We  believe  small/mid-cap  offshore  &  marine  (O&M)  and  oil  &  gas  (O&G) stocks  could  continue  its  strong  outperformance  against  the  big-caps  as investors  look  to  rotate  into  smaller  cap  plays  with  attractive  valuations. We  like  companies  with  strong  growth  profile,  track  record  in  deliveringprofits and management with substantial stake in the company. In order of preference,  our  top  three  small/mid-cap  picks  are  Ezion  Holdings  (BUY; TP:  S$2.02),  Nam  Cheong  Holdings  (BUY; TP:  S$0.29)  and  Technics  Oil  & Gas (BUY; TP: S$1.28). Our top small/mid-cap picks are trading at 25-50% discount to P/E valuations (FY13F) for big-caps. 

Small/mid-caps  outshined  the  big-caps  in  the  past  three  months.  Nine  of the top ten gainers in the past three months were stocks with market cap of less than  S$1.5b,  rising  10-40%.  Our  top  small/mid-cap  picks,  Ezion,  Nam  Cheong and  Technics,  have  surged  40%,  18%  and  10%  respectively,  and  we  expect these  stocks  to  continue  its  re-rating  on  strong  earnings  growth,  and  higher investors' interest in the smaller cap space. We expect Ezion and Nam Cheong to announce record quarterly core net profit in their upcoming 3Q12 results.

Rig  builders  should  deliver  steady  margins  QoQ.  We  expect  rig  builders  to deliver  operating  margins  of  13-14%,  lower  than  3Q11  margins  of  26.0%  for Keppel  and  16.2%  for  SMM  but  flat  QoQ.  The  margins  are  likely  to  be  in-line with guidance from management. The rig building outlook remains robust: (1) rig supply tightened further in 3Q12 with high contracting activities; and (2) dayrates are  rising  with  longer  duration.  We  think  Singapore  rig  builders  are  in  a  strong position to raise ASP, and this will be a key catalyst for valuation expansion.
 
Avoid  Chinese  shipyards  with  heavy  exposure  to  the  commercial  (drybulk, containerships)  shipbuilding  due  to  excess  shipbuilding  capacity,  pressure  on margins for new orders, and deteriorating earnings visibility.

Source: OSK