Towards Financial Freedom
DBSV S'pore Wired Daily 17 June 2013
Today's Focus
Small Mid Caps - Offer stronger growth at lower valuations. Bargain hunt SREITs/yield; go for high conviction growth and value stocks
All ears are on Ben Bernanke's press conference this Wednesday. Investors eagerly await what the FED will say with regards to the timing and pace of QE3 tapering. His comments on May 22 that the FED may reduce stimulus led to a jump in bond yields and pulled equity markets down into a tailspin on worries that the 'easy money' that had underpinned equity markets would go away. Emerging Asian equities were among the worst hit.
DBS Economics Research sees reasons for the FED to sit tight rather than taper the asset purchases. US GDP growth in the next 2 quarters is expected to read 1.4%, not much better than the previous two and less than half the long-term average as the impact of the US85bil sequester cut is felt from April-Sept. Recent manufacturing number has weakened again with the May PMI falling to 49, the lowest since June 2009. The employment rate sub-indices for both the ISM manufacturing and services have also dipped. If these weaknesses persist, the recent pace of decline in the unemployment rate can moderate or even reverse up, which will delay interest rate hikes.
Singapore equities were sold down in recent weeks in anticipation of an early QE3 cut back, but the sell-down appears to have reached a short-term support last week. Consensus expectations are for the FED to reduce the monthly bond purchases to USD65bil from the current US85bil (USD45bil in Treasuries & USD40bil in MBS) by September and start raising interest rates by Mar15. QE3 is unlikely to come to a full stop till middle 2014 and interest rates unlikely to rise from the current low level till mid-2015. Any less talk from the FED this week can trigger a rebound in equity prices.
Base view: As DBS Economics Research's view is that the FED will sit tight on QE, we take the view that the outcome of Wednesday's press conference will please markets and STI's correction ended last Thursday in the short-term at c c.3100. At that level, valuation had fallen to 13.1x (-0.5 SD) 12-mth forward PE. The immediate support is 3120-3130. STI should rebound to 3235 (38.2% upward retracement) or even 3280 (50% upward retracement).
Alternate: What if Ben spooks financial markets on Wednesday that results in another sell-off in both bond and equity markets? While previous post-GFC market corrections have stressed the index down to around 12.3x (-1SD) 12-mth forward PE (2915 based on current forecast) before bottoming, we do not see the current correction pulling the STI down to such extreme this time round. At worst, we expect a bottom that is 'moderately lower' below 3100 but comfortably above 2915.
This is because unlike previous corrections that were ignited by the fear of the Eurozone debt crisis deteriorating into another GFC, the current one started after Ben Bernanke commented that the FED may lower QE3 support if the US economy can sustain its recovery. Investors were caught off guard by the FED's comments and stress tested equity markets on the assumption that QE3 will be removed sooner and interest rate starts to rise earlier.
Compared to the dangers of another GFC, the roots behind the recent correction is much less menacing. Between earlier stimulus cut-back, a rise in interest rates rise from record low levels down the road as the economy improves in a sustainable manner versus another GFC, no prize for guessing which situation investors would rather be in.
Small mid Caps (SMCs) can continue to outperform supported by stronger growth and lower valuations. We believe the selloff in SREITs is overdone. As values emerge, we pick SREITs with identifiable and achievable growth like Mapletree Greater China Commercial Trust (TP: S$1.22), Mapletree Commercial Trust (TP:S$1.53), Cache (TP: S$1.47) and Mapletree Industrial Trust (TP S$1.63). Besides the S-REITs, we see bargain hunting opportunity for Religare (TP: S$1.05) as yield improves to 9.7%.
As macro recovery remains modest, we pick stocks where earnings growth is highly visible and sustainable: Ezion (TP S$3.00) will continue to outperform on secured contracts and its unique market positioning; Tat Hong (TP: S$1.80) is positioned to benefit from the regional infrastructure boom; Del Monte (TP: S$0.97) is a proxy to Philippines, SEA's 2nd largest consumer market. Kreuz (TP: S$0.78) is our top pick in the O&G services sector for its proven execution track record while Midas (TP: S$0.60) is poised for earnings recovery backed by its growing order book. For value, Vard (TP: S$1.46) is a bargain at 6.3x FY14PE vs normalized 10x PE. We believe the Myanmar theme will continue as reforms continue to attract FDIs. Results of telecom license and Yangon Airport development contracts are imminent events. Picks are Yoma (TP: S$1.05) and Yongnam (TP: S$0.41).
Yoma announced that it has extended the long stop date on the acquisition of land for its Landmark development by another six months to 31 Dec 2013. The company remains confident that the Master Lease will be issued and that it is finalising its discussions with the relevant government authorities regarding the terms of the Master lease. Accordingly, the proposed rights issue (1 rights share for every four existing shares) to fund the proposed acquisition will be extended too. We are not surprised by this extension given that bureaucratic delay is common in emerging country. No change to forecast and TP.
CosmoSteel is currently exploring the possibility of establishing a strategic business relationship with a potential strategic partner in Myanmar. This is related to the production, sourcing and/or distribution of piping system components and other steel products in the energy, marine and other industries in Myanmar.
AusGroup has secured an A$34.5m scaffolding contract with CB&I and Kentz Joint Venture on the Gorgon Project, one of the world's largest natural gas projects and the largest single resource development in Australia's history.
Mr. Peter Wong, Tsit Wing's Chairman and CEO, seeks to privatise Tsit Wing. Mr. Peter Wong's wholly-owned special purpose vehicle, Hero Valour and its concert parties, which together control an aggregate 49.52% stake in Tsit Wing, is making a mandatory conditional cash offer for all the remaining shares at an offer price of S$0.3075 per share. The offeror does not intend to increase the offer price, which is at a 36.7% premium over the last traded price of the shares.
Smartflex Holdings is proposing to place out 14m new shares at an issue price of S$0.10 per share. The Subscription Price represents a premium of approximately 7.5% to the last weighted average price. The company intends to use the net proceeds solely and exclusively for its working capital requirements.
Singapore's non-oil exports fell in May as rebounding pharmaceuticals exports were not enough to offset a continued slide in electronics shipments. NODX fell 4.6% y-o-y in May, after a 1.0% fall in April, and below market expectations of a 0.3% contraction. Compared with the previous month, exports fell 1.1% in seasonally adjusted terms, after expanding 1.1% m-o-m in April. Electronics exports declined 13.2% y-o-y, after falling 9.0% in April, while non-electronics shipments grew 0.2%, compared with a 3.3% rise last month. In the non-electronics sector, pharmaceutical exports rose 19.9%, after falling 11.8% in the previous month. Shipments to the European Union, Singapore's biggest export destination, fell 4.3% y-o-y in May, compared with a 13.4% fall in April. Exports to the U.S. fell 0.8% after expanding 4.6% in April. Exports to China, however, grew 6.2% after the previous month's 6.2% increase.
Singapore retail sales put on a better-than-expected performance in April, contracting just 0.5% y-o-y following a decline of as much as 7.4% in March. Stripping out sales of motor vehicles - which were just 2.6% lower compared to April last year - overall retail sales were up by 0.2%. In comparison, sales of motor vehicles dropped by nearly 33% y-o-y in March this year, following February's announcement of stricter curbs on car loans and a tiered additional registration fee structure during the Budget. When comparing month-on-month (seasonally adjusted), sales in April rose 5.3% from March. Excluding motor vehicles, however, sales were down 0.9% month-on-month.
Source: DBSV
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