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2013 Market Outlook And Stock Picks: SI’s Favourites
Perspective | 18 January 2013
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By: Choo Hao Xiang
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By: Ong Qiuying
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The Bull is here! Or so said the experts. Surely no one would want to miss this ride. As the hunt for superior returns in the year of the Snake continues, we bring to you another three counters that are handpicked by the Shares Investment team in this second instalment.

Believe it or not, equities’ performance came out on top among the various asset classes over the course of 2012. After struggling for the first six months of 2012, the equities market emerged decisively as an outperformer as things started to look up when governments around the world took unprecedented steps to ensure the global economy does not slide into a slump again. In view of that, is it too late to switch from risk-off mode to risk-on? Apparently not.

Performances of Asset Classes

Source: FactSet Research Systems Inc.

According to market analysts, the rally is not about to be derailed. Specifically referring to the Singapore market, though economically Singapore is likely to pale in comparison with regional peers, potential market drivers include an inflection point in earnings momentum and undemanding valuations.

2013 STI Targets

Source: Various research reports

In that light, we favour firms whose earnings are largely derived outside of Singapore. We like exposure to Asia, China in particular as the country fires up its fixed asset investment and continues the drive to fortify domestic consumption. We are also eyeing the offshore and marine sector, having seen a year of robust upstream activities for the oil and gas industry in 2012. Let us now go into the details.

 

Betting On China Rebound Plays

China plays have regained the spotlight as fears of a China hardlanding ebbs away. Economists are forecasting China to snap its seven consecutive quarters of weak expansion, with a 7.8 percent rise in its gross domestic product for the fourth quarter of 2012. World Bank also forecasts China to achieve 8.4 percent expansion in 2013 with the likely introduction of accommodative policies following the change of leadership at the top of the Communist Party. With China’s weak growth bottoming out from its slowest full-year expansion and economic data is expected to rebound going forward, we think S-Chips would be a good bet this year.

Perennial China Retail Trust
We like Perennial China Retail Trust (PCRT) for its pure-play China retail development business, which will be able to ride on the rapid urbanisation in China. Also presenting much potential to the growth of the retail sector in China is a rising consumption pattern driven by a rising middle class in the country with higher discretionary income and spending ability that will likely be a boom for PCRT’s portfolio of properties.

Via strategic partnerships with Shanghai Summit and Nenking Group, PCRT has a strong pipeline of commercial developments with improved transport links. Two of these properties are directly connected to high-speed railway stations in Chengdu and Xi’an. PCRT also has a right of first refusal to invest in a similar high-speed railway commercial development site in Changsha. Collectively, these developments worth at least $3 billion. PCRT also has priority to acquire retail projects in the Guangdong Province and is in the midst of developing another mall adjacent to the operational Chengdu East High Speed Railway Station.

While there have been concerns over its current zero revenue and lower distribution pay out of at least 90 percent in FY11 and FY12 to at least 50 percent in FY13, FY13 is likely to be an earnings inflexion point. Assets are completing construction by end-2012 through to 2014 and revenue streams are expected to come in progressively then. Contributions from most of its developments such as Perennial Qingyang Mall and Shenyang Longemont Shopping Mall are already more than 50-percent pre-leased. In the coming year during which its operations will ramp-up, clearer visibility on earnings and distributions will be provided.

Furthermore, PCRT will benefit from significant revaluation gains upon completion of the assets, which had been acquired at low prices. Currently trading below its net asset value (NAV), DBS Vickers also highlighted that PCRT has the potential for NAV realisation upon the completion of its development assets and is likely to close the gap.

Helmed by real estate veteran, Pua Seck Guan, previously the chief executive officer of CapitaMalls Asia and had handled the acquisition, development and management of 70 malls across China, we believe PCRT is in good hands to realise its targets in this coming year.

Oil And Gas Still The Way To Go
The oil and gas industry, especially players in the offshore and marine sector, remains as one of our likings. With the resumption of capital expenditure (capex) and the intensified upstream operations over recent years, offshore support players are waiting in line for the benefits to flow down. Within that context, we shift our focus to laggards with stronger earnings visibility. That is where Swiber Holdings pops out on our screen.

Swiber Holdings
The most glaring item is Swiber’s high earnings visibility. Swiber’s orderbook has snowballed to quite a sum since crossing the US$1 billion level in FY11. Accelerated contract wins totaling about US$1.7 billion last year versus FY11’s US$733 million helped keep its orderbook above the threshold. As of November 2012, its orderbook stood at US$1.4 billion, with bulk of the projects expected to be booked in the next two years.

Certainly, that alone would not suffice. According to a report by Maybank Kim Eng, global offshore spending is expected to grow considerably to US$1.6 trillion from an estimated US$1.2 trillion in 2012. The research house also singled out Asia-Pacific and Middle East as key beneficiaries of these increases in both capex and operational expenditure. Swiber, which has a stronghold in both regions, is well-placed to capitalise on this trend. Its own enlarged fleet size will give Swiber another boost, allowing more deployment flexibility which may translate into better margins for the company.

Still, Swiber’s balance sheet expansion to accommodate its vessel additions is a point of concern. Its gearing ratio went from 0.26 times in the financial year ended December 2006 to 1 time in the first nine months of 2012. This issue is likely to plague Swiber in the near-term. In the longer term, with its fleet expansion program nearing its end, the level of debt is expected to be pared down.

In terms of share price performance, Swiber has been subpar, climbing near 11 percent in 2012 when most of its peers registered more than 20 percent jumps. Currently trading at a discount to its book value and taking into account its prospects, Swiber offers an interesting value proposition.

Likely Beneficiaries Of Booming Sectors
The rise of the Asian economies has been strong for most of 2012 and we think this will continue. Hence, appearing on our radar also are companies that not only provide support services to the booming sectors, but also a beneficiary of the growth spurt in Asia and spill-over effects from China’s economic recovery.

AusGroup
AusGroup is our third pick as we think that the demand for fabrication and structural steel works for oil and gas firms and mining industries will rise in 2013. This is due to the growing demand for crude oil and raw materials – driven by the growth of the expanding economies – that spurs more activities in these industries. This trend bodes well for AusGroup as its oil and gas and mining works forms 55 percent and 45 percent of its total sales in FY12 respectively.

Notably, the company’s orderbook has picked up since 1H11. It ended FY12 with a backlog of orders worth A$324 million. As at 9 January, it has A$284 million of outstanding work after clinching A$17 million in project awards. Although the orderbook seems low, DMG & Partners expects more contracts to start flowing in as was the case in the previous year where AusGroup logged only A$264 million in orders at end-FY11 but went on to deliver A$632 million of revenue in FY12. Furthermore, it is common practice in Australia to enter a small amount of work and subsequently be awarded larger contracts when the quality of work is deemed good.

AusGroup’s repeat customers, who include major mining and energy players such as Apache Energy, Chevron-Gorgon, BHP Billiton, Rio Tinto and Woodside, contributed around 70 percent to its revenue over the last three years. It continues to edge over other competitors as its comprehensive suite of maintenance services offers a convenient one-stop solution and its varied capabilities allow it to handle large and complex projects.

What’s also commendable is the company’s turnaround after placing its focus on a bottom line emphasis with better cost and project management. This has resulted in steadily improving margins over the last eight quarters. We think that earnings visibility of the company will be further enhanced with its plans to expand within Australia by capitalising on the LNG boom and a sole listing of its subsidiary on the Australian Stock Exchange. DMG & Partners noted that AusGroup’s price-to-earnings ratio has been lagging behind Singapore-listed comparable CIVMEC and is likely to catch up on its valuations gap.

With these stock picks from the experts and the Shares Investment team, we wish you a bountiful year ahead. Be sure to catch our quarterly review, the first one coming up in early April!

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.

AusGroup  -- -- --   
Business: Co mainly provides subcontract services to the oilfield equipment manufacturing co in South East Asia. [FY16 Turnover] Projects (62.2%), maintenance Services (28.5%), fabrication & manufacturing (5.5%), port & marine Services (3.8%).

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