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Phillip 3Q22 Singapore Strategy - Phillip Securities 2022-07-04: Demand Destruction Spiral

Phillip Securities Research Singapore Strategy | SGinvestors.io ASCOTT RESIDENCE TRUST (SGX:HMN) ASIAN PAY TELEVISION TRUST (SGX:S7OU) DBS GROUP HOLDINGS LTD (SGX:D05) DEL MONTE PACIFIC LIMITED (SGX:D03) HRNETGROUP LIMITED (SGX:CHZ) OVERSEA-CHINESE BANKING CORP (SGX:O39) SINGTEL (SGX:Z74) CITY DEVELOPMENTS LIMITED (SGX:C09) COMFORTDELGRO CORPORATION LTD (SGX:C52) KEPPEL CORPORATION LIMITED (SGX:BN4)

Phillip 3Q22 Singapore Strategy - Demand Destruction Spiral


2Q22 Review:

  • The STI was down 9.1% in 2Q22. After reversing all the gains chalked up this year, the index was flat in 1H22.
  • Its largest drags were banks, the consumer sector and industrial REITs. Despite rising rates that will benefit banks’ interest margins, recession worries buffeted cyclicals, particularly the banks. Reopening proxies also suffered. These included Genting Singapore (SGX:G13) and SATS (SGX:S58).
  • The biggest gainers were helped largely by company-specific factors. Dividends in specie of its financial arm benefitted Yangzijiang Shipbuilding (SGX:BS6). Stellar earnings at Astra International provided a tailwind for Jardine Cycle & Carriage (SGX:C07). Sembcorp Industries (SGX:U96) rallied on higher spark spreads in India and Singapore.



3Q22 Outlook:

  • The global economy is facing a downward spiral of demand destruction, caused by a duet of higher inflation and interest rates. Higher inflation is outpacing income, shrinking household budgets and confidence levels. For corporates, costlier energy and materials eat into margins and force cutbacks in production. The negative spiral that ensues has workers demanding higher wages and corporates jacking up prices.
  • Aggregate demand is further worsened by rising interest rates, triggering a deflationary shock for asset prices. We are in the middle of this downward spiral. It is hard to short-circuit rising inflation without demand destruction. There are silver bullets to lowering inflation but these are of low probability: an end to the Ukraine conflict, lowering of tariffs on goods going from China to the US and higher crude oil production following Biden's visit to Saudi Arabia.
  • The most critical macro call this year will be inflation. We expect inflation to peak by 4Q22, though remaining stubborn. Supply chain conditions are easing, commodity prices are rolling over and capacity is responding to higher commodity prices, albeit cautiously. Any sustained rally in equities will also depend on the direction of the Federal Reserve’s interest rates.
  • Our base case is rates will rise to a neutral level of 3% by the September FOMC meeting. Thereafter, we expect the Fed to step down on its rate-hike cycle to 25 basis points or even pause.
    • Firstly, higher interest rates work with a lag. We believe the Fed will pause to assess economic conditions before resorting to more aggressive moves.
    • Secondly, inflation has largely been driven by supply chain constraints and disruptions. Monetary tools cannot resolve these bottlenecks.
  • As for the threat of recession, leading indicators point to a weakening economy, raising the probability of a recession in the US. But computing probabilities is pointless. A probability of say, 60%, only means the predictors were not wrong, whatever the outcome.
  • Economic conditions in Singapore remain resilient. Industrial growth is hovering at 9% this year. This is slower than last year's 14% but far stronger than the pre-pandemic level of 2%. Foreign direct investments into the country have recovered sharply. They are close to the record levels of 2019. Employment is surging with record vacancies.


3Q22 Recommendation:

  • We remain positive on the banking sector. Banks benefit from higher rates through their excess liquidity or float and the repricing of variable loans. Benefits immediately flow through to the bottom line. Weaker macros and inflation will likely lead to modestly higher general provisioning. Staff costs will escalate due to a robust employment market.
  • We prefer OCBC (SGX:O39) for its highest capital ratios, high CASA, exposure to a reopening of China and Hong King and dividend upside. Softer economic conditions will raise provisions but not significantly. For instance, the bank’s loan growth has been toeing nominal GDP growth, unlike the 2008 and 2016 provisioning cycles when loans outpaced GDP by 2-5% points over two years. The margin call now is in crypto assets.
  • Residential property prices have been climbing back, to double-digit levels not seen since end-2019 and 2011. New launches have sold more than 70% just over a weekend. A dearth of supply with unsold inventories of 14,000 is the lowest in more than a decade and only 1.2 years to sales. Rising prices work in the favour of developers with planned launches such as City Developments (SGX:C09).


Phillip Absolute 10 model portfolio


Strategy commentary:


Deletions from our model:

  • We removed Frasers Centrepoint Trust (SGX:J69U). We find the current dividend yields unattractive as interest rates climb up further.
  • We added SingTel (SGX:Z74) due to the return of roaming revenue as borders re-open, economic recovery in emerging markets and potential restructuring or monetization Bharti and Optus.

Singapore Stock Picks - The Phillip Absolute 10 For 3Q22

  • Ascott Residence Trust (SGX:HMN): We believe travel is at an early stage of recovery. The first wave is leisure travellers, the next will be business travel and the final recovery phase is the re-opening of China borders.
  • Asian Pay TV Trust (SGX:S7OU): Dividend yield of 8% is attractive and well supported by annual free cash flow of S$70-S$80mil vs $18mil payout.
  • DBS (SGX:D05): With the highest CASA ratio, DBS is the major beneficiary of rising interest rates. We expect a benign provisioning cycle due to tepid lending and resilient real estate prices.
  • Del Monte Pacific (SGX:D03): 4Q22 earnings surged 38% y-o-y, helped by strong sales in the US. Revenue in the US jumped 25% on the back of new product sales, rising prices and households shifting consumption away from restaurants to home dining.
  • HRnetGroup (SGX:CHZ): With 700 recruiters across the region, the company will benefit from the rise in volume and salary of hiring.
  • OCBC (SGX:O39): OCBC is our preferred pick due to the upside in dividends and lower provisioning cycle.
  • SingTel (SGX:Z74): The three share price catalysts are the rebound in roaming revenue, recovery in emerging markets and restructuring or monetization of assets and mobile holdings.
  • City Developments (SGX:C09): A pipeline of more than 2,000 units to ride the resilient Singapore residential market. Another driver of earnings is the recovery in the hospitality sector. The stock trades at a 43% discount to RNAV.
  • ComfortDelGro (SGX:C52): Our proxy to reopening theme with the huge operating leverage and share price is still 40% below pre-pandemic levels and net cash balance sheet of S$578mil.
  • Keppel Corp (SGX:BN4): Re-rating catalyst is obtaining the requisite approvals for the Sembcorp Marine (SGX:S51) deal, the release of the combined entity integration plan and its plan for the $500mil in cash it will receive from the Sembcorp Marine deal.




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Paul Chew Phillip Securities Research | https://www.stocksbnb.com/ 2022-07-04
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