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4 Factors Before A Stock Becomes A Blue Chip
Perspective | 22 April 2014
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By: Peter Ng
Articles (81) Profile
By: Shane Goh
Articles (99) Profile

“The trend is your friend”, is a saying made popular by traders to describe the notion of determining the direction which a stock price is trading through small changes in its price action. In the recent two months, some would already have observed a trend, the trend of privatisation.

Notable ones include United Industrial Corporation’s offer for Singapore Land, Temasek Holdings’ unexpected move to acquire commodity player, Olam International, and in the limelight, was CapitaLand’s proposal to take back CapitaMalls Asia (CMA).

Before someone confuses this piece as one which seeks to identify the next set of potential privatisation candidates, let’s shift our attention and focus on something with a higher probability of occurrence.

As CMA and Olam fall within the 30 constituents which represent the Straits Time Index (STI), their eminent privatisation would mean that these two companies would be replaced by another two. Below are a list of criterias compiled in order to find the most compatible replacements for these two blue chips.

1.       Business
Given that CMA and Olam are primarily engaged in the business of property development and resource trading respectively, the next two candidates to replace them would most likely fall within the similar business segment.

2.       Market Capitalisation
Size does matter, as a list of potential companies from the STI reserve and mid cap list were sieved through, to identify companies which fulfill the criteria of being at least of a certain market capitalisation and not too far apart from the two companies. The market capitalisation of CMA and Olam prior to the privatisation announcements were $7 billion and $4.8 billion respectively.

3.       Earnings Stability
To qualify for the blue chip title is not simply a battle of size. The 30 STI constituents form a list of companies which emit a large degree of earnings stability and visibility. Such a criteria appears logical since earnings fluctuations would cause share price volatility, and ultimately contribute to volatility in the index.

4.       Trading Volume
Most importantly, these companies have to clock a certain level of trading volume per day. Trading volume which denotes a stock’s liquidity needs to be high in order to qualify for a spot in the STI constituent list. The average transaction volume per day of SingTel and DBS Group Holdings are 20 million and 10 million respectively.

Keeping in mind the criteria to look for, we set out to identify companies with similar backgrounds to fill the void soon-to-be left by CMA and Olam. Stay tuned, as we flip our cards and reveal potential candidates to replace the commodity trader and shopping mall giant.

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.

DBS Group Hldgs  24.970 +0.03 +0.12%   
Business: [FY18 Total Income] Institutional banking (43.7%), consumer banking/wealth management (42.9%), treasury markets and others (13.4%).

Insight: Apr-19, 1Q19 net profit rose 9% to a record $1.7b.... Read More
Singtel  3.170 -- --   
Business: Asia's leading communications group. [FY19 Turnover] Mobile Comm (31.1%), Data & Internet (19.2%), Infocomm Technology (17.5%), Sale of Eqmt (16.5%), Digital Biz (7.2%), Fixed Voice (5.2%), Pay-TV (2.1%), Leasing (0.8%), others (0.4%).

Insight: May-19, FY19 operating revenue remained flat at $1... Read More
Olam Int'l  1.820 -- --   
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
CapitaLand  3.550 +0.01 +0.28%   
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: Apr-19, 1Q19 revenue fell 23.8% while net profit d... Read More
United Industrial Corp  2.800 +0.01 +0.36%   
Business: Core business in property development & investment. [FY17 Turnover] Property trading (58.8%), property investment (21.8%), hotel ops (11.5%), tech (7.7%), others (0.2%).

Insight: Nov-18, 9M18 revenue slumped 51.4% to $500m mainly... Read More

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The Shares Investment editorial team welcomes constructive feedback on our coverage and content. We would also be delighted to answer any questions on the above article. Leave us a comment below, and we'll get back to you shortly!

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