The year 2020 is a “watershed year”, according to CGS-CIMB analyst Lim Siew Khee, who estimated an average decline of 32% y-o-y for companies’ earnings per share (EPS) across the board following their 1H20 results.
“We knew 2Q20 would be bad but some corporates were hit harder than expected. For companies under our coverage, the ratio of 2Q results misses-beats was 11:29, or an estimated 2.6x,” Lim writes in a report dated August 18, charting Singapore sectors’ performance as a whole.
“Most companies were adversely affected by the Covid-19 pandemic and the resultant economic fallout from the movement controls. Conglomerates’ book values were written down to almost distressed states,” she adds.
On the other hand, companies were supported by the additional supplementary government budget packages including the Jobs Support Scheme (JSS), which helped to cushion the impact.
Beneficiaries under the JSS include SIA Engineering, which turned in profits instead of losses, and ST Engineering, which delivered a slight profit decline of 4% y-o-y.
Some sectors such as tech, gloves, and consumer, fared better than others, Lim notes, and downgrades to 2020F earnings were “widespread” at -19%.
The CY20F market dividend yield for Singapore has compressed to 3.6% compared to the 5.1% a quarter ago, on the capped dividend pay outs from banks, and earnings cuts from telcos.
“Still, it is relatively higher than the average estimated 2.8% of ASEAN peers. For now, only REITs offer decent above-market yields (>4%),” Lim notes.
Preferring REITs, as well as the consumer, commodities, tech, and gloves sector for 2020F, Lim believes most sectors have “seen their worst” and expects an “incrementally positive” 2H20F and beyond.
“The exceptions are aviation, telco and capital goods which could still struggle given the changes in travel patterns and stiff competition,” she says.
Lim has kept her “overweight” recommendation on tech and gloves, as well as consumer, citing positive demand and inexpensive valuations for the former, and a gradual recovery in discretionary consumption and on supermarkets for the latter.
She has also maintained her “overweight” recommendation on commodities on its improving crude palm oil (CPO) prices.
Lim has downgraded the telco sector to “underweight” due to yield compression, and upgraded transport to “neutral” on the hopes of further controlled reopening of the Singapore economy by October/November if Covid-19 community cases remain at single-digits per day.
On the other sectors, Lim has given an “overweight” recommendation on REITs with a preference on industrial and suburban retail sectors, “neutral” on capital goods and financials, and “underweight” on healthcare, and gaming and constructions.
Lim has categorised her top picks into several categories: yield instrument, Covid-19 beneficiaries on intermittent resurgence of cases, value names, and small-caps.
For yield instrument, Lim’s top picks are Frasers Centrepoint Trust (FCT), Frasers Logistics & Commercial Trust (FLCT) which replaces CapitaLand Mall Trust (CMT), Netlink NBN Trust (replacing Singtel).
Lim has also identified Riverstone as a top pick under Covid-19 beneficiaries, and CapitaLand, Sembcorp Industries, and Wilmar International under value names.
On small-caps, Lim’s top picks are AEM Holdings, CSE Global, Japfa, Koufu, UG Healthcare, and Sasseur REIT.
Looking ahead, Lim says she continues to expect earnings cuts, “albeit at lower quantums vs. 1H20”.
“We also see risks of asset impairment/devaluation especially during year-end review. We forecast 27% y-o-y growth in corporate earnings in FY21F for now. Our economist projects a recovery in 2H20F and forecasts -4.9% GDP for 2020 following a 6.7% decline in 1H20,” she adds.
Lim is also “cautiously optimistic” for 2H20 as most sectors are seeing incrementally positive performances for the half-year. The latest $8 billion mini stimulus from the government could also curtail recession and unemployment fears by 1Q21.
Her estimates for the FSSTI is at 2,495 (13x CY21F P/E, -0.5 standard deviation or s.d. from mean) to 2,630 (14.3x CY21F P/E, mean).
