Recovery trades have a long way to go – raising 12-month target for STI to 2800. A combination of low valuations, higher risk appetite of investors and a liquidity driven rally has pushed the STI past our target of 2,150 since we made a positive call on the Singapore market at end March. We believe the worst is over for the Singapore economy and the market could re-rate to mid cycle PER as the economy progressively recovers. If we apply a target PER of 16x, which is the historical average PER on FY09 earnings, our near term target could hit 2400. Applying a potential earnings growth of 15% growth for next year, the STI could reach 2,865 without stretching valuations to extreme levels.
Early cyclical recovery plays still in vogue. We believe the theme on early cyclical recovery plays has yet to fully run its course, given that the economy is still in the midst of ‘bottoming out’. We would go for laggards within these sectors – our preference for Capitaland over City Development based on potential upside in the property sector, UOB over OCBC for Financials. Wilmar is our top pick, as we expect the potential listing of its China subsidiaries to unlock value for shareholders. We have picked SGX as a proxy to our positive stance on the equities market and SIA Engineering, which will lead the recovery in the aviation sector.
Don’t forget the small caps. Despite the recent surge, valuation gap between the small and large caps has maintained, with the small/mid cap stocks trading at 9.8x(FY09F) and 9.1x(10F).
Our small/mid cap picks are resource-based stocks benefiting from the firm oil/coal/commodity prices (Swissco, SAR, First Resources) or value buys (Ho BEE, and Fraser Centrepoint Trust) trading at a discount to book value.
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