Published April 29, 2009

Sars cue for markets as flu drama unfolds

Analysts bet on telcos, alternative food; negative on aviation, travel

By OH BOON PING

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(SINGAPORE) When Severe Acute Respiratory Syndrome (Sars) hit the region in 2003, it sent the stock markets into a tailspin and wiped out nearly 38 per cent from the Straits Times Index (STI) within a year.

This time around, the fallout from the swine flu outbreak could be even more severe. That is because it comes on the heels of an already weak economic environment which will only exert more pressure on the capital market here, analysts say.

Says DMG & Partners: 'When Sars hit in 2003, the US economy was recovering from a period of economic slowdown - US GDP recorded a 2003 growth of 2.5 per cent.

'The situation is rather different now - with market consensus expecting a 2.5 per cent US GDP contraction in 2009.'

When Sars was taking its toll, the STI once plunged 4 per cent in a single day. It also hit air travel and visitor arrivals as Singapore saw its GDP shrink by as much as 4.2 per cent in Q2 2003.

The market is now bracing for another hard landing. Investors remained calm yesterday as the STI closed 10.20 points lower at 1,808.41 on volume of 390 million shares.

Aviation and travel stocks remained the obvious casualties as investors across the region sold down on stocks such as Singapore Airlines, Cathay Pacific, Qantas and Korean Air.

Kim Eng prefers to avoid SIA for now, saying that news of more confirmed cases could be a negative catalyst for the carrier. 'The knee-jerk reaction would also be for people to avoid air travel.'

For example, SIA saw its passenger load factor plunge to around 50 per cent for a period of about 75 days during the Sars period, says analyst Rohan Suppiah.

DMG recommends a 'sell' on the carrier, adding that it posted record losses of $3 million per day in April-May 2003, due to the Sars outbreak. Also, e-travel provider Asiatravel, with its wide network across 60 countries, is expected to be hit hard, adds DMG.

Indeed, Sars affected mainly the services side of the economy such as retail, restaurants, transport, property and financial services, notes Barclays, and some brokerages are similarly negative on land transport operators this time around. They cite a possible drop in ridership if there is less discretionary travel over the weekends.

For example, OCBC points out that SMRT had posted a 2.7 per cent drop in its FY04 revenue during the Sars period, 'on what we observe as its first ever decline in train ridership since 1995'. ComfortDelGro also reported a reduction in its taxi rentals and inflated its expenses because of the preventive measures that had to be taken.

However, Barclays is less pessimistic, saying that unless the transmission rates from the swine flu outbreak increase dramatically, 'we maintain our growth forecasts for the Asian economies'.

Still others see some winning bets in the current flu episode. Both DMG and OCBC Investment Research also believe that telcos would benefit from the flu pandemic as corporates curbed their air travel and relied on teleconferencing and video calls to conduct their meetings.

DMG says that 'people are less likely to meet face-to-face, which should raise the usage of mobile', while OCBC sees 'a trend in the valuation of telcos rising during the Sars period'.

OCBC recommends a buy on SingTel at a fair value of $3.09 and M1 at $2.12, while DMG prefers StarHub at a price target of $2.35.

In the food sector, impact is likely to be mixed, as stocks with exposure to pork-related businesses could face a significant drop in demand while companies that provide food substitutes such as fish could be winners. These will include China Fishery and Pacific Andes where OCBC has a fair value of 30 cents.

DMG is positive on Riverstone and Medtecs, which supply rubber gloves and surgical masks.

But 'Parkway and Raffles Medical now garner a significant amount of their businesses from foreign patients. Any lock-down in air travel for the region may impede their earnings', said OCBC.

Meanwhile, CIMB says that it is still too early to assess the impact of the swine flu outbreak on demand and supply for edible oils. Therefore, it remains neutral on the regional plantation sector and believes that CPO price will stay strong in the short term, but could weaken in H209 if edible oil supplies improve and global demand for palm oil drops.

It is overweight on Singapore planters, neutral on Indonesian planters and underweight on Malaysian planters. 'For exposure to the sector, we like Wilmar, Indo Agri and Golden Agri in Singapore, London Sumatra and Sampoerna Agro in Indonesia, and Sime Darby in Malaysia.'