Singapore Strategy - Re-jigging top picks

Usual caution towards September unwarranted? Since late August, there has been a growing perception that equities have become overbought. Various strategists have sounded caution. Warning shots like the sell-down of the Chinese stock market last week plus noises about a new interest rate tightening cycle have emerged as new negatives by early September. This, coupled with September’s infamous track record for stock-market disappointments, added to the caution. All the above concerns are valid, though they have to be balanced by the sense that there seems to be still a tremendous amount of un-invested money on the sidelines. Trading into the second week of September, high-yield stocks like SPH, M1 and the REITs have outperformed, indicating a chase for yields and still-high levels of liquidity. Market price actions make us reconsider our defensive posture: one might miss the next rally if one stays defensive for too long.

Maintain Overweight on Singapore; CY09 index target remains 2,700. We leave our 2,700 year-end FSSTI target unchanged for now though it is useful to start thinking about final index target peaks. From our study, the FSSTI peaked at 2.3- 2.4x P/BV in the last two recovery cycles. Simplistically extrapolating such P/BV peaks would imply FSSTI targets of 3,900-4,000 at the end of this bull cycle. This might be a tad too bullish as prospects for bank, property and O&M earnings were much stronger two years ago. The FSSTI peaked above 2.0x P/BV only in periods of extreme exuberance (2000 tech boom and 2007 property boom). Assuming it does not reach 2.3-2.4x P/BV and eventually peaks at 2.0x P/BV, we see a target of 3,350 for next year, when we would turn bearish. Using a mean 16x P/E would also suggest a FSSTI target of 3,400.

Sector thoughts and top picks. From our list of top picks in August, we would take profit on CDL-HT and Ho Bee, replacing them with PLife REIT and Keppel Land. Other picks such as CityDev, Indofood Agri, Noble, SembCorp Industries, SPH, Suntec REIT and UOB remain. Additionally, CSE Global and Ezra have been added to our preferred list. Among the sectors, we suggest going long on property and short on banks. We prefer interest-rate-sensitive sectors to banks. Conglomerates stand out as a non-consensus Overweight, though the brighter prospects in the sector belong to second-tier names for now, we believe.

Sponsored Links

Dry Bulk Shipping - Bi-weekly: BDI correction, near-term rebound

The BDI declined for 10 consecutive days due to weaker iron ore trade as well as seasonality, and it has already stabilised. We expected near-term rebound. Reiterate UNDERWEIGHT.

BDI’s correction due to seasonality. The Baltic Dry Index (BDI) declined by 18% over the past two weeks, mainly due to seasonality. Weak coal demand, quiet grain trade, and fewer chartered-in activities from Australian iron ore miners caused BDI to fall for 10 consecutive days. Rates stabilised later in the week ended 14 August.

Capesize. Fewer chartered-in activities from iron ore miners hence eased ports congestions in China, Brazil and Australia dragged down the Capesize rate. Average earnings fell by 2.5% wow to US$42,972/day.

Panamax. Panamax rate recorded a bigger decline than Capesize due to quiet grain exports from Latin America, weaker global demand for coal, and China’s decrease iron ore import from India. Average earnings fell by 0.6% wow to US$15,390/day.

Handymax/Handysize. Dragged down by Capesize and Panamax rates as well as fewer enquiries, average earnings of Handymax fell by 11.9% wow to US$17,625/day.

We expected a rebound in BDI in the near term after an 18% decline in two weeks. We see strong production of small steel mills in China and a global recovery in grains and other minor bulk trades helping the rates to rebound in the next two weeks. In the longer term, we maintain our conservative view with a BDI forecast of 2,500 for 2009 based on our 2009 steel production forecast of 514mt, considering steel inventories are building up and steel prices are showing signs of weakness.

Rise in iron ore stockpiles stops. The continuous rise in Chinese ports’ iron ore inventory was over. On 14 August, the inventory decreased by 1% to 74.55mt, from 75.29mt, still at a high level. Small- to mid-sized steel mills were rapidly resuming production while fewer chartered-in activities from iron ore miners caused the first two weeks of decline in iron ore inventories since the beginning of the year.

In our shipping sector’s 1H09 results preview, we raised the fair price of COSCO (1919.HK/SELL) and China Shipping Development (1138.HK/SELL) to HK$8.50 and HK$10.40, respectively, but maintain SELL rating. We also raised the fair price of Pacific Basin (2343.HK/SELL) and STX Pan Ocean (STX.SP/SELL) to HK$5.80 and S$11.00 respectively in the 2Q09 results update, and maintain SELL rating. We suggest selling expensive dry bulk stocks. COSCO is our top SELL.

Bukit Sembawang Estates - Downgrade on valuations

BukitSem, Outside bollinger band...sell. BS's share price has gained over 40% since our upgrade of the stock to Outperform in June. While inherent value remains considerable from its low-cost land bank, a lack of corporate access and relatively low trading volume are concerns. As uncertainties in the sector heighten on the back of cooling measures introduced by the government, we fear that BS will retreat into its shell as the launch window for the year starts to close. We recommend taking some money off the table until further evidence of improvements in the sector. We raise our FY10-12 core EPS estimates by 1.1% on minor adjustments to our launch schedules. We maintain our target price of S$5.02, still based on a 25% discount to our end-CY10 RNAV estimate to account for the shares' low trading liquidity and lack of corporate access. Downgrade from Outperform to Neutral on valuations.