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Navigating Singapore 2020 - CGS-CIMB Research 2019-12-09: Big Is Beautiful

Navigating Singapore 2020 - CGS-CIMB Research | SGinvestors.io FIRST RESOURCES LIMITED (SGX:EB5) JAPFA LTD. (SGX:UD2) HONGKONG LAND HOLDINGS LIMITED (SGX:H78)

Navigating Singapore 2020 - Big Is Beautiful

  • Underpinned by global hunt for growth, the mantra of Big is Beautiful could continue to drive capital market among the Singapore listed companies.
  • Singapore is a safe haven amidst uncertainty in the region, which we expect to see more fund flows into the country, potentially benefitting the banks.
  • Cyclicals such as commodities, capital goods and developers could do well in 2020.



2020 Outlook

  • From an equity market standpoint, Singapore is the cheapest ASEAN market, trading at 12.6x CY20F P/E on the back of 3-4% core EPS growth though CY19-20F, while regional peers (Malaysia and Thailand) are seeing earnings dip for CY19F.
  • Unlike regional countries where election results have investment implications for the perceived stability of the country and for politically-linked stocks, the correlation for Singapore is more spurious. In four out of last six elections, market reaction before and after were muted. Good corporate governance and a steady currency could continue to make Singapore the next best choice for MNCs’ relocation.
  • From the perspective of foreign currency flows, we have started to see positive momentum since Jul 19. 2020 could also be a busier than usual biennale-event year, with Singapore retaining its number one position as the most popular MICE destination for business meetings and events.


I. Singapore safe haven

  • The Singapore equity market is mostly a bottom-up market. Companies have growing earnings exposure from outside of Singapore, making the health of Singapore’s economy increasingly irrelevant, and the well-being of ASEAN and Asia relevant. We have not seen much direct benefit to Singapore from the continuous on-off status of the US-China trade talks. In fact, Singapore’s growth in 2019 has been tepid and buffeted by decreased trade flows.
  • While the regulatory authority has warned the Singapore corporates not to be predatory over the Hong Kong social and political unrests, we believe there could be some inherent spillover as Singapore will sharpen its edge as a hub city in Asia.

Foreign currency fund flows.

  • During the three months ended Jul-Sep 2019, Domestic Banking Unit (DBU) deposits recorded S$7.1bn in foreign currency deposit inflows — the largest increase over the past decade (for perspective, 1H19: -S$950m, FY18: +S$866m, FY17: -S$529m).
  • We believe the diversion of funds into Singapore was fuelled by investors seeking a safe haven. Consistent foreign inflows could persist until some resolution is in sight, but the initial euphoria has since died down, with Oct 2019 foreign inflows normalising to just S$579m.

Tourist numbers grew 4% y-o-y in Oct 2019 (YTD Oct 2019: 2.3% y-o-y).

  • Chinese tourists into Singapore grew at 5% y-o-y in Oct this year (YTD Oct 2019: 4% y-o-y). RevPar for 3Q2019 was up by 4.2% y-o-y (3Q2018: 3.4% y-o-y). RevPar over the same period was up by 4.2% y-o-y (3Q2018: 3.4% y-o-y). We think hotels can surprise on the upside in 2020 with biennial events scheduled ahead.
  • In addition, Singapore has retained its number one position as the most popular destination for business meetings and events for the fourth year running, according to venue solutions provider Cvent’s list of the Top 25 Meeting Destinations in Asia in 2018.

General election 2020.

  • Unlike many other countries in the region where election results have investment implications for the perceived stability of the country and for politically-linked stocks, the correlation for Singapore is more spurious. In four out of last six elections, market reactions before and after were muted. The exceptions were in 2006 and 2001 when global events overshadowed local events.


II. I wished I had that - Privatisation Deals & M&As.


Why the wave?

  • The big-cap M&As could be spurred by limited organic growth within the business and significant shareholders’ desire to extract higher value from investments via consolidation. The small-cap privatisations were mainly due to low valuations and under-appreciation by equity investors. Some of the privatised names, such as PACC OFFSHORE and CITIC ENVIROTECH (SGX:CEE), taught us that share price underperformance does not always equal poor financial prospects. Holding companies and individuals in Asia have the means to take companies private if they deem their long-term prospects and valuations attractive.

Screening for potential corporate actions

  • With the average take-out offer coming at more than a 20% premium to the stocks’ last trading prices, we think there are rewards if one can find the next take-out candidate. We go through a two-stage process to screen our stocks quantitatively and qualitatively.
  • Our first screen is a quantitative screen, selecting for stocks that are trading below -1 s.d. of their P/E or P/BV trading bands. We reckon that the key characteristics that could trigger privatisation or M&A attempts include:
    • valuations below 1x P/BV or replacement value;
    • a high net cash position;
    • simple key shareholding structure or shareholders with deep pockets, plus a desire to control; and
    • little need for fundraising in the equity market in the near future.
  • The second screen is the qualitative factors. For instance, have the main shareholders been gradually raising their stakes, signalling their intent? Do main shareholders have deep-enough pockets and the interest to privatise? Our thoughts on the individual stocks are as follows:

The most likely candidates are


Singpost’s trading valuation has retraced to its pre-E-commerce days of 16x forward P/E.

  • Hypothetically, Temasek could take over SINGTEL (SGX:Z74)’s c.22% stake (c. S$500m) in SINGAPORE POST (SGX:S08) which could ease the funding needs of SINGTEL’s capex or potential bid on digital bank while transforming the postal landscape in line with the country’s smart-nation drive. We think the direct ownership by Temasek (or entry of strategic shareholder) could pave the way for SINGAPORE POST towards more collaboration on B2B logistics contracts, or nationwide rollout of a new letterbox infrastructure. The group has recently unveiled its “Future of Post” vision in transforming Singapore’s postal landscape with one-stop shared letterboxes for letters, packets and parcels – a significant step towards pushing Singapore towards becoming a smart nation.
  • In the REIT space, we do not rule out more cross-breed mergers. We see the potential among the smaller players to merge to flex their muscles. For instance, SABANA REIT (SGX:M1GU) and ESR-REIT (SGX:J91U) have similar investment mandates.
  • Within the consumer space, we believe THAI BEVERAGE (SGX:Y92) could extract more value from its beer assets via an IPO. We agree that this could help to de-leverage its balance sheet (post acquisition of SABECO, THAI BEVERAGE's gearing has spiked up). It could also allow for tie-ups with potential partners for the newly-listed entity. Besides an IPO, we would not be surprised if THAI BEVERAGE revisits its F&N (SGX:F99)/FRASERS PROPERTY LIMITED (SGX:TQ5) restructuring plans.
  • Healthcare and small-cap space see more potential for M&As/privatisations, with the likes of FU YU (SGX:F13), VALUETRONICS (SGX:BN2), CHINA SUNSINE (SGX:QES), MM2 ASIA (SGX:1B0), Q & M DENTAL (SGX:QC7) and TALKMED (SGX:5G3).


III. 15 Singapore stocks to play on earnings recovery



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LIM Siew Khee CFA 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 0.700 SAME 0.700
ADD MAINTAIN ADD 6.900 SAME 6.900


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