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STI components now vs 2003 shows volatility has yet to run its course

The Edge Singapore
The Edge Singapore • 4 min read
STI components now vs 2003 shows volatility has yet to run its course
SINGAPORE (Feb 10): As of of Feb 5, 28 persons in Singapore have succumbed to the novel coro­navirus which originated from Wu­han city in China. And the epidemic is expected to impact the city state’s economy and employ­ment rate, says the government
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SINGAPORE (Feb 7): As of of Feb 5, 28 persons in Singapore have succumbed to the novel coro­navirus which originated from Wu­han city in China. And the epidemic is expected to impact the city state’s economy and employ­ment rate, says the government, which also singled out the transport and tourism sectors to be badly hit.

However, the government says it stands ready to provide targeted support to the sectors directly affected, including offering a package of measures for both companies and workers.

“It would be prudent to anticipate sever­al hundred thousand will eventually be sick and thousands will die. If SARS is a reasona­ble guide, the pandemic will likely continue through the first half of this year,” says Mark Zandi, chief economist at Moody’s Analytics in a recent report.

How would that impact the component stocks of the Straits Times Index? Moody's In­vestors Service says the coronavirus outbreak will most affect the revenue-generating capac­ities of the gaming sector and hospitality RE­ITs, because these two industries generate the majority of their revenue from foreign visitors.

But there are no hospitality REITs in the STI, nor are there any stocks whose main source of income is from hotels. Last year, developer City Developments (CDL) privatised its subsidiary Millennium and Copthorne Hotels whose ho­tel operations contributed 15% to ebitda for the nine months to Sept 30, 2019.

As for gaming stocks, Genting Singapore in an EGM on Feb 4, won overwhelming ap­proval from shareholders to spend up to US$10 billion ($13.8 billion) to invest in a possible new project in Japan.

The integrated resort operator says if it wins the project, funding will come from existing cash, borrowings, and potential local part­ners and will not tap existing shareholders to fund the project.

Genting Singapore also says it plans to maintain its dividend payout, which was 3.5 cents for both FY2018 and FY2017. Interest­ingly, Genting Singapore is cheaper now (see table) than it was during SARS based on P/E and P/B. Despite this, Moody’s warns that Gen­ting Singapore’s revenue will be severely im­pacted by a sharp decline in Chinese visitors.

Moody's also warns that the income of retail REITs will fall if the outbreak persists over an extended period, because a sustained decline in tourism receipts and weaker consumer sen­timent will lead to a drop in demand for retail space. CapitaLand Mall Trust (CMT) was list­ed in 2002 before the outbreak of SARS a few months later. At the end of 2003, after SARS had peaked, CMT had a historic yield and P/B of 8.69% and 1 respectively.

At present, CMT is the second largest REIT by market cap in the STI and also a constitu­ent of other prestigious indices such as FTSE EPRA NAREIT Developed Index and MSCI, therefore its yields may not expand to the same extent as they did in 2003. In Decem­ber that year, Singapore’s risk free rates as represented by yields on 10-year Singapore Government Securities were between 3.72% and 3.75%.

For Ascendas REIT, its yield was around 9.66% at the end of 2003. At present, its yield is 5.02% and some market watchers expect this to compress to as low as 4.5%. At this level, Ascendas REIT would still be cheaper than Mapletree Industrial Trust (MINT) which is not in the STI.

MINT is getting expensive because of its in­creasing exposure to data centres. As of Dec 31, 2019, 26.2% of MINT’s $5.4 billion port­folio by valuation comprised data centres. In comparison, Ascendas REIT’s exposure to data centres is small at around 2% of asset value and 4.1% by revenue.

Unfortunately, Singapore Airlines, the re­public’s flag carrier, is in the frontline of novel coronavirus just as it was during SARS. While its P/E is moderately higher than during SARS, its P/B is lower. If the novel coronavirus per­sists till mid-year as Moody’s Zandi anticipates, investors may want to wait for lower price lev­els before investing in the airlines.

Meanwhile, Credit Suisse has an “under­perform” rating on gateway services provider and food caterer SATS which is a lot more ex­pensive now than during SARS.

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