Singapore Strategy - CGS-CIMB Research 2020-05-19: Market Versus Economy

Singapore Strategy - CGS-CIMB Research | SGinvestors.io RIVERSTONE HOLDINGS LIMITED (SGX:AP4)

Singapore Strategy - Market Versus Economy

Can FSSTI achieve a 10% recovery in 2021F?

  • During the past month, our analysts chopped their estimates for FY20F/21F by 21%/17% respectively, led by the banking and transport sectors. We now expect FSSTI stocks’ EPS to decline c 22% for FY20F and grow +10% in FY21F. We suspect analysts are getting quite close to reality for FY20F.
  • In the last two bear markets, FSSTI EPS fell by c.28% y-o-y in 1997/1998 and 2007/2008 but contracted in the year that followed (-56% in 1999 and -9% in 2009) mainly for banks (elevated credit costs stayed over two years) and airlines. This round, Singapore banks have taken pre-emptive upfront macro overlays with guidance on credit costs with the attempt to flatten the credit cycle curve.
  • There is plausible hope that earnings could recover by c.4% for the banks in FY21F.

Government relief could forestall ugly earnings and market crash

  • In the recent 1Q20 earnings/business updates, we saw more disappointments (1:1.8 miss/beat ratio) especially in the retail and hospitality sectors, as well as capital goods (double whammy of lower oil prices and Covid). Consumer staples, gloves and small-cap tech thrived.
  • Government wage credit and job support scheme cushioned the earnings crash of SIA (we estimate S$200m).
  • Two months of circuit breakers mean 2Q20F revenue could be worse off but the 75% JSS for all sectors in addition to belt tightening by corporates could defray an ugly earnings crash. JSS effects will last till 4Q20F, with the broader economy continuing to enjoy a 25% wage co-funding.
  • More support packages will be announced on 26 May ahead of the reopening of the economy on 2 Jun.

CY20 FSSTI target

  • Our end-CY20 FSSTI target is revised to 2,495 points based on -2 s.d. of 12-year mean (12x CY21F P/E). As the realities of a global recession set in and earnings deteriorate fast, investors may start to look to P/BV valuations as pillars. As such, Singapore is not expensive with the market is trading at 0.8x P/BV (GFC: 1x).
  • Going by the Asian crisis’ 0.7x P/BV valuations, a bottom of 2,130 points could be implied.

Our top picks are a mix of defensive, earnings growth and recovery plays.

We are not optimistic yet but liquidity could keep FSSTI rangebound

  • There is a gap between the actual economy and equity market. We think defaults will come through, residential sales transactions may still be anaemic in the near term, commercial landlords could be willing to accede to rental negotiations and airline capacity remains low.
  • In short, the world has to deal with much lower demand for the next 12 months. However, government stimulus, ample liquidity from institutional and retail investors, as well as investor willingness to look beyond 2020F could prevent the FSSTI from sliding to previous crisis levels but stay rangebound.
  • FSSTI is inexpensive at 0.8x P/BV (ROE: 7%), already pricing in a level of distress.

See attached PDF report for detailed analysis.

LIM Siew Khee CGS-CIMB Research | https://www.cgs-cimb.com 2020-05-19
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