Rebound in smaller caps to pick up speed: DBS

Small-and mid-cap (SMC) stocks in Singapore are expected to catch up with the larger caps on attractive valuations against the backdrop of positive Covid-19 vaccine developments this year, said DBS Group Research.

"Lockdown losers" such as the aviation, hospitality and retail sectors have been among the worst-hit, but there is light at the end of the tunnel as vaccines become available now, said DBS analyst Ling Lee Keng in a research note late on Tuesday.

The Straits Times Index (STI) has rebounded 17 per cent since the start of November last year.

Travel-related plays like hotels and airlines, as well as banks, rebounded strongly as investors turned their attention to value plays on the back of positive developments on vaccines, leading to the STI's strong rebound, she said.

In contrast, the FTSE ST Small Cap Index gained only 10 per cent during the same period, to underperform in contrast.

Ms Ling added: "With the gradual recovery of the global economies and the availability of Covid-19 vaccines in certain countries, we expect the rebound in smaller-cap stocks to accelerate and catch up with the larger caps."

In hospitality, travel is expected to restart for the majority of business meetings. Together with the strong pent-up demand for leisure travel, DBS' research team sees a V-shaped recovery taking shape as early as the second half of this year, assuming mass distribution of vaccines is possible in the first half. Its top picks are Ascott Residence Trust and CDL Hospitality Trusts for their attractive valuations.

Meanwhile, malls with "dominant characteristics" will emerge as winners in this new normal, as retailers "handpick" their physical storefronts to maximise visibility and sales.

In the SMC space, the Lendlease Reit (real estate investment trust) portfolio should enable it to buck the trend and deliver operating performance close to, or above, pre-Covid levels ahead of its peers, said Ms Ling.

She also expects the mergers and acquisitions (M&A) and privatisation trend to continue, especially in the technology, Reits and consumer sectors.

Last year, all 13 deals were in the Reits/property, industrial, technology and consumer sectors. This number is only about half of the 28 deals in 2019, mainly attributable to the global pandemic.

But bankruptcies and the number of distressed companies are likely to rise amid the ongoing crisis, presenting opportunities for M&A as companies look for both shelter and new opportunities, said Ms Ling.

Factors driving M&A and privatisation include limited necessity for access to equity capital markets, cost savings, restructuring and streamlining of operations, enabling management to focus on long-term goals without having to also worry about meeting shareholders' short-term demands.

Many tech manufacturers, for instance, are rethinking their supply sources, to balance efficiencies, resilience, costs and diversification of their production networks, said Ms Ling.

Among some of the options: Shifting their supply chains out of China to other Asean countries or back to the United States. However, this process would take time; moreover, not all manufacturing processes can be easily transferred out of China.

Taking these factors into consideration, the M&A or privatisation route could be a viable option.

Ms Ling said: "It does make economic sense for technology companies to adopt the M&A route, as some of these companies may have common customers, provide similar services or manufacture similar products. Synergistic acquisitions can also offer other significant benefits such as economies of scale and increased market share.

"Furthermore, delisting can also lead to cost savings from compliance and associated costs relating to listing requirements and regular disclosures."

THE BUSINESS TIMES