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SI Tops STI Heading Into Second Half
Perspective | 06 July 2012
By: Jade Lee
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By: Louis Kent Lee
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By: Simeon Ang
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The half-time whistle has gone! As both sides head to the locker rooms for their individual pep talks, the score-line reads 2-0! What a match-up it has been so far for both sides! The Straits Times Index (STI) had come very close to leveling the match at one point but the portfolio from Shares Investment defended astutely as it held off the challenge and ended the first half with an even greater lead just before the referee blew the whistle.

Alright, enough with the soccer-esque (ole! to Spain’s Euro 2012 victory!) commentary. Both the STI and the SI portfolio have come quite some ways, has it not? Various developments around the world have hit both the index and our portfolio quite hard, negating some of the gains chalked up in the first quarter. Just to name a few key themes: the Eurozone debt crisis, the US recovery hitting a snag, China’s growth story appearing to dim, and the opening up of Myanmar.

As we head into a portfolio review for the first half of 2012, let us put up some numbers so that we can view the performance from a perspective. As at 29 June 2012, the SI portfolio has beaten the STI by a margin of 7.53 percentage points (including dividends), extending from our first quarter margin of 4.12 percentage points.

Once again, we have ranked the counters in our portfolio using the following criteria: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 the big picture painted in your mind, we shall now dive head first into the first-half review of the SI Portfolio 2012!



Recent Developments…
Backed by Temasek Holdings with its 21.3 percent stake as at 2 March 2012, Keppel Corporation has never disappointed investors with its consistent earnings growth, higher order flows and limited cancellation risks with respect to potential Petrobas orders (Letter of Intents of US$4.1 billion) as well as Floatel International orders (US$315 million).

Excitingly, strong order momentum continues to build with recent contract wins including a third harsh environment jackup order from Maersk for about US$560 million, and contract for construction and repair works in the US and Azerbaijan for US$70 million. These would add on to its last reported orderbook figure of $8.4 billion as at 1Q12.

Analysts’ Views…
Notwithstanding falling oil demand amid continuing Eurozone crisis and the slowing Chinese economy, oil prices are expected to rebound in 2012 with OCBC Investment forecasting Brent crude oil to reach US$100 to US$110. Analysts think the historically-high oil prices would spell good news for the rig building industry in 2012.

Source: FactSet – Keppel’s Target Prices and EPS Estimates

Source: FactSet – Keppel’s Target Prices and EPS Estimates

In Our Honest Opinion…
We remain upbeat on the rig building industry over the long term as drivers such as more exploration and production activities continue to underpin the sector. Evidently, demand for offshore units remains hot this year with Keppel’s oil rigs deliveries extending until 2015. We would also like to point out that Keppel, being the world’s largest rig builder, stands to be a beneficiary of the bullish oil and gas sector.




Recent Developments…
In a move to boost its return on equity and share price, Oversea-Chinese Banking Corporation (OCBC) announced its plan to execute its share buyback program from the market in a controlled and orderly manner. Remarkably, this is OCBC’s fourth $500 million share buyback program, with the bank spending a total of $2 billion as part of its capital management scheme.

Analysts’ Views…
Analysts were not overly excited by OCBC’s 1Q12 earnings and some have deemed it “unsustainable” as closer inspection revealed it was mostly driven by one-off investment gains and market-driven trading income. Wealth management revenue on the other hand has rebounded and Phillip Securities continues to expect it to be the main driver of fees and commission.

Source: FactSet – OCBC’s Target Prices and EPS Estimates

Source: FactSet – OCBC’s Target Prices and EPS Estimates

In Our Honest Opinion…
Ranked the world’s strongest bank for the second straight year by Bloomberg Markets, OCBC’s robust credit and risk management is clearly attested. Furthermore, the full integration of its acquisition of Bank Of Singapore has seen OCBC’s wealth management revenue segment grown from 27 percent in 1Q11 to 30 percent of overall revenue in 1Q12. We feel that further growth in this segment can help consolidate its position as a leading wealth management player in the Asia Pacific region.


Recent Developments…
Olam International has boosted its business operations: sugar (US$240 million investment in Brazil); dairy products and beverages (US$66.5 million acquisition of Nigeria’s Kayass Enterprises); grains (Canadian joint venture with US’ Lansing); cocoa (joint venture with Blommer in US). Separately, Olam commenced a share buyback programme after its share price fell to a three-year low of $1.53 on 4 June 2012. Prices rebounded shortly after the initiation of the programme only to negate some gains upon the announcement of the resignation of its long time chief financial officer, Krishnan Ravi Kumar.

Analysts’ Views…
Post 9M12 results release, analysts at Maybank Kim Eng downgraded the stock to ‘Sell’ while several analysts lowered the fair value of the stock. Analysts have switched their general mood with regards to commodities to a less bullish or more bearish view amidst slower growth in the global economy. A few research houses pointed out that Olam’s cotton business and by extension, its non-food business operations, could continue to produce lacklustre figures for the rest of the year.

Source: FactSet – Olam’s Target Prices and EPS Estimates

Source: FactSet – Olam’s Target Prices and EPS Estimates

In Our Honest Opinion…
Although this time round, commodities appear to represent itself as a bane to Olam, the firm’s food business has been steadily inching upwards on its growth trend. We continue to opine that Olam represents a well-diversified commodity/food counter in our portfolio. Despite it being an overall drag on our portfolio’s performance in the first half, we are steadfast in our opinion and view that any macroeconomic turnaround could offer catalysts to the share price.



  • Most dominant player in scheduled bus operations in Singapore and maintains leading market share over competition with more than 50 percent of the entire taxi fleet in Singapore
  • Sold entire stake in Shenyang subsidiary for approximately $50 million
  • Analysts project ComfortDelGro’s revenue to continue its upward trajectory, although at a slower pace, on the back of rising ridership levels and more cashless transaction in its taxi business. Higher expansion and operating costs related to the upcoming Downtown line is of concern

  • Positive developments such as improving traction with the Mexican national oil company Pemex, and its growing presence in the Gulf of Mexico, a key offshore oil and gas region
  • Riding on the booming offshore oil and gas logistics sector in Australia
    Analysts expect fleet expansion to be the key driver for earnings growth as all assets have secured long-term charters.
  • Strong earnings compound annual growth rate of 105 percent over the period of FY07 to FY11 underscored by clear visibility from secured deals

  • Leased a total of 224,600 square metres of space in 1Q13 alone. To commence development of a large-scale facility in Tokyo, Japan in November
  • Mostly ‘Buy’ calls from analysts with steady average target price. Analysts like GLP for its growing Chinese exposure as well as stable occupancy rates in Japan
  • We note that indications of leasing demand in China will remain robust. The potential divestment of GLP’s Japanese portfolio could also be catalysts for further share price appreciation

  • Recently issued $250 million worth of notes as part of its $750 million guaranteed Euro medium term notes programme
  • Analysts feel that the issuance of the notes will provide further financial flexibility. Most are bullish on the counter mainly due to Indonesian retail exposure
  • While we feel LMIRT’s exposure to the Indonesian retail market is a plus, we also note sound financial fundamentals with gearing at around 9.2 percent and a resilient portfolio

  • Decision by the Infocomm Development Authority and Media Development Authority to drop their search for a standardised entertainment box has hurt M1
  • Fibre take-up rate remains slow at 7000 per quarter
  • Analysts believe that take-up rate for Next Generation National Broadband Network is likely to accelerate in Singapore, and M1 looks set to benefit positively given its ability to leverage on its existing costs and relationships
  • Attractive yield of 5.7 percent as at 29 June 2012 still looks good and earnings outlook remains stable

  • Company has entered into an investment agreement with CS Land Properties and China Sonangol Land, marking its first venture into property development. The venture into property development looks set to help diversify OKP’s core business and is expected to broaden its revenue base
  • Subsequent contract wins from PUB from May to present totals $17.8 million, which will contribute positively to earnings position and eventual earnings per share
  • Roughly half of its market capitalisation is backed by net cash of $85 million
  • Analysts feel recognition from its order book is slow and worry about lower margins being realised

  • Q & M named a new chief executive officer for its China subsidiary amid hopes that its China operations will take off
  • Analysts view Q & M’s expansion plans with keen interests but point out lower margins that has been realised of late due to fees and expenses from its China venture
  • Being the healthcare mainstay of our portfolio, we value Q & M for its resilience in economic adversity as well as further growth in China

  • Extending coverage to emerging markets and developing countries such as Saudi Arabia and Southeast Asia regions
  • Analysts expect direct benefits from rural wastewater treatment development in China as a total of Rmb50 billion has been allocated to the aforesaid sector
  • Recent credit loosening is expected to speed up the award of infrastructure projects in China
  • Rmb2.5 billion order backlog continues to support earnings visibility

  • Joint ventures with Petra Foods and San Miguel to increase market penetration in Indonesia’s and Philippine’s instant coffee markets respectively
  • Analysts expect easing of coffee and sugar prices to improve margins
  • Positioned strategically with its current market share of more than 30 percent to benefit from the newly reformed Myanmar

As global markets continue to deal with more shocks ranging from disagreements to the extent of the bailout needed in the Euro region, coupled with US’ stubbornly high unemployment rate, China’s slowdown and the overall outlook of the global economy, no one can firmly say when the worst will be over.

Some might say the above factors have long been factored into the movements seen in global markets, but have it really? We move into the second half of 2012 hoping for a roaring return of the dragon, whilst awaiting for the next wave of results reporting by companies in a few weeks. Will there be surprises or disappointments? And how will the SI portfolio then fare? Buckle up your seat belt and let us find out together.

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.

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