With the major indices in US shedding off gains, there is a growing concern that the market is returning to a state of panic. As global equities enter a phase of correction (some already in bear markets), DBS recommends investors to get defensive in the current sell down climate. Turning towards yield plays, investors are recommended to seek shelter from income stability.
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As a leading food court and coffee shop operator in Singapore, Koufu is one of the defensive shares that DBS recommends. Koufu is fundamentally very strong with its strong cash flow generation capability, defensive earnings, and net cash balance sheet. In particular, Koufu’s return on average equity (ROAE) of 25.4 percent for forward-FY19 is one of the strongest among its peers.
Growth wise, DBS expects Koufu’s growth to be largely stable going forward. DBS notes that Koufu’s revenue growth offset rising costs and opines that Koufu’s long-term growth drivers include the setting up of an integrated facility aimed at delivering economies of scale and overseas growth in Macau. If Koufu is able to leverage on greater economies of scale over the long term, it could help Koufu better manage cost. Special dividends from the sale of existing central kitchen property before moving into the new integrated facility could also help to catalyse Koufu’s share price.
Yield-wise, Koufu is expected to deliver a dividend yield of around four percent on a payout of 50 percent of earnings.
BUY, TP $0.84; Current share price $0.625
Singtel’s share price has been in a slump over the past two years as earnings were impacted by intense competition and underperforming associates. Going forward, DBS expects Singtel’s earnings to recover. Indonesian associate Telkomsel, the biggest earnings contributor to Singtel, may be looking to raise data pricing by 5 to 10 percent in 2H18. In addition, Singtel invested $250 million in Airtel Africa – a subsidiary of its regional associate Bharti Airtel – to tap on the continent’s burgeoning use of mobile money.
Based on its current valuation, Singtel’s core business is trading at only 5.5 times FY19 EV/EBITDA. This presents investors an opportunity to buy in at 15-20 percent discount to Singtel’s local peers. Singtel is currently looking for partial exit opportunities from its cyber-security and Digital Life! businesses over the next 2 years via a sale to a strategic investor or public listing. The monetisation of Singtel’s digital businesses may lead to value accretion and even provide shareholders with another one-off special dividend. Even without the one-off dividend, Singtel’s 5.4 percent dividend yield is still decent for investors who are looking for dividend income.
BUY, TP $3.70; Current share price $3.12
- ST Engineering
ST Engineering will be buying over General Electric’s engine nacelle (engine casing) manufacturing business MRAS, for US$630 million. The deal is seen as ST Engineering’s intent to move up the value chain of the Aerospace business and move into component original equipment manufacturer (OEM) businesses. According to DBS, the acquisition will help ST Engineering to acquire significant intellectual property in advanced composites and other technologies and brings complimentary spare parts and component MRO opportunities. It is expected to provide immediate earnings accretion to ST Engineering.
While there are concerns over trade war tensions, DBS thinks that demand in ST Engineering’s business divisions will be largely unaffected. On the contrary, DBS believes that ST Engineering is at the cusp of a ‘next leg up’ in its growth story while trading at reasonable valuations. It is currently trading at 19 times forward-FY18 price-to-earnings, which is just below its mean historical level.
BUY, TP $4.30; Current share price $3.42
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