3 Blue Chips To Long Amidst The Current Correction

As the US and China returned to trade barbs over bilateral trade, global markets enter a new phase of correction. Not being spared, the local Straits Times Index (STI) also reversed quickly from above 3,350 by end-July to 3,170 level in a matter of one week.

Despite the headlines, it was a perfect storm in the making for a pull-back or stock market correction. Investors needed to readjust their hopes for a quick deal between the US and China after both agreed to restart trade talks during the G20 meeting last month.

That said, the STI has returned to a much more attractive level and hence opportunistic value investors should pick up some blue chips along the way. Here are three blue chips to long amidst the current correction.

CapitaLand

Following its $11 billion mega merger with Ascendas-Singbridge, CapitaLand became the largest diversified real estate group in Asia. Shortly following the transaction, CapitaLand followed through to propose the merger of its hospitality entities, Ascott REIT and Ascendas Hospitality Trust to establish the largest hospitality trust in the Asia-Pacific.

In the real estate world (inclusive or developers, REITs and Trusts) we think that enlarged entities attract greater institutional interest, leverage and achieve greater economies of scale. Apart from that, they also create value for investors by augmenting strengths in core markets.

Despite the recent corporate moves, valuation of CapitaLand remains to be underwhelming. Amidst the current correction, the stock price has become even more attractive. Coming down from its 52-week high of $3.75, the current share price of $3.42 indicates a price-to-book value of just 0.75 times and an undemanding price-to-earnings of just 9 times.

Singtel

During the rally in mid-2019, Singtel roared back to life to make a 52-week high of $3.56. As the market corrects, Singtel also shed gains, falling to $3.25 as of 8 August. Partially, this could attributed to the counter going ex-dividend of $0.107 per share recently.

In addition, its latest 1Q20 results was yet another uninspiring quarter as underperforming associates continue to weigh on the group’s bottom line. While headlines net profit tumbled 35 percent, Singtel’s net profit would only have fallen by 3.4 percent if it excludes the Indian associate Bharti Airtel.

That said, we are of the view that Singtel has deep value, as the group and its associates continue to drive customer growth and data usage in regions that are still “data-hungry”.

In the meantime, Singtel has shown interest in the government’s recent announcement to issue five digital bank licences. Given its scale and natural alignment, we are confident that Singtel is one of the top runners to secure the licence.

Nonetheless, at the current share price at 17 times price-to-earnings multiple and succulent dividend yield of 5.3 percent, value investors should find it as an intriguing proposition.

ST Engineering

One of the best performing component stocks in the STI, ST Engineering pulled back slightly from its recent 52-week high of $4.35 to $4.21.

We first begun recommending investors to retake a look at ST Engineering in 2017 when the stock was trading at a much lower valuation. Nonetheless, we still think the stock’s investment merits remain in spite of the higher share price.

For one, ST Engineering is a defensive stock. As one of the largest military manufacturers in the world, the group is also supported by contracts from our very own military, the Singapore Armed Forces.

However, ST Engineering also has lots of long-term growth potential, underpinned by the aerospace and smart city projects. Its recent acquisition spree in MRO business, an aircraft engines business and a satellite communication business, should set the group in an exciting period of growth.

Notwithstanding that, the group has a record $14 billion book to be mined as at the end of 1Q19. While investors might find the 25 times price-to-earnings rather demanding, the stock offers 3.6 percent dividend yield to make it more compelling.

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