Singapore Market Focus - DBS Research 2020-09-07: One Step Closer To Dawn


Singapore Market Focus - One Step Closer To Dawn

Deep cuts in earnings but the worst is behind us.

Attractive on P/BV, less so on earnings.

  • STI now trades above 13.2x (average) forward PE while our year-end target of 2,850 is pegged to 14.4x (+1SD) FY21F PE. We maintain our year-end target, and technical support at 2,440.
  • STI should continue to trade at above average PE in the current recession year when earnings forecasts factor in the 2Q global lockdown, while GDP is expected to recover going forward. P/BV is attractive, at a mere 0.84x that is slightly lower than the GFC trough.
  • While US markets should pause for a breather in coming weeks, we think equities will remain in favor amid optimism of vaccine development, broadening recovery and lower-for-longer rates.

Climbing a wall of worries

  • Equity markets continue to face a string of uncertainties.
    1. The corporate earnings cuts on FY20F numbers from the recently concluded 2Q results season were merciless.
    2. Global COVID-19 situation remains uncertain with infection cases rising in Europe, daily new infections reaching nearly 80k in India while closer to home, the rising infections in Indonesia and Philippines are worrisome. These developments could slow down the reopening process and formation of travel bubbles.
  • History shows that US equity market’s strong showing in August may come to a pause as the November elections draw closer.
  • Despite these headwinds, we maintain our view that downside for the benchmark STI looks limited with support at 2,440. The index could be “base building and beyond the near-term, we find reasons to be more optimistic because
    1. The deepest impact of the global COVID-19 lockdowns may have passed.
    2. FED’s commitment to keep interest rates lower-for-longer is a plus for equity markets.
    3. News flow on progress in vaccine development could surface as soon as 4Q20.
    4. Recovery optimism has broadened out beyond semiconductors into manufacturing and Phase-2 Circuit Breaker easing beneficiaries.
  • We look at three themes for this month:
    1. Companies that emerged positively from 2Q results season,
    2. beneficiaries of the broadening manufacturing recovery, and
    3. Singapore’s phased reopening beneficiaries.

Companies that emerged positively from 2Q

  • The 2Q results season saw the fiercest earnings cut in recent years. For stocks under our coverage, FY20F earnings were slashed by -14.9% while FY21F earnings were lowered by - 3.4%. But looking beyond the ashes from the impact of the global lock down and Singapore’s Circuit Breaker, we look for opportunities from the list of companies that saw upward revisions or recommendation upgrades.
  • Hutchison Port Holdings Trust, ST Engineering, SIA Engineering, Wilmar, UMS Holdings and Venture Corp are our picks among the list of companies with either
    1. > 5% positive earnings revision, or
    2. recommendation upgrade
  • Hutchison Port Holdings Trust (SGX:NS8U) – Upward earnings revision factoring in government subsidies, lower finance costs and expectations of a stronger second half performance as many countries start to relax social distancing measures. We believe DPU has bottomed and should improve from 2H20 onwards.
  • ST Engineering (SGX:S63) – We raised earnings on the back of cost savings from an estimated c.S$110m of additional Jobs Support Scheme-related grants that will be available in FY20/21, of which around S$60m is likely to be recognised in FY20.
  • SIA Engineering (SGX:S59) – The worst is likely over for flight traffic despite the slow recovery. The extension of the Jobs Support Scheme will see another S$60m in grant income in FY21 on top of our earlier estimate of S$125m.
  • Wilmar (SGX:F34) – We raise earnings on the back of better overall margin performance as Wilmar has delivered a strong performance even amid the ongoing COVID-19 pandemic.
  • UMS Holdings (SGX:558) – Riding on the strong improvement in customer demand and supply chain recovery, FY20F/21F earnings were revised up by 7%/6% on the back of the positive outlook. Demand has remained strong with a more stable supply side.
  • Venture Corp (SGX:V03) – We expect a stronger 2H20 on the back of the strong demand and steady recovery in the supply chain. Venture’s R&D labs have plans to subsequently release several newly developed products into manufacturing commencing early 2021 that could uncover new customers and business opportunities.

Anticipating progress in vaccine development

  • Interest in travel and leisure stocks could see an interest uptick in anticipation of positive progress in COVID-19 vaccine candidates currently under Phase 3 trials. This comes after the US Center for Disease Control and Prevention (CDC) asked state public health officials to prepare for distribution of a potential COVID-19 vaccine to high-risk groups in limited quantities in late October till November. There could be sufficient clinical data gathered by November or December to indicate that one of the vaccines is safe and effective, according to Anthony Faucci.
  • While the exact timeline for a COVID-19 vaccine to be made widely available is uncertain, we think the recovery in air travel will be very swift once this materialises.
  • Empirical evidence can be found in the sharp recovery in China domestic air travel. Travel analytics company ForwardKeys predicts air travel within China to fully recover by next month (source: Bloomberg) with ticket bookings in the second week of August lower by a mere 2% y-o-y. This is less than five months since domestic travel restarted back in April, in a pre-vaccine environment.
  • Against this backdrop, we think investors willing to look beyond the near term should accumulate travel/aviation and leisure-related stocks in anticipation of the industry recovery next year. Our picks are SIA Engineering (SGX:S59), China Aviation Oil (SGX:G92), ComfortDelGro (SGX:C52), Ascott Residence Trust (SGX:HMN) and Far East Hospitality Trust (SGX:Q5T).

Broadening manufacturing recovery

  • Economic indicators are signalling a continuation of the manufacturing recovery with both US and China (Caixin) August PMIs rising to 56.0 (consensus 54.8) and 53.1 (consensus 52.5) respectively. The S&P500 Transportation Index (+13.21% m-o-m) also outpaced the S&P500 (+6.94% m-o-m) in August in a further hint at a revival in manufacturing and trade activities.
  • Amidst the pandemic, the semiconductor sector has been a bright spot and we continue to like UMS Holdings as it rides the semiconductor upcycle. We believe the broadening manufacturing recovery is positive for Venture Corp and Frencken Group (SGX:E28) as the supply chain disruptions affecting these names are largely over. Both companies have also diversified geographically and benefits from a significant exposure to the buoyant semiconductor sector.
  • The global upturn in trade activity bodes well for container port business Hutchison Port Holdings Trust that currently trades at an attractive FY20F yield of c.11%. Hutchison Port Holdings Trust is set to end its debt repayment programme in 2021 that could lead to further DPU upside from 2022 onwards.
  • Separately, we like Yangzijiang Shipbuilding (SGX:BS6) given its improving order flow of US$184m in the past month and US$1.3bn of order options. Yangzijiang Shipbuilding is now trading at a cheap valuation of 0.6x P/BV which is below its cash holding of S$1.13 per share.

Kee Yan YEO CMT DBS Group Research | Janice CHUA DBS Research | 2020-09-07
SGX Stock Analyst Report BUY MAINTAIN BUY 0.140 SAME 0.140