For him, the theme ahead is investing in the fog of war. “There’s very little clarity, you can’t see what’s ahead, there’s a risk of you falling down. That’s why we are very cautious,” Chew said at the brokerage’s quarterly investment forum on April 11.
With the two-week ceasefire in place between US and Iran, Chew believes this will hold and that the worst of the conflict is probably over. However, he adds that Israel has a doctrine of “mowing the lawn”, which refers to attacking its enemies periodically. In short, what Chew left unsaid is that conflicts will flare up again.
Nonetheless, amid the broader worries, Singapore remains pretty resilient. Interest rates have held steady, due the plentiful liquidity, which in turn, is underpinned by fund inflows and the reserves. At the same time, certain sectors such as semiconductors and the broader electronics manufacturing sector are doing roaring business amid a global AI-driven boom.
Amid this dreary backdrop, Singapore’s Straits Times Index has done well. Singapore Technologies Engineering (ST Engineering) was the top gainer among the 30 index components, as the company chalked up a growing momentum of defence orders not only in Singapore but, more interestingly, among customers in the Middle East, namely Qatar and Kuwait. With a view that this company is enjoying a “big structural tailwind” especially with this Iranian war, Chew’s target price for this counter is $13.
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Two other key performers in the quarter were Wilmar International and Singapore Exchange Group (SGX): The former, with palm oil prices gaining in tandem with global oil prices, while SGX enjoyed big jumps in trading volume as the entire market re-rates thanks to the market-boosting measures by the government.
Now, with inflationary pressures following because of higher energy prices, banks are likely to benefit due to the combination of higher rates to combat inflation, and more hedging activities to cope with risks and volatility.
On the other hand, REITs, which were supposed to finally have their day in the sun when rates were thought to drop, are again under strain. Consumer stocks, with buying sentiment weighed down from the non-stop bad news, are not seen to do well too.
Specifically for Chew, he has removed Singapore Telecommunications (Singtel) from the Absolute 10 model portfolio. He points out that a big chunk of Singtel’s earnings come from its regional associates. In the large emerging markets of India and Indonesia, mobile revenue comes from consumers’ pre-paid top-ups and not so much from monthly subscription plans. This means there is a discretionary element to mobile revenue growth. With the assumption that times are going to be tougher with inflation biting, mobile users can consciously cut back on mobile spending. He acknowledges that Singtel has in place several new growth plans, such as its data centre joint venture, but earnings will not be immediate.
See also: Don’t miss out on the tech rally because of the war in Iran: Dan Ives
For Chew, he sees a key risk in the equities markets stemming from surging energy prices and follow on impact. This will be a particular worry if the Middle East conflict is to drag on and more energy infrastructure damaged. This could cause a disruption that is worse than the pandemic, where disruptions were due to work stoppages and not destroyed facilities. “If you want to buy something [back then], you will get it slower, but you will still get it,” says Chew.
Chew points out that there are already chemical plants — which derive feedstock from oil — that have declared force majeure, with obvious impact on supply of plastics and fertilisers, further setting off more impact downstream in agriculture, food supply, and so on. “If you are an Asian importing country, you will be worried now that the Strait of Hormuz has been weaponised,” adds Chew, referring to the chokehold Iran is imposing. “There’s a lot of geopolitical things happening right now, but … there are a lot of repercussions because of this.”
“If you are an Asian importing country, you will be worried now that the Strait of Hormuz has been weaponised,” says Paul Chew of PhillipCapital / Photo: Albert Chua of The Edge Singapore
Build, build, build
On the other hand, there is plenty of capex going on — a trend dubbed by Chew as “build, build, build”. Here in Singapore, there are plenty of construction works going on, but globally, the big ramp-up is in AI infrastructure such as data centres, which will trigger plenty of demand down the entire semiconductor value chain. As various AI companies go public and become flush with cash, they will ramp up even more, says Chew.
Defence spending will be another big area to watch. Nato, all but abandoned by the US, has already committed to raising their spending, along with numerous other small countries and so-called middle powers. ST Engineering recently won a deal to license the know-how of its 40mm ammunition to an arms manufacturer in Poland.
Plenty of capex is seen heading the way of energy infrastructure. Spooked by the disruptions from fighting in the Middle East, the push for renewable energy as an alternative source will regain more urgency. And finally, of course, there will be rebuilding in the Middle East. “Any companies riding on these themes will be a big beneficiary,” says Chew.
Sembcorp Industries, the latest addition to PhillipCapital’s Absolute 10 portfolio, is liked by Chew for three key reasons. First, because of the fighting in the Middle East, prices of liquefied natural gas (LNG) are trading up, opening up opportunities for Sembcorp’s trading arm to generate some extra profit. Next, with the impending debt-funded acquisition of Alinta in Australia, Sembcorp will enjoy an earnings boost. Last but not least, Sembcorp, which Chew thinks is worth $7, is widely seen to spin off its renewables energy business in India for its own IPO. This means Sembcorp’s shareholders can perhaps look forward to some special dividends, says Chew.
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Another energy-related pick in the Absolute 10 is Geo Energy Resources, which Chew’s team started covering a year ago and has gained around 60% since. From his perspective, this counter, which he figures is worth 75 cents, is underperforming and has more room to go, with a possible doubling or even tripling in the share price. First, coal prices are rebounding, which will directly translate to better earnings. Also, the company will soon complete the construction of a road of nearly 100km-long to better move coal from its mines to the jetty for export. Even before the road is completed, Geo Energy has signed agreements to lease the use to other mines, which will help boost earnings further. “It’s not just a coal miner. It also becomes an infrastructure play because they can charge people for using the road and also the jetty,” says Chew.
The rest of the Absolute 10 stocks are DBS Group Holdings, Oversea-Chinese Banking Corp, Stoneweg Europe Trust, Frencken Group, Prime US REIT, Wee Hur Holdings, City Developments and Keppel.
Colonel vs FDA
Outside of these names, there are several other small and mid caps either favoured by or are on the radar of Chew and his team. One recent initiation was on iX Biopharma, which is in the “brutal” but potentially big payback business of drug development. The company, which has been around for years, used to be covered by Chew before he dropped coverage after a licensing deal fell through. On April 10, Chew resumed coverage again with a whopping target price of $1, sending the stock surging 65% for the day to close at 33 cents.
Chew’s bullish take on this stock stems from a deal iX Biopharma has with the US Department of Defense, where the company will receive some US$40 million ($51.04 million) in funding to bring one of its products used for pain relief towards regulatory approval by the Federal and Drug Administration (FDA), and with commercial deals to follow. “The US government is not only funding you, but also buying from you, and for military use,” says Chew. Presumably, the Pentagon will help iX Biopharma clear the regulatory hoops of the FDA. “Imagine you are meeting the FDA, and there’s a US colonel or general behind [you] — is the FDA going to say no?” In addition, the company need not necessarily manufacture the drugs itself. It can either license the manufacturing to some other drug makers, or sell itself to other competitors, says Chew.
Another medical-related company is Q&M Dental Group, which is on a “very aggressive” acquisition spree after raising new funding of more than $10 million. The company is in the midst of taking over three dental groups in Singapore, Thailand and Australia concurrently. Chew says he is not a “big fan” of acquisitions for he prefers organic growth instead. However, Chew figures that if these deals can be pulled off, Q&M’s earnings can be boosted by 80% or so, which means if the share price holds at current levels, the historical P/E of 60 times can then come down to more reasonable levels. Chew’s current target price for this counter is 71 cents, but if the newly acquired clinics can meet profit guarantees, this company is worth 95 cents, he adds.
Chew remains happy with another of his picks — Oiltek International. Since PhillipCapital started covering this counter two years ago, it has been up 16 times, which makes it easily one of the best-performing mid caps listed here. With a revised target price of $2.72, there is more room to go. The company is plugged into the structural growth of sustainable aviation fuel, which is to be used in growing proportion by the aviation industry as part of broader sustainability efforts. Oiltek recently won a US$350 million contract to help build a facility in Sabah to help produce such fuel, possibly tripling Oiltek’s earnings by 2027.
Chew has his eyes on TeleChoice International as well. The company is an indirect subsidiary of Temasek but has been largely under the radar, given its low-profile key business of handling logistics for a mobile operator in Malaysia. Now, TeleChoice is set for a significant new development: it is part of a consortium gunning for a data centre project in Johor Bahru and had “hinted very strongly” about its chances. The way Chew sees it, “you better have a very good chance of winning” because if not, it can be “very misleading”. Assuming TeleChoice does clinch this deal, its business profile will change significantly. However, Chew acknowledges that this counter’s liquidity is very thin and thus not ideal for all investors. “But we still like it a lot,” says Chew, whose target price for this counter is 27.5 cents.
