Watch out for Omicron, as the new Covid-19 variant is set to exert short-term pressure on reopening names in travel and hospitality, along with office and retail segments, say DBS Group Research analysts Paul Yong and Yeo Kee Yan.
“In the short-term, we can expect news flow on travel restrictions and local variant cases to get worse before it gets better. There will be more uncertainties in the next two weeks and the situation may get better or worse depending on how effective current vaccines are versus the Omicron variant, or how easily vaccines and oral pills can be tweaked to meet the new threat. The fatality rate and seriousness of the symptoms of this variant will also have implications on how the situation will evolve,” write Yong and Yeo in a Nov 29 note.
Yong and Yeo highlight seven vaccine beneficiaries index component stocks (Thai Beverage Public Company, Singapore Airlines, CapitaLand Integrated Commercial Trust, Genting Singapore, Mapletree Commercial Trust, SATS, ComfortDelGro) that make up a moderate 13.7% of STI market cap.
The index tumbled 55pts last Friday with Genting Singapore and Singapore Airline leading the fall, add the analysts.
“We see support at 3,100 and strong support at 3,040. These levels are around 12.7 times 12-mth forward PE and translates to a downside risk of 66 pts (-2%) or 126pts (-4%) at worst. We think the key information to watch is the effectiveness of current vaccines in preventing hospitalisations. If the effectiveness against Omicron is high or similar to Delta, equity markets should snap back quickly to pre-Omicron levels,” write Yong and Yeo.
Aviation and hospitality
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Through the lens of a worst-case scenario, Yong and Yeo view aviation, hospitality, technology, oil and gas, banking and plantations as the sectors most negatively affected by a dominant Omicron variant.
“If Omicron was to overtake Delta as the dominant variant, we would be negative on aviation in general, especially the airlines as international travel would remain highly restricted and the recent easing would have to be rolled back for an extended period,” write the analysts.
“Companies in the hospitality sector will be among the worst hit, as this could not only reverse the loosening of international travel restrictions but also curtail domestic leisure spending,” they add.
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“In the worst-case scenario, Singapore could go into lockdown again; a return to circuit breaker situation could materialise if the new variant were to proliferate domestically; existing vaccinated travel lanes (VTLs) could be scrapped, and mandatory quarantine could be reimposed on travellers upon arrival again.”
While the government will likely extend support, the impact to hospitality companies “will still be devastating”, write the analysts. “It is difficult to ascertain how international border controls will evolve without more information on its transmissibility and resistance to prevailing vaccines, and such uncertainty will weigh on the sector for a while.”
Supply chain issues
On the back of the strong demand, especially during the current peak period for technology companies, the supply chain remains tight. Further lockdown would lead to a much longer waiting time for chips and components, hence affecting order fulfilment, say Yong and Yeo.
“Although chip makers are pouring in big capex spending to alleviate the current chip shortage, with capex expected to grow by 32.4% to reach $146 billion in 2021 and another 10% growth in 2022, the bulk of the new capacity can only come online from 2022/2023 onwards as it takes about two years to build a chip fabrication plant and ramp up its production volume,” write Yong and Yeo.
They expect some improvement on the supply front in 2Q2022, with the shortage likely to resolve by 2H2023.
Oil and gas
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Brent and WTI crude oil prices plunged 12-13% last Friday, the largest daily drop since April 2020, amid concern of Omicron spread pulling back the recovery in oil demand. “Oil prices tend to overreact on change in sentiment, pricing in worst possible scenarios. Fear of widespread lockdown and demand decline will likely continue to impose pressure on prices till there’s more clarity,” write Yong and Yeo.
On supply front, all eyes are on OPEC+ meeting on Dec 2, where member countries will review future production levels.
With the emergence of Omicron variant, the plan to raise production by 400,000 barrels per day (bpd) in December could be reviewed, write Yong and Yeo. “While the new variant could cause short term disarray, we remain positive on longer term supply/demand dynamics of oil. In the short term, it will be tactical to avoid oil and gas names given the uncertain short-term impact.”
Banks’ delayed upsides
Should reopening be delayed and/or certain degree of lockdown be imposed in US, Fed hikes might be pushed backwards, say Yong and Yeo. Markets are currently pricing in two hikes in 2H2022. Singapore banks may only see net interest margin (NIM) and earnings upside in FY2023 instead of 2HFY2022.
Price pressure on plantations
Omicron is negative for crude palm oil (CPO) plantation companies, such as First Resources and Bumitama on lower demand causing selling price pressure, write Yong and Yeo.
However, the pressure may be lesser this time, if the Indonesian government reacts quickly by lowering the export levies and taxes if CPO benchmark price retreat below the US$1,000 per MT level.
On the other hand, Wilmar will benefit, write the analysts. “Stricter lockdown measures, especially in China, mean the higher margin, branded consumer products sales volume will contribute more significantly vs the bulk and medium pack consumer product from Hotel, Restaurant, and Catering (HORECA) food demand as seen in 1H2020. Further earnings upside potential if raw material prices such as palm oil and soybean oil retreat on softer demand,” they add.
Positives in industrial REITs, healthcare
On the flip side, the industrial real estate, healthcare and medical supplies sectors will see bright spots in the coming period.
“We envision that government response will be quicker this time round with an aim to curb the import of the Omicron virus to local shores. As it is, the Singapore government has moved to ban travellers from South Africa,” write Yong and Yeo.
Singapore may see the government continue to extend the current quarantine program, which support the occupancy rates at the local hotels, keeping them afloat operationally, they add.
“Our preference in the hospitality sector will be to focus on the globally diversified portfolios, with Ascott Residence Trust preferred, given that approximately 55% of its portfolio is located in markets more dependent on domestic travel, while the continued pivot to student accommodation space (12% of assets) add further resilience.”
Yong and Yeo see the industrial S-REITs to be prime beneficiaries in the event of a “risk-off” trade given their proven resilience. “We anticipate that REITs that focus on logistics, data centres and business parks to benefit as a re-focus on acceleration of the adoption of e-commerce, connectivity to drive demand for those properties,” they write. “We believe that Ascendas REIT, Frasers Logistics & Commercial Trust and Keppel DC REIT will be beneficiaries of this trend.”
On healthcare, top quality healthcare service providers will benefit from the eventual reopening, write Yong and Yeo. “We maintain our ‘buy’ rating on Raffles Medical.”
Assuming the worst-case scenario, this could lead to a stronger demand for healthcare gloves and may even result in a slowdown in the decline in average selling price (ASP) for healthcare gloves, write Yong and Yeo.
“Demand for healthcare gloves has continued to grow despite the pandemic moving into the endemic phase in many parts of the world. The ASP, however, has begun to normalise progressively in 3Q2021 as major distributors have taken a wait-and-see approach for glove prices to stabilise.”
“We expect the healthcare ASP to hover around the US$30 range per 1,000 pieces in 2022, slightly lower than the US$35-40 level for the October to December period, and the peak of US$90-100 during the April to June 2021 period. We have a ‘buy’ call on Riverstone,” write the analysts.
As at 3.47pm, the STI is trading 39.03 points lower, or 1.23% down, at 3,127.24 points.