IN ITS just-published report, DBS Vickers Securities said it sees the bear market rally that started in 4Q08 extending into 1Q 09.
Investors can look forward to year-end window dressing activities and Singapore’s budgetscheduled on January 22.
The broker’s 18-page report also said that US President elect Obama’s pledge to revive the economy should continue to attract bargain hunting on minor dips ahead of his swearing in ceremony on Jan 20.
Despite these near-term positives, DBS Vickers is mindful of the ongoing credit crisis and the vulnerability of small companies.
Second half of the top chart.
In addition to attractive PE valuations, DBS Vickers considers a strong balance sheet a must. Additional criteria:
* Companies with net cash (or slight net debt),
* An Altman’s Z-score (a formula for predicting bankruptcy, the lower the score, the higherchance of bankruptcy) of at least 2.0.
* Good operating cash flows.
* No sharp increase in debtor’s turnover days.
Excerpts from the report:
(1) Beneficiary of China’s focus on domestic consumption
China Hongxing is expected to benefit from the Chinese government’s initiatives to focus on domestic consumption. Its sportswear products, which cater to mid-to-low end consumers in 2nd and 3rd tier cities in China, are less susceptible to the economic slowdown compared to high-end consumables.
Hongxing offers good value at current value as the stock is backed by 17 cts net cash per share and offering 16.5% EPS CAGR over FY09 and FY10.
More stocks recommended
(2) Beneficiary of China’s massive USD583bil stimulus plan.
The recently announced stimulus package includes plans for environmental protection that could be beneficial for waste and water treatment companies. Our second pick is leading water and wastewater treatment company Epure.
The company has a strong net cash of 14cts/share, and is in a strong financial position which enables it to finance BOT projects and future working capital through internally generated funds. Current valuation is compelling at 4.7x FY09 PER.
(3) Rebound in oil price lifts oversold O&M stocks
Oil price has fallen nearly 70% since peaking out at USD147 per barrell. Our average oil price assumption for 2009 is USD60pbl, which is about 40% higher compared to current price.
Our technical analyst sees strong support for oil price at USD38-40pbl.
ASL has a dividend yield of around 11%. Photo by Leong Chan Teik
Our picks are Ezra and ASL Marine. We view Ezra’s recent announcement to review its orders for 5 multi-functional support vessels positively as it signals a preference towards cash conservation, thus improving on its current net debt position even as growth continues to be underpinned by long-term charter contracts.
ASL Marine’s strong balance sheet and good earnings visibility from its large shipbuilding order book coupled with sustained strong demand for ship repair and chartering services justifies the company as our next pick in the O&M sector.
ASL also offers an attractive dividend yield of c. 11%.
(4) Healthcare sector as defensive
Our final pick is Raffles Medical. Besides the defensive nature of its business, the company boasts of strong operating cash flow and has a strong net cash position that should increase from S$9mil as of Sept 08 to S$16 mil by end 2008.
Its healthy balance sheet will see it through this period of uncertainty. It is trading at its historical low valuation of c. 10x PE.
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