Printing money can save the world as Bernanke has demonstrated. With memories of the worst recession since the great depression fast receding, the bulls are back in force with analysts boldly predicting that the STI will cross 3,000 by the middle of 2010. Private sector economists polled by the Monetary Authority of Singapore recently echoed similar rosy sentiments. Based on the median expectation of 20 economists, growth is tipped to hit 5.5% after a 2% contraction this year.

Stock market returns and economic performance tend to be out of sync. However, we believe that domestic equities will continue to deliver in 2010, after suffering a horrific 16-month bear rampage which saw close to two-thirds of market capitalisation wiped out from the STI.

However, sectors that have dominated 2009 may not follow through into 2010. Banking and property plays might lose steam, limiting upside potential. The run up in local property prices for instance, has prompted the government to introduce cooling measures.

Invest Globally Locally
“Riding the global economic recovery” is the theme for our 2010 stock picks. We are confident that SGX-listed companies with operations outside of Singapore will be prudent investments for 2010. With limited domestic opportunities, overseas markets represent significant opportunities for solid businesses to tap into and boost their revenue stream. Sector wise, we are also sanguine on the prospects in energy and technology as capital investments and consumer spending put on hold in 2009, will flow back in 2010.

In line with a recent UBS Investment Research’s Singapore – Outlook 2010, we are cautious on “obvious” tourism plays such as Genting Singapore and Singapore Airlines. We are also wary of shipping and shipbuilding stocks due to the excess capacity, though they might surprise as 2011 draws closer.

With the theme in mind and a one year investment period, we are banking on heavy weights Keppel Corp, Noble Group, Indofood Agri Resources and Venture Corp to benefit as the world returns to “business as usual” mode. Smaller caps AusGroup and Rotary Engineering join this line up as energy plays, while Epure International is our preferred S-Chip.

United Overseas Bank has navigated the 2009 crisis astutely and is our choice for exposure to the domestic economy. We do not want to discount the opening of the IRs completely and are including CDL Hospitality Trusts, while Yongnam Holdings completes the list as it may be a surprise beneficiary of Budget 2010.

Well Positioned Large Caps

Keppel Corp
Keppel Corp’s diversified business units is a virtue by itself but what will drive sentiment in 2010 will be order wins at its Offshore & Marine segment, fueled by a mega resource hunt off the coast of southeastern Brazil.

Spurred by a 2007 discovery of pre-salt oil deposits, which lies under 5km of water and a further 2km layer of salt, Brazil’s state-owned oil company, Petrobras, is ramping up a 5 year plan that has earmarked US$174b to develop the reserves.

The national oil major is expect to order up to 40 rigs by 2017, with tenders for the first wave of 28 rigs – 7 drillships and 21 of other rig types – to be announced by early 2010.

Analysts are expecting Keppel to snag a few contracts here, especially for semi-submersibles. It also looks well placed to take advantage of the minimum local content stipulated for the vessels, as it already has a significant presence in Brazil – its facility there is regarded as one of the largest and best equipped offshore and marine yards in the southern hemisphere, which could give it an edge over its Korean rivals.

And recent order wins to repair Noble Corp’s drillships as well as an impending contract with Petrobras for a tension-leg platform in the Papa-Terra deepwater oil field can only serve to strengthen its capabilities.

Noble Group
Not all commodity plays are created equal. But Noble Group stands out tall and proud among the locally listed resource firms as the second largest commodity entity in terms of market capitalisation and the most diverse in its business.

Though topline in 9M09 fell to US$21.6b as compared to US$29.3b in the corresponding period, we took heart in the increase of tonnage to 133m tonnes versus 108m tonnes a year ago. The fall in revenue was attributed to sinking commodity prices. Earnings aside, the year also saw two happenings that serve to accentuate Noble’s stellar qualities.

In a stunning move, China Investment Corporation (CIC) took a 15% stake in the company for US$850m. The injection of funds will allow Noble to aggressively pursue acquisitions globally while tapping into the vast network of CIC. Another notable event was the acquisition of Gloucester Coal, which the company could use to consolidate with other coal assets.

Future positive factors include a growing world economy, which is expected to raise commodity prices and increased capacity from acquisitions (due to ample funding) or existing assets such as Gloucester Coal.

Indofood Agri Resources
The Organisation for Economic Co-operation and Development has forecasted growth for Indonesia’s economy to accelerate from 4.5% this year to 5.3% in 2010. ‘Domestic demand should continue to be the main driver, supported by a recovery in credit extension and real income gains resulting from ongoing dis-inflation and falling unemployment,’ the OECD said in its semi-annual economic outlook.

We are picking Indofood Agri Resources to tap into Indonesia’s consumption growth, as it is a vertically integrated agribusiness. Unlike “purer” CPO plays like Golden Agri, IndoAgri has a significant downstream capability. Sales of cooking oils & fats segment comprised 45% of 9M09 turnover. Within this division, it commands a 50% of Indonesia’s branded cooking oil segment, and 70% of the industrial segment of margarine demand.

Moreover, as one of the largest oil palm plantation owners since its acquisition of PT London Sumatra, it will be able to capture margins both up and downstream in the eventuality that CPO prices recover.

Venture Corp
In a recent report dated 11 December, OCBC Investment Research affixed an overweight rating on the Electronics manufacturing services (EMS) industry, citing the ability of these players to adjust to the downturn, being at the end of the electronics supply chain.

Unbeaten and unbowed by the financial turmoil, Venture Corp, a leading global electronics services provider could probably be a safe hedge on a technology sector recovery. Revenue for 3Q09 rose 9.7% quarter-on-quarter to $928m with earnings falling due to mark-to-market loss on its CDOs. On the whole, the company registered improvement in revenue over every quarter in 2009 and the increase is broad-based across all product categories, though the star performer remained the Printing and Imaging segment. Cash position was further strengthened to $293m from $219m, making the company a prime candidate for a dividend payout.

There should be an upturn in the technology sector in the latter half of 2010. However, uncertainty stills hangs over the recovery of the Venture’s CDOs, which mature on 20 December 2009. In the worst case scenario, a further writedown of $47.7m may be necessary in 4Q09. Nonetheless, contract wins from new customers in 3Q as well as the company’s effects to grow a sizable ODM and Solutions Enterprise businesses should lay the foundation for future expansion.

Engineering Gets A Boost

Rotary Engineering
The failure of the Copenhagen climate talks suggests that it is still a long way before traditional energy sources like oil and gas get supplanted by “green” energy. Capital expenditure put on hold, particularly by the Arab Gulf States to support oil prices which tumbled to US$30 per barrel at one point, have returned.

Rotary Engineering has grown beyond its Jurong Island origins. It is in the thick of Middle East action, with its joint venture company with Petrol Steel clinching a US$745m tank farm deal in July, awarded by the Saudi Aramco Total Refining and Petrochemical Company for its Jubail refinery. Much recently, Rotary won a $48m contract to build an ammonia storage tank in Thailand.

If these projects go on smoothly, it will strengthen Rotary’s brand recall not only in the Middle East but also within ASEAN. Rotary’s order book stands at $1.36b as of 3Q09, of which more than 80% are from overseas and will last till the end of 2012.

AusGroup
AusGroup had a below par 1Q10 performance which saw revenue and earnings decline 43.3% and 70.4% respectively due to slow tendering activity and slower than expected start-up of several Australian projects. However, its exposure to the booming mineral resources and natural gas sector in Western Australia, makes it an attractive proposition.

According to OCBC Investment Research, mineral resources giant Rio Tinto has doubled its capex guidance for 2010 from US$2.5b to US$5b, while tendering has begun on Chevron’s Gorgon LNG project. Chevron recently announced that it made a gas discovery at its Satyr-1 well, which may help expand the project.

These developments augurs well for AusGroup, and the energy and resources specialist has guided for “a progressive improvement in revenue” over the next four quarters. It also said it expects margins to “return to more normal levels” towards the back end of the 12 month outlook period.

Epure International
The lone S-Chip, Epure International has seen its top and bottom lines swelled on sale of customised environment equipment and major turnkey engineering, procurement and construction (EPC) projects in Shanxi, Guangxi, Anyang, Hubei and Jingzhou. The explosive growth in earnings translated into a surging share price (234.1% vs the STI’s 36.5% for 2009 as at 18 Dec 2009). Most notably, the company clinched an Rmb562m (almost half of FY08 turnover) contract to design and construct a wastewater treatment plant for Marafiq, a Saudi government linked power and water utility provider.

Prospects of a dual listing as well as fresh deals in the Middle East and Asia region should boost the turkey water and wastewater solutions provider. The contract from Marafiq should lay the foundation for an increased international presence. Priced at 19.9x FY08 earnings, Epure is a steal compared to other listed peers like Hyflux.

Local Delights

United Overseas Bank
Garnering the Aa1 and Prime-1 ratings for long-term and short-term bank deposits respectively by Moody’s, United Overseas Bank (UOB) performed commendably for 3Q09, surpassing consensus estimates.

With the credit crisis easing coupled with improved macro conditions, UOB registered a 10.9% increase in operating profit to $2.6b for 9M09. This was mainly attributable to higher net interest income, and income from trading and non-trading activities. The slight blemish in UOB’s results for the aforesaid period was perhaps its non-performing loan ratio, which remained flat at 2.4%.

Nonetheless, lending has been rather conservative for UOB over the past few years, keeping asset quality strong. This is evident by the bank’s immaterial impact from the recent Dubai saga as opposed to DBS’ $1.8b exposure. In addition, the company appears to be focusing more on the housing loans segment – the only segment to register above 1.8% q-o-q growth for four consecutive quarters. Compared to other loan segments, the housing loans segment is relatively more resilient in times of economic downturn.

Among the three local banks, UOB has the highest total capital adequacy ratio, standing at 18.5% as at 30 September 2009. As major economies worldwide continue to recover, the bank could easily expand lending to take advantage of the improving conditions.

CDL Hospitality Trusts
2009 for CDL Hospitality Trusts (CDL), proxy to the local tourism industry, was a year to forget. Hit by falling tourist arrivals and declining room rates, revenue for the nine months ended 30 September, tumbled 24.2% as compared to the previous corresponding period. Yet we do believe turnover has begun to emerge from trough.

On a sequential basis, 3Q RevPAR increased 14.9% on a 10.6% rise in occupancy. Undoubtedly, visitors’ arrivals were boosted by the Formula One Singapore Grand Prix event. We noted that the decline in tourist numbers started to level off in July with arrivals dipping a mere 4.5% year-on-year during the month and increasing 7.1% in September before falling 0.5% in October.

Looking ahead, we expect Singapore’s position as a premier destination to be cemented with the opening of the Resorts World Sentosa and Marina Bay Sands Integrated Resort as well as the launch of Universal Studios Singapore, all of which will benefit CDL. With short term supply of rooms remaining tight, the company could lock-in to higher rates unlike other REITs which are committed for years to their tenants.

Yongnam Holdings
Securing contracts worth $283m for the Marina Coastal Expressway (MCE) as well as $340m for the Marina Bay Sands Integrated Resorts in 2009, life has been good for structural steel contractor and specialist engineering solutions provider Yongnam Holdings.
According to a recent report, CIMB expects Yongnam to secure at least 5 major projects next year, namely MCE last stage, Singapore Sports Hub, Downtown Line, Jurong rock cavern and Oman airport terminal. Tender announcements should come in early next year. If successful, CIMB estimates that Yongnam’s order book at end FY10 could swell past $600m, breaking the $540m set as of 3Q09.

However, steel prices, which make up 30% of Yongnam’s cost of sales, have been on the mend since April as demand for the metal improved following aggressive infrastructure spending by governments. Also, foreign players who have touched base in Singapore as a result of the high profile IRs will add on to margin pressures with their depressed bids. However, Yongnam’s extensive involvement in these iconic developments should position it ahead of its competition to capitalize on growth opportunities locally and in the region.