What a year 2020 has been.
It has changed our lives in many ways that we would have never thought of.
After that, the index rose around 63% from its March bottom to set a new record, closing at 3,756.07 on 31 December 2020. For the whole year, the S&P 500 index increased by an impressive 16.3%.
Since such ups-and-downs are common in the stock market, we should not be afraid of them but seize the moment by investing regularly into exchange-traded funds (ETFs) or high-quality companies over the long run.
As we welcome 2021, here are nine stocks for investors to consider investing in for the long-term (at least for the next five years).
Without further ado, let’s jump right in!
If you are new to investing, you should check out our ultimate guide to investing in Singapore before reading the rest of this article.
Topics covered include things you should do before buying your first stock and steps to pick the best companies and REITs out there!
Companies Covered in This Report
We talk about three Singapore-listed stocks, three US-listed stocks, and three Singapore-listed real estate investment trusts (REITs) in this report:
- Singapore Stock #1: Micro-Mechanics
- Singapore Stock #2: Singapore Exchange
- Singapore Stock #3: SATS
- US Stock #1: Facebook
- US Stock #2: Shopify
- US Stock #3: Visa
- Singapore REIT #1: Keppel DC REIT
- Singapore REIT #2: Mapletree Logistics Trust
- Singapore REIT #3: Frasers Centrepoint Trust
Singapore Stock #1: Micro-Mechanics
The first company on the list is Micro-Mechanics (Holdings) Ltd (SGX: 5DD), which is involved in designing, manufacturing, and marketing of consumables and precision tools that are used in the semiconductor industry.
Just like how printers require ink cartridges and sewing machines need needles, Micro-Mechanics produces precision consumable tools and parts used by numerous machines installed around the world that assemble and test semiconductors.
Since the parts that Micro-Mechanics produces are consumables, they are required to be replaced frequently by its customers, giving the company predictable revenue.
Micro-Mechanics’ revenue has grown from S$51.3 million in FY2016 (fiscal year ended 30 June 2016) to S$64.2 million in FY2020 while its net profit increased from S$11.9 million to S$14.7 million during the same period.
The company was affected by the semiconductor industry slowdown in FY2019, but things have since improved.
For Micro-Mechanics’ latest quarter ended 30 September 2020, revenue grew 18% and net profit surged 42%.
The company possesses a high gross profit and net profit margin as well.
The company also has a strong balance sheet, another trait that I like.
As of 30 September 2020, Micro-Mechanics had S$25.5 million in cash and cash equivalents with no bank borrowings. This strong balance sheet should enable the company to tide through any tough economic conditions.
Looking ahead, according to VLSI Research, chip sales of the semiconductor industry could double to nearly US$1 trillion by 2030.
The usage of chips should only grow with the ever-increasing use of gadgets and technology in our everyday lives. And the need to digitalise has been further accelerated due to the pandemic.
Singapore Stock #2: Singapore Exchange
Singapore Exchange Limited (SGX: S68), or SGX for short, is a multi-asset exchange that provides services such as equities, derivatives, and fixed income trading.
For SGX’s latest financial year, which ended on 30 June 2020, revenue grew 15.7% year-on-year to S$1.05 billion as all its three business segments — Fixed Income, Currencies and Commodities; Equities; and Data, Connectivity and Indices — showed growth. SGX’s revenue crossed the S$1 billion mark for the first time since its listing.
With that, its net profit improved by 20.6% to S$471.8 million. This allowed SGX to increase its final dividend per share to 8.0 Singapore cents, up from 7.5 cents a year ago.
Going forward, the stock exchange also raised its annualised quarterly dividend to 32 cents per share, an increase of 7%. It explained that the “higher quarterly dividend is in line with our policy to pay a sustainable and growing dividend over time, consistent with our long-term growth prospects”.
The jump in dividend shows confidence in SGX’s growth in the coming years.
At SGX’s share price of S$9.70, it has a P/E of 22 and a forward dividend yield of 3.3%.
Singapore Stock #3: SATS
SATS Ltd (SGX: S58) is a provider of food solutions and gateway services solutions mainly to the aviation industry.
SATS has been hit hard by the pandemic, with the International Air Transport Association (IATA) predicting that air travel will not return to pre-COVID-19 levels until 2024.
Even though the company is facing short-term headwinds, the company is poised to bounce back once the COVID-19 pandemic clears up.
For SATS’ latest quarter ended 30 September 2020 (2Q FY20-21), revenue came in at S$231.1 million, which translates to a 53.5% year-on-year decline.
On a quarter-on-quarter basis, though, revenue improved by 10.4% from S$209.4 million in 1Q FY20-21.
Its dominant market share locally at Changi Airport and the strong network of joint ventures and strategic alliances it has in many countries help to keep competitors at bay.
I feel it would just be too difficult for a new competitor to take over SATS’ entrenched market position, giving it a wide economic moat.
An economic moat acts as a powerful deterrent to those considering encroaching the territory of a business.
Another way to find out if a company has a durable competitive advantage is to look at its return on equity (ROE).
Prior to the pandemic, its ROE increased from 13.7% in FY2015 (fiscal year ended 31 March 2015) to 15.1% in FY2019 while employing very little debt. This is no easy task, and it shows the competency of the firm’s management team.
As of 30 September 2020, SATS’ balance sheet had S$818.5 million in cash and short-term deposits, with S$686.2 million in total loans.
It’s nice to see SATS having a robust balance sheet. This enables the company to better focus on business recovery, and even take market share away from its competitors that are struggling to survive, widening SATS’ moat further.
US Stock #1: Facebook
Facebook Inc (NASDAQ: FB) would be a company familiar to all of us.
It’s the world’s largest social network that runs the well-known Facebook social media platform, along with WhatsApp and Instagram.
Facebook’s economic moat comes from its network effect.
When a new user joins Facebook’s product, that product becomes slightly more valuable. That, in turn, encourages more users to join, creating a network effect at large. Once this network effect is created, it will be hard for users to leave.
Facebook monetises this user base by selling ads as a form of digital marketing.
Over the past five years, from 2015 to 2019, Facebook’s revenue grew 41% annually, from US$17.9 billion to US$70.7 billion.
Meanwhile, its earnings increased by 50% yearly, from US$3.7 billion in 2015 to US$18.5 billion in 2019.
For its 2020 third-quarter (three months ended 30 September 2020), Facebook’s revenue improved by 22% year-on-year to US$21.5 billion while net income grew 29% to US$7.8 billion.
Facebook ended off the quarter with US$55.6 billion in cash, cash equivalents, and marketable securities, with zero bank borrowings.
Looking ahead, there’s room for Facebook to grow further due to its large total addressable market.
The global digital marketing expenditure is expected to grow from US$283.35 billion in 2018 to (45.9% of total media ad spending) to US$517.51 billion in 2023 (60.5% of total media ad spending).
Facebook’s revenue in 2018 was just 20% of the year’s global digital ad spend.
There’s also Facebook’s entry into the burgeoning e-commerce market.
The company recently launched Facebook Shops, which is a mobile-first shopping experience where businesses can easily create an online store on Facebook and Instagram for free. This allows small businesses to sell online seamlessly.
At Facebook’s share price of US$273, it has a P/E ratio of 32.
US Stock #2: Shopify
Talking about e-commerce, Shopify (NYSE: SHOP) is a company that comes to mind.
Shopify is a leading global commerce company that provides tools to start, grow, market, and manage a retail business of any size.
The company powers over one million businesses, including Heineken, Heinz and Lindt, in more than 175 countries.
According to Shopify, its platform provides merchants with a single view of their business and customers across all of their sales channels, including web and mobile storefronts, physical retail locations, social media storefronts, and marketplaces.
Shopify also enables its clients to manage products and inventory, process orders and payments, fulfil and ship orders, build customer relationships, and access financing, all from a single integrated back office.
Shopify’s past growth has been telling.
Gross merchandise volume (GMV), which is the total dollar value of orders going through Shopify’s platform, grew 67% annually, from US$7.8 billion in 2015 to US$61.1 billion in 2019.
With that, Shopify’s revenue surged from US$205.2 million to US$1.6 billion during the same time frame.
In the latest third-quarter, GMV doubled to US$30.9 billion while revenue rose 96% to US$767.4 million.
Even though this was mainly driven by the COVID-19 pandemic with more merchants going online to hawk their wares, there’s still lots of potential for Shopify to grow.
According to Statista, global retail e-commerce sales will rise to US$6.5 trillion by 2023, up from US$3.5 trillion in 2019.
At Shopify’s share price of US$1,131.95, it has a market capitalisation of US$138 billion, a small fraction of the global e-commerce retail market.
US Stock #3: Visa
Visa (NYSE: V) is a company that doesn’t need much introduction.
The firm is one of the world’s largest electronic payments networks based on payments volume and number of transactions.
Many may not be aware but Visa doesn’t issue credit cards nor extends credit, and therefore, doesn’t work like a bank.
Visa is more of a middleman and it collects a small fee for each transaction that passes through its payment network.
To use our Visa-enabled credit or debit card, four parties are involved, and they transact through Visa’s transaction processing network: VisaNet.
Here’s a diagram explaining the four parties and the role of each party:
Visa collects fees in three ways mainly:
- service revenue
- data processing revenue
- international transaction revenue.
After deducting client incentives, which are used to grow payments volume and increase Visa product acceptance, Visa is left with net revenue.
From 2015 to 2020, Visa’s net revenue grew from US$13.9 billion to US$21.8 billion, up 9% annually.
Meanwhile, its net profit rose from US$6.3 billion in 2015 to US$10.9 billion in 2020.
For 2020, both net revenue and net income fell due to the COVID-19 pandemic.
However, over the long-term, the company sees tremendous opportunities for growth as the world turns more towards digital payments.
As discussed in 8 Growth Sectors to Consider Investing in for 2021 and Beyond, the World Cash Report 2018 showed that cash remains the most widely used payment instrument in the world and on all continents.
With strong growth in the e-commerce sector, the digital payments industry is expected to expand further.
Moreover, as the third-world countries catch up with e-payments, there’s another growth layer.
At Visa’s share price of US$218.73, it has a P/E ratio of 50 and a dividend yield of 0.6%.
Singapore REIT #1: Keppel DC REIT
Keppel DC REIT (SGX: AJBU) is a data centre REIT with a portfolio of 18 data centre assets strategically located across 11 cities in eight countries in the Asia Pacific region and Europe.
Keppel DC REIT was added to the Straits Times Index on 19 October 2020, replacing CapitaLand Commercial Trust after it merged with CapitaLand Mall Trust to become CapitaLand Integrated Commercial Trust (SGX: C38U).
From 2015 to 2019, Keppel DC REIT’s gross revenue and net property income (NPI) grew at an annualised rate of 17.4% and 19.5% respectively.
Its distribution per unit (DPU) also stepped up from 6.51 Singapore cents to 7.61 cents, up 4% annually.
Things improved further for Keppel DC REIT’s 2020 third-quarter where gross revenue surged 46% while NPI increased by 48%.
With that, DPU grew 22% to 2.357 cents.
Keppel DC REIT provides a stable income stream for investors with a portfolio occupancy rate of 96.7% and a long weighted average lease expiry of 7.2 years.
It also has a stellar gearing ratio of 35.2%.
Over the long-term, Keppel DC REIT has lots of room for growth, especially with the pandemic accelerating the adoption of digital technology.
Singapore REIT #2: Mapletree Logistics Trust
Mapletree Logistics Trust (SGX: M44U) is the first Asia-focused logistics REIT in Singapore listed in 2005.
As of 30 September 2020, the REIT had a portfolio of 146 logistics assets in Singapore, Hong Kong, Japan, Australia, China, Malaysia, South Korea, and Vietnam. In all, the assets were valued at around S$9 billion, with the majority of assets in Singapore.
Over the past five years, Mapletree Logistics Trust’s gross revenue, NPI, and DPU have grown steadily.
Its DPU increased from 7.38 Singapore cents in FY15/16 (year ended 31 March 2016) to 8.142 cents in FY19/20, up 2.5% annually.
Even during the pandemic, when other REITs were battling with reduced revenue, Mapletree Logistics Trust managed to grow its DPU. For the first half of FY20/21, DPU stepped up 1.2% to 4.1 Singapore cents.
Over the long-term, Mapletree Logistics Trust can ride on the growth of e-commerce (which has been accelerated recently) and domestic consumption, which brings strong demand for warehouse and logistics space that can be fulfilled by the REIT.
Around 75% of Mapletree Logistics Trust’s gross revenue base is derived from consumer-related sectors, such as food and beverage, fashion and apparel, and consumer staples. The REIT’s exposure to these sectors and diversified tenant base of around 700 customers adds resiliency to its portfolio and positions it for long-term growth.
At Mapletree Logistics Trust’s unit price of S$2.00, it has a P/B ratio of 1.6 and a distribution yield of 4.1%.
Singapore REIT #3: Frasers Centrepoint Trust
Frasers Centrepoint Trust (SGX: J69U) is the second-largest suburban retail mall owner in Singapore with 11 malls, including Causeway Point, Northpoint City North Wing, and White Sands.
All of Frasers Centrepoint Trust’s properties are strategically located near MRT stations of major housing estates, giving them strong shopper catchment with a population of three million.
From FY2015 to FY2019 (the REIT’s financial year that ends on 30 September), gross revenue and NPI increased annually by around 1% and 2% respectively.
DPU, meanwhile, grew 1% per annum.
However, for FY2020, gross revenue, NPI, and DPU all fell drastically due to the COVID-19 pandemic. If the rental relief impact is excluded, NPI for the year would have fallen by only 0.7%.
In its latest update, Frasers Centrepoint Trust said that mall shopper traffic has stabilised at 60% to 70% of the pre-pandemic level. It added that the easing of safe distancing measures with Phase 3 re-opening is likely to further support the recovery of shopper traffic and tenant sales.
As of 30 September 2020, portfolio occupancy stood at 94.9%, slightly higher compared to the previous quarter’s 94.6%.
Frasers Centrepoint Trust’s gearing ratio of 39.3% and well-spaced out debt maturity of 4.3 years on average also bodes well for the REIT.
The REIT’s growth prospects look bright with the recent acquisition of the remaining 63.1% stake in AsiaRetail Fund Limited (ARF) from its sponsor, Frasers Property Limited (SGX: TQ5).
In its latest FY2020 earnings announcement, the REIT mentioned (emphases are mine):
“The enlarged retail portfolio upon completion of the ARF acquisition provides FCT with significantly larger catchment population. This strengthens FCT’s ability to offer more options and value to retailers and shoppers. It also provides FCT with the scale to drive omnichannel retail strategies and to enhance the role of its malls as “last-mile” fulfilment hubs in their immediate residential catchment, as working-from-home becomes more prevalent. The Manager believes these factors will continue to underpin the long-term performance and resilience of FCT’s portfolio.”
The REIT also has future opportunities to tap on, such as acquisition-driven growth by purchasing Northpoint City South Wing and other third-party assets.
On top of that, there are other ways to grow such as through asset enhancement initiatives (AEIs). AEIs refer to the revamping of a property to enhance its value, and hence, its future rental income.
At Frasers Centrepoint Trust’s unit price of S$2.47, it has a P/B ratio of 1.1 and a distribution yield of 3.7%.
It’s Not All a Bed of Roses…
On top of looking at the positive aspects of a business, we also have to look at the downsides as well.
For example, a risk with SATS and Frasers Centrepoint Trust is that we won’t know for sure when the COVID-19 storm will be over. And their business recovery hinges on that.
As for Facebook, there’s increasing scrutiny from regulators. Meanwhile, Keppel DC REIT may have a valuation risk with its high PB ratio.
So, before putting our hard-earned money into any of the companies mentioned, we should dig up further to make sure we understand the various risks involved too.
Want to Discuss Further?
Disclaimer: The information that follows serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer owns shares in Micro-Mechanics, Singapore Exchange, SATS, Shopify and Visa.
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