With the U.S. trade war on China threatening to “take a turn for the worse” over the next couple months, stocks trading near “bombed-out” valuations could outperform, DBS said in a September strategy note last week tipping five shares.
It noted that the Trump administration could push for a full and rapid implementation of the proposed 25 percent tariff on US$200 billion of Chinese imports even before the November mid-term elections. U.S. President Trump has since threatened to impose tariffs on all imports from China, with the mainland set to swiftly retaliate.
The five shares are Thai Beverage, Singapore Airlines, Genting Singapore, First Resources and SIA Engineering, it said.
Thai Beverage shares are trading at 16.7 times fiscal 2018 price-to-earnings and 14.1 times fiscal 2019 price-to-earnings, compared with a minus two standard deviation of its five-year average forward price-to-earnings of 16 times, DBS said.
“While overall domestic consumption remains weak, we are hopeful for a gradual turnaround on the back of improving agricultural prices and farm income,” DBS said.
Shares of Singapore Airlines trade at 0.83 times price-to-book, compared with a minus two standard deviation of its five-year average at 0.84 times, DBS noted.
“Going forward, sequential earnings should improve as airlines globally try to push through higher fares and surcharges to offset rising fuel costs, and yields improve,” DBS said, adding it forecast a 1-2 percent yield improvement per year over fiscal 2019 and 2020 for the flagship passenger business.
Shares of Genting Singapore were trading at 8.4 times fiscal 2018 and 7.7 times fiscal 2019 enterprise value-to-Ebitda, which is between ont negative one standard deviation forward EV/Ebitda level of 9.1 times and the negative two standard deviation level of 6.2 times, DBS said.
Ebitda stands for earnings before interest, tax, depreciation and amortization.
“The weak VIP win rate that affected its second-quarter results should normalize and the company will continue to report a sustained increase in profitability over the next two to three years,” the note said.
First Resources shares are trading around 12.6 times fiscal 2018 price-to-earnings, which isn’t far from the negative two standard deviation of its four-year average, which is at 11.1 times, the note said.
“Going forward, volume output will drive earnings besides CPO price as First Resources enter its prime age production phase over the next five years,” the note said.
Shares of SIA Engineering are trading around 18.8 times fiscal 2019 price-to-earnings, slightly below the negative two standard deviation of its four-year average forward price-to-earnings of 19.1 times, DBS said.
“Downside is limited, the stock trading at attractive dividend yield of 4.4 percent,” the note said.
It also pointed to positive earnings drivers from an upswing in the engine MRO cycle, cabin retrofitting on Singapore Airlines’ legacy A380s, a new GE engine collaboration set to be operational in 2019 or early 2020 and expansion of the line maintenance segment in Japan.