1H20 Outlook - UOB Kay Hian 2020-01-02: Taking A Defensive Stance

Singapore 1H20 Outlook - UOB Kay Hian Research | SGinvestors.io JARDINE MATHESON HLDGS LTD (SGX:J36) JARDINE CYCLE & CARRIAGE LTD (SGX:C07) HONGKONG LAND HOLDINGS LIMITED (SGX:H78) JARDINE STRATEGIC HLDGS LTD (SGX:J37)

1H20 Outlook - Taking A Defensive Stance

  • While the FSSTI performed reasonably well in 2019, it paled in comparison to other developed markets in Asia and globally – even the protest-hit Hang Seng Index bettered the STI by a few percentage points.
  • Heading into 2020, we advocate an approximate 60:40 defensive/large-cap strategy vs a growth/small-cap strategy. We forecast 4.3% EPS growth for our UOBKH universe of Singapore-listed stocks, and have a year-end target of 3,370 for the FSSTI (or 4.5% upside from current levels).



A LOOK BACK AT 2019


A tale of two halves.

  • For 2019, the FSSTI experienced a tale of two halves with the index up 8.2% over the course of 1H19 while 2H19 saw a reversal with the index giving up more than half of those gains.
  • The outperformers in 2019 comprised a mixed bunch with the property-sector related stocks standing out with five out of the top 10 outperformers being either property developers or REIT-related stocks. The best performance came from THAI BEVERAGE (SGX:Y92), up a frothy 45% during the year as FY19 profits rebounded y-o-y with the beer segment’s operating profit showing robust growth, and with proposed FY19 DPS at Bt33.00, higher than FY18’s by 34%.
  • (See also Share Price Performance - Straits Times Index (STI) ConstituentsShare Price Performance - S-REITs Sector)

What didn’t work?

  • The protests in Hong Kong led to a severe case of underperformance by some stocks – four out of the five worst in terms of share price performance have material exposure to the country. These include DAIRY FARM (SGX:D01) (-36% for the year), JARDINE MATHESON (SGX:J36), JARDINE STRATEGIC (SGX:J37) and JARDINE CYCLE & CARRIAGE (SGX:C07). Among the top 10 worst performers, HONGKONG LAND (SGX:H78)’s share price also suffered a 9% decline during the year.
  • However as we have pointed out, any improvement in relations between the Hong Kong government and the protesters could positively impact the aforementioned stocks and share prices could rebound on sentiment alone.


MARKET VALUATIONS


FSSTI trading below average valuations.

  • Compared to the FSSTI’s average of 14.8x since 1995 (excluding the spike in 1999), the index is currently trading below average valuations with consensus 2020F PE of 12.6x. This equates to a 15% discount to the long-term average.

P/B valuations are looking even more inexpensive.

  • If we look at P/B valuations, the FSSTI is even more inexpensive as its consensus 2020F P/B of 1.07x is at a 30% discount to its average P/B of 1.53x over the 1995-2019 period. However, we view this discount as fair since the FSSTI’s 2020F ROE of 9.8% is below its long-term average of 10.8%.

Slight upside for the FSSTI to 3,370.

  • For 2020, we forecast a 4.5% upside in the FSSTI to 3,370, based on a 5% discount to mid-cycle valuation of 14.8x PE, 10% discount to 1.5x P/B and mid-single-digit EPS growth of 4.3% y-o-y.
  • (See also Straits Times Index STI Constituents Target Price)


EPS GROWTH IN 2020

  • We are currently forecasting 4.3% y-o-y EPS growth in aggregate for Singapore-listed stocks that we cover. We highlight that the two key sectors, telecoms and plantation, driving y-o-y earnings growth in 2020 are coming off 2019’s earnings declines of 0.7% and 0.6% y-o-y respectively. Our EPS growth estimates are in-line with consensus which is expecting 4.1% y-o-y earnings growth in 2020.
  • Supporting our positive EPS growth scenario, UOB’s Global Economics & Markets Research believes that Singapore’s growth will accelerate in 2020 with the services sector continuing its growth and the manufacturing sector recovering from a poor 2019. In addition, UOB GEMR forecasts that Singapore’s non-oil domestic exports will register 1.6% y-o-y growth in 2020, led by non-electronic export growth, and that the country’s overall GDP growth will be at 1.5% y-o-y.
  • On the other hand, potential downside to our earnings forecasts for 2020 may come from the shipyard sector with SEMBCORP MARINE (SGX:S51) having struggled with new-order flow in 2019 and there being some chance of this being repeated in 2020. This, coupled with macro uncertainties such as the US-China trade war and the potential negative effects from a prolonged Brexit, leads us to believe that there could be downside to our earnings expectations.
  • Potential “turnaround stories” in Singapore for 2020 include SINGTEL (SGX:Z74) which is coming off a poor 2019 due to weakness in its Indian business and SEMBCORP MARINE which is facing better y-o-y comparables - especially on the new order front vs an extremely weak 2019 for new orders. We also point out that any improvement in relations between the Hong Kong government and the protesters could positively impact Singapore-listed stocks such as DAIRY FARM, JARDINE MATHESON, JARDINE STRATEGIC and HONGKONG LAND.
  • For 1H20, we OVERWEIGHT banks, gaming, healthcare, plantations and selected S-REIT sectors and MARKET WEIGHT aviation, property developers, shipyards, technology, telecoms and land transportation.


KEY ISSUES AND RISKS TO LOOK OUT FOR IN 2020


Weaker-than-expected growth from China.

  • Clearly, the “twin issues” of the trade war and protectionist policies affecting global trade are at the forefront of investors’ minds, with trade war-related uncertainties potentially weighing on corporate capex decisions. As a corollary, potentially weaker-than-expected GDP growth from China could affect Asian markets, and we have already witnessed rising bond defaults in China; especially worrying is the fact that some of these are occurring at state-owned enterprises. UOB GEMR forecasts that China’s GDP will grow by 5.9% y-o-y in 2020.

Oil price risk.

  • One issue which we believe appears to have been discounted by the market is risks to oil prices. In 2019, there were three attacks on oil assets in the Middle East – two of those occurred on oil tankers while the most serious one targeted oil processing facilities at Abqaiq and Khurais in Saudi Arabia using unmanned aerial drones. Approximately half of the country’s crude oil production (or 5% of global crude oil supply) was halted for a period of 2-3 weeks, thus destabilising commodity and financial markets.
  • We highlight that the US Energy Information Administration estimates that the OPEC’s spare capacity was only at 1.88mmbpd as at Dec 19, thus implying that in any prolonged disruption to major oil supplies, markets will need to draw upon strategic petroleum reserves.

Elections in Singapore

  • Elections in Singapore have to take place by Apr 21, however, the general consensus is that the government will call for an election after the budget announcement which is slated for Feb 20. However, we do not expect the budget to contain anything material that will affect the equities markets.


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Adrian LOH UOB Kay Hian Research | Singapore Research UOB Kay Hian | https://research.uobkayhian.com/ 2020-01-02
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