Banks, REIT as well as travel and tourism to benefit from the country’s reopening
by IFAST RESEARCH / Pic by BLOOMBERG
AFTER a steep decline in corporate earnings last year (-41% year-on-year [YoY]), earnings per share (EPS) of Singapore equities have started to improve.
Most companies managed to beat earnings’ estimates and on aggregate, Straits Times Index’s (STI) earnings grew 93% YoY in the second quarter (2Q), fuelled by a mixture of organic growth and base effect.
We expect EPS of Singapore equities to rebound robustly this year and to a lesser degree in 2022.
Driving this rebound are companies that benefit from Singapore’s reopening and/or are levered to economic activities such as banks, real estate investment trust (industrial REIT and developers) as well as travel and tourism-related names.
Likewise, the STI is expected to generate a strong 48% YoY rebound in EPS growth this year, accompanied by a 15% YoY growth next year.
1) Banks: Anchor for STI earnings growth
The STI’s heavyweights, Singapore banks (Oversea-Chinese Banking Corp Ltd [OCBC], DBS Group Holdings Ltd, United Overseas Bank Limited [UOB], collectively around 34% of STI), are among the top companies in terms of profit growth for the 2Q21.
The recent earnings season show that wealth management fees (OCBC: 24%; DBS: 27%; UOB: 32%, YoY) and card fees (OCBC: 8%; DBS: 10%; UOB: 12%, YoY) for all three banks grew YoY.
Loan loss provisions for all three banks have also fallen drastically compared to the first half of 2020 (1H20) as asset quality showed significant stabilisation. Net interest income dipped due to lower net interest margin, however the decline was partially offset by loan growth (OCBC: 3%, DBS: 6%; UOB: 6%, YoY).
Bolstered by the cyclical recovery tide, we expect the three banks to continue enjoying above-average EPS growth over the next two years.
Earnings should derive support from: i) decent loan growth owing to a fast Asia expansion; ii) continued growth from wealth management and card fees as Singapore/ Asia reopens; and iii) further easing of loan loss provisions and write backs in the 2H21.
We are also cognisant of a potential shift in the US Federal Reserve’s (Fed) rate cycle, which in turn can drive the banks’ earnings.
There exists a strong correlation between local interest rates and the Fed policy rates, which ultimately fuels bank’s earnings through a potential expansion in the net interest margin.
The Fed rate may shift higher by late-2022 (earliest), thus bank earnings may see reinforced support beyond the next one to two years.
2) Real Estate: Mixed outlook
Generally, the REITs within the STI are likely to benefit from the recent easing of restrictions but the recent strong performance suggests this good news has been baked in.
While valuations are still not expensive (price-to-book ratio of most REITs are still below pre-covid levels), some sub-sectors like the office REITs and selective retail REITs face structural challenges in the longer term due to trends altered by the pandemic.
As such, we tend to favour industrial REITs and see it as a growth driver within the real estate sector.
We expect the DPU growth for industrial REITs to remain underpinned by rental growth from their portfolio of new economy assets including logistics properties and data centres.
Within the STI’s industrial REIT, we favour Ascendas REIT who has strong inorganic growth visibility, and will continue to acquire assets that can future-proof its portfolio.
For developers, we expect robust earnings growth this year, largely due to the low-base effect.
Looking ahead, we see continuous strong support for earnings given a visible pipeline of projects and pent-up demand when Asia reopens.
Additionally, earnings drivers are also materialising in terms of i) steady growth in Singapore’s residential market, (which has seen strong residential sales lately), and ii) a recovery in rental income and property revaluation gains.
3) Travel and tourism: Only a short-term earnings boost in 2022
For the travel-related names (Singapore Airlines Ltd, SATS Ltd), earnings growth should remain underwhelming for 2021 as the recent resurgence of Covid cases has stalled border reopening plans.
With the likely launch of quarantine-free vaccinated travel lanes and travel bubbles next year, growth for the sector should pick up in the 1H22.
Extreme low base in 2020 may also fuel a stronger growth number. The recovery to pre-Covid level by 2022 is still unlikely as flights and passengers are likely to remain limited while international travel should remain controlled.
For the tourism-related names (Genting Bhd), the outlook is slightly more positive. Unlike the aviation sector, Genting is able to fall back on the domestic market for its gaming operations.
Moving ahead, the high rate of vaccination and greater likelihood of border reopening should enable a greater flow of foreign tourists next year, possibly uplifting the company’s earnings.
Given the possibility of controlled international travel, foreign tourist count is unlikely to swing back to pre-Covid level which may cap earnings.
In sum, the travel and tourism-related sectors should see a decent jump in earnings in the next one to two years but growth should moderate eventually.
We note that the share prices for many of these companies have priced in the rosier earnings prospect and therefore reduces the rerating upside.
The views expressed are of the research team and do not necessarily reflect the stand of the newspaper’s owners and editorial board.