Homegrown Stocks to Watch This National Day July 27, 2022

Every 9 August, we commemorate Singapore’s independence gained on the same date 57 years ago in 1965.

Last year, to celebrate National Day, we shared our views on two local stocks listed on the Singapore Stock Exchange (SGX): Sea Ltd and Razer. You can read more about that entry here! https://www.phillipcfd.com/putting-the-red-dot-on-the-map/

This year, we are diving into 2 stocks that are the noteworthy icons of Singapore,DBS Bank Limited, and Singapore Airlines (SIA). We believe that they will benefit from the reopening of the economy and will continue to be a symbol of Singapore’s success as a financial hub!

DBS (SGX: D05)

Description

DBS bank, previously known as The Development Bank of Singapore Limited, is the largest bank in Southeast Asia, with assets totaling USD 491.9 billion. With over 24,000 employees and 250 branches across 50 countries, DBS bank is well-established on the global banking stage [1]. Deemed the safest bank across Asia and the benchmark for regulatory compliance, DBS is so highly regarded that the Monetary Authority of Singapore (MAS) granted its brokerage arm, DBS Vickers a Crypto License to offer digital payment token services. It was the only Asian bank that MAS has granted the license to [2] in Singapore.

The Present

To combat inflation, central banks around the world have increased interest rates. The Singapore Overnight Rate Average (SORA) which is the preferred benchmark for pricing loans in Singapore has seen an increase from the pandemic low of 0.2% (Oct 2021) to the current 1.78% (July 2022), a whopping 790% increase as seen in the graph below.

Source: Bloomberg

DBS reported strong net profits of SGD 1.80 billion in the first quarter of 2022, mainly due to the 4% increase in net interest income as net interest margins increased to 1.46% as overall interest rates rose. However, net fee income fell by 7% due to weaker market sentiment affecting wealth management and investment banking. The bank’s Non-Performing Loan (NPL) ratio has remained unchanged at 1.3%, however, DBS held SGD 0.2 billion above the MAS requirement for general allowance reserves (also known as bad debt reserves) [3].

The Outlook

Given the increase in interest rates to combat inflation, the banking sector has benefited as a whole, due to the increasing interest rate margins. DBS, as the largest bank in Southeast Asia stands to gain if interest rates continue to remain at this level or rise higher in the mid to long term. In the short term, DBS will be able to enjoy the benefits of increased interest rates; however, in the medium to long term, consumers are less likely to take up loans and will change their spending habits which will result in lower demand. Furthermore, with the US having an increasing chance of a recession [4], the chances of Singapore having a recession are increasing as well. During a recession, there will be a contraction in GDP, businesses and consumers tend to spend less and bankruptcy rates increase. As markets are forward looking, DBS shares have dropped from a high of SGD 37.49 in February to a recent price of around SGD 30 (a 20% drop) after pricing in the potential of a recession and its implications.

Source: POEMS Platform

DBS is positioned well to benefit from the reopening of economies and digitalisation of finance in Asia. With its focus on becoming the first local Singapore bank to offer a trusted gateway to access the digital asset and cryptocurrency economy [5], DBS has shown that it has the flexibility to adapt to changes, and enjoys the trust of both regulators and customers. Furthermore, DBS shareholders enjoy high dividend yields of 4.5%, which attracts yield seekers as well. If you are looking for a flexible yet stable bank stock with high dividend yields, DBS should be on your radar.

Singapore Airlines: (SGX: C6L)

Description

Singapore Airlines Limited (SIA) was incorporated in 1972 and began operations in the same year with just three flights. The national carrier of Singapore has since grown over the years to become one of the world’s leading airlines and a source of national pride. Now the airline’s business mainly consists of passenger transportation, cargo transportation and aerospace maintenance through its subsidiary, SIA Engineering Company. SIA together with its budget arm, Scoot, flies to 93 cities in 36 countries and territories across the world as at the end of FY21/22.

The Present

The COVID-19 pandemic in 2020 resulted in unprecedented restrictions on international air travel, as countries worldwide imposed pandemic-related travel restrictions, bringing the entire aviation industry to its knees. Faced with such a crisis, SIA raised over SGD 20 billion in fresh liquidity since April 2020 through a combination of mandatory convertible bonds, rights shares, secured financing and sale-and-leaseback arrangements, to help them weather the crisis. SIA experienced its toughest year in its history as passenger traffic plummeted by 97.9% and it reported a net loss of SGD 4.3 billion in FY2020/2021. However, strong cargo revenues managed to help cushion the plunge in passenger traffic [6].

Countries have started to ease pandemic-related travel restrictions in 2022, allowing people to travel aboard to more destinations. The relaxation of travel restrictions has helped generate higher demand for air travel. This has enabled SIA to reduce its net loss for the second half of FY2021/2022 by 85%; from SGD 837 million to SGD125 million. Revenue also doubled to SGD 7.62 billion compared to the SGD 3.82 billion in FY2020/2021 [7].

The Outlook

Singapore was among the first in the region to introduce a vaccinated travel lane (VTL) in September 2021 in an effort to reopen its borders safely. This gave SIA a head start against its competitors. As the reopening in the Asia- Pacific region continues to build up momentum, SIA’s passenger traffic is likely to pick up faster than expected [8].

With more countries accelerating the relaxation of travel restrictions, SIA is preparing to operate more flights to key destinations. Among them is Japan, where it is expecting higher demand during the northern winter operating season (30 Oct 2022 – 25 Mar 2023) [11]. SIA’s passenger capacity hit 61% of pre-pandemic levels in May, with SIA and Scoot flying a combined 1.7 million passengers, a 14 time increase as compared to a year ago [9]. Passenger capacity is expected to increase further to 81% by the end of 2022 [11].

Despite the positive outlook, rising fuel prices remain a challenge for SIA as average jet fuel prices have risen more than 50 percent to USD 150 per barrel over the past year. Although SIA has managed to offset higher fuel costs by hedging 40% of their fuel requirement at an average price of USD 60 per barrel of Brent until June 2023, fuel costs still contributes to about 43 percent of the increase in its expenditure [7]. While SIA can raise airfares or introduce fuel surcharges to offset the impact, if fuel prices remain high over the long term, it may affect its competitiveness.

Source: POEMS Platform

Nonetheless, SIA will definitely benefit from the easing of travel restrictions worldwide and is in a good position to capitalise on the post-pandemic recovery in air travel demand. SIA’s share price has recovered from a low of SGD 3.20 during the height of the pandemic to a current range of SGD 5 and could return to pre-pandemic levels as conditions continue to improve.

Conclusion

We believe that with the economies reopening, DBS and SIA will benefit significantly and stand out in their respective sectors. Given that National Day is around the corner, we can be proud that DBS and SIA have grown so much from the past and just like Singapore, have become role models for competitors to emulate.

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