(Oct 23): As another reporting season approaches, market sentiment towards some of our holdings is riding high. Strong earnings reports for 3QFY2017 could quickly push some of these stocks higher, but any disappointment could lead to an ugly sell-off.
In particular, Venture Corp is up 83.4% since we added it to our portfolio in Jan 4. On Aug 4, the company reported a 41.3% rise in revenue for 1HFY2017 to $1.8 billion and a 49.5% jump in earnings to $118.4 million. According to Eugene Chua, an analyst at OCBC Investment Research, Venture should benefit from a seasonally stronger 2HFY2017. “Since FY2012, Venture has consistently posted stronger 2H results compared with 1H, as its customers increase spending nearer to the end of each calendar year, and we expect this trend to continue in FY2017,” he says in a recent report.
For FY2017, Chua forecasts a 44.1% rise in earnings to $260.5 million, on a 34.3% rise in revenue to $3.8 billion. This strong rise in earnings, if it materialises, could see Venture declaring higher dividends for the year. For FY2016, Venture declared a total dividend of 50 cents a share. “Given its outstanding results for the past few quarters, solid balance sheet and sanguine outlook, we believe there is much scope for Venture to potentially increase its dividend, which has ranged between 50 cents and 55 cents a share since FY2008,” says Chua in the report. The opinion of analysts such as Chua aside, shares in Venture got a strong boost after the company’s chairman and CEO Wong Ngit Liong waded into the market last month. According to a filing, Wong bought 400,000 shares on Sept 12 at $15.26 each. Immediately after the disclosure, the stock jumped 10% on heavy volume, sparking a query from the Singapore Exchange about unusual trading activity. Wong had also purchased 271,600 shares at $12.51 to $12.52 each on July 14 and 17, according to earlier filings.
“In our view, these transactions provide a very clear positive signal of his confidence [in] where he believes the company is heading towards,” says Chua. He recommends a “buy” on the stock, with a fair value of $20.33.
SGX may do better
Another stock that could see some interest in the coming reporting season is SGX. We added the stock to our portfolio on March 14, and it has climbed only 1.3% so far, though we have also collected a total dividend of 18 cents a share.
Jeremy Teong, an analyst at Phillip Capital, points out in a recent report that activity in the local stock market is showing signs of picking up. SGX has seen its average securities daily average value rise marginally to $1.16 billion in the July-to-September period, from $1.15 billion in the April-to-June period.
Market sentiment is turning more bullish, too, on the back of improving global economic growth. “This has benefitted Singapore-listed companies in the finance, technology and consumer services sectors. Property stock prices have also begun to rise as domestic property market sentiment improved dramatically on the back of strong residential en bloc sales momentum,” says Teong in an Oct 17 report.
SGX also has a derivatives business that is benefitting from higher trading volumes for foreign currency and equity index futures. In fact, this business has been boosted by recent geopolitical tensions and uncertainties. For instance, trading in USD/CNH futures on SGX’s platform tend to rise during periods of heightened tensions in the Korean Peninsula, according to Teong. “At the same time, regulatory changes in China and India have encouraged market participants to approach SGX as a platform to trade USD/CNH, INR/USD and China A50 futures,” he adds.
However, the slow pace of IPOs and a surge in delistings are concerns for SGX. Notably, the expected privatisation of Global Logistic Properties, a relatively large-cap stock with a fairly high free float, should have an impact on trading volumes, says Teong. “A review on listing rules could address the falling number of listed securities.”
Still, on balance, Teong sees SGX doing better in 2HFY2017. He has an “accumulate” call on the stock, with a price target of $8.39.
Sarine forecasts dip
Meanwhile, one of our worst-performing holdings, Sarine Technologies, also bears watching when it reports its 3QFY2017 results on Nov 12. The company has been hit with worrying news about an attempted theft of its intellectual property, and is now suffering from reduced demand for its gemological tools in the face of an overstocking of polished diamonds.
“We estimate our revenues for 3QFY2017 will just exceed US$11 million [$14.9 million], and we currently expect that we will thus record a minimal operating loss of several hundred thousand dollars, including non-cash expenses of approximately $1 million,” the company said on Oct 10. For 3QFY2016, Sarine reported earnings of US$3.9 million on revenue of US$17.2 million. For 2QFY2017, it reported earnings of US$3.2 million on revenue of US$18.2 million.
On Oct 11, Sarine made another statement to clarify its warning of a weak 3QFY2017. The company explained that sales of its capital equipment are affected by seasonal factors. “A high degree of retail polished diamond sales volume takes place during a relatively short period from November to February — after which time, retailers need to restock depleted inventories.” As a result, diamond manufacturers are busy in 1Q and 2Q replenishing stocks needed by retailers.
“The cycle time from buying rough diamonds to being able to offer polished diamonds is typically between three and six months,” says Sarine. “There is thus a delay from the time the sale of polished diamonds from manufacturers to retailers start slowing to the time that the manufacturers actually slow their production output. Whenever wholesale polished diamonds sales start slowing, the manufacturers will still have at least three months of rough diamonds that are in the process of being polished, that will eventually add to their inventory.”
Historically, this has led to an oversupply of polished diamonds in 2Q and 3Q, which weighs on their market prices. “The intensity of the overstocking varies from year to year and is dependent on many factors: how robust end-consumer demand really was during the selling season in the various markets; how aggressive the producers are at offering rough diamonds; how aggressive the manufacturers are at competing for said rough; at what point the manufacturers realise the demand for their polished output is declining; relative prices of rough and polished stones; and more,” Sarine adds.
For Sarine, this has meant that 3Q revenue has historically been 20% to 40% lower than 2Q revenue. It says about three-quarters of the decline in revenue it has flagged for 3QFY2017 versus 2QFY2017 was due to weaker market conditions. It also says the drop in revenue is primarily due to the sale of capital goods and not its recurring revenue segment.
Sarine’s share price is down 49.5% since we added it to our portfolio. However, we are sitting tight in anticipation of better performance in the quarters ahead. Our portfolio is now up 13.9% since its inception at the beginning of the year. The Straits Times Index is up 13.9% in the same period.
