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March Pitstop: SI Portfolio One Up Against STI
Perspective | 13 April 2012
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By: Choo Hao Xiang
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By: Simeon Ang
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On the 30th day of December 2011, we made a wager. A wager that would have us lock horns in an epic clash with the Straits Times Index (STI). In a first by our team at Shares Investment, we pit our skills and knowledge of locally listed counters against the broad market, championed by the STI.

And so it has come to this, our very first pitstop in a dramatic one-two race with the champion, the STI. The probability numbers might have suggested that the index would have taken us down. But lo and behold, our SI portfolio has emerged the victors of the first lap (first quarter)!

While it would be premature to pop the champagne, it is prudent for us to review how our choice counters have fared thus far in the race to produce a winner. Hence, we have come up with a rating system for all 12 counters in our portfolio. This system will take into consideration three main criteria in our analysis:

  1. Share price appreciation together with dividends, whereby we compare individual performance of counters against the STI;
  2. Last financial quarter’s performance, where we will compare, the financial report cards of individual counter’s against their historical data;
  3. The individual counters’ prospects for what remains of 2012

With that thought firmly embedded in your mind, let us now delve into the select twelve diamonds in our quest to beat the STI!

Commodity Prices – Make or Break For Olam

Local commodity player, Olam International, has had quite a ride since the fourth quarter of 2011. The firm had been grappling with signs of margin pressures as volatility struck the commodity markets throughout 2011.

In a bid to add more spur to its growth, Olam has undertaken to increase its presence in the food and food-related segments of its business. In January 2012, the company announced a US$75 million partnership with Russian dairy and grains farmer, Rusmolco. A few weeks later, on 9 February 2012, it acquired a leading Nigerian biscuits and candy maker for US$167 million.

Not forgetting its industrial raw materials segment, Olam had on 19 March 2012 announced that it would jointly develop a 28,000 hectare rubber plantation with the government of Gabon.

Notwithstanding these developments, Olam has obviously come under pressure to perform after recent soft 2Q12 results. Despite the gloom that appears to be shading Olam’s prospects, Olam had during the first quarter reiterated its US$1 billion earnings target in 2012 together with efforts to hedge potential pitfalls due to volatile commodity trading. While some analysts (DBS Vickers, TP: $2.40) have downgraded Olam to Hold, there are others (JP Morgan, TP: $3.40) who remain bullish about Olam’s prospects. On our end, we still feel that Olam represents a stable investment. In testament of this opinion, Olam sits comfortably in the “Stable” section of our portfolio, and we expect it to form the backbone of our portfolio.

GLP – A Tale Of Two Giants

Whoever said that size did not matter must have read too much into David and Goliath. In the world’s second largest economy, China, Global Logistics Properties (GLP) has a large footprint, establishing over 10.4 million square metres (as at 31 December 2011) of gross floor area. In 1Q12 alone, GLP has leased over 213,400 square metres of new and expansion space to clients.

Although China will continue to boast a fast-growing market that is supported by domestic consumption growth, it is in Japan where GLP has announced various initiatives that could provide impetus for its performance in 2012 and beyond. During the first quarter of 2012, the group had embarked on two separate developments to construct large scale multi tenant logistics facilities. These will add approximately 200,000 square metres of gross floor area to GLP’s Japanese portfolio.

With its sound performance being in line with most analysts’ expectations, there is little wonder that GLP has been showered with more than 10 “Buy” ratings from analysts with an average target price of around $2.38. A key factor that most analysts are looking forward to is the planned listing of a REIT that will group GLP’s Japanese assets. This proposed listing in Japan could further unlock value for investors and be a prime catalyst in the counter’s performance for 2012. It thus made good horse sense to have placed GLP under our “Growth” section and we continue to opine that it will help push the portfolio in its bid to outperform the STI.

Our Views Change On OKP

OKP Holdings, the sole listed road specialist on the SGX, turned in a relatively robust financial report card for 4Q11. The firm’s earnings beat several analysts’ estimates as well as the overall market consensus. Observers pointed out that this somewhat stellar result was attributable to gross margins that skyrocketed to around 65 percent in 4Q11.

Although, the feat will be difficult to reproduce in FY12, analysts still feel that OKP will be able to record strong earnings. This is mainly due to its healthy order book as well as potential projects that the government of Singapore will be undertaking. On top of new road projects that are likely to be awarded in 2012, analysts point out to the massive $750 million budget that has been allocated for drainage projects.

If life was indeed a bed of roses, then the thorns on OKP’s bed could be the disappointing dividends that were declared at the end of FY11. A previous special dividend declared in FY10 was non-existent as total dividends for FY11 were slashed by 40 percent to $0.03 per share. However, analysts felt that this cut in dividends likely signals that management intends to deploy additional cash reserves into various opportunities that could ultimately yield good returns.

We note that with the abandonment of the special dividend, OKP’s dividend yield has dropped to below 5 percent. In this regard, we feel that it no longer qualifies as a “High Yielding” counter in our portfolio. However, the growth prospects of OKP have been highlighted by analysts who have continually kept “Buy” ratings on the counter. As such, we will shift OKP Holdings from its current “High Yielding” status within our portfolio to the “Growth” section.

Oil And Gas: Back In Action

There is no question which sector bounced right back onto the radar of investors during the past quarter. At the forefront of the FTSE ST Industry Indices’ performances was the Oil & Gas Index. Having gained 24.8 percent in the first quarter, the index outpaced its nearest fellow index – Utilities Index – by an admirable 4.6 percentage points margin. Corporates were also seen jumping on the about turn in market sentiments when 2012 began as they raised funds through debt and equity issuances.

While the snapping up of oil and gas plays has largely been linked to increasing oil prices, other factors that drive the sector are pointing to a buoyant outlook as well. For one, the built-up in momentum stemming from growing confidence in the energy market is translating to enlarged exploration and production budgets set by oil companies this year. According to a report by DnB Nor, oil companies have increased their 2012 budgets by a combined nine percentage points since its 2011 report. Furthermore, the market is starting to see upticks in both day rates for premium rigs and charter rates as utilisation levels creep up.

Ezion Holdings

Therefore, it was not surprising when Ezion Holdings came in as the biggest mover in our portfolio. Not disappointing the “Growth” status assigned to it, the share surged 50.4 percent in the three-month period. The counter looks to challenge its all-time high of $1.155 achieved in July 2007. Investors were obviously not put off by a decline in its 4Q11 results. Compared to 2011, Ezion began 2012 on a much different footing. Year-to-date, the company has bagged contracts worth around US$437.5 million (Corresponding period in 2011: nil). One of the deals even marked the company’s entry into the Chinese offshore wind farm market which is gaining traction. Apart from clinched deals, Ezion’s two marine supply base developments in Australia will place the company in a good position to bid for upcoming marine tenders to support major LNG developments. (Consensus: “Buy” Rating with TP $1.25)

Keppel Corporation

Keppel Corporation has been similarly impressive as its shares performance eclipsed the gain in STI by 4.4 percentage points. Onto project wins secured this year, contracts awarded were from Keppel’s existing pool of clients which signifies good working relationships the company has built and its strong track record in scheduled delivery. However, there is concern that yard capacity may be a constraint as Keppel’s Singapore yard has to contend with the delivery of 20 rigs in 2013. Nonetheless, Keppel is working on ways to circumvent the issue by outsourcing certain duties and reaping economies of scale from repeat jobs. Like Ezion, Keppel sees huge potential for the offshore wind foundation business as it fortified its suite of solutions for offshore wind farm installations through a 49.9 percent stake investment in OWEC Tower, an industry leading designer of jacket foundation. (Consensus: “Buy” Rating with TP $12.32)

Notwithstanding the stronger 38.2 percent jump in Sembcorp Marine’s shares, Keppel’s diversified exposure which in turn anchors itself in our “Stable” zone remains our key consideration.

The following shows the remaining holdings in our portfolio. In view of their relatively lighter news flow, we decided to condense their respective corporate developments into snippets so as to keep track of their updates.

  • Focused on brand-building to improve brand equity and pricing power
  • New production capability that will enhance its Ingredient segment expected to come online as early as 2H12
  • Easing raw material prices acts to ease margin pressures.
  • Committed to a 50 percent dividend payout policy

  • For FY11, taxi segment turnover surpassed the $1 billion mark for the first time.
  • Typically hedges up to 40 percent of its fuel costs.
  • DMG forecasts losses for Downtown Line during its initial phase with costs starting to roll in this year. Still, the rail expansion will give CDG a 36 percent share of total rail network length.

  • Stable mobile market share of around 26 percent.
  • Seeks to re-bundle data packages to match what consumers want.
  • Margins worry to wane for now as new iPad unlikely to cause much of an impact relative to the iPhone.

  • Expects 70 percent of its current backlog Rmb2.7 billion to be recognized in FY12.
  • First mover advantage in rural wastewater treatment development in China which will be backed by city governments.
  • Targeting emerging markets as part of its plan to widen its international business.

  • Sustained growth of 10 percent in its SME clientele.
  • Sees continued long-term profitability from Insurance business.
  • Retained the lowest non-performing loan ratio status among the three local banks coming in at 0.9 percent as at end-December 2011.
  • Steadily improved dividends with trends showing payouts are consistent.

  • Penetrating Malaysia’s dental market with the acquisition of a dental practice in KL.
  • Beneficiary of government subsidies for middle income families.
  • Well positioned for growth in China with healthy net cash position of $12.5 million as at 31 December 2011.

  • Post-rights, average DPU yield for FY11 was 7.5 percent, compared with average S-REIT yield of 6.7 percent.
  • Portfolio occupancy rate of 94.1 percent as at 31 December 2011, above Indonesia’s retail industry average of 87.6 percent.
  • Low gearing of 8.7 percent, with ability to raise its cash kitty to around $350 million through debt alone. This provides financial capacity for it to realise its growth plans.

This is a co-written article of Shares Investment, which lays out the analytical ideas and thoughts of the authors, who are well versed in investments and market concepts.

Olam Int'l  1.840 +0.010 +0.55%   
Business: Co is engaged in sourcing, processing, packaging and merchandising agricultural products. [FY18 Turnover] Food staples & packaged foods (47.6%), confectionery & beverage ingredients (23.4%), industrial raw materials, infrastructure & logistics (14.9%), edible nuts & spices (14.1%).

Insight: May-19, 1Q19 revenue rose 16.7% due to increased t... Read More
OKP Hldgs  0.205 -- --   
Business: An infrastructure and civil engineering company. [FY18 Turnover] Construction (50.9%), maintenance (44.6%), rental income (4.5%).

Insight: May-19, 1Q19 revenue slid 16.8% due to decreased r... Read More
Ezion Hldgs  -- -- --   
Business: Co develops, owns, and charters offshore assets to support the offshore energy markets. [FY17 Turnover] Liftboats (49.7%), Jack-up Rigs (39.5%), Offshore Support Logistic Services (10.8%).

Insight: Aug-18, 1H18, Co returned to the black with a net ... Read More
Keppel Corp  5.970 -- --   
Business: [FY18 Turnover] Infrastructure (44.1%), offshore & marine (O&M) (31.4%), property (22.5%), investments (2%).

Insight: Apr-19, 1Q19 revenue rose 4.1% underpinned by high... Read More
ComfortDelGro Corp  2.420 -- --   
Business: [FY18 Turnover] Public transport services (71.2%), taxi (19.1%), others (9.7%).

Insight: May-19, 1Q19 revenue rose 7.8% to $947.3m, underpi... Read More
Oversea-Chinese Banking Corp  10.780 +0.04 +0.37%   
Business: [FY18 Turnover] Global corporate/investment banking (35%), global consumer/private banking (34.8%), OCBC Wing Hang (11.5%), insurance (11%), global treasury & mkts (7.7%).

Insight: May-19, 1Q19 total income rose 14.7% driven by str... Read More
Lippo Malls Indonesia Retail Trust  0.235 -- --   
Business: REIT that is engaged in invs in retail ppties in Indonesia.

Insight: Apr-19, 1Q19 gross rental income slid 7.1% due to ... Read More

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