Stock picks - Selective stance for 2014
Adopt bottom-up strategy. We have selected stocks with: 1) Stronger fundamentals and better resilience to softening revenue and margin compression; 2) Oversold companies at attractive valuations; and 3) Stable earnings and dividend payout. On the back of our muted outlook for the sector, we advocate a selective stance in our picks, preferring to look to companies that continue to deliver growth on the back of a reasonable valuation (Osim), oversold counters with possible earnings recovery and growth in FY14F (Courts, Del Monte), and stable growth profile with yield (Sheng Siong).
a) Growth vs Valuation
Avoid ASEAN exposed stocks. Singapore consumer stocks are generally exposed to ASEAN markets and offer growth opportunities within these emerging markets. Since 2H13, domestic demand in ASEAN has slowed down, led by weakening currencies and domestic policies.
OSIM (BUY, Share price: S$2.28, TP: S$2.60). Osim has shown continued growth on the back of reasonable valuations. We like the stock for its continued growth profile and its substantial exposure outside of ASEAN. Osim derives c.55% of its revenue from North Asia markets. The company also consistently innovates and uses new products to drive regional performance.
Going forward, management is lining up newer versions of existing models to be launched next year. This will ensure sustainable revenue growth from these new chair launches this
year and the next. Gross margins are attractively high at close to 70%, which we believe will be sustainable going forward. Valuations are also undemanding at c.14x FY14F earnings.
b) Oversold counters
We pick oversold counters that are trading at attractive valuations.
Courts Asia (BUY, Share price: S$0.59, TP: S$0.77). We advocate a buy on its attractive valuations, even though Courts Asia has disappointed in its recent earnings announcement. At current levels, we believe the stock is oversold. The company’s valuation is now at -1SD of its mean forward earnings based on our FY15F earnings projection. This works out to a compelling PEG of 0.5x.
We believe downside is limited from these levels, as our earnings estimate is conservative and at the low end of consensus. Courts recently tightened its credit to customers, to improve its credit book. Based on our estimate, management should relax its credit before the start of FY15F. We hence expect a more relaxed credit from the start of FY15F, which could potentially drive credit sales, gross margins and earnings growth.
Del Monte Pacific (BUY, Share price: S$0.59, TP S$0.82). We recently upgraded Del Monte Pacific as we believe the recent >30% share price retreat has more than priced in the uncertainty of its proposed US$1.675bn acquisition of US-based Del Monte Foods’ Consumer Food Business. With the majority of its loan funding in place, we believe more clarity on management’s plans and strategy will progressively be shared in 2014, following the completion of the acquisition, expected by Feb 2014. While earnings in FY14F will be impacted by a one-off acquisitionrelated transaction cost, we estimate that at its current price, the counter is trading at c.9x FY15F earnings of the combined entity.
c) Consumer yield plays
Sheng Siong (BUY, Share price: S$0.58, TP S$0.80). We recommend Sheng Siong as a yield play in our Singapore consumer stock pick. As the third largest supermarket operator in Singapore, the company should be able to deliver consistent earnings, and pays 90% of earnings as dividends. Dividend yield is c.5%, which lends support to the share price. Due to its stable earnings, consistent dividend payout and attractive yield, we believe the stock will add a defensive dimension to investment portfolios.
Publish date: 18/12/13