2021 Singapore Stock Market Strategy - UOB Kay Hian 2020-12-09: Reopening & Recovery

Singapore Stock Market Strategy - UOB Kay Hian | SGinvestors.io

OVERSEA-CHINESE BANKING CORP (SGX:O39) SINGTEL (SGX:Z74) GENTING SINGAPORE LIMITED (SGX:G13) RIVERSTONE HOLDINGS LIMITED (SGX:AP4) FIRST RESOURCES LIMITED (SGX:EB5) NANOFILM TECHNOLOGIES INTL LTD (SGX:MZH) FRASERS CENTREPOINT TRUST (SGX:J69U)

2021 Singapore Stock Market Strategy - Reopening & Recovery

We are optimistic that the STI will perform well in 2021, given that COVID-19 vaccines may potentially come to the market in 1H21. This also comes on the back of our 53% y-o-y EPS growth estimates for our coverage universe for 2021. With reasonably strong balance sheets, Singapore corporates are well placed for the recovery.
In our view, STI valuations are not stretched at present, trading at 2021F P/E and P/B of 14x and 0.96x respectively and paying a 4.3% yield. Our year-end 2021 target for the STI is 3,180.
Singapore stock top picks for 2021 includes:

A LOOK BACK AT 2020

An unprecedented year.

The “White Swan” events of various pharmaceutical companies announcing the successful Phase 3 trials of their respective vaccines lifted certain sectors in Nov 20. The global rotation out of growth stocks into value certainly lifted the STI, which rose nearly 16% during the month and was the second best performing index in the region. Nevertheless on a year-to-date basis, the STI remains the second worst performer, down 13% in 2020. It is also evident that Emerging Asia has outperformed Developed Asian markets year-to-date (see charts in PDF report attached below).
Despite a large stumble initially, Singapore has done an admirable job in containing COVID-19. However, being a small but open economy has meant that without adequate containment of the virus by its neighbours, large segments of the economy may struggle to pull itself out of a U-shaped recovery. In our view, the news of the successful vaccine trials has reduced this risk considerably.
The COVID-19 economic impact on Asia has been significant in 2020. However, we believe that the longer-term impact may be muted, given the inherent growth prospects that exist in the region. In addition, policy outlook remains supportive in Asia in our view. Singapore alone has pumped in nearly S$100b into the economy to support and stimulate various sectors.

Strong balance sheets.

We also point out that Singapore corporates entered this crisis in good shape with strong balance sheets. At end-19, STI component stocks had an aggregate net-debt-to-equity of around 15%. Meanwhile, on UOBKH estimates, large cap stocks will end 2020 at 59% and small/mid-cap stocks will be around 33%.
We do not see Singapore corporates’ balance sheet as being stretched. Given the low interest rates, they will enter 2021 in relatively decent shape to participate in the economic recovery.

Outperformers and underperformers.

At a macro level, Asian stocks appear inexpensive compared to US and European stocks. This is especially given that the STI has underperformed not just the regional indices, but also other asset classes. As a result, we view many Singapore stocks as offering good value.

Year-to-date in 2020, the STI has declined nearly 13%.

However, note that prior to the positive vaccine news on 9 Nov 20, the STI had declined 21%. 5 of the 12 stocks that had positive absolute returns year-to-date were REITs or trusts, and it is evident that Mapletree remains the standout sponsor in 2020.
Looking at the market performance since the STI troughed in Mar 20, large caps and REIT stocks have risen 52% vs the STI’s 31% increase during the 23 Mar 20 to 24 Nov 20 period. Specifically, the top performers were Riverstone (SGX:AP4) in the healthcare sector and Sembcorp Industries (SGX:U96) in the utilities sector, with the latter benefitting from its demerger from Sembcorp Marine (SGX:S51). As expected, 10 out of 20 of the best performing stocks were REITs/trusts. This came as investors gravitated towards stocks that were seen to be able to:
1. pull through the pandemic relatively unscathed; and
2. resume paying dividends in 2021 as economic conditions normalise.
As markets got to grips with the business and economic risks presented by the COVID-19 pandemic, stocks that had been beaten down in Feb-Mar 20 subsequently outperformed.
Notably, some of the best performers were hospitality-and aviation-related stocks such as CDL Hospitality Trusts (SGX:J85), Far East Hospitality Trust (SGX:Q5T), SATS (SGX:S58) and ARA US Hospitality Trust (SGX:XZL).

Old economy stocks did less well post-Mar 20’s trough.

On the other hand, stocks that did poorly relative to the STI post-Mar 20’s trough were “old economy” industrial and telecommunications stocks such as SingPost (SGX:S08), Keppel Corp (SGX:BN4), Yangzijiang (SGX:BS6), NetLink Trust (SGX:CJLU), SPH (SGX:T39), StarHub (SGX:CC3), and SingTel (SGX:Z74).
Property developers such as CapitaLand (SGX:C31) and City Developments (SGX:C09) as well as SGX (SGX:S68) and Raffles Medical (SGX:BSL) also did poorly relative to the STI.
See Performance of the Straits Times Index Constituents.

2021 MARKET STRATEGY

We remain bullish on equities over bonds and cash.

With our EPS growth forecast of 53% y-o-y for 2021, we believe that patient investors will be rewarded. As UOB Global Economics & Markets Research (UOB GEMR) has pointed out, there are three drivers that provide a bullish backdrop for Singapore equities in 2021:
1. Signing of the RCEP. Singapore, as a trade-reliant economy, will likely benefit immensely from the Regional Comprehensive Economic Partnership (RCEP). This is because it is the world’s largest free trade agreement, which covers 30% of the world’s GDP and population, and 27% of the world’s total trade value in 2019.
2. The new US administration taking a more constructive and multilateral approach to trade.
3. Singapore’s biomedical and pharmaceutical exposure, which has taken on a more significant role during this COVID-19 pandemic. Importantly, Singapore’s biomedical industry has been the best performing cluster across the manufacturing sector year-to-date. It may also play an important part in the eventual mass production and distribution of vaccines. In addition, Singapore’s airport and its geographical location make it an ideal hub to deliver the vaccines that may need specialised logistics.

Recovery plays.

Since the start of 4Q20, Singapore has continued to register very low levels of community infection rates. Thus, we believe that the government is likely to continue reopening the economy, albeit in a cautious fashion. This should benefit consumer stocks like Koufu (SGX:VL6) and Kimly (SGX:1D0) as well as retail REITs such as Frasers Centrepoint Trust (SGX:J69U) and Suntec REIT (SGX:T82U).
In anticipation of a COVID-19 vaccine, we highlight diversification into cyclical sectors that were more directly hit by the pandemic, such as hospitality REITs (e.g. CDL Hospitality Trusts (SGX:J85), Far East Hospitality Trust (SGX:Q5T) and Ascott Residence Trust (SGX:HMN)).
Related to the hospitality REITs, we believe that a more optimistic market sentiment could lead to better-than-expected share price performance from CapitaLand (SGX:C31) and City Developments (SGX:C09).
One of the recent positive surprises was Genting Singapore (SGX:G13), which released very strong 3Q20 results. This shows that local patronage has led to significant financial improvement on a q-o-q basis. Heading into 2021, the company remains a key beneficiary of better sentiment towards recovery stocks, underpinned by stronger-than-expected financial results.

MARKET VALUATIONS

Trading above long-term P/E valuations.

The STI is currently trading above the long-term average P/E valuation of 15.0x due to depressed 2020 earnings. However, looking forward into 2021, Bloomberg consensus P/E of 14.0x is at a more reasonable 7% discount to the long-term average. In our view, the STI could continue to trade at a premium as COVID-19 recovery takes hold in 2021.

At 0.96x P/B for 2021F, the STI appears inexpensive.

In our view, P/B valuations have normalised from depressed levels, having recently bounced off the -2SD level of 0.9x P/B.
Looking ahead into 2021, Bloomberg consensus forecasts 0.96x P/B, which is a 13% discount to its 5-year average of 1.11x. We believe that this 13% discount may narrow as we head into 2021, given that ROE is expected to expand by 1.7ppt to 8.35%. However, we highlight that this is nevertheless still 23% below the STI’s long-term average ROE of 10.8%.

STI target for 2021:

On a top-down basis using mean P/E and P/B valuations, our 2020 STI year-end target is 3,180.
Using a bottom-up methodology and utilising UOBKH EPS estimates, our 2020 STI year-end target is 3,158.
(vs the previous target of 2930 shared in report:Singapore 4Q20 Stock Strategy - UOB Kay Hian 2020-10-13: Focus On Stability & Selected Cyclicals)
(See also summary of STI Constituents' stock ratings & target prices.)

EPS GROWTH IN 2021

After the recent 3Q20 results reason and the subsequent earnings upgrades, we now forecast 53% y-o-y EPS growth in aggregate for Singapore-listed stocks that we cover. This is an increase from the 43% y-o-y growth that we were forecasting prior to the 3Q20 earnings season.
Potential downside risk in 2021 earnings could arise if:
1. Singapore and the broader Asian region experience a 2nd or 3rd wave of COVID-19 infections; or
2. there is slower-than-expected distribution of vaccines, which could lead to underperforming economies.
There are a number of sectors that will contribute to the 53% EPS growth in 2021 (see table in PDF report attached below), with land transport, others (comprising Genting Singapore (SGX:G13), Thai Beverage (SGX:Y92) and SingPost (SGX:S08)), and REITs being the top three contributors. However, it should be noted that the first two sectors will be coming off low bases in 2020.
On the negative side, we expect EPS declines for the aviation, media and shipyard sectors, with the wild card being impairments for the property developers.
We highlight that we are forecasting 36% y-o-y EPS growth for the STI component stocks, which is marginally more bullish compared to Bloomberg consensus’ 32% y-o-y growth.
Supporting our positive EPS growth scenario, UOB Global Economics & Markets Research believes that Singapore’s GDP will grow by 5% y-o-y in 2021. The latest 3Q20 GDP data also confirmed that the country’s economy has been improving since the trough in 2Q20, led primarily by the manufacturing sector.

BALANCE SHEET ANALYSIS

Singapore corporates entered 2020 with reasonably robust balance sheets. Thus, they were well placed to weather the storms created by lockdowns and “Circuit Breaker” initiatives by the government.
At end-19, the STI stocks had an aggregate Net-Debt-To-Equity of 15%. Meanwhile, we forecast that by end-20, large cap companies’ Net-Debt-To-Equity will be 59% and small/mid-cap companies will be 33%.
In our view, Singapore corporates’ balance sheets do not appear to be stretched heading into 2021. With interest rates at historically low levels (combined with strong policy support from the Singapore Government), companies should be well placed to participate in the economic upswing.

SINGAPORE STOCK TOP PICKS

OCBC (SGX:O39)

Maintain BUY on OCBC (SGX:O39) with a target price of S$12.85 based on 1.19x 2021F P/B, derived from the Gordon growth model (ROE: 8.8%, COE: 7.5%, Growth: 1.0%). Valuation is attractive with 2021F P/B at 0.79x.
We expect 2021 earnings growth of 34.2% for the bank, driven by lower credit costs. OCBC provides attractive 2021 dividend yield of 5.6% and we see potential for dividend yield to further improve to 6.3% for 2022, assuming dividends are restored back to pre-COVID-19 levels.
OCBC’s 3Q20 loan growth remains anaemic at 1.7% y-o-y, but this has been priced into the stock, in our view. OCBC suffered NIM compression of 6bp q-o-q due to lagged impact from global interest rate cuts in March, and NIM appears to be bottoming at 1.54%.
OCBC has reduced total loans under moratorium from S$23.7b at end-September to S$13.6b at end-October. As a percentage of group loans, the exposure was reduced from 9% to 5%. The bulk of the reduction came from Malaysia, where the automatic loan moratorium expired on 30 Sep 20.
See

SingTel (SGX:Z74)

Reiterate BUY on SingTel (SGX:Z74) and a DCF-based target price of S$2.84 (discount rate: 7%, growth rate: 1.5%). At our target price, the stock trades at 14x FY22F EV/EBITDA (5-year mean EV/EBITDA).
SingTel's share price appears to have bottomed in Nov 20 when it traded at -1SD below its 5-year mean EV/BITDA.
Key re-rating catalysts include:
- reopening of economies towards end-20/early-21;
- monetisation of 5G;
- faster-than-expected recovery in Optus’ consumer and enterprise business; and
- market repair in Singapore.
SingTel (SGX:Z74)'s recent 1HFY21 results were weak, with core net profit declining 36% y-o-y to S$837m due to a 27% y-o-y decline in Nationwide Broadband Network migration revenue and margin compression in its Australia consumer segment and higher net interest expense. India and Africa operations were stronger y-o-y.
SingTel's dividend above expectations. The group declared an interim net dividend of 5.1 cents/share. This is based on 100% net profit payout and above our expectations of 7.5 cents/share (50% payout) for the year.
See

Genting Singapore (SGX:G13)

We upgraded Genting Singapore (SGX:G13) to BUY on 16 Nov 20 with a target price of S$0.98, as Genting Singapore is a proxy to economic reopening thematic investment and World Health Organization-endorsed vaccine find. See Genting Singapore 3Q20 - UOB Kay Hian 2020-11-16: At The Forefront Of Reopening-Theme Play; Upgrade To BUY. Our target price implies 10x 2021F EV/EBITDA (mean) and prospective dividend yield of 4.1%.
Resort World Sentosa reported a strong set of 3Q20 results, with gaming revenue and EBITDA recovering 3,100% and 199% q-o-q to S$213m and S$130m respectively, significantly beating consensus expectations.
Gaming revenue has recovered close to two-thirds of pre-pandemic levels, with the surprising resilience being attributed to the mass market and local patronage.
Genting Singapore’s non-gaming revenue is still struggling. Despite Universal Studios Singapore and S.E.A. Aquarium having recommenced operations since July, Genting Singapore’s non-gaming revenue plummeted 74% y-o-y in 3Q20 due to border closure and capacity limitation (to one-third of pre-pandemic capacity).
Significant cost savings of S$143m from the Singapore Government’s various wage & job emes and tax rebates, etc.
See

Riverstone (SGX:AP4)

Maintain BUY on Riverstone (SGX:AP4) with a PE-based target price of S$2.99 (ex-bonus issue), pegged at 15.9x 2021F PE, or -2SD of Kossan Rubber’s 3-year forward P/E band. We believe the supernormal earnings from the current upcycle in 2021 will eventually normalise in 2022. Thus, pegging our target price to a lower P/E multiple would have priced this in.
Continued volume growth. Riverstone's new capacity of 1.5b pieces from Phase 6 expansion is set to be fully commissioned by Dec 20, expanding total capacity by 17% to 10.5b pieces/year. Management has also guided that plans for Phase 7 are being ramped up, raising total capacity by 14% to 12b pieces by 4Q21. Customers have already started to book capacity for Phase 7.
Cleanroom gloves a surprise winner from COVID-19. Riverstone’s cleanroom gloves segment has emerged as a main beneficiary of the COVID-19 pandemic. The segment saw an impressive 30% y-o-y increase in sales volume in 1H20, and is expected to grow a further 50% y-o-y in 2H20.
Riverstone's 4Q20 results should be strong, as ASPs of its healthcare and cleanroom gloves continued to rise in Nov 20.
See

First Resources (SGX:EB5)

Maintain BUY on First Resources (SGX:EB5) with target price of S$1.75, pegged at 12x 2021F PE, or 1SD below the stock’s 5-year average mean of 15x. We like First Resources' good track record of delivering better-than-peers’ performance, and First Resources is also highly leveraged to crude palm oil (CPO) prices.
Highest production growth. Among peers, First Resources has the highest q-o-q growth of 25% q-o-q each in fresh fruit bunches (FFB) and CPO production vs peers’ negative to +15% and negative to +10% growth respectively. We reckon First Resources’ higher production was due to its better-than-peers oil extraction rate.
We expect better q-o-q earnings in 4Q20 on the back of higher ASP and production. The Government is expected to announce an export levy in Nov-Dec 20, which will benefit First Resources due to lower export levy for processed palm oil than for CPO and crude palm olein.
First Resources has recently embarked on aggressive share buyback. To date, it has bought back 5.92m shares at S$1.20-1.53 for about US$6m, representing only about 5% of its cash holdings.
See

NanoFilm Technologies (SGX:MZH)

We initiated coverage on NanoFilm Technologies (SGX:MZH) with BUY and a target price of S$4.07 on 26 Nov 20. See report: NanoFilm Technologies International - UOB Kay Hian 2020-11-26: Unique Technology Solutions Provider With High Growth Prospects; Initiate Coverage With BUY. We value NanoFilm Technologies based on PEG of 0.9, based on 3-year profit CAGR of 38.7% which implies a P/E of 34.8x 2021F.
Strong competitive advantage via its unique technology, superior net margin and sole supplier status for most of its major customers. As a result, we believe this warrants a premium to peers, which trade at 27x 2021F P/E. Further improvement in its profitability track record and wider analyst coverage should help NanoFilm Technologies re-rate upwards.
Differentiated technology-based solutions, especially in the field of vacuum coating, has enabled its blue chip customers to achieve greater user life, enhanced aesthetics and functionality (eg energy efficiency, corrosion resistance adhesion and hardness) in their end products.
Exposure to a number of compelling industries. NanoFilm Technologies is exposed to industries such as smartphones, laptops, tablets, smart watches, hydrogen-powered fuel cells, industrial equipment, and fast-moving consumer goods such as electric toothbrushes and shavers, etc.
See

Frasers Centrepoint Trust (SGX:J69U)

Maintain BUY on Frasers Centrepoint Trust (SGX:J69U). Our target price of S$3.15 is based on the dividend discount model (COE: 6.0%, terminal growth: 1.8%).
The multi-ministry task force on COVID-19 foresees that Singapore could enter Phase 3 of reopening by this year-end, assuming community cases remain low. The gathering size, including dining-in at restaurants, will increase from five to eight persons. Easing of safe distancing measures with Phase 3 reopening would support further recovery in shopper traffic and tenant sales.
Higher weightage in key equity indices. The acquisition of AsiaRetail Fund (ARF) has propelled Frasers Centrepoint Trust to become the 9th largest S-REIT by market capitalisation (previously 11th), thus resulting in it having higher weightage in the FTSE EPRA/NAREIT Global Developed Index.
Frasers Centrepoint Trust's acquisition of the remaining 63.1% stake in ARF for S$1,057m was completed on 27 Oct 20, adding 5 suburban malls (Tiong Bahru Plaza, White Sands, Hougang Mall, Century Square and Tampines1 and bringing Frasers Centrepoint Trust’s total number of suburban malls to 11, or 10.2% share of Singapore’s suburban mall space. Frasers Centrepoint Trust's total NLA expanded 64% to 2.3m sf, and its size has increased 85% to S$6,650m.
See

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2021 Singapore Stock Market Strategy - UOB Kay Hian 2020-12-09: Sector Outlook & Weightings For 1H21.

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