2021 Singapore Market Outlook and Strategy - DBS Research 2021-01-04: Wider Recovery Span


2021 Singapore Market Outlook and Strategy - Wider Recovery Span

  • ’Vaccine-powered’ rally riding on recovery prospects, stable US-China trade relations, fiscal support and low interest rate tailwinds.
  • STI target of 3180 supported by earnings rebound as recovery broadens.
  • Singapore market investment themes - undervalued cyclicals, vaccine beneficiaries, M&A, yield plays.

A Better Year Ahead

  • 2020 saw the world devastated by a once-a-century pandemic and the development of COVID-19 vaccines at record speed. As a result, our economist projected Singapore’s 2020 GDP to decline by 6.0% y-o-y. The macro outlook for 2021 is one of growing optimism. The COVID situation and vaccination rate will play a big role in Singapore’s near-term outlook with our economist expecting 2021 GDP to rebound 5.5% y-o-y.
  • While, the pace of recovery will be uneven, here are four reasons why we are positive about next year.
    1. Vaccines to secure recovery.
    2. Improved trade relations to underpin recovery.
    3. Expansionary fiscal budget in the works.
    4. Low interest rate environment here to stay.
  • See report attached below for more details.

Key Risk Factors

  • While we are optimistic of 2021, we are watchful of three potential risks that could see bouts of market volatility.
    1. Vaccine hiccups, virus mutation.
    2. New property cooling measures.
    3. Rising debt level.
  • See report attached below for more details.

Market Valuations and Outlook

Good old-fashioned cyclical recovery

  • Corporate earnings are expected to enjoy a solid mid double-digit percentage growth as cyclicals recover from the devastating COVID-19 pandemic. Expect the strongest y-o-y recovery in 2Q21 due to the one-off unusually low base comparison from Singapore’s Circuit Breaker COVID-19 restrictions. The earnings recovery trend should continue into 2H21 as the path to herd immunity gathers pace, borders reopen and the recovery to pre-pandemic level gathers momentum.
  • SG stocks under our coverage are expected to register a strong 43.2% y-o-y FY21F EPS growth while that for the STI is an even more solid 50.8%. Cyclicals and vaccine beneficiaries should lead the recovery.

Less room for disappointment with greater expectations

  • The Singapore equity market currently trades at 14.4x 12-month forward P/E that is not far below the +1 standard deviation of its 15-year history. The P/E recovery is driven by a combination of the steep earnings cut last year and the recent “vaccine-powered” rally. While this can lead to periods of market consolidation, we are not alarmed by the above average valuation so long as earnings do recover post-vaccine rollout.
  • Equity markets are forward looking. The stock market is climbing a wall of worry. We see similarities between now and the post-GFC bull market in 2009 when P/E valuations remained elevated as stock markets recovered. This phenomenon continued for a year until consensus earnings revision caught up with the stock market rally.
  • With greater optimism and anticipation comes lesser room for earnings disappointment. Investors want to get what they have paid for. 2021 is a year for strong earnings recovery. Anything less will be frowned upon.

Straits Times Index target of 3,180

  • Our benchmark index target of 3180 is pegged to slightly above 14.4x (+1 standard deviation) blended FY21/22F P/E or about 13.8x (+0.5 standard deviation) FY22F P/E. The above average P/E valuation target is supported by the strong 51% y-o-y EPS growth forecast for FY21F. This translates to a 10.8% upside from the current level. Technical support on pullback is at ~2740 and strong at 2670.
  • Equity markets do not move in a straight line up. The path towards global herd immunity will likely see twists and turns before economies make a full recovery to pre-pandemic levels. These may include slower-than-expected vaccine acceptance by the population and resurgence in community transmission and virus mutations to more transmittable or worse, vaccine-resistant strains. Rising global debt levels and the current optimism for a strong recovery this year could easily give way to volatility if investors sense a major setback that pushes back the recovery timeline.
  • We lean towards the optimistic side that global economies will continue to recover and pick up speed from 2H21 with the rollout of vaccines to the general population. We see the recovery optimism in the past two months sustaining into 2021.
  • The stock market rally in the past two months was led by banks and property companies that are early cyclicals. We see focus eventually turning to mid-cycle recovery outperformers (e.g. industrials, capital goods, materials and construction) as the economic recovery broadens. Laggard blue chips and small-mid cap stocks should also enjoy an uptick in interest.

Singapore Market Investment Theme 1: Stability and income return to the fore

Above average yield spreads support yield compression

  • The lower-for-longer interest rate stance taken by the Fed and other central banks is likely to remain till end-2022 at least.
  • While the yield curve (10Year-2Year) is expected to steepen in 2021/2022 in line with stronger economic growth, we do not see this as a major hurdle for S-REITs given
    1. its gradual steepening (25bps over 2 years) and,
    2. a lower base effect. As such, we think yield plays will remain an important theme in the coming year.
  • S-REITs currently trade at an attractive FY21F yield of 6.0% or a wider than average FY21 yield spreads of ~5.0% (+1.0 standard deviation). We believe that this together with robust growth rates and an extended low interest rate environment will be catalysts to support a further re-rating.

Blend yield with vaccine beneficiaries

Don’t forget the banks

  • While MAS has imposed dividend cap in the immediate term, we believe certain banks are willing to resume previous dividend policies as soon as MAS changes its stance. The worst appears to be over for OCBC (SGX:O39) and UOB (SGX:U11) with both having strong CET1 ratios and offering FY21F yields of ~4.5%.
  • We have a slight preference for OCBC (SGX:O39) given its cheaper valuations that provides better share price upside and potential income support from its diversified non-interest income.

Singapore Market Investment Theme 2: Cyclical Recovery

Traditional names back in trend

  • The vaccine-led recovery should lead to a reversion to normalcy for the stock market. Banks and real estate stocks that are early cycle outperformers have led the blue chips recovery over the past two months in anticipation of a cyclical recovery in a post-vaccine world.
  • We see opportunities in value names that are trading below average historic valuations and have decent recovery potential post-COVID.

Early cyclicals – banks, properties and technology still offer upside

  • Among banking and property names, we think OCBC (SGX:O39) is an inexpensive pick trading at near -1 standard deviation below its average 15-year forward P/BV. Continuing positive contribution from non-interest income should also help to alleviate ongoing net interest margin repricing.
  • Our pick for property is CapitaLand (SGX:C31). We believe that CapitaLand is well positioned to emerge from the COVID-19 pandemic well and capitalise on opportunities. Its earnings diversity will drive ROEs that is expected to rebound to 7%-8% in 2021-2022. The stock is trading at “GFC multiples” that are unwarranted.
  • Operational results are gaining momentum in 2H20 as rental rebates tail off, implying that earnings momentum is already on the rise. Its managed REITs are trading at conducive cost of capital that enables the group to drive recycling activities to the tune of S$3.0bn that will be ROE enhancing.
  • Lastly, while the technology sector has been a clear outperformer in 2020, the sector is likely to witness another uptrend driven by the global economic recovery and the continued semiconductor upcycle. AEM (SGX:AWX) continues to be an attractive pick in this regard, trading at 9.2x FY21F P/E compared to peer average of 19.9x.

Eye on mid-cycle recovery outperformers

  • We see focus eventually turning to mid-cycle recovery outperformers (e.g. industrials, capital goods, materials and construction) as the economic recovery broadens.
  • We eye ComfortDelGro, Keppel Corp, Yangzijiang Shipbuilding.
    • ComfortDelGro (SGX:C52) trades at an attractive 1.32x P/B (below -1 standard deviation of historical mean) as its ROE jumps to ~9% (FY21F). It also benefits from an anticipated consolidation of the point-to-point (P2P) industry and the Phase 3 re-opening.
    • Keppel Corp (SGX:BN4) trades at 0.87x P/B (below -1 standard deviation from 5-year mean) and has made good progress on its capital recycling efforts. Keppel also stands to gain from the improving property sentiment.
    • Yangzijiang Shipbuilding (SGX:BS6) trades at an unjustifiably low 0.55x P/B and below net cash of S$1.13/share. Contract wins in a robust containership market and superior financials of 8% ROE could support a re-rating of the stock.

Singapore Market Investment Theme 3: Vaccine beneficiaries

K-shaped recovery expected but worst is over

  • Singapore’s first batch of vaccines from Pfizer-BioNTech arrived in December 2020. The plan is to have enough doses to inoculate the entire population by 4Q21. In the meantime, Singapore has also entered Phase 3 that has resulted in mall capacity limits relaxed to 8 sqm per person from 10 sqm per person. This bodes well for the F&B and retail sectors.
  • Koufu (SGX:VL6), as an operator of foodcourts and low to mid-end dining, is expected improve with kiosks and foodcourts faring better as restrictions are relaxed. The addition of the Singapore hawker culture to the UNESCO Representative List of Intangible Cultural Heritage of Humanity will also benefit Koufu (SGX:VL6) when international borders reopened in the latter part of the year.
  • Retail REITs such as Lendlease REIT (SGX:JYEU) and Frasers Centrepoint Trust (SGX:J69U) should also see higher tenant sales given the lower capacity limits.

Hospitality and aviation have bottomed

  • The hospitality and aviation sectors are expected to lag in their recovery given Singapore’s dependence on visitors from China, Indonesia and India. But we believe that the worst is over with the rollout of COVID-19 vaccines through the course of 2021 being the light at the end of the tunnel.
  • An improvement in the news flow from vaccine distribution and reopening of borders will support the recovery of stocks in the hospitality and aviation sectors. This benefits all hospitality REITs -
  • Ascott Residence Trust has the largest exposure to hotel assets outside of Singapore and is poised to benefit from a global vaccination effort. Both CDL Hospitality Trusts and Frasers Hospitality Trust are trading at attractive valuations of 0.8x P/B, which is slightly above -2 standard deviation for the former and beyond -2 standard deviation for the latter.
  • We like China Aviation Oil (SGX:G92) and SATS (SGX:S58) in the aviation sector.
    • China Aviation Oil’s key associate SPIA looks to have bounced back in 2H20 with a pick-up in departing frequencies at Shanghai Pudong International Airport since May 2020.
    • While international travel may only recover to pre-COVID levels in 2022, SATS may benefit from the global air transportation of vaccines in the immediate term given its cold chain logistics capabilities.

Kee Yan YEO CMT DBS Group Research | Janice CHUA DBS Research | Woon Bing Yong DBS Research | https://www.dbsvickers.com/ 2021-01-04
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