In the big-cap space, companies have healthy balance sheets but their earnings have sputtered somewhat. We believe that the only way to outperform is to select companies using the bottom-up approach, identifying those with the right business models and products.
Del Monte - could it be a dark horse?
Expectations for Del Monte are low with its share price down 30% since the announcement of its acquisition of the consumer foods division of Del Monte Foods. If the company succeeds in integrating this acquisition, the current share price weakness could provide the perfect opportunity to initiate a position in this stock. Its share price could remain weak in the short term as further financial details emerge, with acquisition costs impacting the next two quarters' results.
Offshore still good
The offshore marine small-cap space dominates our top-pick list. As Ezion has another nine service rigs coming onstream in 2014 that will increase its rig fleet by 60%, its EPS could grow 93% yoy in 2014 - providing a strong re-rating catalyst. Mermaid has proven that it is on the cusp of a strong earnings growth period with the latest set of results and onset of strong subsea earnings momentum. We recommend investors to buy ahead of an earnings recovery at Vard, with past disappointments already baked into its share price. The strategic review at Jaya could lead to a positive outcome.
How to fund?
For funding, we suggest reducing holdings in Cosco, Ezra and SMRT. Cosco‟s redemption still appears a long way off as provisions have returned to haunt investors in its latest results. Its weak execution offers another reason to stay away from this stock. Although Ezra's subsea division turned around nicely in 4Q13, we opine that it is still too early to turn bullish on this stock. Meanwhile, the new rail-financing framework could turn out to be SMRT's saviour. Until then, its share price could remain weak.
Publish date: 04/12/13