(Aug 14): When The Edge Singapore put together a list of 10 stock picks in January, global equity markets were in euphoria after Donald Trump shocked the world by winning the US presidential election. Expectations were high that Trump would initiate major infrastructure spending, tax cuts and deregulation. But his election promises have yet to be realised.
Instead, Trump has made headlines for all the wrong reasons. And confidence that he will be able to deliver on any of his campaign promises is waning. Yet, equity markets — both in the US and around the world — have continued to rally, driven by improving economic growth.
The optimism has lifted many counters, but it has been particularly helpful for the property and finance sectors. Expectations of higher interest rates as central banks react to better economic data have benefited the three local banks. And the local property market is seen as being on the cusp of a rebound.
As a result, the property- and bank-heavy benchmark Straits Times Index has streaked ahead of our portfolio. Between Jan 24, when our portfolio was put together, and Aug 7, the STI gained 9.2%. Including dividends, it delivered a total return of 11.7% during the period.
The 10 stocks we selected have risen by an average of 4.9% during the same period. Including dividends, they have posted an aggregate total return of 7.6%.
Gainers ride on US economic strength
Where we went right was with our plays on a recovery in the US. In anticipation of higher corporate capital expenditure, we included high-precision components manufacturer UMS Holdings among our picks. The com pany, which counts Nasdaq-listed Applied Materials as a major customer and shareholder, advanced 78.2% as the US tech sector saw a rally this year. Including dividends, the stock has returned an even higher 86%.
On May 12, UMS announced earnings of $11.2 million for 1QFY2017 ended March 31 — more than triple its earnings of $3.4 million a year ago. Revenue more than doubled to $41.8 million from $20.4 million previously. The company says the successful renewal of its contract with a key customer by three years beginning January will boost its revenue base and earnings visibility. The contract comes with the option to extend for a further three years into 2023.
Manulife US Real Estate Investment Trust was yet another beneficiary of the stronger US economy, rising 7% in the period under review. The REIT announced 7.5% growth in distributions per unit for 2QFY2017 ended June 30, to 1.58 US cents from 1.47 US cents a year ago. This came largely on higher property income and lower interest costs. Net property income rose 3.7% y-o-y to US$12.8 million ($17.4 million) from US$12.3 million. Including dividends, Manulife REIT returned 15.3%.
We had — correctly — predicted a rebound in the property market. Our play on this theme, property developer and landlord Ho Bee Land, gained 11.6%. Including dividends, Ho Bee returned 14.4%. But we might have done better with a large local developer such as CapitaLand, which returned 21.9% in the same period. For 1HFY2017 ended June 30, Ho Bee’s revenue tumbled 62% y-o-y to $79.8 million as the company had recorded higher sales on two residential development projects in Australia in 2Q2016. However, the company’s earnings surged 53% to $92.4 million on the back of a higher share of profits from associates and jointly- controlled entities in China. This was mainly derived from a residential project in Shanghai.
DBS Group Holdings was included in our portfolio in anticipation of rising interest rates. Although local interest rates have yet to appreciate significantly, the counter has gained 13.3% and returned 15%. It continues to have strong prospects for growth. In particular, its private banking business is likely to attract more customers as the region’s wealth grows (see Cover Story on Pages 10 to 14). DBS is expected to complete the acquisition of Australia and New Zealand Banking Group’s wealth management and retail banking business in five markets by early 2018.
DBS saw 4% y-o-y growth in earnings to $2.4 billion in 1HFY2017 ended June 30. Total income rose 6.5% to $6.16 billion as broad-based loan growth and record fee income offset the impact of a lower net interest margin and weaker trading performance. The results were also underpinned by a decline in expenses from ongoing digitalisation and productivity initiatives and by lower non- performing loan allowances.
Weighed down by commodity-related picks, expensive names
But while we managed to correctly pick several winners, we were also very wrong on others. The biggest drags on our portfolio have been our commodity plays.
The biggest culprit was coal miner Golden Energy and Resources (GEAR). While we were right that higher coal prices would lift its perform ance, the company has been unable to gain traction among investors. The stock was down 19.4% during the period from Jan 24 to Aug 7.
We are hopeful that GEAR’s continued earnings strength will convince investors eventually though. On May 15, it posted an 11- fold y-o-y increase in earnings for 1QFY2017 ended March 31 to US$19.04 million. Revenue surged 47.9% y-o-y to US$143.2 million. The average realised selling price of thermal coal was US$40.86 per metric tonne in 1Q2017, compared with US$31.53 per metric tonne in the same quarter last year.
Another disappointment is PACC Offshore Services Holdings, which has lost 11.8% of its value since Jan 24. Charter rates and utilisation of offshore support vessels remained weak as exploration and production activities did not increase significantly. POSH reported an 8% decline y-o-y in revenue to US$42.4 million for 2QFY2017 ended June 30. The company was in the red, although it recorded a narrower loss of US$9.1 million versus US$17.5 million a year ago.
An ongoing lawsuit has complicated matters. Makamin Offshore Saudi has made counterclaims against POSH Semco — the company’s wholly-owned subsidiary — after the latter took legal action earlier this year to recover certain sums due. POSH says it is seeking advice from its Saudi Arabia legal counsel and that it will “vigorously contest and defend itself” against Makamin’s allegations and counterclaims.
Meanwhile, the underperformance of Raffles Medical Group, mm2 Asia and CITIC Envirotech should serve as reminders not to buy counters that are priced at relatively high valuations. Raffles Medical was our second-worst performer, down 18.3%. We were aware in January that the stock was expensive relative to its trading history, but hoped that its usually steady performance would add some stability to our portfolio. Instead, soft demand from foreign patients appears to have negatively impacted the stock. And earnings and revenue for 2QFY2017 ended June 30 were relatively flat.
We think there is a chance of some improvement though, as the company is making progress on its expansion plans. It is expected to open the Raffles Hospital extension by 4Q2017, which will add at least 50 beds to its operations in the next one to two years. In China, Chongqing Hospital and Shanghai Hospital are expected to open in 2H2018 and 2H2019, respectively.
Media production company mm2 had been doing well for most of 1H2017, and even reached an all-time high of 64.5 cents on June 5. Its performance may have been helped by the successful spin-off of its concert production unit UnUsUal on April 10, as well as a proposal to acquire cinema chain Golden Village Cinema. But it has since given up those gains and is now 9% below the level when we first picked the stock.
The Golden Village deal has hit a snag. On July 24, mm2 announced that the seller, Village Cinemas Australia, had failed to fulfil one of the conditions precedent to the share sale and purchase agreement. However, mm2 says it is exploring other acquisition opportunities. The stock also transferred its listing to the Mainboard of the Singapore Exchange on Aug 7, which may allow more institutional investor participation in it.
Environmental engineering services company CITIC Envirotech had been on a roll at the start of this year, after a string of contract wins. In January, the stock was close to a 52- week high. We chose to include it, however, on expectations of more wins. Unfortunately, none have materialised.
The company announced some relatively weak results for 2QFY2017 results ended June 30. Earnings rose 1.1% to $30.9 million on the back of a 4% decline in revenue to $134.4 million. CITIC says its expansion plans in the water sector are “on track” and it is “strategically expanding” into new business segments. But without new contract wins the stock may lack catalysts.
Finally, we are waiting for shares in Pan-United Corp to have their day in the sun. The cement and ready-mixed concrete producer reported lacklustre results for 1QFY2017 ended March 31. Revenue fell 14% y-o-y to $153.2 million, owing to lower selling prices and demand for RMC and cement. Earnings declined 19% y-o-y to $3.1 million. Shares in Pan- United have returned 10.6% so far. However, other construction plays have seen a pickup in their stock prices of late, so we are hoping to see better momentum for this stock in the months to come.
