AIMS APAC REIT (SGX:O5RU)
CAPITALAND RETAIL CHINA TRUST (SGX:AU8U)
THAI BEVERAGE PUBLIC CO LTD (SGX:Y92)
ESR-REIT (SGX:J91U)
STARHUB LTD (SGX:CC3)
Singapore Market Focus - The Only Thing To Fear Is Fear Itself
- Earnings cut on COVID-19 impact, STI year-end target lowered to 3350.
- Emergency rate cut put REITS back in focus, add pressure on banks’ NIM.
- COVID-19 resilience list - AIMS APAC REIT, ESR-REIT, StarHub, NetLink Trust, Ascendas REIT, Frasers Centrepoint Trust, Sheng Siong and Thai Beverage.
- China’s COVID-19 recovery and Singapore malls’ footfall recovery - Sunpower, Frencken, Yangzijiang, Capitaland Retail China Trust, CapitaLand, Capitaland Mall Trust, Mapletree Commercial Trust & Koufu.
Another rate cut ahead?
- Global monetary and fiscal support continues as COVID-19 was spreading across the globe over the past two weeks. On top of the 50bps emergency cut, consensus expects the FED to lower rates by a further 25bps at the 18 March FOMC meeting. The drop in the US 10-yr yield below 1% is positive for REITs/yield stocks while banks face NIM pressure.
- Downgrade UOB (SGX:U11) to HOLD, Target Price cut to S$25.50. See report: Singapore Banks - DBS Research 2020-03-05: Further NIM Pressures.
Earnings slashed on viral outbreak uncertainties.
- EPS growth for stocks under our coverage was cut by 3.4% and 1.9% for FY20F and FY21F respectively vs the previous quarter. The drag came from
- consumer discretionary (Genting Singapore (SGX:G13), Jumbo Group (SGX:42R)),
- consumer services (SingTel (SGX:Z74), SPH (SGX:T39)),
- industrials (Keppel Corp (SGX:BN4), Sembcorp (SGX:U96), Sembcorp Marine (SGX:S51), Singapore Airlines (SGX:C6L), SATS (SGX:S58)) and
- banks (UOB (SGX:U11), OCBC (SGX:O39)).
- On a positive note, Venture Corp (SGX:V03), Ascendas REIT (SGX:A17U), UOL Group (SGX:U14), Wilmar (SGX:F34) and Sunpower Group (SGX:5GD) saw upward earnings revisions.
STI year-end target 3350.
- The COVID-19 situation in China has improved tremendously over the past month even as more countries are affected. STI earnings are slashed by 6.3% and 5.6% for FY20F and FY21F respectively, leading to almost zero growth for STI this year.
- We thus lower our STI year-end target to 3350 (from 3500) pegged to 12.89x (-0.25SD) FY21F PE.
- Technical support at 2960.
COVID-19 playbook.
- We identify the five phases (fear, anger, relief/acceptance and finally recovery) of COVID-19 experience and the sector outperformers/underperformers. We believe that China has started its recovery phase, where sector outperformers are manufacturing and domestic demand (F&B and retail). Singapore is at the relief/acceptance phase, and its sector outperformers are telecom and domestic demand (F&B and retail).
COVID-19 resilience list
- These include stocks that are resilient to the short-term supply chain disruption, sharp drop in consumer discretionary spending and impact of travel restrictions. In addition, we think S-REITs/yield stocks remain resilient given the plunge in US 10-year yield to below 1.2%.
- Our picks are
Two-pronged strategy.
Positioning for China’s COVID-19 recovery phase and Singapore malls’ footfall recovery
- Stocks that are positioned to ride the current recovery in China’s manufacturing activity (Sunpower (SGX:5GD), Frencken (SGX:E28), Hi-P International (SGX:H17), Yangzijiang (SGX:BS6)) and the anticipated pent-up domestic demand (CapitaLand Retail China Trust (SGX:AU8U), CapitaLand (SGX:C31)) are likely to be unleashed when movement restrictions within China are eased.
- We are also positive on the recent footfall recovery in Singapore malls (CapitaLand Mall Trust (SGX:C38U), Mapletree Commercial Trust (SGX:N2IU), Koufu (SGX:VL6)).
Fall in US 10-yr yield to record low underpins REITs, puts pressure on banks
- The US 10-yr yield fell below 1% after the FED slashed the FED funds rates by 50bps to 1.25% in a pre-emptive off-meeting move. Consensus still expects another rate cut at the 18 March FOMC meeting. The US 10-year yield fell below the 1% mark to 0.98%, the lowest on record.
- The tumble in the risk-free rate is positive for REITs especially after the sector’s recent sell-off as yield spread widens. Among the larger cap REITs, our REITs sector analyst prefers industrials for their longer weighted lease expiry (WALE) supporting distributions, and selected SG & US office REITs for potential acquisitions driving distributions higher.
- We believe that suburban retail landlords will hold their ground better than tourist-focused malls given their focus on necessity shopping which is more defensive.
- However, banks UOB (SGX:U11) and OCBC (SGX:O39) will likely suffer from further NIM pressure. In 4Q19, NIM had declined by 1-4bps q-o-q across Singapore banks amid a lower interest rate environment. This trend should continue given the lower interest rates backdrop. We lowered FY20F earnings by 1-2% across the sector on 1-2bps NIM reduction. We currently forecast 6-9bps. NIM decline through FY20 across the banks. NIM sensitivity: every 10bps decline in NIM will reduce net profit by 6-8%. We have downgraded UOB to HOLD, Target Price cut to S$25.50. See report: Singapore Banks - DBS Research 2020-03-05: Further NIM Pressures.
Kee Yan YEO CMT
DBS Group Research
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Janice CHUA
DBS Research
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https://www.dbsvickers.com/
2020-03-05
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