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BT EXCLUSIVE

Telco, bank, consumer stocks among bargains in discount bin: analysts

STI close to year's low; slower global growth expected next year due to US-China trade spat and rising borrowing costs

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Among telcos, DBS believes TPG's low level of capital expenditure (capex) spend thus far may bring reprieve to telcos.

Singapore

WITH the Straits Times Index (STI) down 10 per cent year-to-date, following widespread selling in the second half of this year, market watchers note that value has emerged in selected stocks, particularly in the telecom, banking and consumer goods sectors.

Among regional markets, Singapore and Hong Kong are trading at the lowest valuation peg, of -1 to -2 standard deviation of their 12-month forward price-earnings levels, according to a recent DBS strategy report.

This has come amid lower expectations for global growth this and next year, weighed down by the impact of US-China trade tariffs as well as slower growth in the eurozone and rising borrowing costs.

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Apart from the trade war, there were other issues including the collapse of the Argentine peso, the crisis in Turkey, the contraction of the South African economy, the weakness of the Indonesian rupiah, Italy's debt-driven deficit, and volatility in the United Kingdom due to Brexit.

OCBC said in a recent strategy report: "It is increasingly apparent that volatility is the new norm. In Singapore, the market went through the same cycle, largely tracking the key North Asian markets and gyrated widely, falling 18.5 per cent from (the) 2018 peak to trough."

With the STI close to the year's low, it believes that "smart money and longer-term value investors will be re-entering the market soon".

Here on the local bourse, DBS said the consumer goods sector, comprising stocks such as Thai Beverage and Sheng Siong, is a good buy. Trading at a valuation of 21.7 times price-to-earnings, which is about 0.7 times below its five-year historical average, the sector's defensive traits and earnings resilience also appeal.

DBS believed Thai Beverage's 35 per cent year-to-date drop in share price has largely factored in its weak financial performance in FY18. The counter is near or at the bottom of its operational performance, and DBS expected the beverage producer's operational performance to pick up in FY19, on the back of the expected Thai elections and the King's coronation.

The brokerage also had a "buy" recommendation for Sheng Siong as it expected to see growth driven by more new stores and warehouse expansion from FY19.

For telcos, it believed that TPG's low level of capital expenditure (capex) spend thus far may bring reprieve to telcos. TPG has so far spent A$66.7 million (S$65.7 million) in cumulative capex on its Singapore roll-out, about 22 to 32 per cent of its planned S$200 million to S$300 million of capex.

"At the current level of capex spend, we think TPG's network at commercial launch in Q2 2019 is unlikely to pose a major threat to the incumbents due to potential network quality issues. We estimate that StarHub, the second largest operator in Singapore, is likely to have spent over S$600 million on its 4G network since 2013, almost 10 times of the current capex spend of TPG on its 4G network."

DBS liked StarHub for its current low valuation at 5.6 per cent yield, and potential upside to future earnings. Singtel is also good for its assured 17.5 Singapore cent dividend per share, and its attractive entry point in share price at 14 per cent below where it began at the start of 2018. NetLink NBN Trust will also benefit from StarHub's migration of all its subscribers from co-axial cable to fibre, which was brought forward to mid-2019 compared to 2020, it says.

UOB Kay Hian head of research Andrew Chow said that among the banks, OCBC and DBS, currently trading at 1.1-1.3 times price-to-book, are undervalued. Selectively, stocks such as industrial farming group Japfa and precision plastic company Fu Yu Corp are also "very cheap" on a price-to-earnings basis.

Japfa, trading at a 39 per cent discount to peers in the market, should see its valuation gap narrow as net profit is expected to increase as the company turns around. Fu Yu's shift to a more diversified customer base is also expected to boost the gross margin and profitability of the company.

The most undervalued stocks identified by OCBC Investment Research include banks, Singapore Airlines and selected hospitality Reits such as OUE Hospitality Trust (OUEHT).

The FTSE ST Financials Index is already down 9 per cent this year and down 16 per cent from the year's high. Research head Carmen Lee said: "We believe that downside is likely to be limited, taking into consideration that on an annualised basis, the banking sector will report record earnings this year and is poised to report another set of record earnings in 2019.

"Based on consensus, the market is expecting the three banks to deliver earnings growth of 20 per cent in FY18 and 9 per cent in FY19. In addition, current dividend yields range from 3.7 per cent to 5.7 per cent."

Sometimes, there are also extraneous reasons why a stock is trading cheaply. In OUEHT's case, it could be due to a dilutive rights issue by OUE Commercial Trust which shares a sponsor with OUEHT. But strong performance expected in the Singapore hospitality sector and the fact that the stock is trading near its historical average make it reasons to buy.

Research analyst Deborah Ong said that she continued to see "significant value" in the counter, even after the recent food poisoning case that affected 175 people and caused banquet operations at the trust's property, Mandarin Orchard Singapore's main ballroom, to be suspended.

Reputational damage to Mandarin Orchard is potentially a risk, as banquet revenue tied to its Grand Ballroom makes up about 4 per cent of OUEHT's annual revenue. "The hotel management's handling of the food poisoning incident and any accommodative measures they take in the next two to three months are crucial.

"In terms of topline impact, we estimate that five to 10 larger scale social events to be held in December may have to be moved out of the hotel to others, should OUEHT's other banquet venues be unable to accommodate," she said.

"Assuming that each event brings in anywhere from S$60,000 to S$100,000 of revenue, the affected slice of gross revenue could represent 1-3 per cent of our OUEHT's revenue estimate for the fourth quarter. On top of this, there could be additional costs associated with compensatory measures. The reputational impact will be harder to estimate and we will watch Q4 2018's results closely for further colour."

In its response to BT, a hotel spokesman said the hotel team is trying to make alternative arrangements for organisers of upcoming events at the Grand Ballroom. These include accommodating the displaced events in other function venues within the hotel, or reaching out to its sister hotel, Marina Mandarin Singapore, and other partner hotels, while investigations are ongoing.

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