Singapore Market Strategy - CGS-CIMB Research 2020-04-22: Do It Right The Second Time

Singapore Market Strategy - CGS-CIMB Research SATS LTD. (SGX:S58) SHENG SIONG GROUP LTD (SGX:OV8)

Singapore Market Strategy - Do It Right The Second Time

  • Singapore further extended its Covid-19 circuit breaker period by four weeks to 1 Jun. Only the ‘most’ critical essential services will remain open.
  • Extension of the circuit breaker period could further dampen the economy; our economist revised her 2020 GDP growth forecast from -2.6% to -6.8%.
  • Our end-CY20F FSSTI target of 2,050 remains, still based on 9.5x CY21F market P/E, 20% downside from the current 2,554 pts.

Light at the end of tunnel in Jun

  • Singapore has decided to further extend the circuit breaker period by another four weeks till 1 Jun, from 4 may. It is currently on the second week of its circuit breaker implementation which began on 7 Apr.
  • There will be further adjustments and easing measures if the community numbers are brought down. The extension also calls for stricter movement control with foreign workers in dorms barred from leaving the premises till 4 May.

Additional S$3.8bn of help, offset by slowdown of activities

  • The enhanced Jobs Support Scheme (JSS), which covers 75% of employees' wages up to a salary ceiling of S$4,600, has been extended to May. The new relief also included some of the board of directors and shareholders. Foreign Worker Levy for the months of Apr and May will now be waived. There will be additional S$750 rebate from levies paid in 2020 for Work Permit/S Pass holders, bringing the total rebate to S$1,500 so far.
  • The cost relief will help companies with a large headcount (yards and construction sectors) but the impact will be offset by the slowdown in activities in 1H20F, especially with the restrictions on the movement of foreign workers, in our view.

Circuit breaker takes a toll on economic outlook

  • The extension of the circuit breaker period puts a further dampener on the economy. Our economist revised her 2020 GDP growth forecast down by 4.2% pts from -2.6% to -6.8% to factor in the reduced output from the 2-month circuit breaker period, though we expect pent-up demand as well as policy support from the cumulative stimulus package of S$64bn (or 13% of GDP) to stabilise demand once the circuit breaker is lifted.
  • Each additional month of circuit breaker extension beyond 1 Jun reduces our revised baseline GDP growth forecast by a further 2% pts.

What to do with Singapore stock market?

  • As companies start to report/update on quarterly progress and give their outlook this week, we believe reality could sink in as a great deal of uncertainty remains in areas such as banks, small caps and cyclicals.
  • We also see profit taking opportunities in names that could be challenged in a recessionary environment, including gaming, travel-related stocks and developers.
  • We expect market EPS to decline 17.5% in 2020F and rise 9% in 2021F and see more downside to our 2021 forecasts as the second-order effects of recession kick in.

Our thoughts on sector implications

Capital Goods/ Yards

  • Negative for Sembcorp Marine (SGX:S51) and Keppel Corp (SGX:BN4), slight positive for ST Engineering (SGX:S63).
  • The yards were affected with some clusters of workers being infected by Covid-19 during/before the first phase of circuit breaker. We believe progressive slowdown of activities had started since Mar. The extension of the circuit breaker period with stricter movement control could further reduce the revenue recognition for the months of Apr and May. This will likely swing Keppel O&M into losses and widen Sembcorp Marine’s losses. The double whammy of this plus weak oil prices may accelerate the need to consolidate both yards.
  • On the other hand, the additional month of enhanced JSS could add up to S$45m or 8% of ST Engineering (SGX:S63)’s group profit, potentially alleviating the risk of a y-o-y decline in earnings affected by weakness in aerospace.

Construction Sector

  • Negative for Yongnam (SGX:AXB) and BRC Asia (SGX:BEC).
  • Construction sites are to remain closed for another four weeks. With the stop-work order, we can expect minimal progress billings for the month of May. We believe the industry’s construction output in 2020F will be further impacted by the extension of the circuit breaker period.
  • While 1-month extension of subsidies including enhanced JSS and waiver of foreign worker levy as well as an additional S$750 rebate foreign worker levy could help offset some labour costs, we still see significant earnings impact for 2020F from the circuit breaker, given the construction companies’ large fixed cost base. Cash flow will be further tightened, elevating credit risk in the sector, in our view.


  • Negative for Singapore developers.
  • The private residential market will remain quiet in the absence of new launches. Moreover, sales at ongoing launches are also likely be adversely impacted during this period. Accordingly, we see downside risk to our current 2020 volume sales projection of 8,000-9,000 units as cautious sentiment persists.
  • In addition, with most construction sites remaining closed during this period, we expect minimal development activities to take place. The slower pace of progressive residential recognition, together with a softer retail and office rental market, will likely drag down developers’ earnings.

Retail REITs

  • Neutral to slight negative for retail REITs.
  • The extension of the circuit breaker period could speed up the displacement of retailers and affect malls’ occupancy in the longer run. Most of the shops in the malls will be closed for another four weeks. Generally, landlords are already giving out rental rebates till Jun. This could cover the extended circuit breaker period. However, we do not rule out landlords’ voluntarily extending an additional month of rebates to some tenants.
  • We have assumed three months of rental rebates (including 100% property tax rebate) to 90% of retail tenants in 2020F.

Hospitality REITs

  • Neutral to Hospitality REITs.
  • The extension would have minimal impact on the hospitality REITs as Singapore has banned short-term visitors since 23 Mar 2020. Given the low occupancy rate (51% in Feb 2020 even before the visitor ban), the hospitality REITs are likely to be just receiving minimum rents in Singapore.

Land Transport Sector

  • Negative for ComfortDelGro (SGX:C52).
  • We expect ComfortDelGro to extend its full taxi rental waiver until 1 Jun. We estimate that the full rental waiver will cost ComfortDelGro an additional S$19m in lost revenue and push its Singapore taxi operations further into the red, but we believe it is a crucial move for ComfortDelGro to retain its taxi fleet through the Covid-19 crisis. We also expect public transport ridership to remain low in May with the further tightening on essential services. We believe ComfortDelGro’s rail segment will be hit harder than its bus segment.
  • We estimate the extension of the circuit breaker period to impact ComfortDelGro's FY20F EPS by another c.7%.

Consumer staples

  • Positive for Sheng Siong (SGX:OV8) and Dairy Farm (SGX:D01).
  • Supermarkets will be able to continue their operations under extended circuit breaker period as they are considered an essential service. We estimate Sheng Siong will reap additional S$0.8m- 0.9m in levy rebates for May from extension of enhanced JSS. Sheng Siong with its estimated 35-40% foreign labour workforce could also receive at least another c.S$0.8m-0.9m of rebates (1-1.2% of net profit) from the extension of foreign worker levy, in our view.

Consumer Discretionary

  • Slight positive for SingPost (SGX:S08) and SPH (SGX:T39).
  • We estimate that with the 1-month extension of subsidies including the enhanced JSS and waiver of foreign worker levy due in May, as well as an additional S$750 rebate from foreign worker levy, SingPost will reap cost-savings on top of the estimated S$5.2m from the earlier Solidarity Budget. Based on its workforce of 700-750 local postmen and 350-400 work permit holders, the group will be eligible for c.S$1.6m financial support from the government in FY21F.
  • Postal and parcel services are deemed essential, and could see an uptick in demand from increased online shopping during the extended circuit breaker period. Recovery in international mail (mostly transhipment) will hinge on recovery of China (Cainiao-driven volumes) and international freight services.
  • Similarly, we estimate that SPH could receive an additional S$5.5m for the month of May (previously S$30.3m under the wage support scheme), for c.60% of its 4,000-odd staff strength (total staff cost base of S$333m in FY19).

Food & Beverage

  • Negative for Jumbo Group (SGX:42R).
  • F&B companies are generally still allowed to operate, although some services may be suspended (e.g. standalone stores that predominantly sell beverage, packaged snack, confectionery and dessert) as government aims to cut the proportion of workforce still commuting to work from 20% currently to 15%.
  • Jumbo Group, which is a restaurant operator, is likely to be impacted more significantly by the circuit breaker measure, compared to mass-market dining options including food courts and coffee shops. With the extension of circuit breaker measure, we see likelihood of further SSSG assumption cuts. Given that most of its operating expenses are relatively fixed, the operating deleverage from extended circuit breaker measure could cause significant earnings impact for FY20F.


  • Neutral to Genting Singapore (SGX:G13).
  • Genting could receive levy rebates of up to c.S$7m for Apr and May. We believe the extension of the circuit breaker period will weigh in on Genting Singapore’s 2Q20F results. However, the previously announced 75% wage support for nine months and property tax rebate (which we estimated could be up to S$170m) would have mitigated the impact on Genting Singapore earnings.
  • As for levy rebates, Genting Singapore with its estimated 40-45% foreign labour workforce could receive at least c.S$6m-7m of rebates (5-6% of admin costs), in our view.


  • Positive for Raffles Medical (SGX:BSL).
  • While government support has largely been directed towards public healthcare resources, we think private healthcare players (like Raffles Medical) could also benefit from the wage support scheme and foreign worker levy rebates and waivers.
  • Raffles Medical has a workforce of 500-600 nurses and 280- 300 allied health workers; it incurred c.S$250m in staff costs in FY19 in Singapore. We see the potential for private hospital operators to rise to the challenge and help offload the burden on public healthcare infrastructure during the extended circuit breaker period.

Tech manufacturing

  • Neutral for AEM Holdings (SGX:AWX) and Venture Corp (SGX:V03).
  • There are no changes to the essential list of manufacturing services for the tech industry. AEM Holdings and Venture Corp have already secured approval to continue operations under the circuit breaker period. Nevertheless, should the government call for a reduction in the allowable workforce going forward, that may result in delayed production and affect the 2Q earnings of both companies.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-22
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