While the rest of the market is letting their hair down and enjoying the festive season, we are on the lookout for undervalued stocks to invest in. In this article, we will highlight three undervalued stocks that DBS and RHB think you should buy. With these three stocks in your portfolio, it is bound to be a festive new year for you.
Singapore Telecommunications – Shining Star Among The Telcos
While many telcos are struggling to maintain their regular dividends, Singapore Telecommunications (Singtel) has been exceptional since it has been raising its regular dividends. According to DBS, Singtel is now in a position to invest $1 billion in growth companies without taking on too much debt. In the next five years, Singtel’s growth business (ICT and digital) is expected to make up 40 percent of its revenue, from the current 25 percent.
Furthermore, Singtel is at a valuation discount. Its core telco and digital business is trading at just 5.6 times FY18F EV/EBITDA compared to its peers. By similar metric, M1 is trading at about 7 times, Starhub is at about 9 times while regional peers average about 7.5 times. This was culminated by Singtel’s flat share price over the last three years while regional associates saw a 35 percent rise in their valuations.
DBS notes that this could be due to mounting losses in the digital businesses, resulting in a lack of positive sentiments. However, with digital advertising arm Amobee achieving an earlier-than-expected positive EBITDA in 2Q18, DBS expects the deep valuation gap between Singtel and its peers would close as investors accumulate Singtel at a discount. BUY, TP $4.30
ST Engineering – Long Term Growth Potential In Autonomous Mobile Robots
RHB believes that ST Engineering’s investment in Aethon is a foundation for future growth. Aethon is a provider of indoor autonomous mobile robots that was acquired by ST Engineering for $50 million, noting that the global autonomous mobile robot market could be worth US$1 billion by 2022. Further testament to its potential, ST Engineering believes Aethon could make a material contribution to its revenue by the medium term. Assuming a 10 percent global market share, that would amount to a contribution of US$100 million by 2022.
The management also took great pains to highlight that the significant investments made to enable future growth. Aside from the Aethon’s acquisition, ST Engineering also made investments in cyber security, acquired SP Telecommunications’fibre optic grid assets and carried out an acquisition of a rig repair facility at Pascagoula at a bargain of US$25M. While investors should expect that the gestation period for these investments extend beyond immediate quarters, RHB believes that it is wise to stay invested in ST Engineering as it holds upside in the future. BUY, TP $4.04
Frasers Centrepoint – Strong Growth Driven By Completed Developments
Frasers Centrepoint’s (FCL) FY17 net profit rose 15 percent year-on-year, which was above market expectations. The strong growth was driven by its development properties in various geographical locations, such as Australia, China, Thailand, and UK/Europe. The growth was mainly driven by completions of development properties and sale of properties.
Despite its diminishing land bank in Singapore, potential land-banking activities could turn into a positive catalyst for FCL. Apart from that, earnings surprise and net asset value upside might come from potential recycling of assets from Waterway Point, Northpoint City and industrial assets in Australia to its REITs. These factors have not yet been priced in by the market.
Meanwhile, DBS views valuations for FCL attractively, as the latter trades at 0.8 times price-to-book value (P/B). Comparatively other large-cap developers are trading at 1 times P/B, indicating that FCL remains a laggard. Moreover, FCL’s dividend yield remains the highest among developers, at close to four percent. BUY, TP $2.35