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Citi Research: Strong US Dollar A Boon To These 2 Firms
Aspire, Hot Picks | 07 April 2015
By: Elaine Lee
Articles (11) Profile

As the second largest trading partner accounting for 9.5 percent of Singapore’s export, the US’s gradual economic recovery will bring positivity to Singapore.

A strengthening Dollar would trigger funds outflow to the US and increase commodity purchases, consumer spending as well as corporate capital expenditure.

This will be essential for companies exposed to commodities prices or are reporting in US Dollars. Key beneficiaries for the strong US Dollar are technology companies and transport related stocks.

In light of the weaker Singapore Dollar, Citi Research is interested in US Dollar earners like Venture Corp and ST Engineering (STE). Both stocks correspond to key beneficiary sectors respectively.

Venture With More Than 6% Dividends

Of all the local tech firms, Venture Corp has cultivated good relationships for its existing and new customers. With proxies to key exposure in US, the company has some of the US biggest tech players, like IBM and HP, among its valued customers.

At the heart of big tech names, Venture’s corporate centric portfolio will benefit from an up-bound in business spending if the pace of the US economic recovery is sustained or picks up momentum in the near future.

An expected upgrade cycle for point of sale terminals in the US next year, would bolster the company’s retail store solutions. Coupled with the continued development of 3D printing, Venture is well positioned for massive potential growth.

In a cyclical business and rising interest rate environment, Venture has superior cash flow generation to support its attractive dividend yields of more than 6 percent. This high dividend yield will help the stock weather through adverse conditions, thus providing a safe haven for weary investors.

With a market capitalisation of $2.34 billion, Venture is considered one of the top tech firms in Singapore. Citi Research proposed a target price of $9.31 with P/E of 14.7 times going forward.

Oil Prices To ST Engineering’s Favour

Since oil is traded in the US dollar, the US Dollar movement is inversely related to oil prices. When the dollar moves higher, oil prices tend to fall.

Recent oil price weakness has seen cheers in the aviation industry as profitability rises undoubtedly due to cost reduction. STE has been witnessing similar rosy turnouts.

With 29 percent of the company’s assets there, about 24 percent of the group’s revenue originates from the US. The strength of the US Dollar should benefit STE greatly.

As confidence rises and air travel demand increases, prospects for the maintenance, repair and operations industry are expected to improve correspondingly.

STE’s operations remain resilient as 40 percent of the group’s revenue is exposed to defence while 20 to 25 percent are invested in government-related contracts.

Airline performance should continue to improve in 2015 as a result of cost declines (primarily due to oil). As such, STE is well positioned to benefit from any industry improvements.

As depicted in the chart above, STE’s performance have been sliding for the most part of last year. Nevertheless, Citi Research places STE on a target price of $3.87, considering the company has been on the road to earnings recovery since the start of the year.

Elaine Lee is a staff writer for Aspire. She is currently pursuing a degree in Economics and Maths with the University of London.

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