Z-Score - UOB Kay Hian 2020-03-31: A Testing Time For Singapore Stocks

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BANYAN TREE HOLDINGS LIMITED (SGX:B58)

Z-Score - A Testing Time For Singapore Stocks

• A “black swan” event such as COVID-19 presents a testing time for Singapore stocks. We use Altman’s Z-score to look at Singapore listed companies at the bottom of the scale to see which of them face challenges, but conclude that while many appear to be in distress, insolvency is not a key risk due to strong balance sheets, decent interest coverage ratios and well-capitalised major shareholders.
• We continue to prefer high-yield stocks in the financial sector, telcos and selected REIT segments.

WHAT’S NEW

• Many appear to be in distress... Figure 1 in attached PDF report features 15 companies with low Z-scores, high net gearing, and high near-term debt and interest payment relative to EBITDA generation, and the key sectors represented are hospitality, property and retail-related REITs.
  • Banyan Tree (SGX:B58),
  • Sembcorp Marine (SGX:S51),
  • Suntec REIT (SGX:T82U),
  • CapitaLand (SGX:C31),
  • Sembcorp (SGX:U96),
  • Oxley Holdings (SGX:5UX)
  • Ascott Residence Trust (SGX:HMN),
  • ARA US Hospitality Trust (SGX:XZL),
  • Sasseur REIT (SGX:CRPU),
  • Singapore Airlines (SGX:C6L),
  • Mapletree Logistics Trust (SGX:M44U),
  • Ascendas REIT (SGX:A17U),
  • CDL Hospitality Trusts (SGX:J85)
  • Overseas Education (SGX:RQ1)
• Within our coverage universe, 40% of our stocks have Z-scores of 1.8 or below (ie distress zone) while 30% are within the caution zone of 1.8-3.0, and the rest are in the safe zone.
• …but insolvency is not a key risk, in our view. Although a meaningful number of stocks appear to be in distress, we point out that the majority of them have strong balance sheets; decent interest coverage ratios; revenues that are backed by leases, contracts or concessions; and more importantly, well-capitalised major shareholders who we would expect to step in, in the event of a cash crunch.
• In particular, we note that 7 of the 15 companies above are Temasek-linked (Sembcorp Marine (SGX:S51), Sembcorp (SGX:U96), CapitaLand (SGX:C31), Singapore Airlines (SGX:C6L), Ascott Residence Trust (SGX:HMN), Ascendas REIT (SGX:A17U), Mapletree Logistics Trust (SGX:M44U)) and thus we expect that any recapitalisation measures will be backed by Temasek, e.g. its support of Singapore Airlines in its convertible bond and rights issue announced on 27 Mar 20. In addition, the Singapore government has unveiled a S$48b Supplementary Budget to aid and stimulate key sectors within the economy.
• Distressed stocks underperformed non-distressed stocks during GFC. Based on Bloomberg data, non-financial stocks within our coverage with Z-scores of 1.81x or below (i.e. distress zone) predictably fell the most from the market peak to the global financial crisis (GFC) trough. We note that property, shipyards and small/mid-cap stocks were the worst-performers during the GFC while land transport, telcos and others (i.e. SingPost (SGX:S08) and Thai Beverage (SGX:Y92)) performed relatively better.
• Little to differentiate share price performance post-GFC. Interestingly, the six-month share-price performance post-GFC showed only a 1ppt performance difference between higher-quality non-distressed stocks (Z-score > 3.0) and distress-zone stocks. We note that the plantation sector showed the biggest turnaround, declining by 47% during the GFC and rebounding by 160% post GFC, or a 113ppt differential.

ACTION

• Tactically we recommend an UNDERWEIGHT on aviation, transport, and retail-centric property stocks. We expect these sectors to continue to bear lingering post COVID-19 effects which include aversion to air travel, a slower-than-expected rebound in retail and F&B spending, and normalisation of tourism and MICE-related businesses.
• High-yield stocks in the financial sector, telcos and selected REIT segments remain appealing, in our view: DBS (SGX:D05), OCBC (SGX:O39), Mapletree Logistics Trust (SGX:M44U), Mapletree Industrial Trust (SGX:ME8U) and NetLink Trust (SGX:CJLU).

What is the Z-score?

• Edward Altman, a professor at the Stern School of Business, New York University, developed the Altman Z-score in 1968 as statistically derived predictive model to determine whether a company, notably in the manufacturing space, is headed for bankruptcy. The formula takes into account profitability, leverage, liquidity, solvency, and activity ratios whereby a Z-score at or below 1.8 suggests a company might be headed for bankruptcy, while a score of 3.0 and above suggests a company is in solid financial positioning.
• See attached PDF report for assessment for the list of SGX listed companies that are in the Z-score 'Distress' zones.

Adrian LOH UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2020-03-31

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