Navigating Singapore 2020 - CGS-CIMB Research 2019-12-09: Sector Allocation & Market Valuation

Navigating Singapore 2020 - CGS-CIMB Research | SGinvestors.io FIRST RESOURCES LIMITED (SGX:EB5) WILMAR INTERNATIONAL LIMITED (SGX:F34) JAPFA LTD. (SGX:UD2) SHENG SIONG GROUP LTD (SGX:OV8)

Navigating Singapore 2020 - Sector Allocation & Market Valuation

  • Sector allocation: Go cyclicals.
  • Market valuation: Singapore is the cheapest.



Sector allocation: Go cyclicals

  • We are Overweight on the following sectors:
    • Banks’ valuations have trended down to an attractive 1.1x P/BV on US-China trade war fears, but c.5% yields should provide baseline support for share prices. The scope for higher dividends given the lack of near-term M&A targets is a key positive. The US-China trade war concerns are likely to have been priced in, and we think that negativity on macro weaknesses and Fed rate cuts should also start dissipating as GDP growth recovers over FY20F. Stronger foreign currency deposit inflows over Jul-Oct 2019 give us reason to expect sustained wealth income for Singapore banks in the medium term. Although most of the initial inflows were fuelled by geopolitical uncertainties and the initial euphoria has since moderated, we believe that Singapore’s position as a safe haven in the region would underpin consistent trade flows through the city state. The banks have also made precautionary buffers against the HK uncertainties, leaving room for reversals in 2H20F if the situation improves. See report: Singapore Banks 2020 Outlook - OVERWEIGHT.
    • Commodities, on the back of a lower stockpile (lower output, with higher exports and consumption) and higher CPO prices in the near term. We think FIRST RESOURCES (SGX:EB5)’ FY20F earnings are likely to recover (+54% y-o-y) on the back of higher CPO prices and FFB output. WILMAR INTERNATIONAL (SGX:F34) has a clear near-term catalyst, i.e. the successful listing of Yihai Kerry Arawana Holdings (YKA) in China by 1QFY20. WILMAR’s outlook for 4Q19 is also bullish on the back of higher consumer product sales and higher CPO prices.
    • Capital goods, as catalysts could come from M&As among the Temasek group of companies. Earnings recovery could also be at play. See report: Capital Goods Sector 2020 Outlook - OVERWEIGHT.
    • Consumer should see good earnings growth from the likes of SHENG SIONG GROUP (SGX:OV8) and JAPFA (SGX:UD2).
    • Property, on the back of steady residential transaction volume and ASPs. For 2020, we expect a volume demand of 9,000-10,000 units, flat y-o-y. Slightly better GDP growth forecast of 1.5% for 2020, with wages projected to rise an average 3% y-o-y, according to global data and research firm ECA International, should underpin demand for private homes. On the pricing front, we anticipate private residential prices to remain range bound, to the tune of 0-5%, due to large incoming supply of new launches.
    • Construction, on the back of Singapore’s government plan to rejuvenate the country with major projects pipeline of infrastructure and industrial projects. These include:
      1. further rollout of Changi Airport Terminal 5 infrastructure works,
      2. Greater Southern Waterfront rejuvenation, and
      3. extension of Integrated Resorts.
    • See report: Construction Sector 2020 Outlook - OVERWEIGHT.
  • We are Neutral on the following:
  • We are Underweight on the following two sectors:
    • Healthcare as gestation is likely to be a recurring theme for hospital stocks in 2020, given the longer EBITDA breakeven period (3-5 years vs. 1-3 years for clinics or smaller medical centres) and the opening of more greenfield projects.
    • Transport on the back of the weaker near-term outlook in cargo for SIA (SGX:C6L) and SATS (SGX:S58) as well as margin pressure for COMFORTDELGRO (SGX:C52).


Market valuation: Singapore is the cheapest

  • The FTSE Straits Times Index (FSSTI) gained about 6.2% YTD, from its low at the start of 2019. The index’s performance this year largely tracked the progress of the US–China trade talks, given the latter’s outsized impact on global trade. GDP growth for the year was relatively muted, though Singapore managed to avoid a technical recession.
  • Our end-2020 FSSTI target is set at 3,275 points, based on 12.5x CY21F P/E (-1 s.d. of its 10-year mean) vs. 3-4% y-o-y core EPS growth in CY19-20F. (See also Straits Times Index STI Constituents Target Price)
  • Relative to other regional markets, Singapore is considered the cheapest, with upside on earnings upgrades from major sectors, such as telcos, banks and airlines.


STI technical outlook

  • Since Apr 18, the FSSTI has been moving in a downtrend as the 3,611 resistance area formed a double top rejection pattern. Despite seeing a strong recovery in 1H19, the resistance at the 61.8% Fibonacci Retracement level halted the bullish momentum and moved the STI back into the downtrend. The sharp selloff that followed in Jul-Aug 18 is currently controlling the immediate trend. See chart in attached PDF report.
  • More importantly, the recent failure to break above the 61.8% Fibonacci retracement level and 3,270 resistance in Nov 19 suggests the downtrend remains firmly intact. The Bearish Engulfing Bar rejection during the week ended 29 Nov closed below the 20-week moving average, signalling further weakness. Therefore, we expect the downtrend to resume towards 3,050 support followed by 2,955 points. On the upside, the 3,270 resistance could act as the ceiling.
  • See attached PDF report for complete analysis.






LIM Siew Khee CFA CGS-CIMB Research | Singapore Research Team CGS-CIMB Research | https://www.cgs-cimb.com 2019-12-09
SGX Stock Analyst Report ADD MAINTAIN ADD 1.760 SAME 1.760
ADD MAINTAIN ADD 4.580 SAME 4.580
ADD MAINTAIN ADD 0.700 SAME 0.700
ADD MAINTAIN ADD 1.370 SAME 1.370



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