Published December 25, 2008

M&As seen for tech, oil and S-chip sectors

Distressed valuation levels provide such opportunities: DBSV

By JAMIE LEE
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GIVEN the current 'distressed valuation levels', the new year could see some mergers and acquisitions (M&As) in the technology, oil-and-gas and S-chip sectors, said a DBS Vickers (DBSV) report.

Going private? Creative will be a prime candidate for privatisation to extract cash, says DBS Vickers

Titled Fire Sale, the report by head of research Janice Chua said that stronger companies could swallow competitors in a bid to ramp up market share while major shareholders could take undervalued companies private.

'Large takeovers running to the tunes of billions are less likely given tighter credits but smaller deals are still possible,' she said.

In the technology sector, DBSV's equity research team picked Chartered Semiconductor Manufacturing, Hi-P and Creative Technology as potential M&A targets. Chartered has a record-low valuation of 0.2 times price-to-book (P/B) and both (Taiwan's) TSMC and UMC are rumoured to be interested buyers, she said, while Hi-P would be a strategic fit for electronic manufacturing companies such as US-based Jabil Circuit and Singapore's Flextronics or Venture Corporation.

'Creative would be a prime candidate for privatisation to extract cash,' she said, noting that the stock is trading below cash of US$3.14 per share as at end-September 2008.

'The bears will prevail in 2009, and we expect the STI to trade within a band of 1,250 to 2,100 (points) as it base-builds towards a more convincing recovery in 2010.'
- Janice Chua,
DBS Vickers

Looking at M&A candidates among marine players, she tossed up Swissco International (for its sweet valuation at 0.4 times forward P/B) and KS Energy as its substantial shareholder - UAE-based conglomerate Dutco Group - has been raising its shareholding recently to about 13 per cent.

Moving to S-chips (stocks of China firms listed in Singapore), China Sports could be eyed for an acquisition, given its net cash position of $127.5 million against the current free float of about $38.6 million.

'However, the operating environment remains tough, amidst falling demand and rising competition from listed players,' Ms Chua cautioned.

She put a 'sell' on asset plays, including property and shipping counters, as valuations are set to head further south.

'Property stocks have been sold down to distressed levels, trading at prices close to 1998 valuation levels,' she said.

'The sector, while cheap, provides no catalyst for re-rating as yet, as we expect more downside to prices of properties', which may have gone down 20 per cent from its peak, half of what DBSV had expected it to go down by.

'Shipping stocks are hit by a plunge in freight rates, overcapacity issues and aggressive expansion plans which will stress balance sheets,' she said.

DBSV also recommends stocks such as SMRT and ComfortDelGro for their earnings resilience against the recession, as well as SIA Engineering for its strong balance sheet.

The market is poised for a near-term rebound and will see fiscal stimuli and earnings downgrades - to be predominant among property and banks - weighing in, said Ms Chua.

'The bears will prevail in 2009, and we expect the STI to trade within a band of 1,250 to 2,100 (points) as it base-builds towards a more convincing recovery in 2010,' she said.