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Phillip 4Q20 Singapore Strategy - Phillip Securities 2020-10-02: Bottomed But A Slow Grind

Phillip Singapore Strategy | SGinvestors.io ASIAN PAY TELEVISION TRUST (SGX:S7OU) MANULIFE US REIT (SGX:BTOU) NETLINK NBN TRUST (SGX:CJLU) FRASERS CENTREPOINT TRUST (SGX:J69U) SINGAPORE EXCHANGE LIMITED (SGX:S68) PROPNEX LIMITED (SGX:OYY) THAI BEVERAGE PUBLIC CO LTD (SGX:Y92) CAPITALAND LIMITED (SGX:C31) COMFORTDELGRO CORPORATION LTD (SGX:C52) YOMA STRATEGIC HOLDINGS LTD (SGX:Z59)

Phillip 4Q20 Singapore Strategy - Bottomed But A Slow Grind

3Q20 was a tough quarter.

  • The market was down 4.7%, chalking up a 23.4% loss for the year. STI has again underperformed most of its regional peers. Only a third of its component stocks made gains this quarter.
  • The pandemic continued to weigh on the earnings of multiple sectors except consumer staples, healthcare (gloves) and electronics. Banks gained some price momentum for their attractive yields, but share prices were later kneecapped by limitation of their dividends this year to 60% of last year’s level.


4Q20 Outlook:


The Singapore economy has bottomed as its lockdown eases.

  • However, after the initial lift-off, recovery has been on an upward grind. Restrictions in international travel are expected to impede the recovery. Earnings for multiple sectors are expected to remain depressed without tourism. These include aviation, hospitality, healthcare, gaming, telecommunications and retail. The combined exposure of stocks to these sectors on the STI is around 20%.
  • An added headwind for the STI could come from banks. This segment is facing a triple whammy of low interest margins, spikes in credit provisioning and restrained dividends. Banks account for 40% of the STI. Thus, at least two-thirds of STI’s component stocks will struggle with earnings this year.

But let us not despair.

  • There are bright spots for the market. Community cases in Singapore have collapsed to a weekly average of one. We can expect further relenting of the lockdown through green lanes and larger group gatherings. Record-low interest rates have also made the dividend yields of the Singapore market stand out in this yield-starved environment.
  • While U.S. elections may produce some near-term jitters, especially with a contested election, current betting odds - and yes, polls - favour a Biden win. A Biden win will be positive for Asian assets and currencies. It will likely mean less belligerent foreign and trade policies.

There will always be something to worry investors.

  • But with interest rates so depressed, equities are the most viable investment option. Rates for 12-month Singapore dollar time deposits hover at 0.15% - 0.25%. In comparison, forecast dividend yields for the STI stand at 4%. This difference between deposit rates and dividend yields reveals one of the cheapest equity markets since the GFC.
  • Furthermore, depositors will be stuck on these measly rates for some time. In contrast, corporate dividends can grow. Only 45% of corporate earnings are paid as dividends. The remaining 55% is retained for growth, historically at 8% which is the STI’s ROE.
  • Another margin of safety available for investors is the STI’s 23.4% retreat this year. To our minds, dividends can only recover after this nasty recession.


Recommendation:

  • We expect uneven sector performances until borders are reopened or a vaccine is found. In all likelihood, businesses reliant on cross-border travel will remain moribund and we are underweight. Sectors we favour are land transportation, property, electronics and REITs.
  • As the economy reopens in Singapore, the immediate beneficiary should be land transport. More group gatherings are expected to lead to more travel for business, classes, work, leisure and worship.
  • The property sector has been surprisingly resilient with new units sales rising modestly this year. Developers have been more sanguine on product pricing.
  • Electronics has been a growth sector even in these recessionary conditions. The work-at-home economy has boosted demand for cloud, edge and mobile computing. Other structural drivers that remain for electronics are a ramp-up in 5G infrastructure, the further electrification and automation of cars and accelerated migration of the supply chain from China to SE Asia.
  • On REITs, the 8% yields offered by Singapore-listed US REITs look the most compelling. These REITs enjoy long leases, quality tenants and Class A buildings. So far, office tenants are the least exposed to the current spate of job losses in the U.S.


Phillip Absolute 10


Strategy commentary:

  • Economic weakness is expected to persist in the medium term. Border closures likely mean tepid and uneven growth. This implies there is no beta trade and just bottom-up alpha stock picks.
  • Our portfolio is centred on high and sustainable dividend-yielding stocks. A tactical trade for increased travel from lockdown relaxation is the inclusion of ComfortDelGro (SGX:C52). For high yields, we have added Manulife US REIT (SGX:BTOU) and SGX (SGX:S68) to provide a balance of growth and yields.

Deletions from our model:


Phillip Absolute 10 For 4Q20






Paul Chew Phillip Securities Research | https://www.stocksbnb.com/ 2020-10-02
SGX Stock Analyst Report BUY MAINTAIN BUY 0.150 SAME 0.150
BUY MAINTAIN BUY 0.900 SAME 0.900
ACCUMULATE MAINTAIN ACCUMULATE 1.030 SAME 1.030
ACCUMULATE MAINTAIN ACCUMULATE 2.790 SAME 2.790
BUY MAINTAIN BUY 9.450 SAME 9.450
BUY MAINTAIN BUY 0.700 SAME 0.700
BUY MAINTAIN BUY 0.820 SAME 0.820
BUY MAINTAIN BUY 3.820 SAME 3.820
ACCUMULATE MAINTAIN ACCUMULATE 1.650 SAME 1.650
BUY MAINTAIN BUY 0.460 SAME 0.460


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