Singapore Strategy

by DMG & Partners Securities (19 Nov)

TARGETING survivors: Some corporates may not have banks' support through this rough patch. The market remains concerned about the impact of global economic deterioration on corporate earnings.

Investors are closely scrutinising companies that have overstretched via massive borrowings to fund their growth, or have yet to generate sufficient operating cash flow, as these corporates are at the highest risk of breaching bank covenants if business conditions worsen further.

On the other hand, there are corporates whose balance sheets are strong. Even with the deterioration in business conditions, banks will continue to support these corporates for their working capital and capital expenditure needs.

These are the companies that are seen to survive this downturn. When economic conditions eventually improve, these companies could return to similar levels of profit or even exceed their previous peak profit levels.

Over the past few weeks, we have reviewed the financial forecasts and TPs for all the stocks under our coverage. With the cuts in TPs, we now arrive at a fair Straits Times Index (STI) target of 2,080 over the next 12 months.

However, in the short term, we see further weakness which could bring the STI to as low as 0.95 times P/B, or a 1,560 level. With the downside of about 10 per cent from the current STI level and difficulty in pinpointing the exact bottom, we recommend investors to start nibbling at stocks that will survive this crisis.

We have identified the following big-cap stocks which we believe will ride through the crisis and emerge stronger:

CapitaLand ('buy', TP: $3.05): At current levels, CapitaLand is trading at a 24.4 per cent discount to its end-Q3 2008 NAV of $3.60. During past crises, CapitaLand has been trading at 40-60 per cent discount to NAV. Taking the view that CapitaLand is now of a different stead compared to then, we have pegged our RNAV base-case value of $5.05 to a 40 per cent discount, implying end-2009 fair value of $3.05.

Risks include further tightening of credit markets and more macroeconomic dampeners. Catalysts include more government measures to prop up domestic residential property markets and further timely divestments or acquisitions.

ComfortDelGro ('buy', TP: $1.63): Plunging crude oil prices will stimulate earnings.

Sembcorp Marine ('buy', TP: $2.49): Sustainable amid challenging conditions. Our earnings forecasts have factored in slowing new order momentum.

Singapore Press Holdings ('buy', TP: $4.35): Over the years, SPH has successfully diversified its business, moving into magazines, property and the Internet. Recurring income in the current two financial years should be aided by the property segment, thanks to high rentals for its flagship Paragon mall as well as its sold-out Sky@eleven project.

StarHub ('buy', TP: $2.68): There have been some concerns over its gearing, but a closer look at its financials would bring comfort to investors. Net gearing for the company stood at 7.6 times in Q3 2008, which ranks it among the highest in the market.

However, there was a capital repayment of $1.1 billion, which resulted in shareholders' equity shrinking to a mere $103 million. If not for this, the net gearing would have only been 0.7 times - a decent figure, given that StarHub paid out dividends of $621 million in 2005-07, and declared another $230 million this year. The cash it generates is also more than sufficient to repay its debts.

ST Engineering ('buy', TP: $2.83): Robust financials, good cash flows from operations, long-term prospects still bullish, and orders remain strong.

United Overseas Bank ('buy', TP: $16.00): Conservative loan expansion over the past four years will keep non-performing loans contained. Our earnings forecasts have factored in huge loan provisions. Interest income should be cushioned by its relatively high loan-to-deposit ratio.

Other mid-cap stocks that also deserve attention are:

Ascendas Reit ('buy', TP: $1.75): Its present price presents a good entry point for investors to buy into a strong sponsor-backed industrial Reit with quality assets and an established track record, as well as stable income backed by long lease tenures.

China Milk ('buy', TP: $0.52): The company is able to generate consistent free cash flows over the years. We believe China Milk can ride through this crisis well.

Indofood Agri Resources ('buy', TP: $1.12): Indofood Agri has the ability to obtain refinancing for its short-term debt, despite the current credit tightening environment. While lower crude palm oil prices will affect earnings, this is partially mitigated by Indofood Agri's growing cooking oil & fats segment.

Li Heng Chemical Fibre ('buy', TP: $0.685): With capital expenses fully budgeted for, and at least another one billion yuan ($224 million) worth of operating cash inflow from H2 2008 to FY2009, the group should be able to withstand any further repercussions from the credit crisis and a slowdown in its business environment.

Raffles Medical Group ('buy', TP: $0.77): Strong operating cash flows should help it face challenges ahead. It has a healthy patient load, a diversified patient base, and a healthy balance sheet.

Venture Corp ('buy', TP: $7.40): Venture has managed to generate quarterly revenue and core operating profit exceeding $900 million and $66 million, respectively, since Q1 2007. While the prospects for Venture may have taken a step back in recent times due to the global economic downturn, we do believe that the present selldown in its share price appears over-extended.

-Research Report by DMG & Partners Securities (19 Nov)