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Singapore Strategy - CGS-CIMB Research 2020-08-18: Life Support Mode But Incremental Positive

Singapore Strategy - CGS-CIMB Research | SGinvestors.io FRASERS CENTREPOINT TRUST (SGX:J69U) FRASERS LOGISTICS & COMMERCIAL TRUST (SGX:BUOU) NETLINK NBN TRUST (SGX:CJLU) RIVERSTONE HOLDINGS LIMITED (SGX:AP4) CAPITALAND LIMITED (SGX:C31) SEMBCORP INDUSTRIES LTD (SGX:U96) WILMAR INTERNATIONAL LIMITED (SGX:F34) AEM HOLDINGS LTD (SGX:AWX) CSE GLOBAL LTD (SGX:544) JAPFA LTD. (SGX:UD2) KOUFU GROUP LIMITED (SGX:VL6) UG HEALTHCARE CORPORATION LTD (SGX:41A) SASSEUR REIT (SGX:CRPU)

Singapore Strategy - Life Support Mode But Incremental Positive




2Q results bloodbath - Perfect storm and free money

  • We knew 2Q20 would be bad but some corporates were hit harder than expected. For companies under our coverage, the ratio of outperform, in line with and underperform was 11:24:29, with the misses-to-beats ratio coming in at 2.6x.
  • Most companies were adversely affected by the COVID-19 pandemic and the resultant economic fallout from movement control. However, some sectors (tech, gloves, consumer) fared better than others. Conglomerates’ book values were written down to reflect an almost distressed state.
  • On the other hand, companies were supported by the four additional supplementary government budget packages, including the Jobs Support Scheme (JSS), which helped to cushion the impact and preserve jobs.

JSS beneficiaries.


Circuit breaker losers.


COVID-19-related outperformers.



Where do we go from here?

  • In 2Q20, analysts further slashed c.19% from FY20F corporate earnings. Although it is less than 1Q20’s 21%, the quantum was much wider than we had expected and were mainly executed on banks (accelerated NIM compression), transport, gaming, telcos (worse-than-expected impact from COVID-19) and capital goods (impairment of assets). This brings the YTD total earnings cut to c.40% and 24% for FY20F and FY21F, respectively.
  • In comparison, during GFC, the heftiest consensus cut (29%) of forward earnings took place over six months from Oct 08 to end-Mar 09. Earnings only started to see upgrades in Nov 09.


Incrementally positive; earnings cut could taper off

  • FY20F is a watershed year (-32% y-o-y) for Singapore corporate earnings as the nation navigates the tricky path of recovery going into FY21F. Over the next six months, we continue to expect earnings cuts, albeit at lower quantums vs. 1H20. We also see risks of asset impairment/ devaluation especially during year-end review. We forecast 27% y-o-y growth in corporate earnings in FY21F for now. Our economist projects a recovery in 2H20F and forecasts -4.9% GDP for 2020 following a 6.7% decline in 1H20.
  • Global travel bans, vaccine availability and development and uncertainty in end user demand growth in most sectors are well-known issues, affecting not only SMEs’ but also corporates’ profits.
  • Across the sectors that we cover, we believe most have seen the worst and see incrementally positive outlook for 2H20 and beyond. This, however, excludes aviation, telco and capital goods, which could continue to struggle amid changes in travel patterns and stiff competition.


Market P/E close to -1.5 s.d. from mean; P/BV at all-time trough

  • At 12x CY21F P/E, FSSTI is close to -1.5 s.d. from its mean since 2007 while P/BV of 0.9x CY20F is an all-time trough, which we believe corresponds to the weak ROE of 6%. The low interest rates and promises among central banks to readily hand out relief packages and stimulus are likely to stave off a crash in major equity markets.
  • We are taking a cautiously optimistic view that the worst of earnings cuts and disappointment are behind us. The negatives of recession, job cuts and lower demand as a result of the COVID-19 pandemic are known. The unknown is when will a vaccine be readily available and when travel bans will be relaxed, which are all positive catalysts.
  • As such, we think FSSTI could trade between 2,495 (13x CY21F or -0.5 s.d. from mean) and 2,630 (mean of 14.3x CY21F). For FSSTI to rerate above mean, we would need to see upgrades to earnings or minimal downgrades.


Yield compression from caps and cuts

  • Consecutive quarters of earnings misses increasingly narrowed alternative sector choices and forced investors to turn to expensive sectors, such as consumer (earnings have not disappointed so far) or yield instruments.
  • With no sign of an interest rate recovery in the near future, one has no choice but to play the yield game of the market. However, as banks are forced to cap dividend payout and telcos suffer earnings cuts, Singapore CY20F market dividend yield has compressed to 3.6% vs. 5.1% a quarter ago. Still, it is relatively higher than the average c.2.8% of ASEAN peers.
  • For now, only REITs offer decent above-market yields ( > 4%). We keep our OVERWEIGHT on REITs with preference on industrial and suburban retail sectors.


We like REITs, consumer, commodities, tech and gloves

  • 2020F is a watershed year (we see -32% EPS), and Singapore corporates will navigate the tricky path of recovery in 2021F (we expect +27% y-o-y). The latest S$8bn mini stimulus of the Job Support Scheme (JSS) extension till Mar 2021 could curtail recession and unemployment fears.
  • We believe most sectors have seen their worst and expect an incrementally positive 2H20F and beyond. The exceptions are aviation, telco and capital goods which could still struggle given the changes in travel patterns and stiff competition.
  • We keep our OVERWEIGHT on tech and gloves (positive demand and inexpensive valuations), consumer (gradual recovery in discretionary consumption, and on supermarkets), and commodities (improving CPO prices).
  • We downgrade telco to UNDERWEIGHT (yield compression) and upgrade transport to NEUTRAL on hopes of further controlled reopening of domestic economy by Oct/Nov if community cases stay at single-digit cases/day.


Top picks


See PDF report attached below for complete analysis and 2020 2H outlook by sector.






LIM Siew Khee CGS-CIMB Research | Singapore Research Team CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-18
SGX Stock Analyst Report ADD MAINTAIN ADD 2.780 SAME 2.780
ADD MAINTAIN ADD 1.430 SAME 1.430
ADD MAINTAIN ADD 1.10 SAME 1.10
ADD MAINTAIN ADD 5.500 SAME 5.500
ADD MAINTAIN ADD 3.420 SAME 3.420
ADD MAINTAIN ADD 2.270 SAME 2.270
ADD MAINTAIN ADD 5.530 SAME 5.530
ADD MAINTAIN ADD 4.630 SAME 4.630
ADD MAINTAIN ADD 0.600 SAME 0.600
ADD MAINTAIN ADD 0.960 SAME 0.960
ADD MAINTAIN ADD 0.860 SAME 0.860
ADD MAINTAIN ADD 3.000 SAME 3.000
ADD MAINTAIN ADD 0.840 SAME 0.840


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