Stock markets have remained volatile as countries take turns going into lockdowns to curb subsequent waves of the Covid-19 virus, creating near-term economic uncertainty.

However, with a slew of vaccines starting to become available, the war with the pandemic is coming to an end. “Investors are positioning ahead of the expected normality to pre-Covid-19 economic conditions,” says Paul Chew, head of research at PhillipCapital, in an interview with The Edge Singapore.

The Singapore market, which has been beaten down to the lows of around 2,200 points in late March, has since recovered smartly to around 2,800 points in November, and in Chew’s opinion, this recovery has legs. “Our end-2021 target is 3,200 points,” he says.

Naturally, investors need to also be wary of possible risks. One of these, according to Chew, is potential health complications arising from the side effects of using the vaccines.

Politics, too, is another area to worry about. For one, what will the US do with regards to its trade policies? Here on the home front, there is the worry of economic stress once the loan moratoriums and government grants end in early-2021, he warns.

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It was in stark contrast to early this year before the pandemic hogged headlines. “Everything was looking very rosy for the banks, Covid-19 was a very big stumbling block,” recalls Tay Wee Kuang, research analyst at PhillipCapital.

As the whole economy comes under pressure, worries mount over the proportion of loans that might go bad, leading to higher allowances made by all three local banks. All three banks remained ahead of schedule in their reserve build-up, says Tay, accumulating 31-52% of expected credit costs by 3QFY2020.

In 3QFY2020 results announced in November, Oversea-Chinese Banking Corporation (OCBC) reported total allowances of $350 million for the quarter, 53% lower as compared to the $750 million set aside in the previous quarter.

DBS Group Holdings had set aside total allowances of $554 million during the quarter. Together with the $1.94 billion set aside in 1HFY2020, total allowances for the nine months quadrupled from a year ago to $2.49 billion.

Meanwhile, United Overseas Bank’s (UOB) total impairment charge for the quarter more than trebled to $477 million from $145 million, as the bank set aside additional allowance for non-impaired assets amid uncertainties from the global pandemic.

Tay expects better visibility of the full extent of non-performing loans come next February when the full-year earnings will be announced.


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On dividends, Tay thinks the Monetary Authority of Singapore (MAS) will slowly ease its cap on payouts, described as a pre-emptive, conservative measure. “Personally, I think that some of the banks might want to resume it as soon as possible because you need some confidence among the investors.”

However, Tay warns that if allowances persist, shareholders might have to be contented with a slow resumption and not a one-off resumption. Better clarity on asset quality allowed UOB to lower its credit-cost outlook to 30-40bps from 50-60bps for FY2021. OCBC expects credit costs to come in at the lower end of its 100-130bp guidance for FY2020 and FY2021. DBS maintains its 80-130bp range for the two years.

Among the three banks, Tay prefers UOB as lower credit costs guided by the bank should lift pressure off its earnings faster than for its peers. OCBC, while relatively attractive in terms of its book value, has a bigger exposure to the combined markets of China and Hong Kong, where the former British colony has been weighed down by months of political unrest.

For DBS, there is also the concern of default risks in China. According to a Financial Times report, DBS has exposure of some RMB779 million ($159 million) to Huachen Automotive Group, a state-owned enterprise.

Over in India, DBS is seen to have its hands full following the merger of its subsidiary with a troubled local lender Lakshmi Vilas Bank, as directed by the Reserve Bank of India. For a start, DBS will put in additional capital of $463 million into the combined entity.

From F&B operators to O&M

While overseas markets do bring in new opportunities during good times, downturns, or major upheavals, such as Covid-19, does have the effect of contrasting how “defensive” companies with a largely pure domestic focus can be. “In the past, it’s good if you have operations in the US, China, all over the world,” says Terence Chua, senior research analyst at PhillipCapital.

He favours Singapore consumer stocks, namely coffeeshop operator Kimly, and food court operator, Koufu. He notes how Kimly was able to report earnings growth of 35.8% to $25.2 million for the year ended Sept 30, even as many others are struggling. “That really tells you how resilient their business model is because whatever happening outside doesn’t really concern them,” says Chua.

He also likes Koufu for its resilient local business, but with a sizeable portion of the revenue from its Macau operations too, which, just like the rest of China, is seeing considerable recovery back to the pre-pandemic days.

Local consumer stocks aside, Chua likes Keppel Corp for a different reason. For one, the conglomerate has laid down clearly it will divest $17.5 billion worth of assets, as it transforms from beyond the offshore and marine business that was previously its very profitable core, into areas with more visible prospects such as asset management, renewable energy and infrastructure.

While Keppel, for obvious reasons, did not indicate which are the assets it plans to sell, the fact that the company is able to give this figure means plans are already well thought through and in motion. Furthermore, Keppel has also given itself a return on equity target of 15%, which is a sign of its confidence, says Chua.

In August this year, Temasek’s partial offer to take greater control of Keppel was seen as the precursor for the possible merger of Keppel’s offshore and marine business with SembCorp Marine. Even though the offer has been dropped, Chua believes that with Temasek as a common controlling shareholder, this is still something investors can look forward to. “The market thinks this is the most rational [outcome] because of all the cost advantages and revenue and cost synergies with a merger of the two players,” he says.

An announcement related to such may come early next year, upon completion of a wider strategic review, where “the full spectrum of organic and inorganic options” will be looked at. “They need to merge in order to survive, to compete not just with the Chinese players, but the Korean players as well, which are huge,” says Chua.

REITs and healthcare sectors

On the REITs front, most sectors are still below pre-Covid-19 prices, says PhillipCapital analyst Natalie Ong. These include retail, commercial and hospitality REITs, which are currently “about 20% to 30% below” pre-Covid-19 levels, she says. The hospitality sector, in particular, has recovered somewhat, with prices improving to 30% from 40% below former prices, says Ong.

That said, the tourism-reliant sector will only be lifted as the vaccine timeline progresses, she adds. While industrial REITs were the first to recover, Ong notes that recovery began to move in November towards cyclical plays, both within and outside of REITs.

With increased digital adoption, Ong thinks demand for data centres will remain, though yields have compressed as many investors have already jumped in, sending up prices to record highs.

As more companies adopt remote work arrangements, commercial office REITs are seeing a structural decline, says Ong, perhaps heading towards an oversupply. “We’ve been hearing the banks, the very large occupiers of space, commit to a more permanent flexible working arrangement or hybrid work mode. So, this definitely will affect the demand for offices.”

Ong, when asked to name three top picks among the REITs, chose Manulife US REIT, for its long weighted average lease expiry (WALE); Frasers Centrepoint Trust for its portfolio of malls in the heartlands with a ready catchment area, and not vulnerable to changes in tourists’ arrivals as the Orchard Road malls.


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Last, but not least, she likes Ascendas REIT too for its growing, increasingly diversified portfolio with a variety of different assets in different markets. While investors buy REITs for their steady yields and keep them as a cornerstone of their portfolios, many should still have the appetite to buy stocks with big potential capital gains.

In early October, Tay initiated coverage on late-stage specialty pharmaceutical company, iX Biopharma, for its potential upside as it moves into the commercialisation phase.

On Oct 20, iX Biopharma obtained approval and registration by the Health Sciences Authority (HSA) for Silcap, a sildenafil drug that is used in the treatment of male erectile dysfunction. The drug, which is iX Biopharma’s second treatment for male erectile dysfunction after Wafesil, has been designed as a novel small capsule, which sets it apart from existing alternatives which are typically delivered in tablet form.

“Specialty pharmaceutical and nutraceutical drugs will benefit from the planned six-fold increase in production capacity to meet the expected surge in demand,” wrote Tay on Oct 2. The company should be breaking even within six to 18 months, says Tay. “That’s when we will see a stronger growth in the short term.” This is in contrast to Hyphens Pharma International, which has a “very stable” business model, says Tay. “They don’t have any new area of growth that will lift the business to a new level.”

The pharmaceutical distributor posted 3QFY2020 profit after tax of $0.8 million, down 53.0%, and $5.1 million for the 9MFY2020 ended Sept 30, up 5.4% y-o-y. Covid-19 test kits that were obtained due to high demand from widespread testing in Singapore had to be written off after the Singapore government centralised its supply of test kits.

In November, Hyphens said it is exploring options to re-sell the kits to other markets. However, about $0.3 million in value was written off with $0.2 million remaining on the books. The remaining amount may be written off if no buyers are found.