Singapore Strategy - CGS-CIMB Research 2020-03-12: Going Into Deeper Value Zone; STI Year-End Target 2595

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SHENG SIONG GROUP LTD (SGX:OV8) SINGTEL (SGX:Z74) SINGAPORE TECH ENGINEERING LTD (SGX:S63) WILMAR INTERNATIONAL LIMITED (SGX:F34) SINGAPORE AIRLINES LTD (SGX:C6L)

Singapore Strategy - Going Into Deeper Value Zone

• For stock markets to rally convincingly, the crucial ingredient is confidence, now lacking amid oil price crash, rate cuts and global pandemic.
• We cut our end-2020 FSSTI target to 2,595 (12.2x CY21F P/E; -2 s.d of 10- year mean) on -13% decline in FY20F EPS. FY21F EPS growth of 4% at risk.
• Any rebound in market should be used as a selling opportunity, waiting for lower entry. In this report, we screened for names near our conviction buys.

Sell while you can

• With a variety of triggers capable of triggering a contagion, the situation now is akin to a perfect storm brewing. Unexpected interest rate cuts by central banks, with possibility of more cuts ahead, imply slower growth. Stimulus measures by many countries to cope with Covid-19 imply potential worsening ahead, and oil price crash intensifies the fear of demand destruction. WHO’s declaration of a global pandemic could change major political and economic ramifications.
• We see vulnerability in banks (NIM cuts, slowdown in loans), developers (potentially slower take-up rates), and some expensive REITs e.g. Keppel DC REIT (SGX:AJBU) (2.07x P/BV, 4% yield).

Keep the ammunition

• We lower our end-2020F FSSTI to 2,595, still based on -2 s.d. of 10-year mean, as we expect FSSTI EPS to decline 13% in 2020F, factoring in a more severe compression in bank earnings on heightened default risks compounded by the oil price crash. Dearth of oil & gas orders in 2020F is almost inevitable, on top of equipment supply chain disruptions due to Covid-19.
• Our forecast of a c.4% earnings recovery for FSSTI in 2021F incorporated slight pessimism in revenue growth, but we see room for weak operating leverage if a recession sets in (typically when corporate earnings contract for two years).
• We identify 2,400 as the FSSTI level that reflects recession (2-year average earnings decline of c.20%), and 2,050 as the likely level in the event of a crisis (total 2-year decline of 30%).
• Our technical analyst now expects further downside to the 2,520 support level. Any rebound near term would likely be temporary, in our view.

Target entry levels still some way down; capital goods, deep value

• Focusing on the more liquid stocks, we identify target individual entry levels for stocks, based “close to trough” levels. On average, share prices need to fall another 18% before we are convicted to buy.
• We list our target entry levels of key stocks in Figs 3-5 in attached PDF report. Some safer names that are close to buy levels are SingTel (SGX:Z74), Wilmar (SGX:F34) and ST Engineering (SGX:S63).
• The capital goods sector presents the deepest value, with names that could double the money in 3-5 years’ time (but not for the faint hearted). Sembcorp (SGX:U96) (0.4x FY20F P/BV) is only worth 0.8x its utilities' net assets, and everything else is free. Sembcorp Marine (SGX:S51) (0.9x FY20F P/BV), and Yangzijiang Shipbuilding (SGX:BS6) (0.5x FY20F P/BV) have sunk to valuations lower than during the GFC and the oil crisis in 2016 -- due to the oil price crash and anticipation of slower shipbuilding if the global economy softens.

More headwinds

• Central banks around the world have eased monetary policies, not only in response to the current material deterioration in economic activity, but also to the risk of material deterioration in their respective economies. At the same time, many governments are rolling out or have rolled out Covid-19 relief packages to cushion their economies from the impact of its outbreak. However, monetary and fiscal policies cannot overcome a global healthcare crisis.
• Much will also depend on how soon the global fear factor can be contained. Therefore, the general market sentiment would likely remain depressed as the market accesses the threat of contagion risk.
• Last week, International Monetary Fund (IMF) managing director Kristalina Georgieva said global growth in 2020 will dip below last year's levels of 2.9%, but “how far it will fall and how long the impact will be is still difficult to predict".
• The US Federal Reserve has also signalled its concern over the impact Covid- 19 will have on the US economy when it on 3 Mar unexpectedly slashed its benchmark interest rate by 50bp to 1.25%. Historically, an emergency rate cut of 50bp or more only happened during crisis periods such as at the height of the Dot-Com bubble in Jan 2001 and the Global Financial Crisis (GFC) in Sep 2007, kickstarting a bear market. Another 50bp rate cut in its scheduled 18 Mar Federal Open Market Committee (FOMC) meeting would mean one full percentage point rate cut in a month, signalling some crack signs in the US economy.
• If the US stock market remains in a risk-off mode even with the monetary support, the ongoing negative sentiment would worsen, leading to a further selloff globally including the FSSTI. Further interest rate cuts to 0.25% by Jun remains a highly probable scenario, according to the Fed Fund Futures. With the zero interest rate policy a possibility, the equity markets would likely remain depressed as the zero interest rate environment suggests a period of weak economic growth.
• The World Health Organization (WHO) declaration of a global pandemic could be the straw that broke the camel’s back.

Our worst case scenario is becoming real

• With WHO declaring a pandemic after being reluctant for weeks could hasten our much feared ‘worst case’ scenario. We fear that as the virus rapidly spreads across the world, US and the rest of Europe could see a sharp rise in infection cases and enters into a similar phase as Italy with the risk of sudden widespread outbreak leading to a partial lockdown of countries. This could push the world economy into a full-blown recession, the dreaded "L" growth.

Lower FSSTI to 2,595

• After the past few days' sell-down, the FSSTI now trades at c.12.9x CY21F P/E or 1 s.d. below 10-year mean. Still, we think it has room to de-rate as earnings forecasts can be fragile with our base case play, compounded by the oil price crash and impending rate cuts.
• Our stress tests on banks and capital goods companies, on lower NIM and weaker orders, respectively, on the back of depressed oil prices point to a 13% decline in market EPS for 2020F, with a hope of a 3.8% recovery in 2021F, assuming default risks dissipate. With that, our new FSSTI target is lowered to 2,595, still based on 12.2x CY21F P/E, -2 s.d. of 10-year mean.
• Given the low single-digit earnings growth expectation for 2021F, this puts FSSTI on the verge of a recession if earnings continue to dip, which could bring FSSTI to 2,400 (total earnings decline of 20% in 2 years). Crisis level would see sharper 2-year earnings contraction of 30% or more, sending the FSSTI to 2,100.

What to buy when the time comes?

• We would look for opportunities to buy, closer to 2,400 points as this level is also cross-checked with most of the analysts' "comfortable” target entry prices. We go through most of the indexed stocks and small cap alpha picks to explore when would be a good time to buy, and at what price. In our screening process, we also identify the reasons why a stock should or not be valued at GFC levels, with arguments from liquidity and business resilience perspectives.
• On average, stocks still have 30% downside from current values to the “crisis” level, and 18% to fundamental comfortable buy levels.
• We list down the top 9 stocks (above US$1bn market cap) that seem to be closer to our comfortable buy levels.
  1. SingTel (SGX:Z74) (target entry: below S$2.70): based on 1 s.d. below its 2006-2020 mean EV/OpFCF. It is currently offering attractive FY20-22F dividend yields of 5.9% p.a. This should provide share price support, as it is close to the 6.1% yield when Singtel's share price hit the trough in Oct 2008 during the GFC. See SingTel Share Price; SingTel Target Price.
  2. Wilmar (SGX:F34) (target entry: below S$3.68): represents 20% below our SOP Target Price of S$4.58 (pricing in listing of its Chinese businesses at 18-22x forward P/E). We do not think it should be pegged to GFC valuations (5.36x P/E) given the current catalyst of listing its China assets. In addition, its integrated business model has allowed the group to produce consistent average core net profit of US$1.2bn over the past 10 years. See Wilmar Share Price; Wilmar Target Price.
  3. Singapore Airlines (SGX:C6L) (target entry: below S$7.50): based 0.75x historical P/BV pegging to GFC low. Factoring in massive marked to market losses based on forward Brent price curve on 10 March, our BVPS would reduce to S$8.71. See Singapore Airlines Share Price; Singapore Airlines Target Price.
  4. Yangzijiang Shipbuilding (SGX:BS6) (target entry: below S$0.85). It is trading at 0.48x CY20F P/BV, below GFC (2x P/BV) and 2016 oil crisis (0.6x P/BV), pricing in risks of contract cancellations and slowing order momentum, in our view. Risk to our earnings forecasts is low as we have recently tempered our order expectations to US$1.2bn vs. management's target of US$2bn. YTD order win is about US$320m. Orders dropped to a low of US$450m in 2009. See Yangzijiang Share Price; Yangzijiang Target Price.
  5. ST Engineering (SGX:S63) (target entry: below S$3.84) based on 16.7x FY21F P/E (pegged to trough valuation during oil crisis in 2016). See ST Engineering Share Price; ST Engineering Target Price. Our stress test still points to a 5% y-o-y earnings growth in FY20F, assuming :-
     • revenue decline for aerospace (aircraft maintenance in FY20F on weaker aviation trend)
     • revenue decline for electronics (large-scale projects affected by reduced government spending)
     • 50% y-o-y decline in commercial ship repair volume on lower oil prices.
  6. Keppel Corp (SGX:BN4) (target entry: below S$5.15) based on 0.8x CY20F P/BV (pegged to trough during the oil crisis in 2016). The near-term catalyst is the partial offer from Temasek at S$7.35 per share. At current share price of S$5.55 and assuming the partial offer will be effective by 21 Oct 2020 (long-stop date), investor’s purchase price would be S$4.40/share, or a discount of 20% to market value. The caveat for the partial offer to de-rail is if Keppel group’s financial performance and condition deteriorate meaningfully over the period of Oct 2019 to the long-stop date. We do not expect major provisions or sharp plunge in earnings during this period, although the outlook for FY21F-FY22F could be dented by slow offshore & marine orders, and completion of property projects in China. See Keppel Corp Share Price; Keppel Corp Target Price.
  7. Sembcorp (SGX:U96) (target entry: below S$1.64). Current valuations implies SMM is trading at distressed valuations of 0.5x CY20F P/BV and 0.3x CY20F P/BV for its utilities business, ascribing very low confidence on its 9% ROE and S$300m FY20F earnings. We did not pick SMM although it is trading at a new trough of 0.89x CY20F P/BV, a valuation ripe for M&A, as risks prevail with losses likely to persist into its fourth consecutive year in FY21F on lower oil prices and order momentum. See Sembcorp Share Price; Sembcorp Target Price.
  8. Sheng Siong (SGX:OV8) (target entry: below S$1.18): based on long-term average of 20x forward P/E. Earnings growth of 12% in FY20F looks firm on higher store count. See Sheng Siong Share Price; Sheng Siong Target Price.
  9. SingPost (SGX:S08) (target entry: below S$0.71): based on -1 s.d. of long-term mean of 13.7x FY21F P/E. We believe it should not be pegged to its GFC low of 10x P/E as it is a proxy for regional ecommerce growth, making its logistics assets more valuable. Its net cash should sustain yield at 5% in FY21F. See SingPost Share Price; SingPost Target Price.
• See attached PDF report for summary on STI constituents downside to target entry prices.

Technical analysis

• Our technical analyst Jeremy Ng opines that since it recovered from the GFC in Mar 2009, the FSSTI has been moving in a bull market that was supported by an uptrend line. However, the selloff in Feb 2020 has effectively broken below the critical uptrend line, suggesting the start of a new prolonged downtrend.
• Moreover, the FSSTI has also broken below the Oct 2018 low point of 2,955 in Mar 2020, further highlighting a growing bearish sentiment. Therefore, we expect further downside to the 2,520 support. Any rebound here in the near term would likely be temporary, and presents a selling opportunity. The resistance at the 2,950-3,000 area would likely limit the upside.
• See chart in attached PDF report.

LIM Siew Khee CGS-CIMB Research | Singapore Research Team CGS-CIMB Research | https://www.cgs-cimb.com 2020-03-12

SGX Stock Analyst Report ADD MAINTAIN ADD 1.420 SAME 1.420

ADD MAINTAIN ADD 3.700 SAME 3.700

ADD MAINTAIN ADD 4.660 SAME 4.660

ADD MAINTAIN ADD 4.580 SAME 4.580

HOLD MAINTAIN HOLD 8.460 SAME 8.460