (SGX:U11) and OCBC (SGX:O39) are all set to benefit, but DBS is likely to lead in the near term.
- The resumption of global air travel is driving medical tourism in Singapore. Launch of “Healthier SG” whitepaper seeks to focus on preventive care.
- Expect continued recovery of local and foreign patients, while COVID-19-related revenues taper off.
- Raffles Medical (SGX:BSL) is our preferred stock pick, underpinned by strong core healthcare division. China reopening remains the wild card for long-term growth.
- Countries are seeking energy security within the current heightened macro environment. Clean energy transition is bringing a major structural change in the generation profile of electricity systems around the world. Variable renewable generation has already surged significantly, driven by reaching grid parity and favourable policy environments. This is a trend that is set to accelerate in line with climate change, we believe.
- Renewable technologies are helping to achieve energy independence and lower electricity pricing while also reducing the cost of production. This should be positive for margins.
- We believe Sembcorp (SGX:U96) and ST Engineering (SGX:S63) should benefit the most from this trend.
Internet and Telecom sector
- Mobile operators are deploying millimetre wave (mmWave) 5G networks, which provide high level of transmission speeds and broader capacity in crowded urban areas. mmWave is best suited for environments that require ultra-low latency and higher speeds over shorter distances.
- A growing number of positive business cases are emerging for 5G mmWave deployments in high traffic, high-density scenarios, in both the consumer and industry markets.
- SingTel (SGX:Z74) has been pushing its 5G dominance and we think it is in a forefront position to benefit from the global expansion of the mmWave technology.
- The downside of sustainability commitments has been a lack of new planting by the industry since 2015, which limits global palm oil supply growth in the coming years.
- Positively, this will help sustain CPO prices at MYR3,000-4,000/t in the near term, providing decent margins. The financial positions of planters have been boosted significantly recently.
- The sector is transitioning into high-dividend yields play given lack of growth opportunity. First Resources (SGX:EB5) and Bumitama Agri (SGX:P8Z) will turn net cash by end-FY22E/ FY23E, offering > 5% net dividend yields.
Real Estate sector
- While inflation, interest rate and tech job cuts dominated headlines, residential fundamentals remain underpinned by rise in population, net job creation and fall in unsold inventory.
- The theme of China reopening has waxed and waned. Notwithstanding that, retail sales and hotel rates have scaled pre-pandemic peaks. Leading retail landlord, Frasers Centrepoint Trust (SGX:J69U) reported portfolio tenant sales averaging 10% above pre-COVID levels in the first 3 quarters of 2022.
- Developers, sponsors and REITs have further refreshed their ESG strategies.
- City Developments (SGX:C09) continues its tradition of championing sustainability by becoming the first real estate conglomerate in Southeast Asia to commit to net zero carbon by 2030.
- Frasers Property (SGX:TQ5) announced net zero carbon target by 2050 early last year.
- In May this year, CapitaLand Investment (SGX:9CI) elevated its commitment to sustainability by aiming to achieve net zero emissions by 2050.
- Mapletree’s refreshed sustainability strategy will include the development of a “Net-Zero by 2050” roadmap.
- REITs are likely to be guided by sponsor’s sustainability targets as well.
Technology Manufacturing sector
- Increasing diversification of supply chains and manufacturing infrastructure out of China.
- Southeast Asia manufacturing firms will continue to benefit significantly from this trend, especially in the mid-long term.
- We believe AEM (SGX:AWX), UMS (SGX:558) and Venture Corp (SGX:V03) will benefit the most from the trend due to their differentiating capabilities and respective strengths and manufacturing footprint.
- The sector has clearly benefitted from reopening tailwinds as many countries have relaxed restrictions and are adopting “living with COVID” strategy.
- While travel demand should remain firm in the near term, we need to watch closely for rising inflationary costs and margin compression.
- Prefer ComfortDelGro (SGX:C52) for its strong balance sheet, supported by undemanding valuations and decent dividend yield of 5%.
Continue to read the report attached below for complete analysis.
Thilan Wickramasinghe Maybank Research | Eric Ong Maybank Research | Kelvin Tan Maybank Research | https://www.maybank-ke.com.sg/ 2022-12-14 2022-12-14