Singapore Stock Strategy - CGS-CIMB Research 2020-05-22: Debunking Lockdown Myths ~ Read-through To Sectors And Stock Calls

Singapore Stock Strategy - CGS-CIMB Research | SGinvestors.io SIA ENGINEERING CO LTD (SGX:S59)

Singapore Stock Strategy - Debunking Lockdown Myths ~ Read-through To Sectors And Stock Calls



  • Contrary to popular belief that Covid-19 would speed up the adoption of online shopping and, in turn, make brick-and-mortar malls less relevant, the survey showed that Singaporeans still prefer to visit physical stores and are not overly price sensitive, which is one of the main pull factors for online shopping.
  • The survey gave us comfort that Covid-19 is not likely to accelerate the adoption of online shopping substantially, while large occupiers such as restaurants and entertainment services would remain relevant. Barring strict social-distancing measures implemented by the government, the pent-up demand for restaurant dining also bodes well for landlords in the immediate term as it may translate into higher turnover sales.
  • Under the retail REIT space, we continue to like CapitaLand Mall Trust (SGX:C38U) (ADD, Target Price S$2.24) for its strong balance sheet, which makes it the safest retail REIT in a distressed environment. We also like Frasers Centrepoint Trust (SGX:J69U) (ADD, Target Price S$2.49) as we expect it to see the fastest recovery, given its pure focus on suburban malls.


  • Alike our observation with the retail REITs, the survey showed that Singaporeans still prefer to visit physical stores (vs. its regional peers) and also exhibited the lowest proportion of switching from offline to online format. This indicates that while the threat of online penetration is always looming, it may be gradual and may affect grocery shopping less vs. other products in Singapore.
  • We believe that the supermarkets in Singapore, i.e. Sheng Siong (SGX:OV8) and Dairy Farm (SGX:D01), will be beneficiaries of such shopping habits, but we prefer Sheng Siong within the space in the near term as its business is predominantly Singapore-centric (Dairy Farm has businesses in other countries as well). Its mass focus puts its supermarkets in close proximity to HDB estates, which houses the bulk of Singapore’s population. It is also sitting on a large cash pile, which accords it dry-powder should it choose to take advantage of distressed assets in the current downturn.
  • We currently have an ADD and Target Price of S$1.65 on Sheng Siong based on 25x CY21F EPS.



  • Any rebound would only be seen in 4Q20, in our view. Given the low demand for staycations, hotel occupancy is likely to remain low in 2Q and will likely miss the seasonal peak period in Jul and Aug. We expect RevPAR to be dragged down by both weaker occupancy and room rates due to weak demand and low room rates paid by SHN and Malaysian workers. We believe the low occupancy is likely to remain until at least 3Q20, as countries progressively open their respective borders and as Chinese tourists travel out of the country during the golden week holiday in Oct.
  • On recovery, we recommend investors look out for CDL Hospitality Trusts (SGX:J85) (ADD, Target Price S$1.31) as we expect it to see the strongest rebound post-Covid-19, given its more concentrated exposure to a single country (i.e. Singapore).
  • We also like Far East Hospitality Trust (SGX:Q5T) (ADD, Target Price S$0.59) for its more resilient income, given the high proportion of master lease income backed by its sponsor. Far East Hospitality Trust is currently trading at 0.57x P/BV, lower than its peers. We expect limited downside to our FY20F DPU forecast of 2.5 Scts, still offers a good 4.2% yield spread vs.
  • Ascott Residence Trust (SGX:HMN) and CDL Hospitality Trusts’s yield spread of 5.2% and 5.3%, respectively. Despite the recent sell-down, as of now, based on our calculations, Ascott Residence Trust is still qualified to join the FTSE EPRA NAREIT Developed Index by Jun 20, which will boost its profile.


  • Historically, demand for office space is closely correlated to GDP growth. Our house view is for Singapore to record a 6.8% GDP contraction in 2020F due to the adverse impact from Covid-19, before recovering in 2021F. This is likely to affect demand for office space in the short term.
  • Expansion demand is on hold as prospective tenants are unable to conduct viewings due to the circuit breaker or travel lockdowns (for MNC tenants). While existing tenants are likely to renew their leases, rather than incur capex to relocate, vacancies are expected to take longer to fill. This would result in longer frictional vacancy for landlords.
  • According to the Urban Redevelopment Authority (URA), 1Q20 overall office rents have declined by 4.5% from its recent peak in 2Q19 and - 0.7% from end-2019. We expect office rents to contract by 0% to -5% for 2020F, on the back of weaker demand. Supply in 2020F remains limited, with c.1m- 1.1m sf of new office completions annually in 2020-2021F.
  • While the office segment is not our preferred sub-sector, we note that office REITs are trading at an average of 5.6% FY20F dividend yield. Amongst office REITs, Keppel REIT (SGX:K71U) is offering a FY20F yield of 5.5% and has indicated that it is unlikely to cut its dividend payout as it had locked in significant asset divestment gains. Our rating for Keppel REIT is an ADD, with a Target Price of S$1.20.


  • For travel patterns to return to pre-pandemic days is for now inconceivable as every inbound traveller is a potential seed that can grow into an outbreak. In the near term, we expect pockets of travel bubbles to be rolled out among countries with low new domestic cases, which will take time. For this to happen, robust testing, contact tracing and standardised guidelines have to be established. Singapore has started talks with Australia, Canada, South Korea and New Zealand to facilitate the resumption of essential cross-border travel, although timeline is not disclosed yet.
  • Our recent upgrade of Singapore Airlines (SGX:C6L) from Hold to ADD (Target Price: S$4.60) is 12-month call, and we believe the negative news are priced in as it is trading at 0.69x historical P/BV or 2 s.d. below its long-term mean. Our assumptions on revenue passenger kilometres (RPK) and yield decline are highly judgemental at this point.
  • Conversely, valuation of SATS (SGX:S58) (REDUCE, Target Price: S$2.56) is not attractive enough yet, trading at a mean of 2.4x forward P/BV.
  • Accordingly, demand for aircraft maintenance, repair and overhaul (MRO) could see a sharp decline in volume structurally as more planes are grounded. Our HOLD call on SIA Engineering (SGX:S59) (Target Price: S$1.78) is premised on wage cost help from the Singapore government as well as its strong net cash (c. S$500m as at end-Mar 20).
  • Our ADD call on ST Engineering (SGX:S63) (Target Price: S$3.65) is also premised on its diversified business structure across aerospace, electronics, marine and land system; defence contracts accounted for 29% of its FY19 revenue.




  • With travel demand expected to be muted in the near term (until at least 3 months after the easing of lockdown), according to 92% of our survey respondents (including those from Malaysia, Thailand and Indonesia), we see a protracted recovery of medical tourism for Singapore’s healthcare sector and private hospital operators like Raffles Medical (SGX:BSL), with q-o-q and y-o-y weakness more significant in 2Q20F. This is partially mitigated by more diagnostics testing, border screening and the inward transfer of non-Covid-19 patients from public hospitals. Meanwhile, the slow penetration of telemedicine will continue to support patient footfall into GP clinics and pose less disruptive risk, given that private hospital players have also developed their in-house teleconsultation platforms.
  • We have an ADD rating for Raffles Medical (Target Price: S$0.98) based on its more attractive risk-reward, FY21F EPS recovery and exposure to China healthcare.


  • The rising adoption of digital banking services during the circuit breaker period could set the stage for the success of new digital licenses to be issued by 2H2020.
  • We believe digital spending ramped up over the years by the local incumbents could have entrenched their positions in the market and enable them to be more prepared to face competition. In the medium term, we expect manageable financial impact to deposits and fees from new entrants. DBS (SGX:D05) and UOB (SGX:U11) have rolled out standalone digital banks in the regional markets. OCBC (SGX:O39) remains the only bank without a standalone digital offering.

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LIM Siew Khee CGS-CIMB Research | NGOH Yi Sin CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-22
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