Phillip 3Q20 Singapore Strategy – Responding with overwhelming force July 1, 2020 1145

Review: The STI was up 4.4% in 2Q20 but remained in the red in 1H20, down 19.6%. We lost ground to US markets massive 20% rebound in 2Q20. The pandemic has slammed the Singapore economy hard. GDP is expected to shrink between 4% – 7% YoY in 2020 – the worst contraction on record. Unlike prior recessions, policy-induced recession was as by-product of the necessary containment measures. We imposed strict lockdowns (circuit breaker) to contain the spread of the pandemic. And it has worked. Pre-CB, average daily community cases was 60 – this number has since dwindled to only 6. Our economy will recover. Lockdowns are easing and the Singapore government has committed S$92.9bn through four budgets to combat this virus. Our economic response to this pandemic is a 15.4% fiscal deficit (S$74.3bn) for FY20. It is the largest deficit spending in percentage terms by any government in Asia and 2nd largest globally, according to the IMF.


Outlook: We believe the current gradual economic recovery, together with highly stimulative monetary easing, is near perfect for equities. There are essentially three reasons to be optimistic about equities.

  1. On monetary support, we can quote Fed chairman Powell that we are “not even thinking about thinking about raising (interest) rates”. To reinforce the easing stance, the FOMC dot plots indicate interest rates to remain near zero until end-2022. To keep rates low, we are in quantitative easing (QE) ad infinitum. The current QE is larger than the past three QEs combined. Around 70% of new Treasury issuance is funded by a “helicopter” Fed. The Fed is also snapping up corporate bonds. The purpose is to push more liquidity into riskier assets. This stimulus has compressed 10-year government bond yields to 0.64% for the US and 0.9% for Singapore. Realistically, we find no intrinsic value in government bonds except as a hedge against market routs.
  2. On government support, the IMF predicts $11tr of fiscal measures globally to combat COVID-19. Fiscal deficits globally are expected to reach 13.9% of GDP. This is almost double the 7.2% during the global financial crisis.
  3. The trajectory and speed of the recovery are unclear. It will track the pandemic. More crucial, in our opinion, we think that a bottomed has formed. Healthcare authorities on high alert and better-informed social behaviour should prevent a more severe second wave. In addition, there is a global race to unearth a vaccine. We are inching closer each day. There are more than 140 vaccines under various stages of development, with three at the Phase 3 stage – the stage before approval.


Recommendation: Our strategy is to buy into equities with sustainable dividend yields. Such assets will become scarcer and even more valuable in the future. Interest rates globally are expected to languish at record lows for the medium term. Sectors with sustainable yield are REITs and banks. Most REITs will be punished by this pandemic to varying degrees in the short term. The positive offset will be cheaper valuations, lower interest expenses and restrained supply.  We have removed Starhub and replaced it with Yoma Strategic. The evaporation of air travel will hurt mobile roaming revenue for at least the next 12 months. Yoma’s large discount to fair value and high-growth consumer businesses render it attractive. We have also replaced Sheng Siong – following its stellar price performance – with Asian Pay TV. This is a more contentious call. Dividends have been cut in the past three years. But precisely, we think they are finally at a sustainable pace of S$18mn per year vs FCF of S$50mn, offering yields of 7%. DBS will replace UOB due to its superior quarterly dividend yields. On a separate note, polling day for Singapore has been fixed on 10 July. Past elections have shown a limited impact on the Singapore market, barring a black swan event.


Phillip Absolute 10
Our Phillip Absolute 10 outperformed the STI in 2Q20. It is a modest consolation to the loss of 18.1%. The changes we are making for 3Q20 is:
4Q19 – Add: DBS, APAC Realty; Delete: China Sunsine, Keppel DC REIT
1Q20Add: Venture Corp, PropNex; Delete: ComfortDelGro, APAC Realty
2Q20Add: Thai Beverage; Delete: SingTel
3Q20Add: Yoma Strategic, Asian PayTV, DBS; Delete: Starhub, Sheng Siong, UOB

Strategy commentary: The change in the macro environment has resulted in our portfolio drifting more towards dividend yield. With interest rates expected to remain low in the medium term, yield stocks should be priced at an even higher premium, in our opinion. Earnings growth will be a challenge this year. Stocks that experience tailwind from the current situation are priced at historically high valuations.

Deletions from the model: We removed Starhub as the fall in roaming revenues will be a headwind for the next twelve months. Sheng Siong has been our core holding for almost two years. We removed it from our model portfolio due to the stellar price performance. UOB is replaced with DBS due to the higher and more consistent quarterly dividends.


Stock Commentary:



1. Ascott REIT

We like the relative stability in their revenue structure and geographical diversification. Valuations are attractive at 0.75x P/BV.

2. Asian PayTV

Expect the yield to be more sustainable at c.7%. This implies a payout of S$18mn against free cash flows of S$50mn. There is also the unpriced optionally of selling 5G backhaul services to mobile operators.

3. NetLink NBN Trust

Highly stable business model. Monthly recurrent revenue from 1.42mn subscribers plus contracted rents from Singtel.

4. Frasers Centrepoint Trust

Suburban malls will be more resilient in the current downturn. There is organic growth from the catchment population surrounding their three largest malls. And inorganic growth from the acquisition of five PGIM ARF suburban malls, which would double FCT’s mall footprint.

5. DBS

Replace UOB with DBS due to the more diverse fee income source across wealth management to investment banking franchise.  Expect quarterly dividends of $0.33 to hold, providing investors with an attractive annual yield of c.6%.

6. PropNex

The circuit breaker will dampen earnings in the near-term. But we still find the company attractive – paying a dividend yield of c.6%, net cash of S$89mn, market share of > 40% and ROE of 24%.

7. Thai Beverage

The almost 1-month ban in selling alcohol in Thailand will hurt earnings. Nevertheless, we find current valuations attractive, at 15x PE for a consumer company with 90% market share in Thailand spirits market, which is poised to recover from a depressed earnings in FY20.

8. Venture Corp

A beneficiary of supply chain shift from China to SE Asia. Pays an attractive dividend yield of c.4% from cash hoard of S$852m.

9. CapitaLand

Building up higher ROE and quality income stems from recurrent fee and rental, 2/3 of FY19 revenue are recurrent in nature.

10. Yoma Strategic

Valuations are depressed given the structural growth ahead. Entrenched foothold in Myanmar’s most attractive and fast-growing consumer businesses, namely mobile finance, property, F&B and motor vehicles.


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About the author

Profile photo of Paul Chew

Paul Chew
Head of Research
Phillip Securities Research Pte Ltd

Paul has 20 years of experience as a fund manager and sell-side analyst. During his time as fund manager, he has managed multiple funds and mandates including capital guaranteed, dividend income, renewable energy, single country and regionally focused funds.

He graduated from Monash University and had completed both his Chartered Financial Analyst and Australian CPA programme.

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