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Phillip: 2 Stock Picks To Weather Turmoil
Aspire, Hot Picks | 27 March 2015
By: Lim Si Jie
Articles (169) Profile

Global equities had been performing well and achieved above average returns over the past two years. In particular, the developed markets has been achieving higher returns compared to emerging markets. Phillip believes that developed markets will continue to “hold an important role” in retail investors portfolio, especially the US market.

Source: Phillip Securities

Simple Investment Themes

Retail investors have been receiving good returns from simple investment themes since 2013. Phillip’s recommendation to retail investors is to continue with this because a trend of positive returns is likely to continue, regardless the strength of the markets.

Phillip is paying close attention to the Singapore market and states that the situation here remains “relatively mixed given its economic outlook.” Phillip emphasised that their strategy for now involves picking fundamentally strong stocks, i.e. Buffett-like stocks. These stocks possess the following criteria:

  1. Under-appreciated industry

  2. Good growth outlook

  3. Superior RoE (Return on Equity)

  4. Healthy free cash flow

  5. Competitive moats

#Stock Pick 1: Sheng Siong – Strong Fundamentals

Growth Outlook

Sheng Shiong continues to have the biggest market share (15 percent) in its highly competitive industry. Revenue is most likely to grow at a CAGR (Compound Annual Growth Rate) of 3.7 percent in FY15 and FY16. Phillip estimates that Sheng Shiong’s store space would have increased by 13.4 percent in 2017.

Economic Moat

Sheng Shiong enjoyed superior EBIT margins and above average margins as compared to its local and regional peers in the past three years. Forecasts have shown that its Gross Margin in FY16 will most likely hit 25 percent if it continues its steady growth. Evidently, Sheng Shiong’s strong margins are indicative of an economic moat.

Key Risks

Despite being fundamentally strong, Sheng Siong still faces keen competition from NTUC Fairprice and Dairy Farm International (Cold Storage and Giant). This could erode its market share that Sheng Siong had been challenging for. Furthermore, increasing labour prices due to Singapore’s labour market tightening could affect margins.

Recommendation

Phillip recommends a BUY rating for Sheng Siong with a target price of $0.88. What’s Sheng Siong’s share price now?

#Stock Pick 2: 800 Super – Underappreciated Business With A Stable Business Model

Under-Appreciated Industry

800 Super engages in providing environmental solutions to the public and private sectors in Singapore, i.e. Waste Management and Recycling, Cleaning and conservancy, and Horticulture services. 800 Super is one of the only few companies that are providing such services to the public.  As Singapore’s need for waste management and rubbish woes continue to persist, the demand and need for 800 Super’s services will continue to grow.

Growth Outlook

800 Super’s total revenue has been growing steadily since FY 2010, from $69.58 million to $114.96 million, which represents a CAGR of 10.56 percent. Furthermore, 800 Super has been maintaining its gross margin at above 21 percent.

Peer Comparison

800 Super continues to maintain its superior RoE of at least 20 percent in its last five financial years. This figure remains far superior to its competitors in the industry. In terms of valuation, both of its P/E and P/BV ratios are lower than its peers as well. On top of that, 800 Super boasts a dividend yield of 2.27 percent.

Recommendation

Phillip recommends a BUY rating for 800 Super with a target price of $0.635. What’s 800 Super’s share price now?

Diversification Matters

Although the current global equity landscape is performing well, it is still subject to hits by sudden unexpected events. Examples include the Swiss National Bank suddenly announcing a revised interest rate or the US Federal Reserve increasing the interest rates prematurely.

These could be potential events that send negative messages to the market, possibly causing a turmoil. Therefore, Phillip advocates a longer investment time frame across a well-diversified portfolio to withstand huge unexpected financial events.

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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