Singapore Strategy - Maybank Kim Eng 2020-03-05: Viral Valuations

Singapore Strategy - Maybank Kim Eng Research | SGinvestors.io UNITED OVERSEAS BANK LTD (SGX:U11) VENTURE CORPORATION LIMITED (SGX:V03) BUMITAMA AGRI LTD. (SGX:P8Z)

Singapore Strategy - Viral Valuations

Deep discounts amidst fear offer opportunities

  • Covid-19 continues to spread rapidly impacting 60 countries so far. Fears of widespread macro impact has resulted in the STI falling 6% YTD. Sectors valuations including Banks & some Tech and Industrial names are trading close to troughs seen in SARS – an outbreak that had a 2.5x higher mortality rate.
  • Approaching warmer weather, together with coordinated government and monetary stimulus measures and better disease management, should keep the current epidemic a limited event risk, rather than a systemic risk (such as the GFC), in our view. In this backdrop, we believe there are significant value opportunities, especially UOB, Venture Corp, Bumitama Agri.

Improving data points…

  • While headline numbers for Covid-19 continue to climb, in the past 2-weeks recoveries are outpacing new infections nearly 2:1. Despite the fact that in the past few days fresh infections in the US and Europe has increased the overall new infections, recoveries still continue to outpace. Improving treatment protocols, faster detection and more coordinated disease management should continue to support this trend, in our view.
  • Expectations by the World Health Organisation (WHO) indicate a natural slowdown of new infections with the approach of warmer weather that impacts the virus transmission cycle.
  • Similarly, rapid policy responses in in affected countries especially US, China, Singapore, Hong Kong, Malaysia should provide support for fundamentals to remain intact, in our view.

…not yet reflecting in valuations

  • Banks, S-REITs and some Tech & Industrial names are close to SARS/historical distress valuations. Recall, the STI recovered 26% in the 3-months following its trough from the SARS infections peak.
  • Separately, while system loans contracted 1.2% from Nov 2002- Feb 2003, they recovered strongly by 7% from there by December. Similarly, street economic forecasts surveys persistently undershot actual GDP growth by 50bps throughout the SARS recovery cycle.
  • Given we are currently in the midst of an aggressive growth downgrade cycle, risks of undershooting recovery need to be closely watched, in our view.

This too shall pass

  • There has been significant global, coordinated and unprecedented fiscal, monetary responses aimed at continued liquidity flow to businesses and households since the beginning of this epidemic. Similarly, there has been major advances in disease containment and treatment compared to previous outbreaks. Death rates are falling materially and recovery rates are increasing globally.
  • The combination of governmental, central bank and health authority support put the resolution of the current epidemic in a solid footing, in our view.
  • As a result, we believe the current deep discounts on UOB, Venture Corp, Bumitama Agri offers value given strong dividend visibility, strong cashflow and balance sheets and underlying fundamental medium-term growth drivers.
  • We believe there are some attractive entry opportunities driven by:
    • Strong 2020E dividend visibility,
    • Visible cashflow and relatively upstretched balance sheets,
    • Underlying structural medium-term growth drivers.

Singapore Stock Picks

  • UOB (SGX:U11) - Strong underlying capital and provisioning levels, track-record of asset quality management through down-cycles and increasing gearing to ASEAN growth.
  • Venture Corp (SGX:V03) - Expect earnings to recover h-o-h and y-o-y in 2H20, underpinned by key product launches across multiple domains. Given Venture Corp’ solid execution track record; and largely MY/SG-based production footprint, expect Venture Corp to be a structural beneficiary of customers’ production diversification out of China.
  • Bumitama Agri (SGX:P8Z) - Strong medium term structural growth prospects from young age profile of palm oil plantations and better cost management coupled with improved fundamentals for CPO pricing given falling supply.

Thilan Wickramasinghe Maybank Kim Eng Research | Gene Lih Lai CFA Maybank Kim Eng | https://www.maybank-ke.com.sg/ 2020-03-05
SGX Stock Analyst Report BUY MAINTAIN BUY 29.17 SAME 29.17