In the classic 1977 film Star Wars, old Ben Kenobi tells Darth Vader, “If you strike me down, I shall become more powerful than you can possibly imagine.”
For Gerald Wong, this line mirrors how he and his colleagues at Credit Suisse see the Singapore stock market for this year. “The more significantly hit the sector was last year, the stronger the recovery can potentially be,” says Wong, the bank’s head of research for Singapore equities.
With vaccination of the general population underway, Credit Suisse believes that Singapore will potentially be the first country in Asia to be fully vaccinated. With effective control of local infections and significant fiscal support, Singapore’s GDP is seen to grow by 6% this year, which is at the top end of the official forecast of between 4% and 6%. If this growth pace can be achieved, it means the drop suffered in 2020 would have been almost effectively reversed.
Amid this backdrop, Wong sees an acceleration in global growth, the re-opening of borders and a rollout of Covid-19 vaccines in other countries driving a fasterthan-expected recovery of corporate earnings. In contrast, Credit Suisse estimates that Singapore companies suffered a 36.8% decline in earnings, with banks the major contributors because of their need to make higher provisions.
Wong now expects Singapore corporates to report a broad-based 43% earnings recovery this year, with banks leading the charge up as they presumably need to make lower provisions. Credit Suisse, in its “Singapore Market Strategy 2021 outlook: Look here for value” report, singles out United Overseas Bank as the favoured one among the three local banks, with a target price of $25.10. He expects UOB’s return on equity to recover from 7.8% in 2020 to 10.4% in 2022, thanks to loan growth and higher fee income amid a stronger economy.
On the other hand, Wong expects the bank’s credit cost to have peaked at 60 basis points in 2020, while its net interest margin (NIM) bottomed in 2QFY2020 and “should be more stable compared to peers”. Furthermore, he believes UOB, which is trading at an undemanding price-tobook ratio of 0.98 times, could revert to its dividend policy of a 50% payout in 2021. This implies an attractive dividend yield of 4.6%, which is more than one standard deviation above the historical average. On July 29, the Monetary Authority of Singapore (MAS) “called on” the local banks to cap their dividend payout for FY2020 at just 60% of what they paid out in FY2019.
Relative to the other two banks, which are more heavily committed in Hong Kong and China, UOB has bigger stakes in Southeast Asia. “In the longer term, we believe UOB will be a key beneficiary in the shifting of supply chains to Asean, given that it has the most extensive presence in the region,” Wong notes.
SATS, ComfortDelGro
Besides UOB, there are two other top picks by Credit Suisse — Sats and ComfortDelGro (CDG) — among the so-called recovery plays. Both are transportrelated companies that were hard hit by the collapse in usual traffic when the pandemic started.
According to Wong, Sats, which provides ground handling and catering services mainly at Changi Airport, has demonstrated strong cost management thus far, with employee headcount down 24% y-o-y as of September 2020, while using the downturn to speed up adoption of more productive processes. “We expect a reset of its cost base to result in operating leverage gains alongside a volume recovery,” he says.
Sats, says Wong, is a key beneficiary and the most directly leveraged play to improving prospects surrounding travel and Covid-19 vaccine developments. Case in point: the Pfizer-BioNTech vaccine has to be kept below 70 degrees Celsius. Sats was able to step up and provide the handling services, and help Singapore to be the regional distribution hub for the vaccines.
As for CDG, Wong believes the operator of buses, trains and taxis is well-poised as the “clearest beneficiary” as commuter traffic recovers to near pre-Covid-19 levels. As of October 2020, CDG’s rail ridership was at 66% of pre-Covid-19 levels, and for taxis, the average mileage of a two-shift taxi in Singapore is similarly recovering and was at 86% of pre-Covid-19 levels.
He believes continued improvements in rail ridership and further moderation in taxi rental rebates could translate to upside earnings surprise, given the effects of operating leverage. Furthermore, Wong notes that the company had already achieved profitability in 3QFY2020 with a profit after tax and minority interests (Patmi) of $21.7 million. Credit Suisse’s price target for CDG is $1.80.
Restructuring
Despite concerns that the pandemic may cause structural damage to the Singapore economy, given all the changes and trends it has brought, Wong believes that the permanent “structural impact to the economy will be quite limited, given the very significant fiscal spending that we saw last year”.
On a macro level, economic reform is expected to be focused on tapping opportunities from technological developments, keeping manufacturing jobs and raising workforce productivity as keys to the long-term economic growth trajectory.
Due to the massive fiscal support given to companies, he sees “more positives in the structural shifts, and more opportunities rather than threats”, with the broad themes of economic transformation, further digitalisation, and development using next-generation 5G mobile networks by businesses.
Credit Suisse’s top picks for the restructuring theme are gaming and ecommerce player Sea, property and hospitality giant City Developments (CDL), and grocer and supermarket operator Dairy Farm International (DFI).
Sea
Late last year, Sea was given one of the four hotly-contested digital bank licences by MAS, capping what was already an eventful year that saw its market value overtake DBS Group Holdings to be the most valuable Singapore-based listed company.
The company, which runs its gaming business via Garena and its e-commerce business via Shopee, enjoyed strong growth on both fronts. For the nine months ended September 2020, so-called adjusted gaming revenue grew by about 69% y-o-y, while e-commerce gross merchandise value was up by 97% y-o-y. In the same period, Sea made an operating profit of US$58 million ($77 million), versus operating losses of US$179 million in the year earlier.
Wong notes Sea’s strong performance in 2020 was driven by the accelerated, structural adoption of digital services in the region amid the pandemic. He expects Sea to continue to witness growth in gaming and ecommerce businesses during 2021 as adoption of these services increases.
Residential proxy
This year, Wong expects the Singapore residential market to stage a “nascent” recovery, given steady underlying residential demand and downside support from policy measures introduced in 2020. As CDL is seen as “the Singapore residential proxy”, there is significant scope for a further re-rating, he explains.
With average selling prices of new launches last year amid a Covid-19-hit economy largely above initial expectations, Credit Suisse sees prices in the residential market gaining between 3% and 5% this year.
To be sure, Wong is not discounting the downside risks in the event of a K-shaped recovery. Under this scenario, the lower-income demographics are harder hit relative to the higherincome earners. The latter are the potential buyers of private properties, as they are drawn also by cheap financing given how Sibor rates are at their lowest since 2014. Credit Suisse expects a 10% increase in primary volumes and 45% increase in secondary volumes.
Wong’s bull case on CDL is further supported by company-specific catalysts on redevelopment of its CBD office assets to unlock latent portfolio value, and the possible spin-off of its UK assets into a REIT. He also highlights the divestment of CDL’s non-core assets, and restructuring of its investments in China, as well as its recent privatisation of hospitality arm, Millennium and Copthorne Hotels.
Recovery ‘taking shape’
DFI operates grocery and supermarket brands like Giant, 7-11, Guardian and Cold Storage in Southeast Asia. It also runs the health and beauty chain Mannings in Hong Kong.
Over the past few years, DFI, part of the Hong Kong-based Jardine conglomerate, suffered from stiffer competition and weaker demand. A turnaround plan, Wong believes, is “taking shape”, at least in Southeast Asia. DFI has brought in a new management team, and the majority of store closures had been completed as of 1HFY2020. As such, he expects grocery retail operating margin to increase sustainably to 3.5% from 1.2% in FY2019.
Besides closing loss-making stores, DFI is eking out higher margins by focusing more on fresh food and private label products. The company has also implemented centralised procurement, while constantly tweaking its product portfolio.
Based on DFI’s 3QFY2020 interim management statement, the company’s health and beauty segment was still suffering, as China tourists, who made up a big chunk of Hong Kong retailers, stayed away. Yet, improvement in the grocery business of Southeast Asia had more than picked up the slack.
Now, with Covid-19 vaccines becoming available, Hong Kong can likely see a resumption in tourism numbers and consequently, a recovery in retail sales. DFI currently trades at an 18 times forward P/E, below its 21 times historical average. Credit Suisse’s target price for this stock is US$5.30.
Overall, Wong thinks that the Singapore market is attractively valued, and Credit Suisse said that Singapore ranks first in Asia ex-Japan on Credit Suisse’s valuations scorecard. The market remains attractively valued on a 2021 P/E ratio of 14.4 times, against the historical average of 13 times, and looks even more attractively valued at a P/B ratio of 1.1 times, close to its Global Financial Crisis low of 1.05 times, while offering a dividend yield of 4.2%.
