Singapore Equity Strategy

Valuations & Momentum
Using four valuation and momentum indicators, we conclude that the Singapore Market should turn in positive performance for 2013. We analyze the Singapore Market using earnings momentum, equity risk premium, P/B multiples vs GDP and historical P/E & P/B.

1) An inflection point in earnings momentum.
Our calculations suggest that earnings momentum have slowed and contracted on a sequential basis (sequential momentum bottomed out and is now at 4%, i.e. mkt turning!). Intuitively, poor earnings momentum should be a negative sign for stocks. However, our analysis of historical data suggests that inflection points (bottoms) often occurred near and just after market bottoms. Hence, we believe that inflection points (bottoms) are actually bullish indicators for the stocks. Yes, it feels counter intuitive, but it is probably in line with contrarian theories of buying-in at points of pessimism. Recent data points suggest that we might have just passed the lowest point (Sep 12) for earnings momentum trends.

2) ERP remains elevated. Too much fear?
Relative to historical levels (7yr average of 4.7%), Equity Risk Premium (ERP) in the Singapore Market remains
elevated at 5.5%. We believe that market participants remain concerned over global macro issues and expect positive macro news flow to lower the ERP demanded by the market in the year ahead. With a normalizing of the ERP, equity prices should increase accordingly.

3) STI P/B vs Singapore GDP suggests expansion on the multiple in the year ahead.
Our Macro Analyst, Weiwen, expects GDP growth of 2.0% in 2013 for Singapore. Historically, the STI tends to trade at higher valuations in times of robust economic growth and GDP growth of 2.0% is consistent with a P/B multiple of 1.5X (current: 1.4X). Hence, a top down approach to analyzing the market suggests room for multiples expansion for the Singapore Market.

4) Valuations appears undemanding Finally, we wish to highlight that current valuations for the Singapore Market remain below historical averages at P/E of 12X and P/B of 1.4X with room for mean reversion. During the last cycle, the STI traded at average P/E of 15X and P/B of 1.7X.

Historical components on market return In the chart below, we examine the various components of return on the STI. In the early stages of a market recovery, expansions on the multiple typically account for majority of the returns (1999, 2009). However, multiples usually contract in the subsequent year as earnings grow at a faster pace. We believe that 2013 will probably be comparable to the 2005/06 period, where earnings growth was low and multiples expansion was moderate. In 2005/06, the Singapore Market experienced a 14-23% improvement in multiples with moderate earnings growth of 0-3%.

Themes that could do well in 2013

We live in uncertain times; let’s focus on what is at hand. There are plenty of uncertainties in our world today, which creates a prevailing mood of hesitance and fear among investors. Let us focus on the more certain issues at hand. Firstly, interest rates are expected to stay low for the next 2- 3yrs as the global economic recovery remains weak. Secondly, a high level of construction activity is expected due to major infrastructure projects for both the private and public sectors in Singapore. Hence, we believe that investors should position themselves in the following areas to take advantage of these for 2013.

Theme #1: Dividend plays would remain in focus

Flight to dividend yielding stocks remains the vogue. Despite a fairly strong run-up in various high yielding counters, the dividend theme remains very much in focus in our conversations with clients. We believe that this preference for dividend yielding stocks stems from the reasons below:

1) Low interest rate environment forces investors to search for other income yielding assets, such as stocks with a consistent dividend track record.

2) Better confidence in companies that have the ability to generate surplus cash for distribution to shareholders.

3) Lack of confidence in “growth” related counters, due to worries over the weak globally economic recovery.

We argue that these 3 reasons for the flight to dividend yielding stocks remain very much intact and do not expect the preference for dividend plays to end soon.

In short, we love dividend yielding stocks in the year ahead, but more so if the dividends can grow! Hence, we aim to find companies that have the ability to dish out more dividends than they have previously been paying. We ran a stock screen on the universe of Singapore listed counters using the attributes below. We aim to find large cap counters with payout ratio of below 70% and a decent level of dividend yield, as a gauge of their ability to increase historical levels of dividend. In order to screen out poor quality businesses, we overlay our screen with a criteria for Altman Z-Score of >1.8pts.

1. Current dividend yield: more than 3%.
2. Dividend payout ratio: less than or equal to 70% for FY09- FY11.
3. Altman Z-Score: more than 1.8.
4. Market Cap.: more than S$1bn.

8 companies appeared on our screen results. While we do not have a rating on most of these counters, we aim to discuss the general business and performance drivers. We also cite consensus dividend forecasts for these counters as available.

1. Keppel Corp. (Not Rated)
KEP paid out S$0.43 of dividends in FY11 with average payout ratio of 40% in the past 3 years. This conglomerate derives majority of its profits from the offshore and marine segment, which has very strong order outlook with contracts stretching out as far as 2019. Consensus expectations are for a 2% CAGR from FY11 to FY13E.

2. Jardine C&C. (Not Rated)
JCNC paid out U$1.23 in FY11 with average payout ratio of 40% in the past 3 years. JCNC is a conglomerate that derives majority of its sales from the distribution of motor vehicles, parts and accessories. The company would benefit from increased demand for vehicles and has a high exposure to the consumer market in Indonesia. Consensus expectations are for a 4% CAGR from FY11 to FY13E.

3. Yangzijiang Shipbuilding. (Not Rated)
YZJ paid out CNY0.27 in FY11 with average payout ratio of 28% in the past 3 years. The outlook for the shipbuilding industry remains poor with an oversupply situation plaguing the shipping sector. Upside for YZJ would come from successful ventures into the offshore market. Consensus expectations are for a -10% CAGR from FY11 to FY13E.

4. ComfortDelGro Corp. (Buy, TP: S$1.80)
CD paid out S$0.06 of dividends in FY11 with average payout ratio of 51% over the past 3 years. We believe that this land transport conglomerate has the ability to raise dividends, but is unlikely to bring payout ratios substantially higher. M&A spending is likely to continue as CD seeks to grow its overseas footprint. We expect 6% CAGR (consensus: 5%) from FY11 to FY13E.

5. Wheelock Properties. (Not Rated)
WP paid out S$0.06 in FY11 with average payout ratio of 25% in the past 3 years. We find the net cash position for WP as odd for a property developer. The company had been paying down its debt with the cash generated from its operations between FY07 to FY11, which led to a build up of cash in the company. Wheelock Place and Scotts Square retail continue to generate consistent levels of recurring income to the company. Consensus expectations are for no dividend growth from FY11 to FY13E.

6. STX OSV. (Not Rated)
SOH paid out S$0.15 of dividends in FY11 and declared a special interim dividend of S$0.13 in FY12. Current order book for the company remains healthy at c.1.5X sales for FY11 (30 June 2012: NOK 18,267mn). Consensus expectations are for normalized dividend payout in FY13E.

7. Haw Par Corp. (Not Rated)
HPAR paid out S$0.20 of dividends in FY11 with average payout ratio of 51% over the past 3yrs. While the company is known for its healthcare products, profit contributions from its investments remain the largest contributor to the group. HPAR holds substantial stake in UOB, UOL and UIC that contributes c.62% to the group profits in FY11. With low levels of debt and significant liquid assets, we believe that HPAR have the capacity to increase its dividend distribution to shareholders. However, the company could retain its cash for investment purposes as highlighted in their 2011 annual report. There are no consensus estimates for HPAR.

8. ARA Asset Management. (Not Rated)
ARA paid out S$0.05 of dividends in FY11 with average payout ratio of 56% over the past 3yrs. The company is in a net cash position and has a very low level of debt. Consensus expectations are for no dividend growth from FY11 to FY13E.

Other stocks that could grow their dividends Apart from the stocks highlighted in the screen above, our analysts believes that the following stocks under our coverage offers a yield of >3% and could grow their dividends over the next few years.

Theme #2: Companies that play a crucial role in the value chain within Singapore’s construction industry

- We think that Singapore’s construction sector will enjoy a multi-year boom to ease supply-side infrastructure bottlenecks arising from a faster-than-expected increase in resident population. We are optimistic about construction over the medium and long term horizon.

- The National Population and Talent Division reckoned in its 2012 paper that Singapore at 5.3m people is already under-infrastructured, and that 5-10yrs of building is required in order to restore capacity. Furthermore, the target population has already been hinted at by the Prime Minister as 6mn.

- 2011 was a bumper year for the construction sector with total contracts awarded worth S$35.2bn, owing to a ramp up in residential housing (S$15.3bn) as well as the major public civil engineering projects (such as the construction of Downtown Line 3).

- In 2012, construction demand is expected to come in at S$22-28bn. YTD, the value of contracts awarded (S$21.8bn) has already hit the lower end of the forecasted range.

- Looking ahead, construction demand is expected to remain healthy on the back of both private and public infrastructure building. In the next 2 years, BCA expects an estimated S$20-28bn of contracts to be awarded on average per year in 2013 and 2014.

S$60bn alone has been set aside just to double the current MRT network (Fig.16), and the Building & Construction Authority estimates demand at S$20-28bn/yr (S$15bn/yr public) till 2014. The government is currently undertaking a number of projects – Tuas West MRT extension, Downtown MRT line, LNG Terminals, Sports Hub, Marina Coastal Expressway, Pasir Panjang new port facilities, NTF Hospital, and a healthy supply of HDB BTOs.

Other major public projects about to start in 2013 are the Singapore Power cable tunnels and Changi T4, major private sector construction for 2013 includes South Beach (S$2.7bn) and Marina One (S$7bn). Going into 2013 and 2014, a hefty amount of private residential, and office, shop, factory floor space is under construction or unstarted.

Beyond 2014, the announced, unstarted public works pipeline sounds just as hefty – Thomson MRT (S$18bn) line, East Regional MRT line, North-South Expressway (S$8bn), Sengkang General Hospital, community hospitals, and the eventual relocation of all city port facilities to Tuas Megaport followed by the redevelopment of the entire city coast, is a huge project in waiting.

Apart from benefiting construction and building related companies, these activities in the construction sector will also have positive spillovers to the financial sector (largely in term of lending activity) as well as real estate services.

Top Pick to proxy Construction Boom – Pan United:

All these infrastructure activities – particularly the building of underground tunnels for the extension of MRT railways as well as expressways – will create demand for Singapore’s market leader in cement and ready mixed concrete (RMC), Pan United.

Pan United’s Basic Building Materials division holds a onethird market share in terms of size for RMC, is an RMC innovation leader with >200 RMC products backed by years of field data and R&D, and is a vertically integrated supplier with 2 granite quarries, a raw materials transport fleet, an extensive production facilities and cement terminal in Jurong Port with 2 due cell silos.

We feature Pan United in our top pick section for 2013 (Pg. 9), and have issued a detailed initiation report on the company on 24th Dec 2012.

PSR Coverage Overview
This is a stock picking environment. Companies with strong fundamentals looks rightly valued, while those with challenging outlook looks cheap. Hence, we do not think taking a sector approach is wise in the year ahead, at least not for now. We will tell you when we see turning points for certain sectors. Our top picks for the Singapore Market are SIA Engineering Company, Capitaland and Pan United Corp. All three companies have a strong track record and would benefit from long term trends in their respective industry.

#1: SIA Engineering Company Ltd We believe that SIA Engineering Company (SIAEC) is a key beneficiary of the aviation growth story in the region. Over the next decade, a record number of planes would be delivered into the region and demand for maintenance work is expected to increase. We also expect SIAEC to benefit from the record aircraft orders by the Singapore Airlines Group. Furthermore, we believe that the economic moats in its engine maintenance JVs have not been fully appreciated by the market and could be a source of upside to future earnings. The free cash generating nature of the business is a key feature of the stock.

#2: Capitaland CapitaLand is one of Asia's largest real estate companies with a property portfolio diversified across countries and asset classes. It is also one of the world’s leading serviced residence owner and operator. It has a proven track record as property manager, as well as a property fund manager. Despite having been in acquisition mode for the past 2 years, its financial capacity remains strong and is ready for further acquisitions. It has a strong pipeline of assets for divestment in the next 3 to 4 years and with 1/3 of assets located in China, it could benefit from the potential bottoming out of China’s economy.

#3: Pan United Corp Pan United has 3 main businesses: Basic Building Materials, Ports & Logistics, and a small Shipping fleet.

When playing the construction sector, why bet on individual contractors when you can bet on a dominant supplier? Pan United’s BBM division, which commands a 29% and 33% market share in cement and ready mixed concrete in Singapore, would be an almost guaranteed exposure to a strong and visible pipeline of public works till estimated 2019 as Singapore struggles to close the infrastructure gap after a decade of population expansion. Apart from size, Pan United is also a market innovator of ready mixed concrete with >200 products backed by years of field data and a team of R&D engineers. It is vertically integrated with its Shipping fleet providing raw material transport, also owns 2 quarries, an extensive network of production facilities, and a cement terminal at Jurong Port.

Its Ports & Logistics division has a 51.3% stake in a top 10 river port in China, Changshu-Xinghua Port. CXP has a compelling combination of location (Yangtze Delta, captive audience Suzhou-Wuxi-Changshu industrial reigon), depth (13.3m, 100k dwt), and size (1.7km berth, 1m sqm). Well utilized as testified by its near 50% ebitda margins, CXP should grow with China’s economy. Potential catalyst if PU increases its stake as 38% owner Macquarie Infrastructure Fund has completed a strategic review.