Hunting for value in Singapore Stocks

This is a post from The Edge June 14 edition. With worry on QE3 tapering, stock markets around the world has been volatile and been falling. Singapore stock market has also felt the impact with STI falling back to where it started in beginning of 2013. In this report, Citi Research points out a handful of stocks in various sectors to look for value in.

IN A REPORT dated June 13, Citi Research points out that the STI is back to where it started in the beginning of the year after having lost some 10% in a month. Meanwhile, Singapore's 10-year government bond yields have risen to five-year average of 2.1%. While talk of the US Federal Reserve tapering its QE programme and a stronger US dollar are the main reasons for the rise in yields here, Citi’s economists have also raised GDP growth for Singapore to 2.3% from 2% previously.

Still, the market’s decline should not be blamed entirely on QE tapering. “Recent concerns about the current-account deficit in Indonesia have increased worries. Singapore’s economy is linked to Indonesia’s via exports, banking (trade finance, wealth management), property ownership, tourism as well as the medical tourism segment,” says Citi Research.

Whatever the case, STI’s valuation based on its price-earnings ratio (PER) is back at 15 times. Citi expects support at a PER 14.2 times, which is the equivalent of 3,000 on the index. The Euro crisis low was at a PER 13 times, or 2,700.

But the problem is that earnings growth in Singapore is likely to be modest. “Within our coverage universe, flat aggregate EPS trends are expected for 2013, growing into a modest 8% in aggregate EPS growth for 2014E,” Citi states. “Our Earnings Revisions Count ratio (ERC or the upgrade versus downgrade count) is in mildly negative zone at –10% versus –16% at end-Feb post 2012 results.”

Citi has a handful of stock picks for when the market settles and investors return to hunting mode. They are Keppel Corp for capital goods, Hongkong Land on valuation basis, ST Engineering and Venture Corp to play the stronger US$, and United Overseas Bank as the most defensive of the local banks.

Keppel Corp is still the world’s largest rig builder despite the rise of Chinese yards. “Our view remains that the rig cycle remains intact despite volatility in oil prices and we believe orderbook momentum can continue in 2H13, with margin resilience,” Citi reckons. The broker has a $13.45 target price based on a marginal discount to its RNAV estimate of $13.58, applying a 20% discount to the value of Keppel's investments in M1, K1 Ventures, Dyna-Mac and K-Green Trust, its 55% stake in Keppel Land at market price. An average PER of 17 times FY13-15 earnings is applied for the offshore and marine business.

UOB has retraced by around 10%. Citi likes UOB for its Asean footprint and growing fee income. Its target for UOB is $20.30 using a dividend discount model assuming EPS of $1.67, dividend per share of 63 cents and 7.1% long-term growth rate.

Hongkong Land is trading at a discount to RNAV of 40% compared to an average of 20% elsewhere.“While there is risk of rising interest rates impacting cap rate valuations, we are already using a cap rate of 5.0% versus the firm’s 4.25%,” Citi says.

Venture Corp too benefits from a stronger US$, and Citi believes it can sustain its dividend yield of 7%. Moreover, its 12-month target of $8.12 is based on modest valuations, of 13.7 times PER for this year’s earnings.


To read other undervalued SG stocks and investing strategy highlighted in previous blog entries, click the following:
SG stock investing strategy
Undervalued stock: Goodpack