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Deutsche’s Top Picks Outperform By 7%, Here Are Those Picks
Aspire, Hot Picks | 10 March 2015
By: Lim Si Jie
Articles (169) Profile

“Unexciting” and “slightly disappointing” were the choice words that Deutsche Bank (DB) had for the 4Q14 earnings season that recently ended. The reason? 2014 earnings growth for DB-covered Singapore listed stocks fell below DB’s forecast. Of the 32 DB-covered companies that have released results so far, DB noted that “17 have been in line, with 11 below forecasts.”

Key Money-Making Themes FY15

Despite that, DB believes that these four areas will be the key money-making themes for 2015:

1) Buy residential property stocks on physical market bottoming and a subsequent rise in transaction volume

2) Buy the land transport sector on policy reforms that should lift bus margins and spur the sale of bus assets

3) Rising interest rates (SIBOR) having a positive effect on banks and

4) Avoiding the offshore and marine sector on lower oil prices.

Top Five SG Picks

DB deems that the current “top-down valuations for Singapore remain unexciting” but managed to pick out five stocks that aligned with its money making themes. Perhaps it is important to note that DB’s top five Buy picks portfolio has outperformed the index over the last few months with outperformance dating back to October 2014.

1. City Developments: Discount Stock To Capture Residential Market

(Buy, TP of $12.30)

City Developments (CDL) offers the most diversified exposure to the Singapore residential market, with products across all market segments. While DB expects “a 10 percent price decline for the Singapore residential market in 2015”, the increasing willingness on price negotiation by sellers could help establish a market clearing price and potentially trigger recovery in transaction volume.

With a 35 percent discount on RNAV (real net asset value), DB remains “positive on the Singapore residential market”. The likely pick-up in transaction volume gives credence to the RNAV calculations.

Key Downside Risks

A few key downside risks remain for CDL:

(i) Sharper-than-expected slowdown in growth or a return to recession affecting housing and leasing demand,

(ii) Government policy risk

(iii) Succession and strategy risk are potential risks that might have negative impact on CDL.

2. ComfortDelGro Corp: Fundamentally Strong Stock With Possibility Of Special Dividends

(Buy, TP of $3.76)

ComfortDelgro is a key beneficiary of the Government Contracting Model (GCM) for buses as the market leader with 70 percent market share. DB forecasted that the GCM would “lift operating profit margins to nine percent starting in late 2016.” The sale of bus assets to the government from under the GCM should also earn CDG about net $850 million (35 cents per share).

DB speculates that the company would likely use the cash from the sale to “fund overseas acquisitions and/or pay a special dividend.”  Point to note, CDG increased its dividend payout ratio to 62.2 percent in FY14, from 56.5 percent in FY13.

Key Downside Risks

A few key downside risks remain for CDG:

  1. No change in business model for the Singapore operations

  2. Lower-than-assumed margins for the regulated businesses

  3. Radical change in competitive landscape

  4. Higher-than-expected fuel costs (especially since Comfort’s net profit is relatively sensitive to changes in oil prices)

  5. FX negatively affecting revenue translations from overseas businesses

  6. Other regulatory risks affecting both the domestic and overseas operations

CDL and CDG are two of DB’s top five picks. Stay tuned as we round up the remaining three stock picks from DB!

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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