A TRICKLE of reports from stockbrokers has come out to highlight deep-value stocks or stocks with resilient fundamentals.
We highlight a report from Merrill Lynch and one from DMG & Partners.
In its Nov 21 report, Merrill held up Comfort DelGro ($1.30, PE of 12.1 X next year’s earnings) as a major beneficiary of lower fuel prices.
“Energy cost makes up about one-fifth of total operating expenses. Management has begun to hedge its fuel requirement for 2009 as diesel price fell steeply over the weeks. We estimate fuel/electricity cost could fall by 23%, resulting in a 35% increase in earnings.
“We maintain our Buy rating and expect the stock to be a defensive holding during these times. We believe the defensive revenue, anticipated sharp earnings recovery in 2009 and a dividend yield of 6.6% lend support to the share price.”
Its target price is $1.70.
Next stock: Beauty China (35.5 cents).
”We maintain our earnings forecasts post Beauty China’s in-line 3Q result. The stock now trades at its trough valuation of 3x 09 PE with 14.5% forecast earnings growth, 4% yield and net cash accounting for ~20% of its market cap. Given undemanding valuation, stable growth outlook and healthy balance sheet, we reiterate Buy with price objective of SGD0.51 (44% upside potential).”
*****
DMG & Partners in its report on Nov 19, noted that at 1759 points, the STI trades at a 1.1x P/B, which is similar to the bottom P/B recorded in 2003, when Singapore’s economic growth was affected by SARS.
Back in 1998 (during the Asian Financial Crisis), the STI traded at an even lower 0.74x P/B. Although the current crisis is more widespread, as it affected many of the developed countries (unlike the 1998 situation when Asian economies were the ones primarily hit), the impact on Singapore economy is thus far more muted.
”We believe the efforts taken by the central banks globally to keep the markets liquid will translate to low interest rates and cushion the impact on the economy. We therefore do not see the STI retreating back to the 0.74x P/B level.
“We have identified the following big cap stocks which we believe will ride through the crisis and emerge stronger” They are:
• Capitaland (BUY\S$2.72\Target S$3.05) – We have pegged our RNAV base-case value of S$5.05 to a 40% discount, implying end-FY09 fair value of S$3.05. Risks include further tightening of credit markets and more macroeconomic dampeners. Catalysts include more government measures to prop up domestic residential property markets and further timely divestments/acquisitions.
• ComfortDelgro (BUY\S$1.33\Target S$1.63) – Our S$1.63 target price is derived from sum-of-the-parts valuation.CD also offers an attractive 2009 dividend yield of 6.8%. We believe further falls in WTI prices will be the catalyst for investors to relook at investing in CD.
• Sembcorp Marine (BUY\S$2.05\Target S$2.49) – We believe the stressed-test for SCM’s worst case scenario would imply business activity constricted to repair and conversion projects at intrinsic fundamental value of S$2.18. However, this is unlikely going to be the case, as SCM has progressed into an internationally-renowned rig-builder.
• SPH (BUY\S$3.41\Target S$4.35) – We estimate earnings to grow 11.7% to S$487.1m in FY09 and3.1% to S$502.2m in FY10. Based on its share price of S$3.50, it is trading at a prospective yield of 7.8%, one of the best among the blue chips. We have a price target of S$4.35 for the stock, based on our sum-of-the-parts valuation.
• StarHub (BUY\S$2.20\Target S$2.68) – At S$2.20, StarHub offers an attractive yield of 8.2% for both FY08 and FY09. Based on our DCF, we attain a target price of S$2.68 for the stock, suggesting an upside of 22% from current levels.
• ST Engineering (BUY\S$2.25\Target S$2.83) –Despite a step back in its macro outlook during the recent period, STE’s order book had increased from S$9.29b in 2Q08 to S$9.54b in 3Q08, where S$1.25b is expected to be delivered in 4Q08.
• UOB (BUY\S$12.12\Target S$16.00) – Given the global economic slowdown, we are pegging banks’ share prices to P/B levels close to those experienced during the 2003 SARS period. UOB traded as low as 1.2x book then. Given UOB’s more conservative lending stance over the past 4 years, and its strong balance sheet, we see UOB riding through the crisis. We accord a target of 1.3x 2009 book.
Other mid-cap stocks that also deserve attention are:
• Ascendas REIT (BUY\S$1.40\Target S$1.75) – At current levels, A-REIT is trading at FY09F – 10F yields of 11.1 – 11.8%. From our view, its present price presents a good entry point for investors to buy into a strong sponsor-backed industrial REIT with quality assets and established track record, as well as stable income backed by long lease tenures (5.5 years). Risks include its widely-held shareholding structure and further macroeconomic dampeners.
• China Milk (BUY\S$0.355\Target S$0.52) – As of 30 September 2008, China Milk is in a strong net cash position of RMB846.2m despite a sizeable long term loan of RMB978.9m. The company is able to generate consistent free cash flows over the years. We believe China Milk can ride through this crisis well.
• Indofood Agri Resources (BUY\S$0.47\Target S$1.12) – We have assumed a CPO price of RM1,500/tonne for FY09. We are valuing IFAR using 7x prospective earnings. With IFAR trading at 2.9x our FY09F earnings, valuations are looking attractive.
• Li Heng Chemical Fibre (BUY\S$0.295\Target S$0.685) – Bleak market ahead but foundations strong. Our target price of S$0.685 is derived from our DCF model using a WACC of 22.3% and a terminal growth rate of 1%. It trades at 2.5x FY08 and2.2x FY09 P/E based on our estimates.
• Raffles Medical Group (BUY\S$0.56\Target S$0.77) – Balance sheet was healthy, as Raffles had anet cash position of S$9.0m (1.7 S¢ / share) at end 3Q08. We are estimating Raffles to remainin a net cash position at end FY08. Its operations generated cash flows of S$15.8m during3Q08 (or S$29.2m during 9M08). This would help place it in a better position to face the challenging operating environment ahead.
• Venture (BUY\S$4.94\Target S$7.40) – Our valuation methodology is based on a 30% discount to Venture’s 3-yr P/E average of13.6x. Assuming Venture trades up to 9.5x FY08 P/E, this implies a target price of S$7.40. Coupled with a prospective dividend yield of 10.1%, we recommend BUY.
