Yahoo Finance Eight sectors including banks and healthcare identified as having 'long-term upside potential': Maybank
Looking back at 2022, the analysts at Maybank Securities called the year an “annus horribilis”, but with “silver linings”.
Looking back at 2022, Maybank Securities analysts Thilan Wickramasinghe, Eric Ong, Kelvin Tan, Li Jialin and Jarick Seet called the year an “annus horribilis”, but with “silver linings”.
The Latin term “annus horribilis”, which refers to a year of disaster or misfortune, is a phrase that was made famous by the UK’s late Queen Elizabeth to describe the year she had in 1992.
In 2022, there were “dislocations brought about by invasion, interest rates and inflation drove volatility and torpedoed valuations,” the analysts write.
“Nevertheless, underneath these headlines there were notable positive developments that promise to drive long-term earnings and valuations higher,” they add. “These largely fell into three categories: enablement through technology; reorganization amidst deglobalisation; and constructive policy shifts.”
In their report dated Dec 14, the analysts note that there were certain pivotal developments in 2022 such as the banking sector’s investments in technology such as artificial intelligence (AI) and big data. The investments, the analysts point out, have “reached a point of commercial deployment with use cases in hyper-personalised services being offered to customers at scale.”
Other developments include the first deployment of 5G millimetre wave (mmWave) technology, which was completed by Singtel. The 5G mmWave technology is said to be critical for the development of smart cities, Internet of Things (IoT), and other high bandwidth uses.
In addition, the technology manufacturing sector also emerged with “larger market share wins and new capacity additions” amid the pressures of deglobalisation and the reorganisation of supply chains.
Meanwhile, Singapore’s policy shift towards preventive care from the current reactive care “promises to remake the healthcare landscape moving forward,” the analysts say.
“In real estate, a dramatic reversal of fortunes took place in retail sales surpassing pre-Covid levels and property prices remaining supported despite cooling measures and higher rates,” they add.
To the analysts at Maybank, these developments have positive long-term upside potential, in their view.
“The scaling of AI and, or big data could also enable the banks to enjoy the dual tailwinds of growing their revenues while avoiding costs,” they write, adding that the scaling may “blur the differentiation” between banks and platform players “leading to [the] broadening of addressable markets for the sector”.
The deployment of 5G technologies for the telecommunications sector increases upside risks to average revenue per users (APRUs) and volumes.
“[It will also have] beneficial impacts across industries through driving efficiencies and reducing costs,” the analysts point out. “With increasing demand for friend-shoring and establishing supply chain security, the capacity additions in Singapore technology manufacturing could become a critical competitive advantage, in our view.”
On the reorganisation of healthcare, the analysts see that the move could “likely support the growth” of primary care networks in terms of volumes and margins.
Meanwhile, in real estate, the industry in Singapore is likely to remain supported with the population expected to surpass pre-Covid-19 levels through increased inflows. Other factors in favour of the industry are the large levels of liquidity in the banking system and unsold housing inventories at hovering at cycle lows.
Eight sectors to benefit in the long-term
Further to their report, the analysts have identified eight sectors that could benefit from the above-mentioned trends in the long-term.
These are: banks and financials, healthcare, industrials, internet and telecom, plantations, real estate, technology manufacturing and transport.
For banks and financials, the analysts see “clear revenue pathways” emerging from the use of AI and big data.
“The banks are reaching an acceleration point in deploying hyper-personalised financial services through leveraging big data in conjunction with AI,” the analysts reiterate.
“DBS has spent $1 billion annually for the past four years, while UOB is planning to spend $500 million to scale digital offerings until 2026, on top of the average $535 million spent on technology annually in the past four years. Together with Oversea-Chinese Banking Corporation’s (OCBC) AI Lab established in 2019, these investments are now reaching commerciality,” they add.
The banks could also enjoy potential upsides to their earnings per share (EPS) with “broader addressable markets” thanks to the move up the hyper-personalisation curve, the analysts continue.
Among the banks, the analysts have selected DBS Group Holdings as their top pick. According to them, the bank has the “advantage” in the near term.
“We believe DBS, UOB and OCBC could all benefit from accelerating AI and Big Data operationalisation,” they write. “So far, disclosure levels are highest with DBS in terms of quantifying potential revenue uplift and cost savings. We believe improved transparency could drive medium-term earnings upgrades as well as contribute to determining competitive advantages versus regional peers.”
The analysts have rated all three banks “buy” with target prices of $42.69, $33.77 and $12.35 for DBS, UOB and OCBC respectively.
In healthcare, medical tourism is “back in vogue” with the resumption of global air travel. “Notwithstanding the keen competition, foreign patients - especially from regional countries - have been streaming in since April, when the border restrictions were significantly eased,” the analysts note.
The continued recovery of local and foreign patient volumes will also serve as a buffer while Covid-19-related revenues taper off.
Among the healthcare stocks, Raffles Medical is the analysts’ top pick. “[This is] due to its integrated and multi-disciplinary services, as well as a potential beneficiary of ‘Healthier SG’ initiative by leveraging on its extensive primary care network,” say the analysts.
“Meanwhile, the group is well on track to open its first In-Vitro Fertilisation/Assisted Reproductive Therapy centre in Hainan by 1QFY2023. The facility will complement its three existing China hospital offerings through forming a full life-cycle service chain within its obstetrics and gynaecology (O&G) practices for its patients across China. As China relaxes its dynamic zero-Covid policy, we believe this could possibly result in a shorter gestation period for its China operations,” they add.
Raffles Medical has a “buy” call with a target price of $1.60.
In the industrials sector, energy security matters “more than ever” with the high demand and tight supply.
“Clean energy transition is bringing a major structural change in the generation profile of electricity systems around the world. Variable renewable generation has already surged significantly, driven by reaching grid parity and favourable policy environments. This is a trend that is set to accelerate in line with climate change, we believe,” the analysts say.
“Renewable technologies are helping to achieve energy independence and lower electricity pricing while also reducing the cost of production. This should be positive for margins,” they add.
Among the counters, Sembcorp and ST Engineering should benefit the most from the electricity security and grid parity trend.
Both have “buy” calls with respective target prices of $4 and $4.30 for Sembcorp and ST Engineering.
The internet and telecom sector will benefit from the unlocking of the full potential of 5G with mmWave.
"Mobile operators are deploying mmWave 5G networks, which provide high level of transmission speeds and broader capacity in crowded urban areas. MmWave is best suited for environments that require ultra-low latency and higher speeds over shorter distances,” the analysts write.
“A growing number of positive business cases are emerging for 5G mmWave deployments in high traffic, high-density scenarios, in both the consumer and industry markets,” they add.
Singtel has been identified as the analysts’ top pick to benefit from the trend as its 5G standalone (SA) network achieved over 95% 5G nationwide coverage in Singapore in 2022 and currently covers more than 1,300 outdoor locations and over 400 buildings.
“With the implementation of 5G mmWave spectrum, we think Singtel would continue its dominance in the 5G space,” the analysts continue.
Singtel has a “buy” call and a target price of $3.15.
In the plantation sector, while its crude palm oil (CPO) yield per hectare has been on the decline due sustainability commitments, limiting growth, the analysts see some upside in the form of sustained CPO prices at 3,000 ringgit ($913.18) to 4,000 ringgit per tonne in the near term, providing “decent margins”.
The higher CPO prices in the past two years have helped planters “generate significant free cash flows”, the analysts note. As such, they have forecasted counters First Resources (FR) and Bumitama Agri (BAL) to be in “net cash positions” by the end of the FY2022.
“FR and BAL have dividend payout policies to pay out up to 50%/40% of yearly patmi to reward shareholders, translating to net dividend yields of above 5%/ 7% for FY2023 respectively. We like FR and BAL for their single-digit P/E ratio valuations and attractive dividend yields,” the analysts write.
FR and BAL both have “buy” calls and target prices of $1.79 and 89 cents respectively.
In real estate, residential fundamentals remain underpinned by the rise in Singapore’s population (up by 3.4% y-o-y), net job creations and a fall in unsold inventory. While the theme of China’s reopening has “waxed and waned”, the analysts note that retail sales and hotel rates have scaled their pre-pandemic peaks.
Among the counters, the analysts like City Developments Limited (CDL), Frasers Property (FPL) and CapitaLand Limited (CLI) for their environmental, social and governance (ESG) strategies, with sustainability taking centre stage within the sector.
Only CLI is covered by Maybank, with a “buy” call and target price of $4.30.
In technology manufacturing, the analysts see that there’s an increasing diversification of supply chains and manufacturing infrastructure out of China. In their view, Southeast Asia manufacturing firms will continue to benefit significantly from this trend, especially in the mid-long term.
On this, the analysts “prefer” AEM, UMS and Venture Corporation with “hold”, “buy” and “buy” calls respectively. AEM, UMS and Venture have target prices of $3.43, $1.34 and $20.20 respectively.
“AEM has managed to establish itself as a global leader in the fast-growing Test 2.0 market and has a full-stack solution composed for modern testing needs. They have expanded their research and development (R&D) labs in Malaysia and in the US, namely Arizona and California to be able to work more closely with their customers,” the analysts write.
For UMS, the group has seen some order components previously lost to its Chinese competitors gradually coming back to them partly due to the US-China trade war.
“For Venture, they already have a strong proven track record and are expanding its production in Malaysia which would grant them significantly more capacity. They have also bought additional land and could further expand in the future if needed. They are one of the key players in Southeast Asia who has the capacity to manufacture as well as aid customers in designing key components or products,” the analysts add.
Finally, the analysts see the transport sector “clearly benefitting” from the reopening tailwinds on the back of relaxed restrictions.
That said, while travel demand should remain firm in the near term, the analysts say there’s a “need to watch closely for rising inflationary costs and margin compression”.
Despite the near-term challenges, the analysts still prefer ComfortDelGro (CDG) for its “undemanding valuations and solid balance sheet”.
CDG has a “buy” call with a target price of $1.60.
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