Market Strategy - UOB Kay Hian 2020-05-26: Positioning For Recovery

Market Strategy - UOB Kay Hian Research | SGinvestors.io SINGTEL (SGX:Z74)

Market Strategy - Positioning For Recovery

  • We believe that global equities have largely bottomed out thanks to governments’ and central banks’ swift move to release monetary and fiscal stimulus packages. The Singapore government has done a good job in attempting to protect individuals’ and corporates’ balance sheets.
  • Exiting the “circuit breaker”, we advocate exposure to financially robust companies that are leveraged to the general economic recovery and/or pay a sustainable dividend.
  • Year-end target for the STI is 2,760.

Positioning For Recovery

  • Although Singapore’s outlook has darkened due to the global spread of the coronavirus, thereby exerting domestic supply-and-demand shocks, this report attempts to see which companies in our coverage universe could emerge as winners in a post-COVID-19 world.
  • We believe that global equities have largely bottomed out thanks to governments’ and central banks’ swift move to release monetary and fiscal stimulus packages.
  • Locally, the Singapore government has done a good job in attempting to protect individuals’ and corporates’ balance sheets.

Strong policy response – Avoid credit crunch, provide relief and stimulate economies

  • On the issue of monetary policy, central banks globally have taken a “whatever-it-takes” approach to provide liquidity and ensure that markets continue to function. The largest has been the US Federal Reserve’s unlimited quantitative easing, with its announcement that it will purchase corporate bonds and even Exchange Traded Funds (ETF) for the first time in its history to show its intent to provide as much support as the US economy needs. There have also been unprecedented moves beyond actions taken during the Global Financial Crisis in 2008, such as the FIMA Repo Facility announced on 31 Mar 20 which offers liquidity to foreign central banks in order to ease pressure on dollar funding.
  • On fiscal policy, governments globally have implemented sizeable stimulus packages. Singapore’s fourth supplementary budget announced on 26 May 20 (the “Fortitude Budget”) brought its total spending to S$92.9b (US$65.4b), or around 19.2% of GDP.

Base case: A U-shaped recovery.

  • Our base-case view is that Singapore’s and the global economy will undergo a U-shaped recovery starting in 4Q20, assuming that signs emerge by 3Q20 that the virus is well-contained globally. In our view, economic activity should bounce back once fears of community infection recede and government-mandated lockdowns are lifted. Singapore’s current “circuit breaker” (CB) measures end on 1 Jun 20 and the broad expectation is for an easing of some of the measures.
  • We assume that COVID-19 will not permanently impair the labour force, the capital stock or productivity, and thus the regional and global economy should normalise and employ as many people and produce as much output by end-21 as it would have done in the absence of the virus.
  • Clearly, even a U-shaped recovery will result in damage to some corporate balance sheets, which we have analysed in a later section “Balance Sheets At Risk In 2020” (see attached PDF report). This loss has been mitigated by the Singapore government’s three budgets which have cushioned the blow with public resources, thus shifting the burden to the public sector. As a result, the overall loss is smaller, especially since a significant percentage of the budgets were targeted at the labour market, either directly or indirectly.

UOBKH EPS growth estimates for 2020 and 2021.

  • Evidence from other countries shows that the stock market bottoms before EPS hits a trough. However, in Singapore the data is mixed with the most recent period showing that EPS hit a trough before the market bottomed.
  • Nevertheless, note that the STI witnessed aggregate earnings declines of about 45% in the past four downturns in 1997, 2001, 2008 and 2011. Since the 2017 peak to the present, we have seen a 35% decline in EPS.
  • In the current COVID-19 pandemic, UOBKH has revised its EPS from a forecast of 5% y-o-y growth at the start of 2020 to an earnings decline of 21% y-o-y at present.

Further downside to be expected?

  • If history is any guide, we should expect more EPS declines, but it appears that we are near a trough. Further downside to earnings estimates could occur as the CB measures were only tightened in April, and we note that during the 1Q20 results season, a number of companies guided for weaker profits in 2Q20.
  • The longer lockdowns around the world last, the greater downside to earnings in the near to medium term.

Lowering our STI target to 2,760

  • The STI has recovered 12% from its low of 2,233 on 23 Mar 20, rising in tandem with global equity markets as risk aversion ebbs. So far there has not been a second bottom that appeared to be the market consensus in April. In the near term, we believe that the market will remain volatile as investors will potentially focus on the economic damage arising from the country’s CB and phased entry to normalcy over the next few months.
  • In our view, the market capitulation in Mar 20 was the trough as US credit spreads spiked, the VIX reached 80, and the S&P500 hit successive limit downs during a few trading sessions. Fortunately, central banks around the world swiftly responded by injecting massive monetary liquidity into their respective banking systems, which successfully calmed nerves and resulted in a significant narrowing of US credit spreads and VIX in Apr 20.

The FSSTI is trading well below long-term PE valuations.

  • Compared to the FSSTI’s average of 14.8x since 1995 (excluding the spike in 1999), the index is currently trading 35% below long-term PE valuations with consensus 2020F PE of 9.6x. Even taking a nearer-term view, the STI is trading at a 20% discount to 10-year average PE of 12.0x.

FSSTI's P/B valuations look even more inexpensive

  • P/B valuations look even more inexpensive as the consensus 2020F P/B of 0.85x is at a 44% and 35% discount to its long-term and 10-year average P/B respectively. Even taking into account the FSSTI’s 2020F ROE of 9.0% (vs long-term average of 10.8%), we view these discounts as unwarranted if we take a 12-month view.
  • Assuming that we are on the initial path towards socio-economic normalcy, it would appear that at least on a P/B basis, the worst is behind us vis-à-vis other crises:
    • Asian Financial Crisis (1997): 0.70x P/B
    • SARS (2003): 1.08x P/B
    • Global Financial Crisis (2008): 0.87x P/B

We have revised down our year-end FSSTI target to 2,760

  • We have revised down our year-end FSSTI target to 2,760 which implies a 15% decline from the index level on 1 Jan 20, and upside of about 10% from present levels. Our new FSSTI target is based on a 15% discount to mid-cycle valuation of 14.8x PE, 20% discount to 1.5x P/B and our forecast 19% y-o-y decline in EPS. Note that our previous year-end 2020 target for the STI was 3,030 which was set at the beginning of the year.
  • We believe that these valuation discounts to both PE and P/B are reasonable given that the path toward socio-economic normalcy will likely not be a smooth and straight road, with the potential risk being a second wave of COVID-19 infections, in our view.

Foundations for a market recovery in Singapore.

Themes To Play

SGX listed companies to focus on.

Stocks to keep on your watchlist.

SGX listed companies at risk of book-value deterioration in 2020.

  • Continue to read the PDF report attached report for details.

Adrian LOH UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2020-05-26
SGX Stock Analyst Report BUY MAINTAIN BUY 3.000 SAME 3.000