Research and Markets: Singapore Infrastructure Report Q3 2012: The Tuas West Extension of the East-West Metro Railway Line is Scheduled to Be Operational by 2016

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Singapore stocks may rise on ECB talk and as earnings buoy Dow.

Singapore shares closed 0.25% lower on Wednesday. The STI fell 7.52 points to 2,990.92. About 1.2 billion shares were traded. Losers beat gainers 218 to 140.

Here are some stocks and factors to watch:

Ascendas Hospitality Trust (A-HTRUST), said the public tranche of its IPO was 5.9 times oversubscribed. This was based on valid applications for 484,929,000 stapled securities received for the 70,148,000 stapled securities available to the public at the close of subscription.

Frasers Commercial Trust announced a distributable income of $11 million to unitholders for the quarter ended 30 June 2012 (3Q FY12), a 25.8% increase compared to $8.7 million achieved a year ago.

Aussino Group, which has been on the watch list of the SGX since September 2011, said it plans to buy Max Strategic Investments for $70 million, payable in shares. Max Strategic has agreed to acquire from Max Myanmar its energy business unit which operates 21 petrol kiosks across key cities in Myanmar.

Singapore Airlines reported a 73% increase in earnings to $78 million for the first quarter ended June 30, 2012 from $44.7 million a year ago. SIA warned that profits at its cargo and passenger units remain under pressure.

Biosensors International Group said earning for the first quarter ended June 30, 2012 rose 45% to US$32.63 million from a year ago.

SATS reported a 2.8% decrease in earnings to $41.3 million for the first quarter ended June 30, 2012 from a restated $42.5 million a year ago.

PEC said it has secured a $65 million worth of contracts from new and existing clients.

Roxy-Pacific Holdings said its wholly owned subsidiary, RH West Coast, has agreed to acquire a freehold residential site at 223A Pasir Panjang Road, also known as Harbour View Gardens, at $33 million.

Mapletree Commercial Trust Management has recorded a DPU of 1.537 cents for 1Q FY 2012/13 (the period from 1 April 2012 to 30 June 2012). This is an increase of 20.6% over the Forecast DPU of 1.274 cents.

It’s been a tough 2012. Yet, the 10 stocks The Edge Singapore recommended during the Lunar New Year period are mostly beating the market six months down the road. When The Edge Singapore put together its 10-stock portfolio for 2012, we were conscious that the equity markets weren’t in a particularly robust state. Europe’s sovereign debt crisis was worsening, a US economic recovery looked doubtful and the possibility of a hard landing in China loomed.

Despite the uncertainty, however, we decided against loading up our portfolio with defensive dividendyielding plays. If things improved, we thought, those stocks would fail to keep up in a broad market rally. And, if the economic outlook worsened, defensive stocks might end up being the last shoe to drop. Instead, we pulled together a portfolio of stocks with a cyclical flavour but that also offered some downside protection through conservative balance sheets and low stock valuations.

Six months on, global equity markets are still being dogged by the same issues. Europe’s politicians do not seem to be much closer to figuring out a solution to their problems. US economic data has not been conclusively positive. And China has just announced GDP growth of 7.6% y-oy for 2Q — below market expectations. That has been especially hard on commodity prices and growth-oriented stocks.

Yet, our portfolio is outpacing the benchmark Straits Times Index. On a total return basis, with dividends reinvested, our portfolio has returned 9.5% since its inception on Jan 25. That compares to a 6.1% return for the STI. Excluding dividends, our return is 7.5% compared with the STI’s 4.3%.

Even more gratifying is that six out of our 10 picks have outperformed the index. The best performers were Pan-United Corp, which has returned 31.4% in the period under review, and CapitaMalls Asia (CMA), with a 26% return. The worst performer to-date is Noble Group, with a negative return of 18.1%.

 

Will our portfolio keep beating the market in the second half of the year? Much could depend on macroeconomic factors. Clearly, a broad global recovery would be positive. Yet, further weakness might also work out well for us, if it prompts more monetary stimulus by central banks around the globe. “Bad economic data is actually good for the market,” says Jimmy Koh, chief economist at UOB.

What could trip us up is a situation where growth is neither strong enough to lift the markets nor weak enough to draw more monetary easing. Simon Grose-Hodge, head of investment advisory for South Asia at private bank LGT, thinks equity markets are unlikely to move upwards this year for exactly that reason. “We don’t believe that we will get QE3 but that’s what a lot of the markets are looking for,” he says. “There are more [Federal Open Market Committee] members against QE3 than there are supporting it. QE3 is probably the last step that they can take [and they need] to keep it for next year.”

On the other hand, Fan Cheuk Wan, head of research for Asia Pacific at Credit Suisse’s private banking arm, expects central banks and governments to work towards spurring growth. “Asian central banks have turned more dovish and more decisive easing action is expected in the pipeline. Asia also has the policy flexibility to introduce fiscal stimulus.” In fact, Fan thinks that most of the concerns about weak growth are already priced into stocks and she sees the market moving higher on loosening policy. Over the next 12 months, her target is for the STI to hit 3,300 points.

BETTING ON THE BULL
If the market rebounds on policy easing, some of the worst performers on our list could well turn sharply. Shares of commodity supplier Noble, for instance, typically enjoy a strong correlation with commodity prices, which would get a lift from policy easing as well as stronger growth expectations. In a July 5 market strategy report, DMG & Partners Research suggests clients look at selective cyclical stocks that have seen their share prices fall significantly. Noble is among them. The brokerage also sees 3Q2012 as being better for commodity plays.

There may still be room for shares of Sembcorp Marine to rise further if the market takes off. In a recent note, OCBC Investment Research says the company is “likely to catch up in the orders front in the months ahead” with more orders possibly coming from Brazil’s Petrobras. The brokerage also sees earnings picking up in 2H2012.

Petrobras recently approved the construction of six new build semi submersibles and DBS Vickers says this latest development implies the approaching tail end of Petrobras’ protracted 28-rig contracting process. “Sembcorp Marine could also announce firm orders for the remaining five Petrobras drillships. We believe this could be worth circa US$4 billion ($5.02 billion),” says DBS in a report.

 

 

 


Meanwhile, it could be tough for some of our other cyclical picks to make much more headway because of their increasingly stretched valuations. For instance, United Overseas Bank, has returned 15.1% so far. We picked UOB because, even though it was the most expensive bank, it also has the most conservative balance sheet and loan book. That selection has served us well over the last six months. However, analysts now think the industry is due for a softer 2Q, making further gains unlikely. Yet, it also seems unlikely that the counter will give up much of its gains because of its conservative balance sheet.

As for ST Engineering, we placed it in our portfolio as a play on the cyclical aerospace industry, which we hoped would take off this year. To its credit, the company has been able to win quite a number of orders. Moreover, its relatively steady cash flow and generous dividends have helped attract investors this year. Yet, after the good run its stock has enjoyed this year, it could be hard for it to keep going in the months ahead unless it delivers strong earnings growth.

SPECIAL SITUATIONS
Some of our stocks were picked for micro turnaround or growth stories. Some of those stories have panned out and others haven’t.

One idea that is working is Bukit Sembawang Estates, which is up 18.8% to-date. That doesn’t take into account a final dividend of four cents a share and a special dividend of 14 cents, declared for FY2012 ended March — although the share price would have factored in the payout to some extent. CIMB Research believes investors can look forward to higher dividend payouts in the quarters ahead on the back of a strong balance sheet.

Genting Hong Kong, on the other hand, is the second-worst performer on our list — down 10%. Besides earnings growth from its operations in the Philippines, we had figured that the company might see some corporate activity either in a spin-off of its cruise unit Norwegian Cruise Line or an injection of some businesses from its parent. No luck so far, though.

Nevertheless, UOB Kay Hian still sees catalysts ahead for the stock. The brokerage is expecting an earnings recovery in 2Q2012 and the distribution of maiden dividends. “We believe these catalysts will for now override concerns of maiden competition in the integrated resort and casino space in Manila that would likely impact its bottom line only from mid- 2013 onwards.”

We had also expected infrastructure and civil engineering company OKP Holdings to benefit from higher infrastructure spending this year as well as from its partnership with China Sonangol. Unfortunately, the stock has seen little action this year and returned a negative 3%. At the end of last month, OKP announced an investment of $111,111 for a 10% stake in CS Land Properties Pte Ltd, a wholly owned subsidiary of China Sonangol. CS Land Properties is seeking to develop a condominium project and this marks OKP’s first foray into property development. However, OCBC doesn’t see the investment having a material impact on financials for FY2012 and is therefore maintaining its “hold” rating.

On the other hand, Pan-United Corp has indeed been benefiting from the infrastructure spending we envisioned. For 1Q2012, the company posted results that came in ahead of expectations. Earnings were up 54% y-oy on ready-mixed concrete sales and analysts expect demand to remain strong this year. In a report, DBS analyst Ho Pei Hwa highlights that public projects will account for 50% of construction output compared to 30% in 2011. Ho has raised her target price on the stock to 70 cents from 68 cents before.


CONSUMER STRENGTH
A couple of our picks for 2012 were bets on Asian consumption, which we figured would be an abiding theme for the year. Recent data hasn’t been inspiring though. Local retail sales volume and value experienced a pullback in the month of May. And, the Nielsen Global Consumer Confidence Index for 2Q showed a drop of two points in Singapore to 94, following a short-lived uptick in 1Q. A figure below 100 indicates pessimism.

Even so, the two consumer driven names in our list have done well. CMA has returned 26% while FJ Benjamin Holdings is up 10%. Can that outperformance continue?

DBS analyst Lock Mun Yee recently raised her target price on CMA to $2.06 from $2.02 to factor in the higher share prices of the counter’s listed subsidiaries and associates as well as the recent establishment of a new private equity fund. Lock sees the fund strengthening CMA’s fee income model, increasing assets under management, allowing CMA to realise divestment gains and lowering the company’s gearing.

For its part, FJ Benjamin managed to record a 7.5% y-o-y growth in revenue and 7.7% growth in earnings for the quarter to March despite the slower economy.

DMG is encouraged by that performance and points out that its gross margins improved to 45.6% from 43.3% a year ago. The research house figures that the company’s performance could also be helped by foreign visitor arrivals, which were up 15% in 1Q while tourism receipts grew 8%. “FJ Benjamin’s portfolio of popular brands and its good relationship with the retailers would help it ride out the near-term uncertainties,” DMG says.

Heartened as we are by the performance of our portfolio so far, we aren’t expecting it to be smooth sailing from here on. As Grose-Hodge of LGT notes, “things that are cheap can get cheaper.” Meanwhile, Koh of UOB says: “Investors are already coming back but we have to be prepared for periodic shocks.” Here’s hoping our stock picks will prove themselves to be shockproof.