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WORDS OF WISDOM FOR THE DAY:
Great thinkers, such as Benjamin Franklin advocated prudent decision-making in which the pros and cons are carefully compared. When it comes to trading, however, there isn't always enough time to spend so much effort and energy in making a decision. The stock markets can be fast paced, and if you take too long to act, you may miss an important market move.
Besides, the kind of information we examine in making our decisions is often fallible and hardly worth the effort to consider in detail. Sometimes it is better to avoid over-thinking and just make a thoughtful but quick decision. Trading often requires making a quick decision, but no one wants to make an uninformed or impulsive decision.
Prudent decision-making is the hallmark of success. However, that there are some situations where a great deal of over-thinking is actually an impediment. Some trading decisions may be such situations. Your psychological energy is limited and spending too much time and energy may exhaust your limited psychological resources and hamper performance. So sometimes it's useful to avoid over-thinking and make a quick but reasonable decision. Just implement the trading strategy and focus on the outcome. You may find that you'll achieve greater profitability in the end.
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SINGAPORE STI INDEX CHART COMMENT
The Straits Times Index slid 13.84 points or 0.45 pct to close at 3,078.74, after moving within the range of 3,058.17 - 3,105.16. Over the week, the index was down 231.7 points or 7.0 pct.
Located in a strategic uptrend, the STI marked an alltime high at 3,316 this week on Monday. At this level, the index posted a Harami Cross in the candle chart and started a correction on Tuesday.
The day before yesterday, prices plunged, forming a huge downside gap. With this sell off, the STI reached a midterm relevant support area between 3,045 and 3,099 which can be defined by the rising 50-day moving average, the lower Bollinger Band and a horizontal support from this January.
If prices manage to stabilise in the upcoming sessions, a pullback towards the upper gap boundary and the centre line of the Bollinger Bands at 3,216 seems possible.
A move below 3,040 on the other hand could extend the correction towards the major support zone between 2,049 and 3,000. Only a sustained decline below this latter support would darken the mid-and long-term bullish picture.
Investment Strategy:
Anti-cyclic acting traders may consider taking restrictively hedged long-positions in case of signs of stabilisation just above 3,000 in the upcoming trading days. The stops of existing mid-and long-term oriented long-positions may be trailed to just below 2,049.
Singapore shares closed Friday lower in extended correction on Wall St weakness. New York's main oil futures contract, light sweet crude for delivery in April, dropped 25 cents to 61.75 usd a barrel from 62.00 usd. The contract earlier hit a peak of 62.49 usd, a level last seen on Dec 26. Brent North Sea crude for April delivery slipped 11 cents to 62 usd a barrel.
Buy shares only when the stock market is in extremely oversold positions and sell shares when the stock markets turn extemely overbought positions. These are the times you make money from your stock investment and you just won't know it until later on (compare share prices in both extreme positions & you will know what I mean....)
Clients may refer to everyday Business Times under Stock Section: under other Singapore Market Indices column - Business Times Overbought / Oversold indicators : BT OB/OS This indicator is widely used as an indication for entry and exit when trading in the Singapore stock market;
1) Recalled Sinapore market was in extremely oversold positions by 938 points on 1st May 2004; it turns over-bought positions by 391 points in 1st June 2004 and becomes grossly over-bought positions by 616 points on 12/7/2004.
2) In 25th october 2005, S'pore stock market was again in extremely oversold position by 1004 points, But in 11th January 2006, S'pore stock market had turned extremely overbought by 933 points...
3) As of 25th May 2006, S'pore stock market was again in extremely oversold position by 1483 points and truly as it turns out on the 5th July 2006, S'pore markets became overbought Positions by 822 points.
4) On the 24th January 2007 S'pore stock market was in extremely overbought position by 1071 points, isn't SELL signal brewing and S'pore stock marklets bound for correction soon. Time to cash out your profitable positions and stay out of the stock market before it make a mockery out of you...
5) On the 05 February 2007 S'pore stock market was back to oversold position by 404 points, off its recent overbought high of 1071 points.
SINGAPORE (XFN-ASIA) - Share prices closed lower as the market pared earlier technical gains, extending a correction following renewed weakness on Wall Street overnight and a subsequent mixed showing across regional bourses, dealers said.
The Straits Times Index slid 13.84 points or 0.45 pct to close at 3,078.74, after moving within the range of 3,058.17 - 3,105.16. Over the week, the index was down 231.7 points or 7.0 pct.
The day's volume was 2.15 bln shares, valued at 2.37 bln sgd.
Losers outnumbered gainers 406 to 298, with 1,213 stocks unchanged.
Dealers said the market's next direction remains unclear, with a further consolidation looking more likely, given a dearth of news following the end of the reporting season. "(The) long-term uptrend may still be intact but (it is) hard to see the STI back to the 3,316 peak soon as consolidation is likely to follow once the current sharp swings peter off," Fraser Securities research head Najeeb Jarhom said in a note. Commenting from a technical viewpoint, he added: "The short-term trading range appears to be 3,050-3,150.
"But if the market quickly gets back to its feet by staying far away from 3,050 and moving to 3,150-3,200, which it briefly managed to do on Wednesday and Thursday, then the damage from this week's nightmare would be less than feared."
Leading the fall were property heavyweights. Keppel Land was down 0.15 sgd at 8.50, City Developments down 0.10 sgd at 13.30 and Capitaland down 0.35 sgd at 6.85.
Some blue chips staged a mild recovery, with ST Engineering up 0.04 sgd at 3.26, Singapore Airlines up 0.30 sgd at 16.00 and Singapore Press Holdings up 0.04 sgd at 4.38.
United Overseas Bank rose 0.40 sgd to 20.50, Oversea-Chinese Banking Corp gained 0.10 sgd to 8.70, but DBS Group Holdings remained weak, closing 0.10 sgd down at 20.90.
Semiconductor stocks held on to gains prompted by news of a surprise takeover bid for STATS ChipPAC by Temasek Holdings unit ST Semiconductor. Chartered Semiconductor firmed 0.01 sgd to 1.55, STATS ChipPAC added 0.01 sgd to 1.82 and United Test & Assembly Center added edged up 0.005 sgd to 0.92.
STOCK ALERT - Singapore's Design Studio says orderbook at 90 mln sgd as of last yr
SINGAPORE (XFN-ASIA) - Design Studio Furniture Manufacturer Ltd said its orderbook stood at 90 mln sgd as of last year. The amount consists of 54 mln sgd from local projects and 36 mln for export sales to the US, Dubai, Japan, Malaysia and Pakistan, it said. It said most of the export orders are expected to be realized this year. The accumulated orders will have a positive impact on its revenue for 2007, the company added.
SINGAPORE (XFN-ASIA) - Moody's Investors Service said it has assigned a corporate family rating of "A3" on Frasers Centrepoint Trust (FCT), crediting the sustained income stream from the real estate investment trust's (REIT) well-located suburban malls. "The rating reflects FCT's investment focus on suburban retail properties in Singapore, a sector whose entry barriers tend to be relatively high, and which is usually resilient to economic shocks because of the presence of tenants mainly providing daily necessities," Moody's said in a statement.
"The stable outlook reflects Moody's expectations of management's capabilities in executing stated growth strategies and sustaining cash flow generation, against the backdrop of a favorable Singapore market, the company's minimal development risk exposure, and its adherence to financial discipline in the pursuit of growth," the ratings agency added.
It also noted, however, that the REIT's lease profile is short in terms of the weighted average lease term, which was 1.8 years, compared with the typical three-year tenure for the local retail industry, which leaves FCT more exposed to market risk. Moody also cited FCT's short operating history as a REIT, with a limited track record for demonstrating enhancement value to its retail assets.
"At the A3 rating, Moody's has fully factored in the expected benefits of FCT's potentially enlarged portfolio and accretive cash flows," it said, adding it would unlikely change the rating unless the REIT showed financial flexibility through reducing its encumbered assets ratio and reliance on secured borrowings, as well as implementing a reasonable level of committed backup facilities.
STOCK ALERT - Singapore's Inter-Roller to sell property space for 23.25 mln sgd
SINGAPORE (XFN-ASIA) - Inter-Roller Engineering Ltd said its unit Inter-Roller Investments Pte Ltd will sell its property units at Suntec Tower 1 for 23.25 mln sgd. The company said it stands to gain, before tax, about 10.85 mln sgd over the net book value of the property from the sale. Inter-Roller said the deal will be completed by this year and it will use the proceeds to repay the bank loan taken to finance the property units and the balance for general working capital purposes.
STOCK ALERT - Singapore's Darco wins 15 new industrial deals worth 17.4 mln sgd
SINGAPORE (XFN-ASIA) - Darco Water Technologies Ltd said it has secured 15 new water and wastewater treatment projects worth 17.4 mln sgd. With these projects, the firm said its current order book for the industrial sector now stands at 22.9 mln sgd. "The total secured orders of 22.9 ml sgd marks an excellent start for 2007, especially when compared to the 23.4 mln revenue generated from this sector in 2006," chief executive officer KM Thye said. The company said the deals are expected to have a positive material impact on group revenue this year.
STOCK ALERT - Singapore-listed Gems TV hits new high on Thai tax exemption lead
SINGAPORE (XFN-ASIA) - Gems TV Holdings Ltd hit its highest price since its listing in November after the company announced that the authorities in Thailand had granted tax exemptions to its unit there, NCS Group Co, dealers said. In afternoon trading, Gems TV was up 0.11 sgd or 7.38 pct at 1.60 sgd, off a high of 1.61, with 2.69 mln shares traded.
Gems TV said that among other things, NCS would be exempted from corporate income tax on net profit derived from the production of jewelry and ornaments for eight years, from import duties on raw and essential materials for exports and from import duties on items for re-export for five years after they were first imported.
Gems TV said it was unable to estimate the effect of the exemption from corporate income tax over eight years, but that this year the exemption was expected to reduce the group's tax bill by about 10.7 mln usd. "The group's effective tax rate is expected to be approximately 9.8 pct instead of 33.8 pct," Gems TV said.
SINGAPORE (XFN-ASIA) - Ocean Sky International Ltd was sharply higher after the maker of clothing for internationally known brands reported that its net profit had risen 27.5 pct to 11.52 mln sgd last year, dealers said. In late morning trading, Ocean Sky was up 0.015 sgd or 7.69 pct at 0.21 sgd, with 816,000 shares having changed hands. The company has proposed a dividend of 0.016 sgd per share for last year, its first ever. Ocean Sky said it was confident of a healthy stream of orders and that it would increase its production levels with a new plant in Vietnam by the third quarter this year.
SINGAPORE (XFN-ASIA) - Genting International was higher amid emerging hopes that it and partner Star Cruises will eventually secure a license to run a casino at the Sentosa integrated resort they are building after the consortium pledged full commitment to the project, dealers said. The consortium signed the development agreement for the Sentosa IR with the Sentosa Development Corp yesterday.
The Ministry of Home Affairs said on Tuesday that the signing of the development agreement does not automatically mean the consortium will get a casino license. In response, the consortium said: "Genting International is fully committed to ensure the success of Resorts World at Sentosa and that (it) meets the suitability requirements of the authorities for a casino license."
The ministry has been conducting suitability checks on relevant parties to ensure that the consortium meets the suitability requirements before the casino license is issued. Genting International was up 0.06 sgd or 7.74 pct at 0.835 with 76.52 mln shares traded, while Star Cruises was up 0.035 usd or 12.72 pct at 0.31 with 29.10 mln shares traded.
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STOCK WATCH COMMENT : (Research Houses Daily Trading BUY / SELL Contra Trades Recommendation for Short Term Investment) - (Market Outperform: BUY) ; (Market Perform: HOLD) ; Market Underperform: SELL) - (All else being equal, it's better to buy a stock near its 52-week low than its 52-week high )
SINGAPORE (XFN-ASIA) - DBS Vickers Securities says it has raised its target price for City Developments Ltd to 15.50 sgd per share from 14.60 sgd after revising its valuations of the firm's property developments. "We expect the group will continue to benefit from the upturn in the physical property market as well as strong contribution from the Millennium and Copthorne group," DBS Vickers said in a note to clients.
The brokerage firm said City Developments would put on sale about 700 up-market and mid-market apartments in the first half of this year. DBS Vickers said the company was considering selling some of its retailing property portfolio and creating a real estate investment trust. The brokerage firm rates City Developments stock a "buy". At 4.07 pm, City Developments was down 0.20 sgd or 1.49 pct at 13.20 sgd, with 2.52 mln shares having changed hands.
Seksun Corp to 0.63 sgd from 0.52 and is keeping its "buy" call on the stock after the company reported strong earnings for its third quarter to December. Seksun's net profit in the third quarter rose 89 pct year-on-year to 20.39 mln sgd. The brokerage said it also views positively the group's initiatives to start producing disk clamps by offering a lower-cost hybrid process of metal stamping and machining.
Although the company reported a net debt of 3 mln sgd versus 13 mln in net cash in the quarter due to higher capital expenditure of 31 mln sgd for its Thailand plant, DBS Vickers said it believes the lower capital expenditure of 18 mln sgd in the current quarter will allow the company to return to a net cash position. At 3.30 pm, Seksun was up 0.01 sgd or 1.96 pct at 0.52 on volume of 5.51 mln shares.
SINGAPORE (XFN-ASIA) - CIMB-GK says it has lowered its target price for Sinomem Technology Ltd to 1.05 sgd from 1.10 sgd in view of the company's lower earnings potential, which is due to narrower margins for its core engineering business and a delay in the production of what could become its biggest downstream product, Xanthan Gum.
The brokerage firm said it had cut its estimates of Sinomem's earnings per share for 2007-2008 by 6-10 pct because the company's production of Xanthan Gum was likely to be held back by 4-5 months as busy suppliers had been unable to deliver critical machines on time. But CIMB-GK is sticking to its "outperform" rating for Sinomem stock, saying the company is primed for more acquisitions and joint ventures following its issue of convertible bonds in December that raised 80 mln sgd.
The company has formed a joint venture with German firm Nanovation AG to produce ceramic membrane and a plant is due to start production in October. CIMB-GK estimates that if the membrane is priced at an average of 100-150 euro per square meter, the product could contribute about 6 mln sgd per year to revenue when the plant is working at full capacity. At 3.10 pm, Sinomem was down 0.055 sgd or 5.79 pct at 0.895 sgd, on volume of 613,000 shares.
SINGAPORE (XFN-ASIA) - DBS Vickers said it has cut its target price for Sino-Environment to 3.62 sgd from 3.96 to factor in lower earnings prospects due to revenue recognition deferrent. "Since bigger-sized desulphurization projects may take more than 12 months to complete, we are deferring part of the revenue for recognition in 2009, hence our cut in earnings assumptions for this division in 2007," the brokerage said in a note.
It has revised its earnings estimates for Sino-Environment downwards for 2007 by 18 pct to 267.8 mln yuan and for 2008 by 2 pct to 486.1 mln yuan to factor in lower revenue for its desulphurization projects and lower estimated industrial waste gas devices sold. But DBS Vickers said it remains positive on the outlook of the company on expectation of good contract flows this year and the next. It also expects Sino-Environment's breakthrough in research and development efforts to develop two new applications of recovery technology to allow it to expand its customer base to service the refineries and the export market. At 2.54 pm, Sino-Environment was down 0.12 sgd or 3.92 pct at 2.94 on volume of 824,000 shares.
SINGAPORE (XFN-ASIA) - CIMB-GK said it cut its target price for FerroChina to 2.32 sgd from 2.37 sgd to factor in the company's weaker earnings prospects after its 2006 results came in below expectations. The brokerage said it also lowered its earnings per share estimate for FerroChina by 2-3 pct for 2007-2008 due to higher interest estimates.
But CIMB-GK added that it is keeping an "outperform" call on the stock, saying the recent share price pullback presents "a brilliant buying opportunity" into FerroChina, while the company's capacity expansion will catalyze its stock price. "With plans underway to grow capacity as global steel consumption looks set to continue increasing, FerroChina's earnings will bloom," CIMB-GK said in a note. It noted that FerroChina plans to continue to engage in tie-ups that allow it to increase capacity without heavy capital spending and underutilization of steel mills, similar to its tie-up with Baotou Steel in February. "This growth in capacity amid growing steel demand will be the main driver of its growth," CIMB-GK added. At 2.16 pm, FerroChina was up 0.02 sgd or 1.31 pct at 1.55 on volume of 2.19 mln shares.
SINGAPORE (XFN-ASIA) - DBS Vickers Securities says it has raised its rating for DMX Technologies Group to "buy" from "hold", while keeping its target price at 0.65 sgd, because the recent sharp declines in price that followed the company's profit warning have made the stock inexpensive. "We believe that all the negatives are already priced-in, and DMX could only rise from the current stock price," DBS Vickers said.
The brokerage firm said it estimated conservatively that DMX's earnings would grow by 12 pct this year and 10 pct next year as the company reorganized itself to focus on higher-margin businesses and arrest the narrowing of its margins. "The catalyst to re-rate the stock could be evidence of higher earnings growth year-on-year," DBS Vickers said in a note.
Higher growth could come from greater contributions from outside China through unit Packet Systems and from some big projects in its technology provisioning segment that could make DMX a software licenser instead of just a systems integrator. At 2.14 pm, DMX was up 0.005 sgd or 0.95 pct at 0.53 sgd, after 1.07 mln shares had been exchanged.
SINGAPORE (XFN-ASIA) - CIMB-GK Research has increased its target price for Hyflux Ltd to 2.20 sgd per share from 2.02 sgd as it raises its 2007 earnings per share forecasts for the water treatment specialists to account for the company's gains from a recent divestment. Going forward, the brokerage noted that the company has many promising ventures that could propel growth.
"They include used oil recycling, and the recent 80 mln sgd R&D and manufacturing joint ventures in China with a large US private company, Marmon Water," CIMB-GK said in a note. "In particular, used oil recycling is expected to be the new pillar of growth from 2008 as Hyflux expands its presence from Singapore to China, and then Southeast Asia," it added. CIMB-GK has, however, kept its 'underperform' rating on Hyflux on a lack of execution record.
SINGAPORE (XFN-ASIA) - CIMB-GK Research said it has lifted its target price for People's Food to 1.55 sgd per share from 1.30 sgd previously after the Chinese meat supplier posted sterling 2006 results. People's Food said its net profit rose 15.7 pct to 852.65 mln yuan last year on the back of a 13.5 pct growth in sales to 8.7 bln yuan.
CIMB-GK said it has lifted its 2007 earnings estimates for People's Food by 3.8 pct as it expects better sales this year. People's Food may also enjoy better margins in the first quarter of this year as selling prices have risen by 35 pct year-on-year during the past two months as a result of Chinese New Year festivities.
However, the margin improvement may not be sustained as prices are expected to taper off around May this year, it added. People's Food closed the morning session unchanged at 1.37 sgd with 916,000 shares traded.
BROKER CALL - Singapore's Banyan Tree target raised to 2.20 sgd - DBS Vickers
SINGAPORE (XFN-ASIA) - DBS Vickers said it has raised its price target for Banyan Tree to 2.20 sgd from 1.70, or a 20 pct premium to the stock's current trading levels, in view of the company's strong branding, expansion plans and new hotel management contracts this year. "The premium is for the branding of Banyan Tree, which comes with a strong reputation of renowned quality services, superior design and vast network of exotic holiday destinations," the brokerage said in a note.
"The premium also includes their desire to expand presence in the high growth areas of Vietnam, China, North America, the Middle East and North Africa, which they have identified as their key expansion areas for the future," it added. DBS Vickers said it is keeping its "buy" call on Banyan Tree, as it views favorably the company's plans to set up property funds to co-develop its projects in China and then in Vietnam, and its efforts to diversify its product by going into inner city hotels in key cities like Beijing and Bangkok.
STOCK WATCH - Singapore's Sino Techfibre sees double-digit earnings growth this yr
SINGAPORE (XFN-ASIA) - Sino Techfibre Ltd, a Chinese producer of microfibre and polyurethane (PU) synthetic leather, said it is confident of achieving another double-digit earnings growth this year, given the strong consumer demand in China and on the back of its expansion plans. "Our earnings in 2007 is certainly going to be better than that in 2006.
There will certainly be growth ... it should be double-digit growth," group deputy chief executive Li Changrui told XFN-Asia in an interview on Wednesday. "We have invested in a new PU production line and two more microfibre production lines. All these are going to boost our topline," Li said. The group has spent some 138 mln yuan on these new facilities, which will commence production in July this year.
Last year, Sino Techfibre's net profit jumped 48 pct to 345.8 mln yuan on the back of a 45 pct leap in sales to 944.49 mln, with margins increasing to 45.2 pct from 44.7 pct. "We aim to keep our margins above the 40 pct level by developing new higher-margin products," Li said.
As part of its ongoing efforts to develop new products, the group is investing 300 mln yuan on two production lines to manufacture pattern moulding paper (PMP), making it the first company in China to have this capability. With this, China will become the fifth country to produce PMP, besides the US, Germany, Italy and Finland.
Li estimates that China imports some 100,000 tons of PMP annually. To kick-start its PMP production in the fourth quarter, Sino Techfibre will identify five common PMP types and produce close to 4.0 mln metres a month, which is 10 pct of its maximum PMP capacity of 40 mln metres. It hopes to sell its PMP at 80,000 yuan per ton, slightly cheaper than imported PMPs which are selling at some 100,000 yuan per ton.
"We have received enquiries from a number of our customers in China who are interested to distribute our PMP products but we will wait till our product is out and consider the various sales avenues," Li said. Li added that financing for further PMP capacity expansion may be necessary, when its net proceeds of 107.5 mln sgd from its initial public offering last October is used up. For 2007, Sino Techfibre estimates it will need 350 mln yuan in capital expenditure.
STOCK WATCH - Singapore's Penguin Boat to sustain earnings growth in next few yrs
SINGAPORE (XFN-ASIA) - Penguin Boat International Ltd said it expects to see continued earnings growth this year and beyond, having returned to the black last year after three preceding years of losses. "Judging by the first two months of this year alone, we have good reason to be confident that we will be able to make more (earnings) this year," Penguin director of business development James Tham said in an interview with XFN-Asia earlier this week.
He noted that the group's two-year restructuring efforts to improve utilization rates, reduce depreciation through strategic vessel sales and boost revenue by building vessels for third-party ship-owners have finally paid off. Penguin Boat recorded a net profit of 1.18 mln sgd last year compared to a loss of 3.93 mln in 2005, mainly aided by cost savings.
Earnings going forward will be supported by existing orders. So far this year, the group has secured about 56 mln sgd worth of orders, more than double the orders secured in 2006. Penguin Boat unit Pelican Offshore Services Pte Ltd had this week secured its first contract in the Middle East for the supply of three vessels, worth 23 mln usd, to the Abu Dhabi National Oil Co.
"We are expecting repeat orders from our Middle East client," Tham said. Pelican Offshore Services also counts major oil producers like Brunei Shell Petroleum (BSP), CNOOC, ConocoPhillips, ChevronTexaco and ExxonMobil as among its clients. Given the strong demand, Penguin Boat is anticipating capacity constraints at its existing shipyards and is now looking to acquire new land in Southeast Asia to build yards or partner with other shipyards in the region to build crew boats and ferries.
It currently has two yards in Singapore with a combined land area of 23,000 square metres and is developing a 37,000-square metre yard in nearby Batam, Indonesia. The Batam yard will be completed by the end of this year. "We are in the position for looking at sensible acquisitions, so we are talking to companies that we can either joint venture with, outsource to or even acquire outright for the shipbuilding," Tham said.
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CORPORATE WATCH : (Research Houses BUY / SELL Recommendation for Medium Term Investment (1-3 Months Period) - (Market Outperform: BUY) ; (Market Perform: HOLD) ; Market Underperform: SELL)( For Phillip Securities In-House Reseach Reports, Please Logon To POEMS Website At www.poems.com.sg Under Research column page)
ANALYSTS CHART COMMENT ON OCBC BANK (S$8.70) : Duetsche Bank Equity Research House - 05/3/2007
OCBC shares had been situated in a broadly based long-term sideways movement since 2004. With a dynamic move upward, prices eventually overcame the upper boundary of the range at 7.15 in November, turning the technical bias from neutral into bullish.
Four weeks ago, OCBC shares overcame a short-term relevant horizontal resistance at 8.00 and the upper channel line of the established mid-term uptrend channel around 8.16. This surge may be seen as a sign of acceleration of upward momentum.
Having posted a bearish Doji on Monday, a distinct correction started. Up to now, the decline can be regarded as a mere pullback towards the upper channel line which is now providing support around 8.41.
The mid-term uptrend would be questioned in case of a violation of the major support around 7.80/7.90. Resistance is located at 8.75 and 9.10.
Investment Strategy:
Due to the overriding long-indication, traders may still prefer long positions. Then a protective stop may be placed just below 7.80. Risk-averse traders may await either a surge above 9.10 or a further correction towards around 8.00 before initiating a long-entry.
CITIGROUP SMITHS BARNEY EQUITY RESEARCH HOUSE ANALYSTS COMMENT ON OCBC BANK LTD

Target S$8.75: OCBC delivered the strongest 4Q results of its peers, driven by strong interest income growth and insurance. We are raising 2007/08 estimates by 10%, and set a new price target of S$8.75 based on a PER of 16x 2008E. The only issue is OCBC’s relatively higher valuation versus peers. Introducing 2009 estimates.
 Estimate 8-10% EPS growth in 2007-08E: Key assumptions are 10% loan growth but near flat margins, 15% fee growth, cost income ratio 44-45% and provisions charges of 7-13bps of loans. Average tax rate assumption 18%.
 CEO/CFO views: OCBC is on track in its “New Horizons 2” business strategy, in particular in deepening penetration into the regional. In Singapore OCBC continues to tap mass market potential (supermarket tie-ups, Sunday banking), but is cautious on aggressive pursuit of mortgage growth. More value will be unlocked from property divestments. Mgmt see a takeover of OCBC as unlikely.
Investment thesis
We have a Hold/Low Risk (2L) rating on OCBC with a target price of S$8.75 (from S$7.85). OCBC is trading above mean levels on our PER cycle framework. Our Singapore strategist, Jit Soon Lim, has a cautious outlook for the Singapore market (STI), with a 2007 index target of 3,023. From a sector perspective, the recent correction has trimmed valuations to be closer to fundamental earnings performance, but not yet to strong “buy” levels. Event risks include better-thanexpected profit growth from recent acquisitions, particularly in Indonesia, further M&A (we do not expect this to be material versus the bank's current excess capital position) and further capital management/higher dividends.
Valuation
Our target price for OCBC is S$8.75 (from S$7.85). (1) Using a dividend discount model, assuming 2008E cash ROAE of 17%, a net dividend per share of S$0.27, and cost of equity of 10%, determines a fair value P/E multiple of 16x 2008E, which when applied to our 2008E EPS estimate of S$0.53 derives a fair value of S$8.75, equating to a 2007E PER of 17.2x.
We use DDM as a primary valuation framework for banks because we believe it best reflects sustainable earnings/dividend growth and excess returns relative to cost of equity, which in turn factors in the liquidity/sentiment impact on valuations. It is also consistent with the methodology underpinning our P/E investment cycle analysis framework. (2) Using our P/E cycle analysis, which suggests an average troughpeak P/E range for the Singapore banks of 11-18x (for OCBC 12.8-17.9x, average 15.3x) on one-year consensus forward earnings estimates, applying this to the 2007 consensus EPS forecast of S$0.51, the trough-to-peak price range is S$6.52-S$9.12, with a cycle mean of S$7.80. Based on this framework, our price target is above the mean of the PER cycle range.
Investment Risk
We rate OCBC as Low Risk, a reflection of the capital strength and financial regulation of the Singapore bank sector. This is in line with our quantitative riskrating system, which tracks 260-day historical volatility of the shares. Key risks to our call include: [1] The pace of consumption recovery; [2] earlierthan- expected recovery in consumer/mortgage growth; [3] market liquidity/risk appetite; and [4] higher-than-expected dividends or capital management. Downside risks include: the property market recovery could remain confined to the luxury segment and mortgage recovery could fail to materialize. These risks could impede the stock from achieving our target price.
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ANALYSTS RESEARCH RECOMMENDATION ON UNITED OVERSEAS BANK (S$20.50) : UOB's target price raised to S$21.70 from S$20.70 on higher 2008 ROE of 13.4% (from 13.0%). We value UOB using the dividend discount model using ROE of 13.4%, cost of equity of 8.9% and long-term growth of 4%. We apply the calculated 1.9x book against 2008F ROE and discount back by 12 months to Feb 2008. The key risk to the stock is the recent sharp market decline and potential deletion of 40% of Singapore stocks from the MSCI Standard Index at the end of March : Duetsche Bank Equity Research House - 05/3/2007
4Q06 net income jumps 16% QoQ to S$537m, another quarterly record
Net interest income grew 3% QoQ and non-interest income jumped 54%. Unfortunately, operating expenses also rose 17%, but 20% revenue growth caused cost to income to fall slightly to 41%. We upgraded 2007 and 2008 earnings by 9% and 14% respectively. TP is raised by 5% to S$21.70 on higher earnings and ROE assumptions. We maintain Buy.
NIM remains weak at 1.99% (up 2bp), but loans growth reached 14% YoY
UOB continues to lose market share in SGD loans, but USD loans jumped 30% YoY and Ringgit loans rose 23%, which drove the net interest income growth. Non-interest income soared 54% QoQ due to a 50% rise in fees and commissions and a 72% jump in other income. However, UOB’s non-interest income can be seasonal and lumpy and we expect it to decline in 1Q07.
Expenses rose rapidly due to higher staff costs and computerization
UOB had lower expenses than peers historically but a tight labor market and foreign expansion caused expenses to bloat. This will become an issue if the operating environment is not as buoyant as it was in 4Q06. We don’t expect UOB to make any Cumulative Impairment provisions for the next three years and have upgraded our earnings accordingly. Asset quality continues to improve.
TP raised to S$21.70 from S$20.70 on higher 2008 ROE of 13.4% (from 13.0%)
We value UOB using the dividend discount model using ROE of 13.4%, cost of equity of 8.9% and long-term growth of 4%. We apply the calculated 1.9x book against 2008F ROE and discount back by 12 months to Feb 2008. The key risk to the stock is the recent sharp market decline and potential deletion of 40% of Singapore stocks from the MSCI Standard Index at the end of March.
Duetsche Bank Equity Rating
(1) Buy: Based on a current 12- month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected dividend yield ) , we recommend that investors buy the stock.
(2) Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.
(3) Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock
CITIGROUP SMITHS BARNEY EQUITY RESEARCH HOUSE ANALYSTS COMMENT ON UOB BANK LTD
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Top sector pick, target S$22.35 — UOB delivered a robust set of 4Q results, although the main revenue surprise was markets-related non-interest income and wealth management fees. Raising 2007/08 estimates by 4%, and set a price target of S$22.35 based on a P/E of 16.3x 2007E. Introducing 2009 estimates.
 Revised estimates; 9-10% EPS growth in 2007-08E — Key assumptions are 10-11% loan growth, near flat margins, 15% fee growth, cost income ratio 42-43% and provisions charges of 20bps of loans. Average tax rate assumption 19%.
 Mgmt bullish on 2007 — Deputy Chairman/CFO comments post FY2006 briefing suggests an optimistic 2007 ahead. UOB has captured market share in the Singapore mortgage market, while it continues to see strong growth in Malaysia and Indonesia. Management is monitoring developments in Thailand. China and Vietnam add further dimensions to growth although near term contribution will likely be small.
Investment thesis
We rate UOB as Hold/Low Risk (2L) with a target price of S$22.35. UOB is trading above mean levels on our P/E cycle framework. Our Singapore strategist, Jit Soon Lim, has a cautious outlook for the Singapore market (STI), with a 2007 index target of 3023. From a bank sector perspective, the recent correction has trimmed valuations closer to fundamental earnings performance, but not yet to strong “buy” levels. UOB event risks include better-than-expected profit growth from acquisitions in Thailand and Indonesia, further M&A (we do not expect this to be material versus the bank's current excess capital position) and capital management/higher than expected dividends.
Valuation
Our target price is S$22.35. (1) Using a dividend discount model, assuming 2008E cash ROAE of 16.8%, a net DPS of S$0.64, and cost of equity of 11%, gives a fair-value P/E of 14.9x 2008E, which when applied to our 2008E EPS of S$1.49 derives a fair value of S$22.35 — equating to a 2007E P/E of 16.3x. We use DDM as our primary valuation framework, as we believe it best reflects sustainable earnings/dividend growth and excess returns relative to cost of equity, which in turn factors in liquidity/sentiment impact on valuations. It is also consistent with the methodology underpinning our P/E investment cycle analysis framework. (2) Using our P/E cycle analysis, which suggests an average trough-peak P/E range for the Singapore banks of 11-18x (for UOB 10.7-15.4x, average 13.1x) on one-year consensus forward earnings estimates, on the 2007 consensus EPS forecast of S$1.31, the trough-to-peak price range is S$14.1- S$20.2, with a cycle mean of S$17.1. Based on this framework our target price is above the mean of the P/E cycle range.
Investment Risk
We rate UOB as Low Risk, a reflection of the capital strength and financial regulation of the Singapore bank sector and is in line with our quantitative riskrating system, which tracks 260-day historical volatility of shares. Upside and downside risks to our Hold/Low Risk call and target price include: [1] the pace of consumption recovery; [2] earlier-than- expected recovery in consumer/mortgage growth; [3] market liquidity/risk appetite; and [4] higherthan-expected dividends or capital management. These risks could impede the stock from achieving our target price.
PHILLIP SECURITIES RESEARCH HOUSE ANALYSTS COMMENT ON UOB BANK LTD:
The Group reported record earnings of S$2.57 billion for 2006 (+50.4% yoy) which is inclusive of one-time gain of S$689 million. The result exceeds our expectations by 2% due to higher non-interest income. Excluding one time gain, the Group’s net profit after tax recorded a 10.1% increase over 2005 to S$1.88 billion. Net interest income was up 15.4% to S$2.71 billion backed by 9.5% increase in customer loans to S$70.1 billion over the year. However, net interest margin remains at 1.99% for 2006, unchanged from a year ago. This came as a disappointment to us as UOB failed to leverage on the higher interest rate environment in Singapore.
The management assured that the excess funds will be placed cautiously in the longer term to yield better profits and we should see improvement in the coming quarters. Loans growth was mainly broad based in terms of segments as well as regions. Growth in loans was spread equally among Singapore, Asean and OECD including US, UK, Australia and Canada. Mortgage loans (S$18.9b, +13.6%) continue to grow as the Group targets the private housing sector. Loans to deposit ratio was up 80.5% to 78.5% as compared to a year ago.
Non-interest income performed better than expected. Fourth quarter non-interest income rose to S$517 million against our forecast of S$360 million. This is due to net gain on trading securities, government securities and derivatives as opposed to a loss in 3Q06. Fee and commission income grew to S$332 million (+13.3% yoy, +50.2% qoq) fueled by broad base increase of all segments. As such, excluding one-time income, non-interest income grew by 7.1% over 2005 to S$1.51billion in 2006.
Total expenses increased 21.9% to S$1.74 billion due to higher staff cost (S$ 867m, +26.8% yoy) and other operating expenses (S$ 869m, +17.4% yoy) mainly due to professional fees, commission and brokerage, business promotions and IT maintenance. Asset quality remains good with NPL on its downward trend. NPL ratio improved to 4.0% as compared to 5.6% in 2005. Total NPLs decreased 19.5% to S$3.2 billion as at 31 December 2006. Regionally, Singapore has the largest decline of 31.1% compared to 2005. We would expect the trend to continue downwards due to the improving economy outlook in Singapore.
Tier 1 CAR remains unchanged at 11.0% while total CAR increased 0.2% to 16.3% due to higher retained profits but offset by higher risked weighted assets, dividend payment and share buy-back. Taking into account of the decrease of Tier 1 ratio to 6% by MAS, UOB has approximately S$5.4 billion of excess capital. The management is assessing ways to return the funds to shareholders including share buybacks and dividends.
ROE for 2006 moderated to 12.3% as compared to 12.4% last year excluding onetime gains. EPS improved 8% to S$1.20 with net asset increasing to S$10.48. The Group is also proud to announce an increase in final dividend to 50 cents and an additional special dividend of 10 cents. Going forward, we expect loans growth to be healthy supported by the construction and mortgage segment as well as interest rates to remain high. The Group has also applied for local incorporation in China and has invested in Vietnam’s Southern Bank to boost their overseas earning. Thus, looking at the positive economy outlook for the region, we increased UOB’s one-year target price to $22.80, 1.9X FY08 BVPS based on our Gordon growth model. However, we caution investors that this is a one-year target. Maintain HOLD Recommendation.
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ANALYSTS RESEARCH RECOMMENDATION ON SINGAPORE BANKING STRATEGY : Recent correction puts Banks' valuations more in-line with fundamentals. Should the correction overshoot, our price targets suggest “buy” levels at S$7.80 for OCBC (OCBC.SI - S$8.50; 2L), S$19.90 for UOB (UOBH.SI - S$20.6; 2L) and S$20.50 for DBS (DBSM.SI - S$21.5; 3L). UOB is our current preferred pick in the sector : CitiGroup Smiths Barney Equity Research House - 05/3/2007
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Much needed correction: Valuations trimmed to 14-17x ‘07 PER vs. 8-10% EPS growth 1.6-2.0x P/B, 12.5% ROAE). Should the correction overshoot, our price targets suggest “buy” levels at S$7.80 for OCBC (OCBC.SI - S$8.50; 2L), S$19.90 for UOB (UOBH.SI - S$20.6; 2L) and S$20.50 for DBS (DBSM.SI - S$21.5; 3L). UOB is our current preferred pick in the sector.
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FY06 results — OCBC/UOB beat expectations: OCBC surprised on robust net interest income and insurance performance. UOB delivered better than expected fees and non-interest income. DBS was in-line. Post results we have raised estimates on OCBC by 10% and for UOB by 4%. All three banks paid out higher dividends, suggesting confidence over future earnings.
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Price ratio charts — DBS most oversold, OCBC most overbought: Our price ratio analysis as of last night’s close suggests a relative switch into DBS and out of OCBC/UOB, and a switch into UOB out of OCBC. DBS’ underperformance is in part explained by its lack of surprises in its results. OCBC looks to have factored in much of the good news and is the most expensive of its peers.
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Forecast assumptions: We assume 8-10% EPS growth in 2007E, on 10% loan growth, stable margins (2%-2.2%), 15% fee income growth, steady cost-income ratios (40-45%) and continued low provisions (c.10-20bps of loans). Underlying this, we expect +S$6bn (+10%) Singapore mortgage growth, higher than the S$3.5bn growth seen in previous property rallies of 1999 and 1996 [1].
DBS Group (DBSM.SI - S$21.50; 3L)
Valuation
Our target price for DBS is S$23. (1) Using a dividend discount model, assuming 2008E cash ROAE of 17.8%, a 2008E net dividend per share of S$0.688, and cost of equity of 11%, gives a fair-value P/E of 14.5x, which when applied to our 2008E EPS of S$1.59 derives a fair value of S$23, which equates to a 2007E P/E of 15.5x (P/B of 1.8x). We use DDM as a primary valuation framework for banks, as we believe it best reflects sustainable earnings/dividend growth and excess returns relative to cost of equity, which in turn factors in liquidity/sentiment impact on valuations. It is also consistent with the methodology underpinning our P/E investment cycle analysis framework.
(2) Using our P/E cycle analysis, which suggests an average trough-peak P/E range for the Singapore banks of 11-18x (for DBS 11.0-17.5x, average 14.3x) on oneyear consensus forward earnings estimates, on the 2007 consensus EPS forecast of S$1.507, the trough-to-peak price range is S$16.5-S$26.4, with a cycle mean of S$20.8. Based on this framework our target price is above the mean of the P/E cycle range.
Investment Risk
We rate DBS as Low Risk, a reflection of the capital strength and financial regulation of the Singapore bank sector. This is in line with our quantitative risk rating system, which tracks 260-day historical volatility of the shares. Key upside risks to our Sell call include:
[1] The pace of consumption recovery;
[2] earlier-than-expected recovery in consumer/mortgage growth;
[3] market liquidity/risk appetite; and
[4] higher-than-expected dividends or capital management.
These risks could take the stock above our target price.
OCBC (OCBC.SI - S$8.70; 2L)
Valuation
Our target price for OCBC is S$8.75. (1) Using a dividend discount model, assuming 2008E cash ROAE of 17%, a net dividend per share of S$0.27, and cost of equity of 10%, determines a fair value P/E multiple of 16x 2008E, which when applied to our 2008E EPS estimate of S$0.53 derives a fair value of S$8.75, equating to a 2007E PER of 17.2x. We use DDM as a primary valuation framework for banks because we believe it best reflects sustainable earnings/dividend growth and excess returns relative to cost of equity, which in turn factors in the liquidity/sentiment impact on valuations. It is also consistent with the methodology underpinning our P/E investment cycle analysis framework.
(2) Using our P/E cycle analysis, which suggests an average troughpeak P/E range for the Singapore banks of 11-18x (for OCBC 12.8-17.9x, average 15.3x) on one-year consensus forward earnings estimates, applying this to the 2007 consensus EPS forecast of S$0.51, the trough-to-peak price range is S$6.52-S$9.12, with a cycle mean of S$7.80. Based on this framework, our price target is above the mean of the PER cycle range.
Investment Risk
We rate OCBC as Low Risk, a reflection of the capital strength and financial regulation of the Singapore bank sector. This is in line with our quantitative riskrating system, which tracks 260-day historical volatility of the shares. Key risks to our call include: [1] The pace of consumption recovery; [2] earlierthan-expected recovery in consumer/mortgage growth; [3] market liquidity/risk appetite; and [4] higher-than-expected dividends or capital management. Downside risks include: the property market recovery could remain confined to the luxury segment and mortgage recovery could fail to materialize. These risks could impede the stock from achieving our target price.
