Published April 8, 2009

Defensive, early cyclical stocks find favour here as volatility rules

Telecos, media, manufacturing sectors in hot picks

By OH BOON PING

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(SINGAPORE) Defensive stocks and some early cyclicals have emerged as hot favourites, even as the high stock market volatility looks set to continue.

A BT poll of several equity research houses shows a bias towards telecommunications, media and manufacturing - sectors that are either immune to further downturns, or are well- placed to ride on a market recovery.

Another theme is resources, plantations and property-related plays, as reflected in a number of OCBC's picks - Suntec Reit, UOL, Ezra, Straits Asia Resources, and Noble Group.

DMG & Partners analyst Terence Wong said it was premature to aggressively enter the market, while OCBC Investment Research head Carmen Lee is neutral on most sectors in the Singapore market, 'with the only exception being the telecommunications sector where we have an overweight and a buy on all three telco stocks'. Price targets are set at $3.09, $2.12 and $2.78 for SingTel, M1 and StarHub respectively.

Similarly, DMG is neutral on the Singapore market, while calling for overweight on defensive sectors such as land transportation, Reits and telco.

M1 is CIMB's telco of choice, while DMG likes StarHub. Citigroup favours SingTel for its limited downside risk.

CIMB research analyst Kenneth Ng noted that the 'telco sector was the top-performing sector in 2008 and we believe the strength will continue in 2009. In uncertain times, defensive sectors are appealing for their yields and earnings stability. Singapore telcos offer such a shelter'.

M1 is CIMB's telco of choice, while DMG likes StarHub. The price targets are set at $2.13 and $2.35.

Citigroup favours SingTel for its limited downside risk, while earnings from the home market look resilient. Plus, SingTel 'continues to raise its mobile market share. Optus also delivered higher revenue and earnings in 4Q08. Near-term watch points are the Aussie dollar and NBN Optus bids'.

Moving away from telecommunication, Citigroup and DBS Vickers also see value in Singapore Press Holdings - 'the most defensive play in the traditional Asian media, offering a 12 per cent dividend yield and trading at 9 times price- earnings. Plus, it is one of the few STI component stocks where the price- book has fallen past the trough of 1.95 times seen in Asian crisis,' said Citi in a report.

'Locked in property sales from Sky@eleven should ensure that dividends remain highly dependable. Historically, dividends have never been lowered, despite no explicit dividend policy,' it added.

DBS says that SPH is a beneficiary of the government's job credits scheme announced in the recent Budget, and its strong balance sheet and monopoly position will ride it through this crisis.

Apart from defensive stocks, CIMB believes there is still room for commodity play, as it sees a repeat of the run-up in food prices seen last year, plus 'stronger oil price trends in 2010, which would be positive for plantations and the offshore & marine sector'. For this reason, Wilmar may turn out to be a winner from that sector.

The brokerage is also overweight on manufacturing and, in particular, S-Reits - a common call made by Citi, DMG and DBS Vickers which carried 'buy' on Ascendas-Reit.

Specifically, DBS favours A-Reit, citing its relatively stronger financial position, that is, gearing ratio of 33 per cent - one of the lowest among its S-Reits peers, with little major short-term re-financing requirements. Interest cover should remain healthy at estimated 4.2 times over the next two financial years.

Also, some 43 per cent of income have been secured on a long-term basis and it is confident that A-Reit can 'maintain a forecast FY10-11 DPU yield of 10.5 per cent through the current recession,' said DBS in a report.

Citi analyst Wendy Koh is negative on the property market - and especially the commercial and high-end residential segments, as mid to high-end residential prices could fall another 35 per cent.

She prefers Reits over property developers, but is 'mindful of the refinancing risks haunting the sector'. Besides A-Reit, her other Reit 'buys' include CapitaMall Trust, Suntec Reit and Frasers Centrepoint.

In manufacturing, Venture Corp stands out for its focus on high-margin products, and its cash-generating record. DMG analyst James Lim believes its prospective dividend yield of 10.3 per cent is sustainable, and targets a price of $5.92 on the stock.

Similarly, DBS says Venture is financially strong and ready to capture new opportunities and gain market share when competitors fail in this environment. It called for a 'buy' at $6. Venture is further considered a 'value' cyclical poised for a recovery in the second quarter, according to some analysts.