Phillip 2020 Singapore Strategy - Phillip Securities 2019-12-16: A Domestic Recovery

Phillip 2020 Singapore Strategy - Phillip Securities Research | SGinvestors.io

ASCOTT RESIDENCE TRUST (SGX:A68U) NETLINK NBN TRUST (SGX:CJLU) UNITED OVERSEAS BANK LTD (SGX:U11) FRASERS CENTREPOINT TRUST (SGX:J69U) PROPNEX LIMITED (SGX:OYY) SHENG SIONG GROUP LTD (SGX:OV8) VENTURE CORPORATION LIMITED (SGX:V03) CAPITALAND LIMITED (SGX:C31) SINGTEL (SGX:Z74) STARHUB LTD (SGX:CC3)

Phillip 2020 Singapore Strategy - A Domestic Recovery

2019 REVIEW

YTD19, the STI is up 4%. We fell short against the benchmark MSCI Asia Ex-Japan (MAXJ)’s rise of 11% (SGD terms). The STI has underperformed MAXJ in four out of the past five years. See Share Price Performance - Straits Times Index (STI) Constituents.
We lack the earnings growth and re-rating theme. This has resulted in STI valuations being stuck in a tight range.
When reviewing sector performance, REITs stood out as the best performer in 2019. See Share Price Performance - S-REITs Sector. We entered 2019 with expectations of two rate hikes. Instead, we faced the “Powell pivot” and experienced three rate cuts in 2019. As the year progressed, the slowdown in the global economy, led by manufacturing-stoked fears of a looming recession swayed by the inverted yield curve and escalation of tariffs between the U.S. and China. Stocks that performed the best were driven more by bottoms-up company-specific drivers rather than a broad macro driver.

2020 SINGAPORE OUTLOOK

In 2020, we think the domestic Singapore economy could surprise on the upside.
- Firstly, the economic backdrop globally is expected to recuperate after two years of deceleration led by the manufacturing sector.
- Secondly, several key sectors of our economy are starting to recover. Property transaction volumes have rebounded after the malaise post-July 2018 cooling measures. Property sales from new launches are up 13% in 2019 and accelerating. The improvement in the property sector supports retail spend and mortgage loans. The construction sector is on the mend with contracts awarded at four-year highs. Even the moribund retail sector is registering some stability.
- Thirdly, the macro setting is turning positive. Foreign direct investments in Singapore are at record levels of US$108bn. After two consecutive years of decade-low population growth, Singapore manage to eke out an improvement in our population growth.
There will be several political events to eyeball in 2020. Of course, we have our own Singapore elections. Past elections have not seen any meaningful impact on the stock market. Another notable event will be the Democratic Primaries. If Elizabeth Warren secures the presidential nomination, we can expect a knee jerk sell down in U.S. equity markets. Then there are the November Presidential elections. Maybe, only Michael Bloomberg can save the following four years.
On the dreaded trade war, our base case is a truce via the Phase 1 deal. We believe the deal has a better chance in this period because
1. Trump is heading into Presidential election which he will not wish to risk further deceleration in the US economy;
2. The headline Phase 1, can provide both sides with the legroom to claim victory that more concessions and assertion could be attained in Phase 2; and
3. A desire to avoid 15 December punitive tariffs on the U.S. consumer.

PHILLIP ABSOLUTE 10 - 2019 PERFORMANCE REVIEW

Our Phillip Absolute 10 outperformed the STI in 2019. Below were some of the changes we made during the quarters.
- 1Q19 - Add: SINGAPORE EXCHANGE (SGX:S68), KEPPEL DC REIT (SGX:AJBU), CHINA SUNSINE (SGX:QES); Remove: CHIP ENG SENG (SGX:C29), MICRO-MECHANICS (SGX:5DD), BANYAN TREE (SGX:B58).
- 2Q19 - Add: NETLINK NBN TRUST (SGX:CJLU), ASCOTT RESIDENCE TRUST (SGX:A68U), SINGTEL (SGX:Z74); Remove: ASCENDAS REIT (SGX:A17U), CAPITALAND COMMERCIAL TRUST (SGX:C61U), GEO ENERGY RESOURCES (SGX:RE4).
- 3Q19 - Add: DBS (SGX:D05), APAC REALTY (SGX:CLN); Remove: CHINA SUNSINE, KEPPEL DC REIT.
- 4Q19 - Add: VENTURE CORPORATION (SGX:V03), PROPNEX (SGX:OYY); Remove: COMFORTDELGRO (SGX:C52), APAC REALTY.
The portfolio was dragged down in 1H19 by some of our growth stocks such as CHINA SUNSINE and GEO ENERGY RESOURCES. Earnings severely disappointed with both stocks. KEPPEL DC REIT was a hindsight miss, as we took profits too early as we felt valuations were stretched.
We switched our income-generating stocks in 2Q19 with NETLINK NBN TRUST and ASCOTT RESIDENCE TRUST. In the 3Q19, we included our first mid-cap stock - real estate agency APAC REALTY. We exited COMFORTDELGRO as taxi industry continues to lose market share to private hire vehicles and rail business was hit by several charges. In 4Q19, we added VENTURE CORPORATION as a beneficiary of recovery in electronics industry plus swapped APAC REALTY with PROPNEX due to the latter's better execution.

RECOMMENDATION - 2020 THE PHILLIP ABSOLUTE 10

There is no single underlying theme in our portfolio. Our selection is purely a bottom-up balanced portfolio of stock picks which we hope to generate alpha. We look for balance returns in our model portfolio.
Our top 10 picks - The Phillip Absolute 10 by categories are:
- Dividend Yield: ASCOTT RESIDENCE TRUST (SGX:HMN) and NETLINK NBN TRUST (SGX:CJLU) are the yield anchors to our portfolio.
  - Around 40% of ASCOTT RESIDENCE TRUST revenues are income protected (master lease and income guarantees) and the balance is diversified across nine geographies.
  - NETLINK NBN TRUST is your residential fibre provider monopoly enjoying regulated returns. Incremental to earnings growth will be connections for 5G deployment and penetration in commercial fibre business.
- Dividend Growth:
  - We expect UOB (SGX:U11) to grow their dividends in view of their 7% earnings growth in FY19e.
  - FRASERS CENTREPOINT TRUST (SGX:J69U) is a new addition. Growth will come from the rise in captive HDB population for their malls and likely inorganic growth from a pipeline six suburban mall assets in PGIM fund held by its sponsor.
- Growth:
  - The recovery in HDB transactions and a large number of new property launches will be supportive of PROPNEX (SGX:OYY) earnings growth in FY20.
  - We expect another year of growth for SHENG SIONG GROUP (SGX:OV8) as they grow the stores, market share and margins.
  - VENTURE CORPORATION (SGX:V03) will ride on the shift in global electronics supply chain into Southeast Asia and an improvement in electronics demand from improving Sino-US trade relationship.
- Re-rating:
  - CAPITALAND (SGX:C31) is scaling up its lodging and asset management fee income. We view this as a higher quality income and will re-rate the valuation of the company.
  - We are expecting STARHUB (SGX:CC3) pay-TV operations to improve as customers are locked in two years and the content cost is gradually restructured. We think mobile competition has peaked and intensity will subside.
  - We expect SINGTEL (SGX:Z74)’s associate Airtel to improve group earnings, after a brutal price war, the wireless market in India is currently going through a series of price hikes.

2020 The Phillip Absolute 10 Company Report:

2020 STI TARGET

We are raising our STI target from 3400 to 3700. The improvement in growth and re-rating potential could surprise on the upside. This pegs the market at 15x PE FY20e.
Click on view full report button below for complete analysis.
See also Straits Times Index STI Constituents Target Price.

Paul Chew Phillip Securities Research | https://www.stocksbnb.com/ 2019-12-16

SGX Stock Analyst Report ACCUMULATE MAINTAIN ACCUMULATE 1.420 SAME 1.420

ACCUMULATE MAINTAIN ACCUMULATE 0.990 SAME 0.990

ACCUMULATE MAINTAIN ACCUMULATE 27.800 SAME 27.800

ACCUMULATE MAINTAIN ACCUMULATE 3.110 SAME 3.110

BUY MAINTAIN BUY 0.590 SAME 0.590

ACCUMULATE MAINTAIN ACCUMULATE 1.320 SAME 1.320

ACCUMULATE MAINTAIN ACCUMULATE 17.180 SAME 17.180

BUY MAINTAIN BUY 4.200 SAME 4.200

ACCUMULATE MAINTAIN ACCUMULATE 3.530 SAME 3.530

ACCUMULATE MAINTAIN ACCUMULATE 1.580 SAME 1.580

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