Re-iterating our conviction picks
The FSSTI did well in December and early January. Asian markets in general, have ignored December’s S&P500 fiscal cliff jitters but have joined in the ‘fiscal-cliff-relief’ Capricorn rally. China has led the way. Our Singapore downgrade in November was a relative call.
As fears of a hard landing for China recede, we had advocated that investors step out of their ‘yield’ comfort zone and stretch for growth. We had felt Singapore would lag because it lacked growth, hence the downgrade. Our bottom-up end-2013 FSSTI target (3,316) remains, implying target 13.2x CY14 P/E. Singapore is rated Neutral.
In our 2013 outlook, we felt a more bullish environment was plausible and thought that Singapore could lag as it is not associated with growth. We advocated 1) a non-consensus downgrade of REITs, in favour of developers; and 2) a Commodities upgrade. The FSSTI rallied ahead in Dec-Jan and is now merely 3% below its 4Q09 high (3,314). For the past six weeks, stocks geared to the China recovery theme (Capitaland family, Jardine family) has done well. Even gaming has done well on strong Macau data points and hopes that the Chinese gambler will revive. Else, tier-2 property stocks have rallied in December on privatisation hopes. Second-tier O&M plays have joined the rally and commodity traders and processors have soared from low valuations.
What We Think
We think the China-led rally for Asian markets can still go on. There is little reason to doubt that the FSSTI cannot surpass that post-GFC high, now that financial markets look unlikely to break down in a big way. Markets will probably be jittery in February when the US debt ceiling talks come into fore. Once that is settled, slowdown concerns are more long-dated and less disconcerting.
What You Should Do
Our top picks are intact. We maintain that investors should stretch for growth and not hide in no-growth yields. For mega-funds, our top three large-cap proxies are Capitaland, DBS and Wilmar. For investors less constrained by liquidity, our conviction picks are UOL, Tat Hong, CWT.
Downgrade Singapore a relative call
We downgraded Singapore to Neutral (from Overweight) at end-November, not because we were getting bearish on markets. It was a relative country call in favour of China as global growth was stabilising, economic indicators coming out of China were turning positive and China had underperformed for three years. The FSSTI had outperformed in 2012 but heading into 2013, it lacked earnings growth drivers and had restructuring-induced cost pressures. Its only chance of another strong year was if valuations’ multiples expanded. We did not think it was likely. While fears of a hard landing for China had receded and a breakup in Europe seemed less imminent, the developed world still had to grapple with lacklustre GDP growth as government spending budgets shrink. In such an environment, it is difficult to argue for market-wide P/E expansion; stocks that deliver earnings growth will find it a lot easier to attract investors.
Amid this backdrop, within a country context, we took the non-consensus call of upgrading Commodities and Property (to Overweight) and downgrading REITs (to Underweight). Investors had huddled around earnings delivery and dividend visibility in 2012 and have shunned cyclicals, contributing to a polarisation of valuation multiples. We thought it was getting difficult to adopt the safety strategy for 2013 and achieve outperformance. The themes we advocated were to: 1) play a recovering China and sustained asset inflation, 2) make small bets on unloved cyclical sectors; 3) get out of large-cap REITs, and 4) go for stocks with visible earnings growth drivers.
What has worked so far…
Since our downgrade, the FSSTI has tracked broad US and Europe indices, but ASEAN overall has lagged the outperforming China market. We think this will go on. With 1) China keen to open its markets and issuing more QFII; 2) its economic data points confirming early turnaround indicators; and 3) the Shanghai Index having suffered three years of underperformance, it will not be surprising if 2013 turns out to be China’s year. Our Singapore stock picks remains geared to stocks that will benefit from a China recovery.
Within a country context, our Overweight on Commodities (non-consensus) and Property have started to work. In the commodity space, Noble and Wilmar outpaced the index in December and early January. Lee Wen Ching and Ivy Ng still like both stocks. Less expectedly, Olam raced ahead as the top performer among Commodities in January even when there were more downgrades than upgrades by the Street in December. We reckon the large short position on the stock might have caused the current short squeeze; once we get past dealing with the US fiscal debt ceiling, more stale bears might get squeezed out further. Our analyst, Lee Wen Ching, upgraded the stock to a
Neutral after the selldown; not totally comfortable with a full upgrade yet. Overall, it has been tough to convince investors of this sector due to its opaque earnings, but it also means there is hardly any problem of over-ownership; we reckon the sector has more to go.
In the property space, our key calls (Capitaland and UOL) have not significantly outperformed the index yet, but December saw massive outperformance of various second-tier property names that we liked (Bukit Sembawang, Ho Bee, United Engineers, Singapore Land, Hotel Properties, Keppel Land) on hopes that SC Global’s privatisation could be a precursor to similar developments for them. Some of these names were previously highlighted in a prior report. Catching the privatisation wave, 29 Aug 2012. For more liquid proxies, our property analyst, Donald Chua, remains convinced on Capitaland and UOL.
What has not worked so well yet
Our downgrade of REITs and underweight on Gaming has not worked so well. REITs outpaced the FSSTI in Dec-Jan, with P/BVs breaching 2H10 P/BV highs, on sustained low interest rates and lots of liquidity. We recognised that yield spreads were still decent when we downgraded but argued for the downgrade as REITs were beginning to trade at NAVs; developers were better NAV plays. So far, it has worked. On gaming, Genting Singapore has charged ahead after positive Macau gaming trends. The implications are that if China businesses are recovering, VIP money flows, as a derivative, must recover also.
We re-iterate our 2013 themes and stock picks:
1. Asset inflation, improving China: CapitaLand is a relatively cheap proxy for a bottoming China, having a large asset-development pipeline in China and manageable gearing, even on a look-through level. DBS can be differentiated from its Singapore and Malaysian peers by its deepest links to China, though its assets in Hong Kong, Taiwan and China. It has both the capability and geographical presence to benefit from regional trade across Asia and developing debt-capital markets.
2. Growth at reasonable price: DBS, Dairy Farm, Ezion and Tat Hong fall into this category. Dairy Farm offers steady growth and can benefit from consumer spending in Hong Kong and Singapore as well as store growth in Indonesia. P/BV is near historical lows as an excess capital base builds up. Ezion‘s earnings is backed by a deluge of orders won over 2012 while the recent pairing with industry veterans could produce new growth drivers. The stock has been our highlighted country top pick since Feb-12 and has raced past 10x P/E recently; we will review our targets. Tat Hong will benefit from the infrastructure build-out across Australia and Asia, with power plants, oil & gas projects, flood defence infrastructure and metro projects coming through.
3. Unloved cyclicals: Commodity stands out as a sector. Wilmar has had a turnaround quarter and is guiding profitability for its oilseed and grains division as it has been timing its feedstock purchases well. Stock is starting to performing in January, we think there is more to go. The traders are
cheap because of low earnings visibility, but are ideal short-term portfolio beta for a market that is turning bullish. CWT is an under-the-radar offshoot, whose base metal trading division has been doing well ever since the company brought it under its wings. Keppel Corp has been de-rated together with peer, SembMarine, but has less execution risk in Brazil and could even spring positive margin surprises, on any early deliveries.
4. Yields with some catalysts: We like yield stocks with some catalysts. REITs need organic DPU growth to perform from here. Pre-commitments / occupancy for AREIT’s industrial developments tend to ramp up when the properties are near their completion, providing catalysts; 2013-14 are the years. StarHub has the potential for special dividend surprises. ST Engineering’s two major divisions are doing well while dividend yields are comparable to large-cap REITs. The stock has kept on quietly outperforming.
Publish date: 08/01/13