Navigating Singapore - CGS-CIMB Research 2020-12-09: Injection & Hope

Navigating Singapore - CGS-CIMB Research | SGinvestors.io BOUSTEAD SINGAPORE LIMITED (SGX:F9D) CSE GLOBAL LTD (SGX:544) HRNETGROUP LIMITED (SGX:CHZ) ISDN HOLDINGS LIMITED (SGX:I07) JAPFA LTD. (SGX:UD2) KOUFU GROUP LIMITED (SGX:VL6) SBS TRANSIT LTD (SGX:S61) UG HEALTHCARE CORPORATIONLTD (SGX:8K7) YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6) CITY DEVELOPMENTS LIMITED (SGX:C09)

Navigating Singapore - Injection & Hope

  • Everyone is looking forward to 2021 being a better year after the 2020 blip; hence, we set the bar higher to hunt for sectors and companies that have emerged unscathed, resuming their growth path from 2019.
  • We are still bullish on a recovery theme although the past month’s rally could have run ahead of fundamentals. One should await a market breather to reload ammunition.
  • 2021 year-end base case target for FSSTI: 3,068 points on mean valuations; Bull case: 3,412 points on +1 s.d. from mean.



2020 a blip year.

  • One month into a surprise rally, brokers and investors are sounding almost positive again. Markets are no longer overly concerned with intermittent waves or postponed travel bubbles; the challenges of a pandemic slowdown are deemed less catastrophic.

No putting all eggs into one basket.

  • Pharmaceutical advances and adjustments in the behaviour of people and firms to keep the virus in check have set the stage for strict restrictions on mobility to be lifted progressively as Singapore heads into a new norm “Phase 3” economy. Singapore is likely to use more than one approved COVID-19 vaccine to ensure an efficient return to the norm. Critical mass deployment looks feasible after mid-2021, if anyone dares to take it.

Liquidity precedes fear


Singapore emerging stronger post-COVID-19.

  • The Singapore market is attractive relative to regional peers on
    1. below-mean valuations,
    2. resilience of individual companies, backed by very proactive government relief,
    3. high levels of risk-averse money seeking havens, and
    4. most drastic declines in new daily COVID-19 cases from a peak of close to 4k in May 20 to ~7 cases/day since Nov 20 with almost zero cases in the community.


10-20% potential upside for FSSTI.

  • Our 2021 year-end STI target of 3,068 points is conservatively based on a mean of 14.2x. A catalyst is EPS upgrades from stronger-than-expected targeted help, although the quantum is unlikely to match 2020’s S$23.5bn. +1 s.d. from mean or 15.8x CY22F matched against ~13% y-o-y EPS growth could bring FSSTI to 3,412 points (pre-COVID-19 level in Jan 20).


Take your growth stock picks for 2021


Who is better than in 2019?

  • Beyond bull expectations spurred by vaccine, we think investors could look for structural stories that offer good growth that are not too pricey. Within Singapore, there are some sectors that are unscathed and expected to beat their pre-COVID-19 earnings in 2019, which we think could draw interest in 2021F.

Super growth.

  • We forecast the Commodities sector to post ~25% growth over their 2019 earnings, if crushing margins and commodity prices (sugar and palm oil) are sustained. Technology/manufacturing sector could post ~18% growth over 2019 on the back of secular demand growth.

Sustainable growth.

  • Normally in a market full of bull expectations, rotation out of yield is recommended but we are not ready to fully part with S-REITs, which is the sector seeing sustainable 5-7% growth over 2019 and into 2022F, thanks to the M&A build-up.

Recovery and postponed hope.

  • Flush liquidity in the market could post positive surprises on banks’ non-interest income, bringing forward earnings normalisation in 2021F. Otherwise, the real recovery will take place only in 2022F as credit costs taper.
  • Telco is the other sector that will see recovery in FY22F on higher enterprise revenue from higher ICT spending by public sector as well as turnaround in overseas associates.
  • We think the share prices of Transport and Gaming sectors have run ahead of fundamentals post vaccine newsflows and real recovery is only likely to resume in 2022-23F as the sectors stomach hefty earnings declines in 2021F.


Super growth candidates

  • The table in page 6 of PDF report attached below highlights companies with FY21F earnings growth over FY19. The obvious ones are the COVID-19 beneficiary glove names (Riverstone (SGX:AP4) and UG Healthcare (SGX:8K7)) as they position to enjoy a full-year contribution of bumper profits in FY21F. Sheng Siong (SGX:OV8) could benefit from the positive structural shift towards hybrid work-from-home/office models and sustained high demand for fresh food.
  • Among the S-REITs, Frasers Logistics & Commercial Trust (SGX:BUOU) continues to reap the harvest of post-merger FCOT and FLT in 2019 while Frasers Centrepoint Trust (SGX:J69U) expanded its DPU significantly with the acquisition of AsiaRetail Fund Limited (ARF).
  • Sembcorp Industries (SGX:U96) stands out after hiving off Sembcorp Marine (SGX:S51) if there is no impairment required for its India operations.
  • Expectations of an end to the pandemic should support a value country like Singapore. We think the lessons from the previous crises were that mean-reversion strategies work well during high volatility environments and with strong risk-on appetites in today’s market.


Technical Outlook


Bullish crossover.

  • Since the bullish crossover signal between the 20-day and 60-day moving average was triggered on 9 Nov, the FSSTI has been trending higher with surging momentum and breakout above multiple key resistance levels. See chart in PDF report attached below.

Expect short-term correction.

  • In the next couple of weeks, we expect the FSSTI to enter a correction phase as the bullish momentum appears overstretched. The 15.8% rally in Nov has driven the Relative Strength Index (RSI) to an extreme overbought high of 83. Historically, the FSSTI would enter into a period of correction when the RSI exceeded the 70 overbought level. The correction could take FSSTI down to the 2,635–2,700 support level before resuming an uptrend towards the 3,000–3,044 resistance.
  • Since 1995, there have only been four occasions where the monthly gains were 15% or more. Three of these stunning recoveries (Oct 98, Apr 99, May 09) led to a strong bull market (c. +34% over 12-18 months) but the one in Feb 98 failed to put in a bottom immediately.
  • The strong gains in the month of Nov 20 (+15%) could signal the start of a new secular bull market. If history repeats itself, the FSSTI could continue to rally into 2021F, likely to see +20% upside or a 3,400–3,550 resistance area.
  • Anecdotally, the price action in the monthly timeframe also paints a bullish outlook following the strong gains in Nov 20. After seven months of consolidation since the 10-year low of 2,208 points in Mar 20, the FSSTI finally broke above the range significantly in Nov 20, reversing the pessimistic sentiment. Notably, the current bottoming price action pattern looks uncannily similar to the bottoming price action pattern in the recovery phase of the 2008 Global Financial Crisis.


Economics Outlook

  • Recovery driven by a combination of stimulus measures, improvement in key trade partners and regional markets, normalising consumption and investment patterns, the prospects of vaccine delivery and easing of social distancing rules. However, the resumption of activities in the construction, tourism and mobility-dependent services sectors remain hampered by the rising tide of new COVID-19 global infections as well as weak consumer and business sentiment. We reiterate our forecasts for Singapore’s GDP growth at -5.7% in 2020F and +5.3% in 2021F.
  • The COVID-19 health crisis has taken a heavier toll on Singapore’s labour market, even with the government’s extensive support measures including wage subsidies and hiring incentives. We project the headline unemployment rate at 2.9% in 2021F (vs. 3.5% in 2020F) and the resident unemployment rate at 4.0% in 2021F (vs. 4.9% in 2020F).
  • We expect the government to extend fiscal support on a targeted basis to sectors and employees that are still heavily affected as well as spending to improve Singapore’s public healthcare capacity. Emergency stop-gap measures such as cash transfers and broad-based wage subsidies during the Circuit Breaker are unlikely to be repeated in Budget 2021, which we expect to shrink the fiscal deficit to 2.5% of GDP.
  • Deep and uneven strains from COVID-19 on the economy and labour market call for a dynamic and calibrated policy response that is better suited to fiscal expansion rather than monetary policy. Anchored by stability in the S$NEER basket and US$ weakness, we expect the S$/US$ to appreciate to 1.30 by end-2021F.


Sector Preference and Country Top Picks for Singapore

  • With growth and recovery prospects being the key theme, Commodities and Telco are our new Overweight sectors . Banks, Construction and Property are long-term winners for an economic recovery.
  • We also like Technology/Manufacturing on strong earnings outlook and the demand for IT-related infrastructure and life science equipment. The recent successful listing and outperformance of Nanofilm Technologies could draw more tech IPOs to Singapore, lifting the sector’s interest and valuations.
  • Capital Goods could see a good run from a recalibrated focus among the Temasek-linked companies as well as M&A hope.
  • On the flipside, we believe the recent run-up in Transport has priced in perfection and we do not think it is sensible given its +1 s.d. to mean valuations vis-à-vis weak earnings profile; downgrade to NEUTRAL.
  • We make some changes to our country top picks — we remove Singapore Airlines (SGX:C6L) and CapitaLand (SGX:C31) after the surge in recent months. We add Yangzijiang Shipbuilding (SGX:BS6), driven by heightened order momentum for containerships, and City Developments (SGX:C09), as a proxy to robust residential sales in Singapore and as a laggard play.
  • If liquidity is ample, we think small caps could be in vogue in 2021F and add two new names to our list — HRnet Group (SGX:CHZ), on strong demand for flexible staffing by corporates and government agencies as well as growth in North Asia (China), and ISDN (SGX:I07), which could outperform on super profits (+166% y-o-y) in FY20F from the demand for industrial automation motors, especially in China.




LIM Siew Khee CGS-CIMB Research | Singapore Research Team CGS-CIMB Research | https://www.cgs-cimb.com 2020-12-09
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