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Top Sinkies: Breaking In Or Breaking Out?
Hot Picks, Tradeable | 23 July 2013
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By: Raymond Leung
Articles (142) Profile

Now that we have reviewed the top performers for 1H13 here, let us review the list of top losers in the Straits Times Index (STI), middle-capitalisation (mid-cap) and small-capitalisation (small-cap) stocks! We shall take a closer look at these companies and see if they are poised to break in or to break out.

Straits Times Index – City Developments, CapitaLand & Noble Group
Since the start of Quantitative Easing (QE), the STI had hit a high of more than 3,450 in May this year as if it was on steroids but has since retracted. When reviewing the components of STI, we noticed that Noble Group, CapitaLand and City Developments are on the top of the list for top losers. All three companies lost more than the index.

Notably, two of the losers of STI are City Developments (-17.63 percent) and CapitaLand (-18.09 percent); both are property developers. The fall is likely due to the peaking property prices which have caused staggering sales coupled with government measures to cool down property prices. As such, investors started to hold a bearish stance towards property developers as the outlook becomes gloomy.


Source: Factset, Chart of STI vs City Developments vs CapitaLand vs Noble Group


Source: Sharesinv.com, top three stocks in the Straits Times Index with the lowest returns over 1H13 (excluding dividends)

Singapore Developers – Building On Diversification
Last month, we featured an article here, about the outlook of Singapore developers! In the article, we mentioned on the effects on property developers by the change in QE policy and strategic positions taken up by them. Considering the adverse condition of local property market, we prefer property developers with geographical diversification (specifically China) as said in the previous article.

Companies with significant exposure in China like CapitaLand are preferred (low correlation with Singapore) as their profits will not be dragged down as much with revenue diversification. The current downside of CapitaLand (-18.09 percent) could be due to poor market sentiments towards the sector rather than anticipation of poor performance of the company.

Mid-Caps – United Engineers, Indofood Agri Resources & GMG Global
Mid-cap stocks in general have been rather choppy this year as it gained drastically in the earlier months of the year but fell all the way to negative region in recent months. Sinking drastically without regards of the index are Indofood Agri Resources, United Engineers and GMG Global. The three companies are the top losers of the mid-cap with -29.35 percent, -28.82 percent and -25.53 percent respectively.


Source: Factset, Chart of FTSE Mid-Cap Index vs United Engineers vs Indofood Agri Resources vs GMG Global


Source: SharesInv.com, top three stocks in the FTSE Mid-Cap Index with the lowest returns over 1H13 (excluding dividends)

United Engineers – WBL Takeover; Just A Bad Move?
United Engineers (UE) have been performing well over the years, bringing the company from FTSE Small-Cap to FTSE Mid-Cap. Recently, UE acquired WBL, a car dealer listed on SGX, which was meant to help UE diversify its business away from the volatility of the property market. Notably, the offer for WBL was raised from $4.15 to $4.50 per share in May, valuing WBL at $1.25 billion. Now, UE has proposed an one-for-one right issue to reduce the debt of the company (mainly from the acquisition of WBL).

This right issue will bring about dilution of holdings and lower the earnings per share. However, when putting the end of the low interest rate environment into consideration, it might be better for UE to lower its debt through this right issue. The rights issue will raise a minimum of approximately $454.1 million for the company. Topped with its cash balances of $489 million as at 31 March 2013, this larger cash holdings will enable it to improve its gearing and enhance its financial flexibility to tap into potential opportunities arising from this diversification.

Small-Caps – United Fiber System, China Fishery Group & AusGroup
Last but not least, the small-caps. Shares of small-cap companies have all along been volatile and have seen much growth this year. Comparing the 1H13 performance between STI, mid-cap and small-cap, the small-cap recorded the best performance (+5.31 percent) when the performance of STI and mid-cap stands in the negative zone with -1.6 percent and 4.09 percent respectively.

The biggest loser for the small-cap is United Fiber System with more than 50 percent loss. Joining United Fiber System are AusGroup and China Fishery Group having lost 31.43 percent and 22.75 percent respectively.


Source: Factset, Chart of FTSE Small-Cap Index vs United Fiber System vs China Fishery Group vs AusGroup


Source: SharesInv.com, top three stocks in the FTSE Small-Cap Index with the lowest returns over 1H13 (excluding dividends)

AusGroup – Tough Climb Ahead?
Demand for energy from Australia has decreased as China, its biggest customer faces a downturn in economy. AusGroup, is being dragged down as its order book is mainly from the energy sector. From the start of the year, AusGroup managed to win a series of small contracts but not any of significant size. To further worsen the situation, the drop in Australian Dollar (AUD) will narrow the profit margin from the little revenue it makes.

According to research report from OSK Research, the fundamentals of AusGroup is eroding with low visibility, structural pressures on the functional currency, and a clear risk to earnings are strong reasons against attempting to bottom-fish at this price. However, looking at another perspective, most of the negative news have been factored in which might allow a rebound should any good news gets on the street.

Fall = Value?
After the drastic fall of the stocks above, investors might be tempted to buy in. This sparked the question of whether the fall has brought about value for investors. I think that the fall might bring about value in some companies that are fundamentally strong as they are well positioned to rebound. These companies should respond strongly on signs of a turnabout in economy.

Regardless, investors should think twice before entering the market now as it will take lots of guts to enter given this uncertain environment (it is definitely not for the faint hearted). For those who have decided to enter now, brace yourself, it is going to be a bumpy ride!

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Trained in fund management, Raymond is familiar with shares and various investment vehicles.

Please click here for more information about this author.

CapitaLand  3.640 -0.04 -1.09%   
Business: Co develops, owns, and manages real estate properties. [FY18 Geographical] China (41.2%), S'pore (38.5%), Europe & others (18.6%), Vietnam & Others (1.7%).

Insight: Feb-19, FY18 revenue jumped 21.3% to $5.6b on acco... Read More
City Developments  9.230 -0.03 -0.32%   
Business: Co is an international property & hotel conglomerate. [FY18 Turnover] Property development (48.4%), hotel operations (39.8%), rental properties (8.5%), others (3.3%).

Insight: Feb-19, FY18 revenue rose 10.3% to a record $4.2b ... Read More
Indofood Agri Resources  0.280 -- --   
Business: Diversified agri-business mfg & retailing cooking oil, with oil palm, rubber & sugar plantation in Indonesia. [FY18 Turnover] Edible oil & fats (75.4%), plantations (24.6%).

Insight: Feb-19, FY18 revenue slid 10.6% mainly due to lowe... Read More
United Engineers  2.520 -0.02 -0.79%   
Business: [FY17 Turnover] Engineering & distribution (25%), property development (27.1%), property rental & services (24.3%), manufacturing (15.8%), corporate services & others (7.8%).

Insight: May-18, 1Q18 revenue fell marginally by 0.8% to $1... Read More
AusGroup  0.029 -- --   
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%).

Insight: Nov-17, 1Q18 revenue increased by 53.6% due to the... Read More
China Fishery Group  -- -- --   
Business: An integrated industrial fishing co managing fishing vessels, sells marine catch & produces fish products. [FY14 Turnover] Peruvian fishmeal (68.9%), contract supply (24.4%), china fishery fleet (6.7%).

Insight: Oct-15, Co announced that in line with its assessm... Read More


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