The Straits Times Index (STI) had a decent run this week, and is now up 6.4 per cent as of Wednesday, February 08, 2017. However, the bank stocks could not find a firm footing this week, though all three bank stocks recouped some gains on Thursday, and were up strong by end of the trading week on Friday. DBS stock started the week on a sour look after CIMB Securities Research put out a research note on February 02 saying that the three banks’ exposure to potential liabilities coming from Ezra Group could be hefty. It added that should the company goes into full liquidation, along with a 40 to 80 per cent estimated write-down of the book value of the fixed assets, DBS, being one of Ezra’s principal bankers, will have to make specific provisions of around 8 to 16 basis points (bps). This will also likely negatively impact DBS’s FY 2017 forecast net profits by 6 to 12 percent. OCBC’s net profit for the same fiscal year will also get hit by 5 to 8 per cent, followed by UOB with a 4 to 5 per cent hit. DBS stock came down as low as $18.69 from its open of $18.79 on Monday, 6 February. The stock managed to recover its losses and closed the day at $18.93.
Nevertheless, the CIMB research note did result in some investors taking a pause towards investing in bank stocks early in the week before they resume buying aggressively on Friday. All the three banks will be reporting next week, OCBC on 14 February, followed by DBS on 16 February, and UOB on 17 February.
How did the bank stocks perform
Looking at the chart comparison of all the three banks, it is no surprise that DBS stock has outperformed its two other peers, OCBC, and UOB. Interestingly, both UOB and OCBC stocks took on the same trajectory path sometime close to end of 2016, before OCBC pulled away, and is now 27.5 per cent higher based on the one-year chart.
How did DBS stock perform
Although the trajectory of DBS stock is riding high, the average directional index (ADX) has risen a bit at 26.877 reading, compared to 26.799 on February 08. The negative directional indicators (DIs) have also started to moderate, while the positive DIs have also ended Thursday trading with slightly upwards.
In summary, looking at the one-year chart of DBS stock, we think that the stock is likely to see some short-term correction before resuming higher. The STI has also risen by around 0.75 per cent as compared to the start of the trading week, while DBS stock has fallen by minus 0.37 per cent as of Feb 09 close. We believe the DBS stock could display some instances of stock price consolidation, but due to its competitive price-to-book (P/B) ratios, DBS stock will still be a highly sought after bank name as one can see in the comparison chart between the stock and the FTSE ST Financial Index. However, investors are advised to select strategic entry and exit points, and not be too enthusiastic on trading the bank stock as it reports its earnings next Thursday, February 16.
Real estate stocks in focus
Readers might note that the FTSE ST Real Estate Holding and Development Index has massively outperformed the STI by a difference of 10 percentage points. There are various explanations for the surge in several SGX-listed real estate stocks recently, namely the low valuation multiples, the signs of pockets of growth in some real estate segments, namely the high-end property developments, the possibility of government’s relaxation of cooling measures, and the return of foreign buyers which could signal investor confidence, among others.
How did the key STI property counters perform
Among the top three STI property counters (see above chart), City Developments Ltd (CDL) is the major top performing stock among the rest of its STI property counters, CapitaLand Limited, and UOL Ltd. Taking a look at the technical analysis (TA), namely the stock’s Average Directional Index (ADX) shown below, it is trending upwards with more positive DIs as compared to negative DIs.
Looking at the chart below, the trading support for CDL is expected to around $9.15 to $9.16, while the trading resistance is around $9.50 to $9.71. The stock currently trades at $9.44 per share, and the stock achieved at 52-week high of $9.59 on Tuesday before it comes back down to current levels. At the current price of $9.44 per share at the time of this article write-up, the immediate test for support is likely around $9.39 on the 20-day moving average (MA) line. Should that support level is broken downwards, the next immediate stock price to look out for is $9.00 per share.
Another fundamental relook at CDL’s stock would be through the use of the proprietary valuation tool by Maybank Kim Eng (Maybank KE) which shows that the stock is relatively undervalued.
The value chart above seeks to find out undervalued stocks where the current price is below the fair value line. According to the chart, when the stock price is near the fair value, or above the line (overvalued), this may not be the best time to invest even if it is a strong company. Looking at the value chart, it appears that CDL’s stock could potentially be undervalued since its current price as of February 09 is at $9.53, which is below the fair value of around $10 per share.
Another property counter to watch is UOL Ltd. The property counter owns and/or manages approximately 30 hotels under the Pan Pacific and Parkroyal names in Asia, Oceania, and North America with approximately 9,800 rooms. The company is also a developer of many residential, commercial, and retail mall projects. Some of its local residential projects include Bontanique at Bartley, the upcoming Raintree Gardens (was sold en-bloc recently to UOL), The Clementi Canopy and Principal Gardens, among others. One of its most prominent local retail mall projects is OneKM mall along the Tanjong Katong area.
Lately this year, UOL bought into a niche East Coast area. The land site is located on 45 Amber Road land site for $156 million. The site currently housed a nursey farm, and is sandwiched between The Shore Residences, and The Sea View, and occupies 70,000 sq ft. According to local press reports, the group’s deputy chief executive officer (CEO) said that the site will be able to accommodate about 190 apartment units in a 22-storey block.
The developer is also about to open its showflat for the 505-unit The Clementi Canopy project this Saturday, 11 February, 2017. The development is expected to consist of two 40-storey blocks with two- to four-bedroom units from 635 sq ft to 1,539 sq ft. The average price will range from $1,330 psf to $1,336 psf. According to the local press reports, about 40 per cent or 194 apartment units are two-bedroom units ranging from 635 sq ft to 732 sq ft. The prices will range from $850,000 to $1.2 million.
Based on data obtained on SGX StockFacts, the stock currently trades at 18 times historical price-earnings (P/E) multiples, with a price-to-book (P/B) value of 0.672, and dividend yield of 2.25 per cent. Debt leverage as measured by total debt equity ratio is about 25 to 30 per cent, and interest coverage ratio is around 11 to 12 times.
Technical Analysis of UOL Ltd
The stock is trading significantly higher and has broken its 52-week high of $6.68 per share as of Friday, Feb 10. The Relative Strength Index (RSI) is also showing that the stock is trading at ‘overbought’ levels. The Average Directional Index (ADX) which is not shown is at around 42.3804, with positive DIs outweighing the negative DIs. We believe that there could be some anticipation by traders on the potential overwhelming response for this weekend’s soft launch of The Clementi Canopy project.
Based on the latest Reuters consensus outlook for UOL Ltd, there were 12 bullish calls, and 7 bearish calls by analysts with a target price of $7.224 per share.
Summary of the latest Committee on the Future Economy report and what stocks/sectors are favourites
Readers might also note that the highly anticipated report by the Committee on the Future Economy (CFE) which is tasked to provide a comprehensive look at how Singapore will manage the present and future challenges was released on February 09, 2017. The report cited seven strategies needed to overcome the various global challenges, and they are:
- Deepen and diversify international connections.
- Acquire and utilise deep skills.
- Strengthen enterprise capabilities to innovate and scale up.
- Build strong digital capabilities.
- Develop a vibrant and connected city of opportunity.
- Develop and implement industry transformation maps (ITMs).
- Partner each other to enable innovation and growth.
In a nutshell, the report is geared towards transformation of the entire Singapore’s economy, and many of its points highlighted were also noted by several sell-side firms. For example, CIMB Securities summarised the reports’ findings into three points:
- The review of the tax structure’s competitiveness is probably the only new thing that we gleaned from the paper published by the Committee on the Future Economy (CFE).
- Finance, hub services, logistics, urban solutions, scalable healthcare technology, ICT, real estate, and advanced manufacturing are key growth areas.
- The direct beneficiaries include ST Engineering (STE), Keppel Telecommunications and Transportation (KTT), Keppel DC Reit (KDC), Venture, Mapletree Logistics Trust (MLT), SingPost, SATS, and Genting.
The direct beneficiaries are cited due to the potential investments and infrastructure spending geared towards the technology, and innovation areas, improved transport connectivity especially with the ongoing and proposed projects like Changi Airport Terminal 5, the seaport in Tuas and the Kuala Lumpur – Singapore High Speed Rail. The logistics sector is also targeted to be developed in order to cater to the growing e-commerce industry.
Hang Seng Index is heading towards major highs
The Hang Seng Index (HSI) in Hong Kong scored a major high yesterday, January 09, 2017 when the index hit an intraday high of 23,644.63 before closing the day at 23,525.14. Looking at the above chart, the HSI has crossed above all the moving averages and was last traded at 23,623.70 at the time of the writing of this article. ADX is also slightly rising, while volumes stay quite stable.
Looking at the next chart with the S&P 500 overlapping the HSI chart, it is noteworthy to see that the HSI is closing the gap on the S&P 500 trend line. While there was a divergence between both indices towards the end of last year, HSI managed to climb back up, and is now moving head to head with the S&P 500 chart.
S&P 500 Index valuation is getting pricey
Looking at the S&P 500 chart above, it appears that the index is slowly inching towards a consolidation phase. The index closed at 2,307.87 on Thursday, February 09, 2017 and is close to its 52-week high of 2,311.08. However, the downtrend ADX, along with low trading volumes seems to suggest that there are a lot of investors taking a pause at buying stocks in anticipation of more clarity from the upcoming tax cuts announced by President Trump on Thursday.
Apart from the chart observations for the S&P 500 index, the current earnings multiple is about 25 to 26 times, as compared to many Asian markets which are trading in the range of 13 to 18 times current P/E. Until the final tax package is announced, or there is more information on President Trump’s campaign’s promises of more infrastructure spending, and adopting a regulation-lite market environment, among others, there might not be any major impetus to move S&P 500 Index higher, along with increased trading volumes.
How did our portfolio perform
Readers who have been following my weekly and monthly updates might have realised that my portfolio selections are targeted towards the mid to long-term basis with an expected return of 3 per cent to 5 per cent.
With that, the overall portfolio returns since the inception at the end of November 2016 has now appreciated by around 5.4 per cent on a total return basis. This compares to the total return of 6.8 per cent for the STI Index for the same time period. The STI closed on Friday at 3,100.39, and is now up by 7.55 per cent since the start of 2017.
Our best performing stock so far is Dairy Farm Holdings Ltd and the stock has turned in a positive 21.6 per cent return since inception. Our least performing stock is Raffles Medical Group which we added at the end of January 2017. The stock fell to a minus 2.7 per cent to end at $1.44 per share at the close of Friday’s trading.
Over the long run, we are still relatively positive about the near-term recovery of the oil and gas (O&G) sectors, namely Keppel Corporation ($6.36), and Ezion Holdings Ltd ($0.385). We think that the market has been discounting the potential for recovery for Ezion Holdings as the company is probably one of the few O&G companies that are generating positive free cash flows (FCFs).
On the latest report by the Committee on the Future Economy (CFE), we are on a lookout for value- add healthcare and technology companies, particularly those that design and produce highly advanced medical technologies. We are also on a lookout those companies that provide advanced digital technology services for companies such as cybersecurity, and data management services. Some of these companies include Procurri Corporation Ltd ($0.40) which is in the business of providing data centre management and lifecycle services. The company trades at around 11.5 times earnings, and has a price-to-book (P/B) value of 1.69. The company also has relatively little debt and its interest coverage ratio is around 23 times as of end FY 2015.
We hope to search for new stocks to add, and possibly realise some of our returns in certain stocks in the portfolio. We are adjusting our STI forecast up a bit to around 2,900 to 3,000, and is up from our previous forecast range of 2,800 to 2,900. We think that there could be increasing risks of global economic slowdown, particularly China, which is our largest trading partner. Overall, we are positive about the various recommendations put up by the CFE as these strategies are targeted at the long-term growth of around 2 to 3 per cent for the country’s economy. We shall await for the Budget announcement on February 20, and will determine if there are any changes to update.
What to watch out for next week
As noted in the beginning of our market roundup, all the three banks will be reporting next week, including OCBC (Feb 14), followed by DBS on Feb 16, and UOB on Feb 17. CapitaLand Limited will also be reporting on Feb 15. There are 15 bullish calls, and 4 bearish calls by analysts, and target price for the stock is $3.79 as of February 10. CapitaLand currently trades at $3.49, up $0.04 intraday. ST Engineering (STE), a STI component stock, will also be reporting on February 16. There are 13 bullish calls, and 9 bearish calls by analysts with consensus estimates for $3.351 per share. STE is currently trading at $3.39 per share and is up 3 cents intraday at the time of the article writing.
On the economic front, the government of Singapore will be publishing the December retail sales where the consensus is calling for a 1 per cent monthly decline, while on a yearly basis, retail sales for December is expected to show an increase of 1.1 per cent. The data will be released on Wednesday, February 15, 2017.
On Friday, February 17, 2017, the government of Singapore will also be publishing the trade figures for January 2017. The forecast for non-oil exports is likely to show an increase of 1.29 per cent on a monthly basis, while the trade balance is likely to show a positive S$4.9 billion surplus.
Disclaimer: The views/analyses expressed by the author in this article are based on public information sources, and individual analyses. These views do not necessarily represent the views shared by my principal firm. Investors seeking to trade in the stocks mentioned in this article are advised to seek the opinions from licensed financial advisers.