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




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.



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.



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:



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)


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)


NanoFilm Technologies (SGX:MZH)


Frasers Centrepoint Trust (SGX:J69U)






Adrian LOH UOB Kay Hian Research | Singapore Research Team UOB Kay Hian | https://research.uobkayhian.com/ 2020-12-09
SGX Stock Analyst Report BUY MAINTAIN BUY 12.850 SAME 12.850
BUY MAINTAIN BUY 2.840 SAME 2.840
BUY MAINTAIN BUY 0.980 SAME 0.980
BUY MAINTAIN BUY 2.990 SAME 2.990
BUY MAINTAIN BUY 1.750 SAME 1.750
BUY MAINTAIN BUY 4.520 SAME 4.520
BUY MAINTAIN BUY 3.150 SAME 3.150



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