Market Strategy Singapore - OCBC Investment 2018-10-08: Corporate Actions Heating Up

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Market Strategy Singapore - Corporate Actions Heating Up

• Corporate activities picking up pace.
• Signalling value in the market.
• Stick with fundamentals.

Corporate actions sparking interest for more ahead

• While the Singapore market has taken a hit in line with the rest of the region (benchmark STI down 5.7% YTD), corporate activities seemed to have picked up pace recently.
  • In July, Wheelock & Co [20 HK] made an offer for Wheelock Properties (SGX:M35) at S$2.10 (versus prior closing price of S$1.74, up 21%).
  • In Sep, Keppel Corporation (SGX:BN4) proposed a privatisation of Keppel T&T (SGX:K11) with a 40% premium to last traded price prior to the offer. M1 (SGX:B2F)’s share price also surged from S$1.63 to S$2.11, up 29%, following Keppel Corp’s and Singapore Press Holdings’ (SGX:T39) pre-conditional voluntary general offer for M1 at S$2.06. The current price is higher as the market is expecting a competing bid (please refer to our report dated 28 Sep 2018: M1 - Sit Tight, We're In For A Ride for more details).
• With these corporate activities, related companies in the same two sectors have also moved higher.
  • In the property space, with Wheelock Properties’ offer, stocks also regained some ground in July and recovered from their year’s lows in July and this included Wing Tai Holdings (SGX:W05), Ho Bee Land (SGX:H13), Bukit Sembawang Estates (SGX:B61) and Guocoland Limited (SGX:F17).
  • In the telecommunications space, beleaguered Starhub Ltd (SGX:CC3) also rose in Sep and helped to erase some of the YTD losses (current price of S$1.97 versus year’s low of S$1.58). Singapore Telecommunications (SGX:Z74) also posted gains, rising from the year’s low of S$3.02 to S$3.21 on 5 Oct 2018.

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Stick with fundamentals

• With protectionism as the theme in 2018, the on-going trade war has taken a toll on equity markets. While a certain level of uncertainty seems to be the accepted norm now, a focus on quality and fundamentals is necessary in this environment. Companies with cash will shine, and defensive sectors are likely to be better positioned in this environment and will include the healthcare, insurance and consumer staples sectors.
• Recent Singapore corporate activities and share buy-back volumes suggest that key owners and shareholders see value in the market currently. This is also seen in the current market valuations where the STI is trading at 12.0x FY18 and 11.1x FY19 earnings and at price/book of 1.1x FY18 book with dividend yield of 4.2%.
• While corporate actions are likely to focus on the undervalued companies with lower trading liquidity, good longer term investment ideas include DBS, UOB, CapitaLand, UOL and SingTel.

Insiders are discovering value at current price levels

• Insiders have also been active in the market via share buyback activities. Share buyback activities have been rising after the 2Q18 results (refer to Exhibit 1 in the PDF report attached).
• Share buyback is not just confined to the bigger market capitalization STI companies (such as DBS, OCBC, CityDev, CapitaLand, SGX, SATS, etc.), but is also seen at the smaller-cap companies. In addition, there are 87 share buyback transactions in Jan-Oct 2018 versus only 28 in the whole of 2017 and 40 in 2016, based on information from Bloomberg. The bulk of the share buyback in 2018 took place from Jul-Sep 2018, or a total of 51 or 59%, coinciding with the same period when the market was at its lowest.
• At the lowest on 12 Sep 2018, the STI was down 14.8% from the high in May 2018. While there could be many reasons for share buyback, the pick-up in share buyback transactions is a key signal that the insiders are seeing value in their stocks at current price levels, largely due to the rapid decline in the STI.
• At 5 Oct 2018 closing, the STI is down 5.7% for the year or down 11.9% from this year’s high.

Cooling measures led to property stocks trading at discount to book

• For the recurring theme on privatization, we have shared in the past that some of the probable candidates included Wing Tai (SGX:W05) and Wheelock Properties (SGX:M35), largely due to high key shareholders’ ownership levels in these companies, low trading liquidity and discounts to book values. The offer for Wheelock Properties did not surprise us as we have shared our thesis on this scenario. Wheelock Properties’ offer was timed at almost the low of the year. With patient and cash rich owners, it may take a while (for a good price level) before the launch of an offer.
• With the 2018 property cooling measures, most property stocks fell sharply in July. Based on the FTSE Real Estate Holding & Development Index [FSTREH], which is down 14.6% YTD, the index is currently trading at 0.56x book. Below is a list of property companies which are currently trading at below 0.9x book.

Property stocks trading at < 0.9x book

Stock	Last ($)	YTD (%)	P/B (x)	Mkt Cap ($m)	52w High ($)	52w Low ($)
Hong Lai Huat Group Ltd (SGX:CTO)	0.220	+4.8%	0.36	45,159,170	0.28	0.148
Hong Fok Corp Ltd (SGX:H30)	0.715	-16.9%	0.36	622,487,711	0.92	0.64
Heeton Holdings Ltd (SGX:5TP)	0.540	-4.6%	0.41	175,584,506	0.62	0.49
Wing Tai Holdings Ltd (SGX:W05)	1.970	-13.6%	0.44	1,510,842,762	2.44	1.83
Lian Beng Group Ltd (SGX:L03)	0.570	-23.0%	0.44	284,822,844	0.84	0.45
Perennial Real Estate Holdings Ltd (SGX:40S)	0.770	-11.5%	0.45	1,279,597,217	0.92	0.735
TEE Land Ltd (SGX:S98)	0.174	-4.4%	0.51	77,756,424	0.23	0.153
OKP Holdings Ltd (SGX:5CF)	0.210	-35.9%	0.54	64,770,425	0.38	0.205
GuocoLand Ltd (SGX:F17)	1.920	-14.3%	0.56	2,271,926,686	2.48	1.79
Ho Bee Land Ltd (SGX:H13)	2.580	+5.7%	0.57	1,716,294,948	2.69	2.24
UOL Group Ltd (SGX:U14)	6.610	-25.5%	0.58	5,570,347,684	9.49	6.5
SingHaiyi Group Ltd (SGX:5H0)	0.091	-19.6%	0.59	389,513,013	0.13	0.089
Metro Holdings Ltd (SGX:M01)	1.100	0.0%	0.60	914,098,541	1.27	1.0518
Sinarmas Land Ltd (SGX:A26)	0.320	-20.0%	0.63	1,361,875,999	0.45	0.285
First Sponsor Group Ltd (SGX:ADN)	1.260	-1.7%	0.64	817,605,109	1.39	1.2182
GL Ltd (SGX:B16)	0.775	-7.7%	0.66	1,060,249,316	0.94	0.73
Amara Holdings Ltd (SGX:A34)	0.460	-13.2%	0.70	264,485,372	0.60	0.425
Hotel Grand Central Ltd (SGX:H18)	1.380	-1.4%	0.72	1,002,618,820	1.59	1.3
CapitaLand Ltd (SGX:C31)	3.260	-7.6%	0.72	13,570,773,167	3.88	2.98
Libra Group Ltd (SGX:5TR)	0.137	-2.1%	0.76	29,221,031	0.17	0.092
Soilbuild Construction Group Ltd (SGX:S7P)	0.099	-38.1%	0.80	66,625,862	0.20	0.092
City Developments Ltd (SGX:C09)	8.670	-29.8%	0.81	7,868,903,531	13.45	8.55

Looking for the next gem…

• At current levels for the STI, we believe that value is emerging. While the near term upside is unclear due to trade tensions, the longer term prospects appear healthy. Exhibit 3 in the PDF report attached shows that while 2019 economic growth rates will ease off from 2018 levels, growth is still intact based on consensus estimate from Bloomberg. Similarly, corporate earnings growth in 2019 is estimated to range from 5% (for Taiex) to 20.5% (for Sensex), based on consensus estimates from Bloomberg (Exhibit 4).
• The spike in interest in corporate activities is not solely in the Singapore market and we believe this trend is likely to be seen for other markets in the region, where share prices have come off in the last 3-4 months, and this could start with the telecommunications sector. 
• While it is difficult to name the next potential takeover/privatization candidate, some useful indicators include good earnings growth, healthy balance sheet, strong cash holdings, low to no debt, strong shareholders and share prices trading below historical valuations (either against peers or its own historical levels).

Carmen Lee OCBC Investment Research | https://www.iocbc.com/ 2018-10-08

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