Despite deep cuts in the latest quarterly earnings of Singapore-listed companies and trusts, the worst is now behind them, said DBS Group Research in a market strategy report yesterday.
The second-quarter results season had reflected the impact of global Covid-19 lockdowns, with a sharp 14.9 per cent cut in forecast earnings for the current financial year. This applies to stocks under DBS' coverage.
Investor interest is likely to pick up for travel or leisure stocks, lifted by progress in Covid-19 vaccine candidates that are under trials, noted DBS analysts Yeo Kee Yan and Janice Chua. DBS' picks are Hutchison Port Holdings Trust (HPH Trust), ST Engineering, SIA Engineering Co (SIAEC), Wilmar International, UMS and Venture Corp. These are among the counters with either a positive earnings revision of more than 5 per cent or a recommendation upgrade.
"Looking beyond the ashes of the Q2 earnings slash, we seek opportunities from the list of companies that saw upward earnings revisions or recommendation upgrades," Mr Yeo and Ms Chua said. These are companies that have emerged positively from the second quarter.
While the exact timeline for a vaccine to be made widely available is uncertain, DBS thinks the recovery in air travel will be swift once it materialises. The analysts pointed to empirical evidence showing that China's domestic air travel had recovered promptly to near pre-Covid-19 levels in a pre-vaccine environment within five months.
DBS thus recommends investors look beyond the near term, to accumulate travel and leisure-related stocks in anticipation of the industry possibly recovering next year.
Its picks in the travel and leisure space are SIAEC, China Aviation Oil, ComfortDelGro Corp, Ascott Residence Trust and Far East Hospitality Trust.
As for manufacturing and trade, DBS noted the strengthening purchasing managers' indices in the US and China, as well as the transportation stocks' strong run-up from the third quarter. These hint at a broadening manufacturing recovery and a revival in trade activities, said Mr Yeo and Ms Chua.
DBS' picks in these areas are semiconductor components maker UMS Holdings, capital and consumer equipment service provider Frencken Group, and Venture Corp, which provides contract manufacturing services to electronic companies.
DBS also favours HPH Trust, which the research team sees as a proxy to improving global trade activity, offering a yield of about 11 per cent. The mainboard-listed Chinese shipbuilder Yangzijiang Shipbuilding has also seen improving order flow and attractive valuation.
Meanwhile, Maybank Kim Eng has raised its target for the benchmark Straits Times Index (STI) to 2,995, from 2,200 previously.
The higher STI target implies a 17.9 per cent upside, the brokerage said in a report last Friday, adding that its equity strategy calls for a balance between defence and growth, by weighting towards stocks with structural growth, dividend visibility and diversification.
Maybank Kim Eng also noted that fears of a worst-case scenario seemed to have "overshot lockdown reality, with less earnings misses and higher earnings per share (EPS) upgrades" in the second quarter results season.
"Despite the worst of regional lockdowns in Q2, only 29 per cent of combined STI and Maybank KE coverage stocks missed Street expectations," its analysts wrote.
DBS yesterday maintained its year-end target for the STI at 2,850, with technical support at 2,440.
The STI currently has a 12-month price-to-earnings ratio of about 13 times, and a price-to-book ratio of 0.84 times.
In the second quarter of this year, five stocks disappointed for every three stocks that beat expectations.
The main culprits behind the market's second-quarter earnings drag were travel and leisure plays such as Genting Singapore and Singapore Airlines, as well as telco Singtel, along with a one-off cut for property developers CapitaLand, UOL and City Developments Limited, DBS said.
In contrast, tech stocks such as UMS, Frencken and Hi-P International, as well as healthcare counters, saw their earnings revised upwards.
The STI's forecast earnings per share contraction has deepened to 36.1 per cent for this financial year.
That said, there will be an equally sharp jump of 35.4 per cent for FY2021 EPS, boosted by the anticipated 5.5 per cent recovery in gross domestic product on a low-base effect, the analysts wrote.
THE BUSINESS TIMES
