SI Research: 3 Blue Chips With 10% Upside Potential Or More

2018 kicked off with a good start extending last year’s bullish sentiments. Within 3 trading sessions we are already seeing the Straits Times Index (STI) surge past last year’s high of 3,468.77 to 3,501.16 on 4 January, inching towards the historical peak of 3,539.95 in April 2015. Against such a backdrop, do blue-chip counters in the local bourse still have room for further advancement?

By mentioning blue chips, we are actually referring to component stocks that form the STI which incidentally have a market capitalization of at least $10 billion. That said, we have identified 3 blue chips from UOB Kay Hian’s (UOBKH) alpha picks for 2018 with additional upside potentials of more than 10 percent despite their already significant rallies.

Keppel Corporation

Keppel Corporation (KepCorp) made a surprising announcement late last month of a US$422 million fine for corrupt payments made in Brazil. This represents a one-off impact to the group’s financials and accounted for approximately 4.5 percent of its 3Q17 net asset value.

Notwithstanding the hefty penalty which we believe that KepCorp has the financial means to comply, the impact to its businesses in the US or Brazil should be minimal as demonstrated by the award of projects by Pasha Hawaii and Petrobras despite ongoing proceedings.

With greater clarity and overhang removed, KepCorp is in a better position now to play the growing recovery of the rig market alongside the up-cycle in its property business.

KepCorp’s share price has registered an appreciation of 26.5 percent last year from $5.81 to $7.35. Nevertheless with UOBKH’s revised target price at $8.75, this translates to an upside potential of another 12.2 percent from current market price of $7.80 as at 8 January 2018.

Singapore Airlines

Singapore Airlines’ (SIA) performance in the last couple of years has been lackluster plagued by intensifying competition and persistent weak yields. However, as capacity growth is expected to slow in 2018, pax yield growth is likely to improve.

Coupled with strengthening cargo operations underpinned by both rising volume and higher yields attributable to increasing e-commerce transactions and exports, this bodes well for SIA’s profitability in the coming quarters.

Notably, SIA has hedged approximately 41 percent of its fuel requirements for 2H18 at about US$65 a barrel and has long-dated Brent contracts at US$53 – 59 per barrel till FY23. We foresee that the group will not be adversely affected by higher jet fuel costs despite the relatively costlier oil prices.

SIA’s share price has risen 10.2 percent last year from $9.68 to $10.67. As at 8 January 2018, its share price stood at $10.85 and UOBKH’s upgraded target price of $11.90 implies a potential upside of another 9.7 percent.

Singapore Telecommunications

Singapore Telecommunication (SingTel) recognized an exceptional gain of $2 billion from the divestment of its 75.2 percent stake of NetLink NBN Trust following the latter’s initial public offering. Nevertheless, the special dividend payout of merely $0.03 was slightly disappointing as management intends to utilise the balance of the proceeds for acquisition of spectrum and investments.

Despite the increasingly crowded mobile space in Singapore, SingTel is likely to be the least affected by a fourth mobile operator’s entrance as the group’s local businesses account for an estimated 30 percent of its bottom-line.

SingTel’s dividend yield seems sustainable in the near term supported by the group’s strong cash flow and divestment proceeds.

SingTel’s share price dipped 1.1 percent last year. With a market price of $3.63 as at 8 January 2018 and UOBKH’s target price of $4.53, there is an upside potential of around 24.8 percent.