Singapore Strategy - UOB Kay Hian 2016-11-14: Positioning In Volatile Times

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OVERSEA-CHINESE BANKING CORP O39.SI

Singapore Strategy - Positioning In Volatile Times

• While waiting for the dust to settle after the shock outcome from the US presidential elections and the US$ volatility, we highlight deeply undervalued stocks and companies benefitting from the US$ strength.

WHAT’S NEW

• Unexpected events unfolding. The FSSTI saw heightened volatility after the recent US presidential elections and the US$ strength. 
• Over the past three days since the US presidential elections, the US$ has strengthened 0.7-3.3% against the ASEAN currencies. This report highlights stocks impacted by the US$ strength.

ACTION

Volatile times; wait for the dust to settle. 

• The unexpected outcome from the US presidential elections has seen the VIX escalating to a recent high of 22.51. While the VIX has since pulled back, we would position cautiously, given the high volatility and macro uncertainties. However, we think investors looking to buy could consider:
  1. solid companies that are deeply undervalued (based on P/B), and 
  2. companies with US$ earnings.

Stocks at deep value. 

• Big-cap stocks we favour include:

OCBC (BUY/Target: S$10.45). 

• Trading at -1.9SD to mean P/B. OCBC is well positioned to weather the slowdown in the domestic economy due to its conservative management and strong CET-1 CAR of 12.8%. 2016-17F dividend yield of over 4%.

Sembcorp Industries (BUY/Target: S$3.05). 

• Trading at -2SD to mean P/B. We favour SCI for its visible earnings from utilities. SCI’s India utilities segment is suffering from initial teething issues but the business carries significant upside earnings potential, given the volatility in spot electricity prices.

Beneficiaries of US$ strength. 

• A strong US$ would benefit companies with US$ earnings, including: 

Venture (BUY/Target: S$11.00). 

• Venture benefits from the strength of the US$ vs the ringgit given that its facilities are located in Johore and Penang (accounting for 65% of its manufacturing capacity). Most of its revenue is in US$. The group provides an attractive dividend yield of 5.6%, one of the highest in the technology sector. 

ST Engineering (BUY/Target: S$3.42). 

• About 25% of STE's revenue accrues from the US and the unit would benefit from forex gains as well as rising infrastructure related spending. Every 1% rise in the US$ against the S$ would lead to about a S$1m increase in PBT, excluding the impact of hedges. The company will also be a beneficiary of lower US corporate tax rates. 

Cityneon (BUY/Target: under review). 

• Victory Hill Exhibitions (VHE) segment's functional currency is in US$. For the travelling sets, licence fees and royalties are paid mostly in US$. For the permanent set in Las Vegas, ticket sales and merchandise sales are in US$. A 5% appreciation in the US$/S$ results in a 4.3-5.6% increase in our net profit estimates for FY16-18. Our target price of S$1.15 is under review.

Riverstone (HOLD/Target: S$0.94). 

• The group receives 85-90% of revenue in US$, while 35-40% of costs are in US$. As such, it will benefit from a strong US$/RM. Assuming ceteris paribus, our sensitivity analysis shows every 1% appreciation in the US$/RM will lift FY16-17 pre-tax profit by RM0.9m (or 0.7%). Entry price is S$0.80. 

Others. 

• No impact for OSV companies, whose reporting and functional currencies are in US$. 
• For Singapore yards (Keppel, Sembcorp Marine), a stronger US$ will naturally be beneficial to them. However, this most likely offsets the forex losses they recognised in 1H16, for a net impact that is probably inconsequential. Reported net profit might swing a little, but our earnings forecasts and valuations (for the sector) have always depended on adjusted net profit, which excludes forex effects, ie earnings are neutral to forex movements.

Selected opportunities in S-REITs. 

FLT is our top pick. 

• We believe the weakness in REITs’ share prices on earlier-than-expected Fed rate hike expectations (a 24bp upward shift in the US yield curve over the past week) will present attractive investment opportunities. 
• We believe REITs are ideal in the current market environment as investors seek a balance of stable yield income and good growth potential. 
• We recommend diversified, deep value REITs with exposure to the business park segment. 
• Our top picks in the REIT space are FLT, A-REIT and CCT.

Andrew Chow CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-11-14

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