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Singapore Market Strategy To Take On 2016’s Market
Perspective | 04 December 2015
Related stocks:
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By: Louis Kent Lee
Articles (199) Profile

It is no surprise to see many throwing their hands mostly due to desperation.

Singapore stocks have experienced a series of disappointing earnings stemmed from weak global and trade growth on top of the rout in commodities which lowered commodities’ prices.

On the get go, the largest disappointments were seen among stocks in the industrials, consumer, and commodity trading sectors.

At current, the market is seemingly suggesting negative expectations for the Singapore market, in terms of the ability to earn returns above its cost of equity.

It is notable that most stocks in the banking, property and capital goods sectors are currently trading below historical averages.

However, pressure from the Fed rate hike and weak property asset prices are still headwinds to contend with.

Oil and gas stocks continue to bear the brunt of damage and we opine a continued drag on earnings as a result of depressed oil prices and the situation of an oversupply of drilling rigs.

STI, Weakest Performance Among Peers

Looking at chart 1 below, it is evident that the Straits Times Index (STI) is the weakest performer in terms of market returns when decked against its peers.

Chart 1: YTD Performances (as of 27/11/15)

Albeit the weak performance and impending headwinds, we think value still persists, and perhaps attention can be paid to themes, sectors, and types of plays that we will be sharing.

Property Sector Priced Attractively

The property sector is currently trading at near crisis levels of 2008 and 2009, with prices trading at significant discounts to their respective RNAVs.

In the view of a cycle trough and an expectation that authorities should review and relax some of the restrictions on buying and selling properties in 2H16, demand and volume should pick up accordingly to benefit the property market then.

In the short term, further downside to property prices in 2016 will be largely expected as we see a competitive environment where developers deploy fierce pricing strategies to move units.

That said, it is difficult to not notice the 30-40 percent discount property stocks are trading to their 2016E RNAVs.

On the other hand, recent news flow from china showed new home prices growing for a fifth consecutive month in September 2015. Tier-one cities recorded annual price growth of 13.9 percent.

Thus, CapitaLand, which has a strong competitive advantage in integrated and mixed-used projects in tier-one cities, and also has residential development works spanned over major tier-one and two cities will likely help CapitaLand drive growth from this region.

As at time of writing, CapitaLand’s P/B ratio is 0.73. This is near its negative one standard deviation band of 0.7, a level seen previously in the 2008 – 2009 crisis period.

It’s P/B ratio mean of 1.1 suggests that the current discount of close to 50 percent represents undemanding valuation and sufficient room for upside growth.

Stocks Poised For Potential Privatisation

We have seen mergers and acquisition activities in the lion city surpassing that of initial public offerings in the spate of a weak 2015.

In fact, between October and November alone, we’ve already seen five privatisation deals.

From the table below, it is undeniable that there is money to be made from privatisation deals.

Table 1: Privatisation Deals in Oct & Nov 15

While you are reading this, you’d have probably already seen reports on Neptune Orient Lines and HTL, where their major shareholders are in negotiation with third parties on possible transactions. Of course, corresponding share price increases in their stock prices have already been seen as well.

Harping on the same note, we think that some of the potential privatisation candidates include United Industrial Corp (UIC) and Wheelock Properties. (Table 2)

UOL Group currently owns 51.42 percent of UIC’s shares, while Wheelock Properties’ parent; Wheelock & Company, owns 76 percent of Wheelock Properties shares. Moves triggered to privatise both companies if chosen to, should not be that difficult considering the amount of ownership already owned.

Table 2: Potential Privatisation Candidates

Stable Net Cash Plays

One of the key play types we like to look for after filtration would be net cash plays. The reason, though simple, is mainly hinging on the immediate translation to possible balance sheet durability, and we like companies with strong balance sheets.

Valuetronics, covered previously that laid out its catalysts and potential is backed by a net cash position of HKD505.8 million, making up some 33.2 percent of its total assets for FY15.

The net cash position makes up close to 60 percent of its current market capitalisation (as at 27/11/15).

The stock currently trades at low PE ratio of 5.7 times. Stripping the net cash from its price, its PE ratio ex-cash, would be some 2.3 times.

Coupling the low valuation, the stock also offers a consistent dividend payout ratio between 30 – 50 percent. Its current dividend yield is at 8.8 percent.

Fu Yu Corp, a leading one stop supplier for precision mould fabrication, injection moulding and assembly, is also another stock which made it to our net cash plays list.

The company is backed by a net cash position of $89 million, which is some 80 percent of the company’s current market capitalisation.

The company is a beneficiary of a 70 percent owned cash cow in Malaysia, which have reported stellar results and registered net profit growth of some 122 percent for 9M15 at RM15.5 million.

With the policy of the Malaysian subsidiary declaring at least half its profits as dividends, 70 percent of this portion that is declared will flow into Fu Yu Corp’s coffers and is expected to boost overall net profit position.

Coupling this with the company’s trend of dividend declaration since its capital reduction exercise in 1Q15, we expect more dividends to be paid out. The market is expecting a forward dividend yield of 6.9 percent for FY15.

Conclusion

As much as this year has been quite sluggish for the STI in general, as evidenced above, it is not only crucial to be focused on taking opportunities to add on positions of strong blue chips, but more so than not, looking at opportunities that not many are interested to look at.

That said, it is also advisable to look across other markets for opportunities, as honestly, quality of stocks across borders are also of good performance grade, and offers good growth that is higher than that of Singapore’s stocks when chosen properly.

Louis is a qualified accountant with the ACCA, and is the Research Editor at Shares Investment magazine.

Please click here for more information about this author.

CapitaLand  3.070 +0.02 +0.66%   
Business: Co develops, owns, and manages real estate properties. [FY17 Geographical] S'pore (38.8%), China (38.5%), Europe & others (11.9%), Other Asia (10.8%).

Insight: Feb-18, FY17 revenue decreased 12.2% due to lower ... Read More
United Industrial Corp  3.140 -0.01 -0.32%   
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: Apr-18, 1Q18 revenue declined 37% to $165.7m mainl... Read More
Wheelock Ppties (S)  -- -- --   
Business: Engages in property development & investments. [FY17 Turnover] Property development (85.4%), property investments (11.9%), investments (2.7%).

Insight: May-18, 1Q18 revenue fell 40.3% to $56m as Panoram... Read More
UOL Group  6.850 +0.06 +0.88%   
Business: Co engages in property development, property investments, and hotel businesses. [FY17 Turnover] Ppty devt (52.2%), hotel ops (23.6%), ppty invs (14.9%), invs & others (9.3%).

Insight: May-18, 1Q18 revenue surged 88.5% to $661m owing t... Read More
Fu Yu Corp  0.170 -- --   
Business: Co is a plastic products manufacturer. [FY17 Geographical] China (60.6%), Singapore (21%), Malaysia (18.4%).

Insight: May-18, 1Q18 revenue improved by 3.6% on the back ... Read More
Valuetronics Hldgs  0.680 -0.010 -1.45%   
Business: Provides integrated electronics manufacturing services. [FY18 Turnover] Industrial & commercial electronics (51%), consumer electronics (49%).

Insight: May-18, FY18 revenue rose 25.4% to HK$2.9b contrib... Read More
Camsing Healthcare  -- -- --   
Business: Co engages in the distribution and retailing of health supplements and foods under the Nature's Farm brand name.

Insight: Mar-18, FY18 net profit plunged 67% as revenue fel... Read More


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