Left Brain Right B - the DBS Vickers Securities Equities Research

Regional Equity Strategy 4Q 2009
Country Assessment
Sector recommendation and stocks for Singapore
SECTOR REMARKS STOCK SELECTION
Banks & Finance
Overweight
Consumer Goods
Overweight
Consumer Services
Overweight
We believe that loan demand is picking up especially for the consumer segment
with positive signs in the rejuvenation of housing loans. We also understand that
loan approvals have improved. For the rest of 2009, loan growth should
predominantly be driven by the remaining drawdown from the Integrated Resorts
loans, SME loans from the SPRING scheme and recovery of mortgage loans
following the euphoria in property launches over the last few months. However,
with corporate repayments outweighing the quantum of new loans, loan growth
for 2009 may remain relatively subdued. We note that loan spreads for the
corporate and SMEs having peaked while loan rates for consumer loans, especially
housing loans remain competitive and as such NIM upside may be capped. We
expect provisions to trend down for the rest of the year and we believe the worst of
spiking NPLs is over with NPLs to peak by this year end. Capital ratios for banks
remain robust while dividends remain intact. In terms of picks, we prefer UOB (Buy,
TP S$18.60) as its valuation lies in the recovery of its book value. In the longer term,
UOB's ROE of 13% stacks up better than its peers. Meanwhile, we have a Hold call
for OCBC with TP at S$8.00 as we believe most good news have been priced in.
For plantation, we expect 4Q09 palm oil price to rebound on seasonally slower palm
oil supply growth and run down in US soybean oil inventory by 1Q10. Recent pause
in some plantation stock prices means that there is more upside on the horizon once
palm oil prices do recover. In the mean time, we recommend investors pick those
with significant volume growth potential. Our top pick is Kencana Agri, given decent
upsides to our DCF valuations.
We are turning positive to the consumer goods sector as the world economy is
gradually trekking out of recession. We’ve been seeing reports of shortages of
workers for factories in China’s coastal provinces since 3Q09, and stats show that
YoY growth of retail sales in China has improved from its lowest point at 11.6% in
Feb 2009 to 15.4% in Aug 2009. Our top pick for the downstream consumer goods
is Pacific Andes Resources. We believe it will benefit from a robust domestic
consumption demand from the PRC, given that PRC contributes more than 50% of
the Group’s revenue. Valuations are undemanding at c.5.3x on FY10F PER, which is
at a significant discount from peers. Furthermore, its 65% stake in China Fishery
Group is worth about S$816m, more than the market capitalization Pacific Andes
itself (S$765m).
We raise this sector to overweight largely on the defensiveness of earnings (land
transport), and recovery of operational earnings (for SPH and SIA). For land
transport, we take the view that with a market correction likely, after the market
rally for 6 months, the preference is for defensive counters like ComfortDelGro. We
like CD given its resilient earnings, coupled with good operational peformance
continuing into 3Q results (from 2Q) on lower oil prices yoy and stronger GBP and
AUD qoq. We believe SPH's ad revenues has seen its worst drop earlier this year and
this is poised to recover in 4Q09/1Q10 in line with the economy. Furthermore, there
could be upside surprise to our final DPS expectation of 13cents, up to a potential of
16 cents. For SIA, we expect demand to improve gradually along with the economy,
boosted by the upcoming opening of Singapore's two Integrated Resorts. Load
factor and yield should also see an uptrend, as supply has been trimmed industrywide.
UOB
Kencana Agri and Pacific
Andes; Olam, Noble
SIA, SPH and
ComfortDelGro.
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