Singapore Strategy - CGS-CIMB Research 2020-03-04: Protracted Outbreak


Singapore Strategy - Protracted Outbreak

  • Risk aversion heightens on the Fed’s emergency rate cut (potential for more) amid Covid-19, leaving us limited choices but to turn to yield plays.
  • Straits Times Index (STI) is unlikely to mean revert anytime soon and could find a floor of 2,800 (11.8x CY21F P/E), mimicking the Jun 09 average. Our end-20 target: 3,020.
  • Upgrade REITs, telco and tech to OVERWEIGHT. Downgrade banks to NEUTRAL.

FSSTI could find its floor at 2,800; negative growth

  • The combined impact of the Covid-19 global spread, emergency Fed fund rate cut, and the Organisation for Economic Co-operation and Development (OECD) cutting its global GDP forecast by half percentage point to 2.4% meant that engines for demand are weakening. The likely effect is more earnings cuts, margin squeeze and slowing investments.
  • Currently, with the latest rounds of earnings cuts among banks, our Straits Times Index (FSSTI) EPS swung into a decline of 1.4% for CY20F. We are still unsure about a 4.7% recovery in CY21F if the Covid-19 outbreak extends beyond 1H20. The adoption of half-yearly earnings reporting for SG corporates could somewhat cushion the negative news flow of a potentially bad 1Q20F.
  • Our technical analyst is also pessimistic and expects the near-term index to be in the range of 2,800-2,950. At 2.800, Straits Times Index mimics the valuations at the tail-end of the Global Financial Crisis in Jun 2009 (or 11.9x forward P/E). A recessionary valuation would see the index heading towards the c.2,000 level (an 8-9x forward P/E).
  • Our fundamental end-20F FSSTI target of 3,020 is based on -2 s.d. of 12.2x the 10-year mean. We expect some reprieve in 2H20 when the Covid-19 infection rate slows down globally. Singapore is still relatively cheaper than its peers. (see also Straits Times Index Constituents Target Price & Rating)

FSSTI musical chairs

Not just yields, but sustainability

  • As a whole, FSSTI provides dividend yields of 4.6% for CY20F and 4.7% for CY21F, supported by REITs, banks and telcos. Fig6 in attached PDF report lists the top 20 high-yield stocks with a market cap above US$500m. (We exclude stocks less than US$500m, as we believe their liquidity is not ideal for investment).
  • Our top picks of the highest-dividend yield stocks (excluding REITs, telcos and banks) are

Changes in sector ratings


  • Our end-2019 preference for developers over REITs was due to developers’ -1 s.d. valuations, REITs’ outperformance, and our tapered expectations for interest rate cuts. Our change of heart stems from:
    • an increasing sense that rate cuts could resume and heighten to cope with a potential global pandemic, and
    • that temporary disruptions in supply chains (workers and building materials) could delay developers’ construction progress.
  • Therefore, we lean towards the ‘completed assets’ thesis. We also think REITs could achieve yet another year of outperformance in a lower interest rate environment. The yield spread over Singapore’s risk-free rate has again widened to 310bp (vs. the long-term average of 342bp).
  • Our preferred picks in the sector are
  • See also report: REIT - CGS-CIMB Research 2020-03-04: More Tailwinds For SREITs.
  • We retain our OVERWEIGHT stance on Singapore developers as they are still trading at an attractive 48% discount to RNAV and offer upside to our TPs, which are based on an assumed discount to RNAV.
  • A near-term catalyst would be good sell-through rates for new launches and absence of project delays from interrupted supply chains.
  • Downside risks include weaker-than-earlier-projected macroeconomic outlook, which could dampen the demand for big-ticket items, such as housing. We prefer City Developments (SGX:C09) and CapitaLand (SGX:C31) among the developers.

Upgrade Telco to OVERWEIGHT from NEUTRAL.

  • We like the sector’s yield of almost 6%. Singtel appears to be the least affected by the Covid-19 outbreak. If the epidemic lasts until Jun 20, our group FY20/21F core EPS would be hit by -0.9%/-0.8% (assuming roaming traffic drops 50%). TPG’s commercial launch impact may be lesser-than-feared in a challenging macro environment.
  • StarHub (SGX:CC3)’s efforts to control costs are paying off as the company achieved 64% of its cumulative gross savings target of S$210m over FY19-21F in Year 1. We believe this should help to cushion the decline in core EPS to 18.6%/21.9%/5.2% y-o-y in FY20F/21F/22F, even with a further 15% ARPU erosion over the next two years.
  • We prefer SingTel (SGX:Z74) to StarHub after its recent underperformance.

Upgrade Tech to OVERWEIGHT from NEUTRAL.

  • We upgrade the tech sector from Hold to Overweight. This is mainly due to our upgrade on Venture Corp (SGX:V03) from Hold to ADD, driven by its positive outlook for FY20F. Earnings growth is set to resume for Venture Corp after a challenging FY19 as customers launch new products. See report: Venture Corporation - CGS-CIMB Research 2020-02-27: Anticipating A Stronger 2H.
  • In the semicon sub-sector, AEM (SGX:AWX) continues to benefit from the strong demand from its major customer while UMS (SGX:558) expects to benefit from the semicon industry this year.
  • In the plastic injection space, although the outlook is still challenging, we believe the dismal outlook for Sunningdale Tech (SGX:BHQ) is priced in and its share price will Hold at current levels given its 6.6% dividend yield, low gearing and low expectations from investors.
  • We think Covid-19 has presented additional impetus in addition to the US-China trade war for customers to seek alternative manufacturing partners outside of China to diversify risks. This could provide new revenue streams for Singapore tech companies even after the resolution of the virus outbreak.
  • Our preferred picks in the sector are

Downgrade Banks to NEUTRAL from OVERWEIGHT.

  • The Fed’s 50bp emergency rate cut (on fears of slowing economic growth amid the Covid-19 breakout) expels our expectations of some stabilisation in margins come 2H20. We cut our NIM forecasts further in FY20F (DBS: -12bp y-o-y to 1.77%; OCBC: -10bp y-o-y to 1.67%; UOB: -10bp to 1.68%) and factor in added pressure from a highly probable 25-50bp rate cut come Mar/Apr’s Federal Open Market Committee (FOMC) meeting (based on Fed Funds Futures) spilling into FY21F’s estimates (4-5bp compression). The resilience in SGD rates may falter.
  • We also factor in lower loan growth of c.2% and higher credit costs of 26-30bp (previously 25- 29bp) as ECL models under IFRS9 necessitate hefty impairments on exposures under monitoring, although not past due nor non-performing.
  • Following this, we downgrade DBS and UOB to Hold, and cut TPs of all banks. See report: Singapore Banks - CGS-CIMB Research 2020-03-04: Unwinding The Margin Expansion.
  • Singapore Exchange (SGX:S68) is a safer pick in the financial sector, but among the three banks, we still prefer DBS (SGX:D05) for its better margin management track record, dividend visibility and smaller SME portfolio among its peers.
  • We think c.5% dividend yields will still serve as a key support factor to bank valuations. While counterproductive to increased returns, we like the defensive shield of robust CET-1 ratios of 14.1-14.9% across the banks, providing a substantial buffer against asset quality deterioration.
  • Upside/downside risks are a removal of HK geopolitical uncertainties/sharper Fed rate cuts to combat a prolonged Covid-19 situation.

Downgrade Capital Goods to NEUTRAL from OVERWEIGHT.

Downgrade Gaming to UNDERWEIGHT and Construction to NEUTRAL.

  • We see earnings risks for Genting Singapore (SGX:G13) if there is a sharper-than-expected contraction in visitor arrivals to Singapore. We have only baked in a 10% y-o-y decline in revenue for FY20F.

Downgrade Construction to NEUTRAL.

  • Although construction demand is still expected to stay strong in 2020F, manpower shortage arising from travel restrictions imposed on foreign labour as well as potential disruption in building materials could see projects being delayed.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-04
SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.210 SAME 2.210