Head for Reits and telcos in Q3: UOB- Kay Hian | UOB-Kay Hian

Straits Times: Mon, Jul 11

GO on the defensive and head for real estate investment trusts (Reits), telecommunication companies and low-beta stocks in the third quarter, says UOB-Kay Hian in a strategy report. The brokerage expects the Straits Times Index (STI) to trade range…
GO on the defensive and head for real estate investment trusts (Reits), telecommunication companies and low-beta stocks in the third quarter, says UOB-Kay Hian in a strategy report.

The brokerage expects the Straits Times Index (STI) to trade range-bound within 2,900-3,400 points for the second half of the year during this time of uncertainty.

The STI closed at 3,151.28 points on Friday, so UOB-Kay Hian’s estimate at the top-end of the range implies an upside of just under 8 per cent.

The year-end target of 3,400 points translates to a price-to-earnings (PE) of 15.7 times, representing an 11 per cent discount to the market’s long-term PE of 17.4 times, the brokerage noted.

‘In the absence of any major shocks that could drive up the market risk premium significantly from its current level, we think the current market valuations have factored in considerable downside,’ UOB-Kay Hian noted in its report issued this month.

The brokerage noted that the market is imposing an equity risk premium of 6 per cent, ahead of the market’s long-term mean in market risk premium of 4.2 per cent.

Excluding the spike in market risk premium during the Lehman Brothers collapse, the highest risk premium stood at 7.4 per cent in 2004, or the post-Sars period. Then, the market had priced in weaker earnings outlook over a 6-12 month period.

‘However, we think the current scenario is more encouraging since earnings expectations for the market have been conservative, with no major upward revision in consensus earnings since the beginning of 2011,’ UOB-Kay Hian said.

Still, it noted that more ‘people-friendly’ government measures on real estate and immigration after the recent General Election would take a toll on the market’s performance, since sectors such as residential property and land transport could be hit.

The brokerage stayed positive on the Reit segment, saying that the average yield of 7.5 per cent should put it in good stead given the current low interest rates environment.

‘Unlike the other property segments, we think the industrial segment still offers ample acquisition opportunities at accretive valuations,’ the brokerage said.

‘The diverse ownership mix and smaller acquisition size of industrial properties provide a more conducive environment for M&As.’

Its top picks are Ascendas Reit, Cache Logistics Trust and Mapletree Industrial Trust.

For the telecommunications sector, UOB-Kay Hian is sanguine on all three telcos StarHub, M1 and SingTel due to their high dividend yields and the positive impact that cloud computing will have on mobile communications.

It is also bullish on the banking sector on hopes of robust loan growth that should be driven by business loans, residential developers replenishing their landbank as well as growth in intra-regional trade and investment.

Source: Business Times © Singapore Press Holdings Ltd.

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