DBS Equity Research: Wired Daily 12 Jan 2016

kiasutrader

Publish date: Tue, 12 Jan 2016, 02:55 PM

Maintain view that the 2650-2700 level for the STI is an opportunity to accumulate stocks for a rebound trade

SMC Monthly - Our conviction picks: Growth - mm2, Riverstone and Sheng Siong; Yield - China Merchants Holdings (Pacific); Recovery - Japfa

US stocks ended with moderate gains as a rebound in Apple Inc and Intel Corp shares offset a weakness in commodity stocks. The corporate earnings season has started for US companies. Alcoa has started the ball rolling. Its shares fell even as it reported better-than-expected 4Q earnings after the markets closed. According to Bloomberg, consensus expectations are for profits of S&P 500 companies to fall by 6.7% last quarter.

For the Singapore market, the STI fell slightly below the 2700 level yesterday before recovering above. We maintain our view that declines to the 2650-2700 level is an opportunity to accumulate stocks for a rebound trade. . The uncertainties from China should subside in the short-term as the RMB stabilizes, substantial shareholder sales are curbed and the circuit breaker system suspended. Furthermore, at 2700, STI's PE valuation is considered attractive at close to 10.7x (-2SD) FY16F PE, given the mid single digit EPS growth of 5.9%.

Technically, once the STI builds a base around the 2700 level, we expect an initial rise back towards 2900 in the weeks ahead that coincides with a major 23.6% upward retracement level. Beyond this, the 38.2% retracement level is around the 3000 level.

Small-cap names can often shine despite uncertainty and malaise in the broader market. We begin 2016 with the following conviction picks under the following themes:

1) Growth - MM2, Riverstone and Sheng Siong

2) Yield - China Merchants Holdings (Pacific)

3) Recovery - Japfa

For mm2 Asia (BUY, TP S$1.05), earnings should be boosted by growth in local productions as well as its expansion into the China market. Riverstone (BUY, TP S$2.83) should benefit from an enlarged capacity as well as a strong USD vs Ringgit, while Sheng Siong (BUY TP S$1.01) is looking to see both store growth and margin expansion. A rebound in dayold-chick prices should help Japfa's (BUY TP S$0.90) earnings to recover, and lastly, CM Pacific (BUY TP S$1.45) offers a highly attractive dividend yield of over 8%, with long-term earnings bolstered by recently acquired toll roads in China.

Watch out for potential reversions for oil & gas-related names. While we are bearish on near term oil prices, if it does recover significantly, and holds, we can expect to see a rebound in stock prices of oil & gas companies. Among these names, we think Ezion(BUY, TP S$1) and Pacific Radiance (BUY, TP S$0.42) should bear the most watching.

PACC Offshore Services Holdings (POSH) has secured a project to provide towage and positioning services for the Shell Prelude floating liquefied natural gas (FLNG) platform -the world's largest offshore facility ever constructed. For the project, POSH will deploy five vessels. This underscores POSH's differentiated business strategy to diversify across the offshore services sector.

Noble Group founder and chairman Richard Elman has pumped more money into buying shares in the commodity trader on the open market. His latest purchase was 10m shares on Monday, bringing his stake up to 22.28%, according to a Singapore Exchange filing.

Sembcorp Industries inked a Memorandum of Understanding (MOU) with Chongqing Energy Investment Group to explore a strategic partnership on a broad range of development areas, in line with China's "One Belt, One Road" initiative. Owned by the Chongqing Municipal Government, Chongqing Energy Investment Group is one of the large-scale conglomerates in investment and industry in Chongqing. The Group invests in coal, electricity, natural gas, real estate, building materials, machineries and logistics businesses.

Source: DBS

Riverstone (AP4)Sheng Siong (OV8)Japfa (UD2)Pacific Radiance (T8V)Sembcorp Ind (U96)Ezion (5ME)

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