DBS Vickers 13 Jan 14

KEY POINTS
􀂃 Decline in Dec’s US non-farm payrolls likely to be
temporary, unemployment rate drops to 6.7%
􀂃 Recovery theme stays valid – US-Europe exposure
and O&G, keep a watch also on commodities
Wired Weekly
STI heads into the 4QFY13 reporting season that kicks
off this week, trading below 13.9x (ave) FY14F PE at
about 13.12x (-0.5SD) FY14F PE. These are inexpensive
(even attractive) PE valuation parameters considering
our EPS growth forecast of +11% for FY14F and
consensus forecast of 9%, compared to -3.5% for
FY13F.
An end to the downward earnings revision trend would
likely see the STI returning to or even exceeding its
average 12-mth forward PE levels (i.e. STI 3350 by June)
given the c.10% forward earnings growth projection.
The current reporting season over the next few weeks
will be closely monitored.
December US non-farm payrolls figure was lower than
expected, rising by 74k versus consensus estimate of
197k, and 241k for November. The decline is partly due
to the current bad weather, which means that the
decline in December should be temporary. December’s
unemployment rate fell to 6.7%, which is close to the
6.5% threshold that the FED has set before it starts to
lift interest rates from the near zero level.
Comment from the FED minutes; the view that the dip
in December non-farm payrolls is temporary and
optimism of better US growth underpin our view that
stocks that benefit from the US-Europe recovery theme
as well as the O&G sector will continue to find interest
among investors. Our picks for global recovery exposure
are HPH Trust, Venture Corp, Goodpack and ST
Engineering.
Within the O&G sector, we see opportunities for rate
recovery in the OSV market. Our picks are Pacific
Radiance, Jaya, Nam Cheong and Ezion. While interest
among commodity stocks such as Noble Group and
Olam is currently still muted, optimism about the
recovery in US-Europe should also support their share
prices.
2400
2600
2800
3000
3200
3400
3600
3800
Dec-12 Jun-13 Dec-13 Jun-14 Dec-14
+0.5SD @ 14.7x
Average @ 13.9x
-0.5SD @ 13.1x
-1SD @ 12.3x
90
95
100
105
110
115
120
125
Jan-13 Apr-13 Jul-13 Oct-13 Jan-14
US$/barrel
Singapore Traders Spectrum
Wired Weekly
Page 2
Data still underpins interest in global recovery names
Weak December non-farm payrolls likely temporary,
unemployment rate falls to 6.7%
December US non-farm payrolls figure was lower than
expected, rising by 74k versus consensus estimate of 197k,
and 241k for November. The decline is partly due to the
current bad weather that has blanketed the country. The
coldest December in 4 years probably contributed to a slump
in hiring at construction and recreation companies, while
stalwarts such as health care and accounting have also cut
staff. The impact on hiring due to the cold weather is
temporary.
Meanwhile December unemployment rate fell to 6.7%
(consensus 7%) from 7% the previous month. This puts the
figure closer to the 6.5% threshold that the FED has set
before it starts to lift interest rates from near zero level. 73%
of 41 economists that Bloomberg surveyed said the 6.5%
threshold will remain. 22% said the Fed will alter it and 5%
said it will be dropped entirely.
Outside of the official employment data, other numbers
released last week pointed to a continued recovery in the US
labour market. The ADP employment change for December
came in at 238k, better than consensus estimates of 200k.
At the same time, weekly jobless claims had fallen more
than expected.
The FED minutes released last week revealed that officials
saw diminishing economic benefits from bond-buying and
expressed concerns about risks to financial stability. Janet
Yellen commented that the US economy should strengthen
this year to a more likely 3%. At the same time, the IMF
plans to raise its forecast for global economic growth this
year in 3 weeks time, underscoring confidence in the global
recovery as the outlook for the U.S. improves. Back in
October, the IMF said the US economy would expand 2.6%
in 2014 compared to 1.6% in 2013.
Recovery theme stays valid
Comment from the FED minutes, the view that the dip in
December non-farm payrolls is temporary and optimism of
better US growth underpins our view that stocks that
benefit from the US-Europe recovery theme as well as the
O&G sector will continue to find interest among investors.
Our picks for global recovery exposure are HPH Trust,
Venture Corp, Goodpack and ST Engineering.
1. HPH Trust has a 40-45% trade flow to US and Europe
and offers an attractive FY14F forward yield of about
9%. Shares of HPH look to have stabilised and have
staged a modest recovery after touching a low of $0.60
in December. We see the stock re-establishing a base at
S$0.665 with upside bias to S$0.72.
2. Venture Corp’s earnings growth is forecast to rise 9%
this year. Investors can also look forward to a potential
DPS of 50Scts in February that should underpin the
stock price in the coming weeks.
3. Goodpack remains one of the best proxies to US/Europe
recovery with almost half of its revenue from that
region.
4. ST Engineering is our large cap pick with 33% sales
exposure to US/Europe and is backed by a 4.5% yield. It
recently announced that its aerospace arm secured
contracts worth S$780m while its marine arm secured
orders worth S$446m in 4Q13. The stock retreated
from a high of S$4.30 in September 2013 but looks to
have found support at S$3.73 last December.
Within the O&G sector, we see opportunity for rate recovery
in the OSV market. The sector is expected to reverse a two
year earnings downtrend to post growth of 27% for 2014,
on the back of rates recovery, improved execution and
better margins. We expect the recovery in the OSV market
to gain further traction in FY14, underpinned by a growing
rig fleet size of 9%, 12% and 15% in 2013/14/15
respectively. Our picks are asset owners/operators such as
Pacific Radiance and Jaya , shipyards Nam Cheong while
Ezion should see sustainable earnings growth from strong
execution in its niche vessel segment.
While interest among commodity names Noble Group and
Olam is currently relatively muted, optimism about the
recovery in US-Europe may lift interest in these stocks. We
think Noble Group’s earnings are set to bottom out this
quarter in the absence of Agricultural and Yancoal losses.
Our current forecast is for FY14F EPS growth of 71%,
recovering from the 35% decline in FY13E. While operating
environment remains challenging, Olam is expected to see
earnings growth stemming from previous investments.