2020 Outlook & Strategy - DBS Research 2019-12-12: Road To Recovery

2020 Outlook & Strategy - DBS Research | SGinvestors.io DBS GROUP HOLDINGS LTD (SGX:D05)

2020 Outlook & Strategy - Road To Recovery

  • Bottoming signals in exports fuel recovery optimism.
  • Broader-based earnings growth from cyclicals and staples.
  • Volatility beats to drum of trade war, bar bell investment preferred with focus on recovery + yield plays.
  • M&A deals on a roll.

Economy is bottoming, tepid recovery ahead

  • The outlook for 2020 is one of cautious optimism. Singapore’s small-open economy should gain if the anticipated interim US-China trade deal materialises, the global electronics cycle turns up and the economies of China and Europe stabilise.
  • Our economist expects 2020 GDP to recover +1.4% y-o-y from +0.6% this year, led by a turnaround in the services and bottoming of the manufacturing sector.

Manufacturing bottoming, services in recovery

  • Global semiconductor shipments are rising and semiconductor equipment billings have improved. See report: Spotlight on Semiconductor - Clear Skies Ahead
  • Singapore’s manufacturing sector should be bottoming, in line with the anticipated recovery in the global electronics cycle. Although still in contraction, November electronics PMI reading of 49.7 was the highest since April this year while the m-o-m change of +0.8% was the best since September 2018. The manufacturing sector should receive another uplift if US-China trade ties improve.
  • The services sector continues to be a bright spot with loan growth and container throughput growth improving in September 2019. This suggests that trade activity is improving, supported by stronger business loan growth.

Expansionary 2020 fiscal budget

  • We expect a strong fiscal thrust in the upcoming budget given the large accumulated surplus of S$15.6bn that should underpin the domestic economy. Notably, Singapore’s final fiscal balance tends to surprise on the upside which could mean an even larger accumulated surplus. This, coupled with an upcoming election, provides impetus for the government to implement an expansionary fiscal budget.
  • Policymakers would be aiming to strike a balance between achieving near-term counter-cyclical needs and persevering on long-term economic transformation. The budget will likely focus on short-term counter-cyclical needs such as measures to aid companies during the economic slowdown and mitigate the impact of a weaker labour market. These should be balanced with a need for economic transformation in the long term with support for skills upgrading and technology investment as key focal points.

End in sight for earnings recession trend

  • Earnings revision trend for stocks under our coverage slipped two consecutive quarters during 2Q and 3Q. The latest 3Q results season saw negative earnings revisions of -1.5% for FY19F and -1.7% for FY20F. However, we see an end to the current earnings ‘technical recession’ if an interim US-China trade deal materialises.

Broader-based earnings recovery

  • Barring a rapid intensification of US-China trade tariffs, we expect the stocks under our coverage to deliver a high single-digit EPS growth of +8.2% for FY20F compared to sub 1% for FY19F. Earnings growth for index-linked stocks is expected to improve by +6.2% for FY20F compared to +2% for FY19F.
  • FY20F dividend yield of 4.2% is among the highest in the region. Earnings turnaround is driven by a good mix of cyclical and non-cyclical sector stocks.

Industrials, consumer discretionary, IT and property lead cyclical recovery

  • The industrials sector should benefit from SIA ENGINEERING (SGX:S59)’s core operating margin improvement, increased workload at its engine shops and recovery in associate/ JV profits; while ST ENGINEERING (SGX:S63) enjoys a strong earnings visibility from its record orderbook of S$15.9bn. Meanwhile, SINGAPORE AIRLINES (SGX:C6L)’s recovery is driven by higher revenue per ASK (RASK) and firmer revenues.
  • The consumer discretionary sector benefits from rising tourist arrivals that should lift GENTING SINGAPORE (SGX:G13)’s earnings recovery next year with the expected rebound in VIP and mass gaming volumes. Higher visitor arrivals benefit JUMBO GROUP (SGX:42R) as well, which is a popular restaurant among seafood lovers.
  • The information technology sector is lifted by the expected recovery of the semiconductor segment (UMS HOLDINGS (SGX:558), AEM HOLDINGS (SGX:AWX)).
  • Earnings uplift for CAPITALAND (SGX:C31) is the key driver to the property sector’s recovery.
  • The index heavy weight banking sector is expected to deliver a flat earnings growth next year due to lower NIM, higher credit cost and slower loan growth. However, this sector is supported by a high 4.7% dividend yield. UOB (SGX:U11) is our preferred pick for its defensive qualities.

Communication services and consumer staples uphold non-cyclicals

  • The consumer staples sector benefits from higher CPO price for plantation stocks (e.g. WILMAR INTERNATIONAL (SGX:F34), FIRST RESOURCES (SGX:EB5), BUMITAMA AGRI (SGX:P8Z)). We expect CPO price to rebound by 19% to US$596 per MT in 2020 on plateauing global palm oil supply, coupled with reasonable headroom for soybean price due to positive developments in the US-China trade war and African swine fever. See sector report: Plantation Sector 2020 Outlook & Strategy - Earnings Rebound On The Horizon.
  • THAI BEVERAGE (SGX:Y92)’s better performance with growth at Sabeco, breakeven at NAB and stable growth at its Spirits operations should also give the consumer staples sector another earnings boost. Meanwhile, higher margins as a result of better sales mix and new store openings are the driving force behind Sheng Siong’s mid-single-digit EPS growth.
  • Meanwhile, the communication services sector is lifted by earlier-than-expected tariff hikes in India from December 2019 onwards for SINGTEL (SGX:Z74) as well as a high 94% fibre penetration and 2% annual growth in households that drive NETLINK TRUST (SGX:CJLU)’s earnings.

Guard against complacency

  • We advocate a barbell approach to strike a balanced risk-reward even as the outlook is turning less cloudy.

No endgame in sight

  • The US-China tariff war remains a significant driver of financial market volatility with a potent mix of economic superpower struggle as well as election and regional politics. Even as positive sentiment on a possible ‘Phase 1’deal has buoyed equity markets in recent months, an endgame is not in sight.
  • Events might take a sudden turn, like during mid-2019. Even if a ‘Phase 1’ deal materialises, the devil is in the details that will set confidence levels for a ‘Phase 2’ going forward.

Accommodative monetary policy

  • Global central banks are expected to maintain their accommodative monetary policy stance as the declining interest rate trend this year comes to a halt by 1Q20.
  • In Singapore, the SGD nominal effective exchange rate (NEER) policy band should start appreciating at a tamer pace of +0.5% per year (from +1% previously). Even as the slight economic rebound in 3Q19 has reduced the likelihood of monetary easing going forward, the MAS stands ready to ease monetary policy should the downturn resurface.
  • Our interest rate strategist expects a modest steepening of the yield curve across the G3. Shorter-term rates are likely to be broadly stable as their respective central banks keep the already low policy rates on hold while an improvement in growth dynamics should see longer-term rates drift higher. The US 10-year yield should recover to 2.2% (+40bps) and Singapore 10-year yield to 2% (+24bps) by end-2020.

Favour yield with growth

Market Outlook and Valuation

PE re-rating a potential catalyst

  • Singapore market’s defensive-yield at a reasonable PE-growth rate amid increasing hope for recovery makes it an attractive investment proposition for investors heading into 2020.
  • Singapore is one of the more attractive markets in Asia with its high single-digit EPS growth of 8.1% that trades at 12.9x 12-month forward PE, which is slightly below the 10-year average. Its dividend yield of 4.2% is among the highest in Asia. We see upward PE re-rating potential should the macro headwinds subside.

Base case (70%):

  • Our STI target for next year is 3500 that coincides closely with 12.59x (-0.5SD) FY21F PE and 13.18x (average) blended FY20/21 PE. This is premised on a modest 1.4% y-o-y recovery in Singapore’s GDP as the manufacturing sector recovers and a stop or even rollback in the US-China tariff war.

Bear case (30%):

  • A rapid intensification of the US-China tariff war whereby both countries pull away from negotiations of an interim deal and reignite tit-for-tat tariffs against each other. Under this scenario, our bear-case STI target is 3,060 at 11.41x (-1.5SD) blended FY20/21 PE.
  • With the 2020 US GDP looking to slow to +1.9% (from +2.2% 2019F) in 2020F and that for China dipping to +5.8% (from +6.1%), we see a good reason for both countries to work towards an interim trade deal. Thus, we attach a high 70% probability of the base case developing.
  • See also: Straits Times Index (STI) Constituents Share Price Performance; Straits Times Index STI Constituents Target Price.

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2020 Sector Outlook:

Kee Yan YEO CMT DBS Group Research | Janice CHUA DBS Research | https://www.dbsvickers.com/ 2019-12-12
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000