PSR Coverage – SG Top Picks
We have removed Singapore Exchange and Pan United from our top pick list and replaced it with DBS Group and SingTel. With increasingly positive economic data from the major economies (US, China, Japan and Eurozone), we think that big caps will stand to benefit most in the near term, thus our change in focus.
#1: DBS Group (New!)
We like DBS (Accumulate, TP: S$17.50) for the following reasons. 1) Benefit from rising interest rates. The eventual increase in short term interest rates will lead to higher interest income. DBS’s high proportion of cheap CASA deposits will contribute to higher NIMs. 2) Higher exposure to Greater China relative to local Singapore peers. This allows DBS to benefit from any economic improvement in China, in particular a rise in import/export activities. DBS is able to offer transaction banking services, including trade financing. 3) Price to book trading at a discount relative to peers. We expect rerating potential for DBS as it continues to gain traction in its various focus areas. These include its SME business, Wealth Management, and Transaction banking services. 4) Various revenue streams registering strong results. The potential stabilizing of NIMs and strong double-digit loans growth leads to higher net interest income. Fees and Commission, driven by WM and trade-related fees, grew double-digit y-y in 1H13
#2: SingTel (New!)
We like SingTel (Accumulate, TP: S$3.99) for the following reasons. 1) Attractive dividend yield of 4%-5%, with potential for dividend growth. With a committed dividend payout range of 60%-75% of net profit, higher net profits will lead to higher dividends. 2) Healthy EBITDA growth in SG and AU excluding currency effects. In Singapore, continued data monetizing is expected to drive higher mobile ARPU. SingTel continues to dominate in both the mobile and fibre broadband segment, with continued high net adds and low churn rates. In Australia, Optus’ focus on maximizing profits from existing customers instead of growth of customer base has also improved EBITDA despite stiff competition from its AU peers. 3) Strong growth potential, both from overseas associates including AIS and Telkomsel, and from investments in Group Digital Life when they crystallize. Besides increasing revenue, potential successful Digital Life initiatives may also increase loyalty among customers of both SingTel and its overseas associates.
#3: Keppel Corporation
We like Keppel Corp (Accumulate, TP: S$12.25) for the following reasons. 1) Robust O&M outlook, well-supported by high dayrates and utilizations for both jack-up and semi-sub rigs. Crude oil prices continue to stay at healthy levels above US$80/barrel, which should support E&P spending by oil companies. 2) Strong order book wins, with S$4.4bn new orders YTD vs PSR FY13F of S$5.9bn. Management continues to be positive, citing rising energy demand from emerging countries, and depletion in existing oil fields. 3) Stronger track record relative to its Chinese peers has also contributed to its healthy order books. This is despite aggressive pricing and appealing payment terms offered by its Chinese peers. 4) Y-y higher O&M margins from repeat orders of its proprietary KFELS B Class jack-up rigs, and record delivery of 20 jack-up rigs in FY13F (11 already delivered in 1H13). In addition, we note that average prices for its proprietary KFELS B class jack-up design increased by more than 10% over the past two years. We forecast margins of >14% for FY13-15E vs FY12 margin of 13.5%, as the majority of 2014-15 earnings should materialize from contracts secured at higher pricing in 2012-13. 5) Attractive dividend yield of ~4-5% to reward its investors.
Publish date: 20/09/13