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SI's Delicate Picks: First Quarter 2013 Review (Singapore Stocks)

Yes, you can say it now, spring is here. And so is the first quarter's reporting season. Needless to say, many who were awed by the stellar run seen in stock markets in the earlier part of the year continue to ask the same question, "Is this sustainable?"

Recapping our macro outlook from the previous issue, ranging from the cooling measures of the Singapore government on the property front to the frenzy seen not too long ago in Cyprus, we are reminded that the overall economy is not exactly the source fuelling this run that we have been seeing, thus, we will still need to look at our equity markets, with a much heavier pinch of salt.

Looking at the table below, you would've realised that all three stocks SI picked (inclusive of dividend gains) have outperformed the Straits Times Index's (NYSE:STI) performance so far. Rounding up on SI's picks, let's now delve into the breakdowns of these companies below.

First Quarter Performance Of The Stock Picks

Swiber Holdings

Swiber Holdings have had a good run, surpassing its industry peers, as tracked by the FTSE ST Oil and Gas index, by an impressive 8.5 percentage points. An interesting note though, weakness seems to plague the stock since it hit $0.715 on a closing price basis in January.

Results were largely in-line with consensus estimates. Solid performance for the fiscal year 2012 helped to provide some reprieve for Swiber's declining share price in February. The company's top and bottom lines grew more than 40 percent year-on-year, both at record highs since the company's listing in 2006. Another healthy sign is the positive operating cash flow generated in the fourth quarter. While the company would have to show that such generation is sustainable, the turnaround after five successive quarters of negative operating cash flow is a start.

During the period under review, Swiber successfully completed its first floatover operation in India. This is a milestone for the company as the execution marked the first time that any company has used floatover methods for offshore field development in India.

More recently, notes worth $160 million was issued. Of all the outstanding bonds, the latest issue came at the highest cost.

Record Years In The Making? It is estimated that the company's tender book stands at some US$2.4 billion. This has led to expectations that 2013 could be another bumper year after Swiber bagged deals worth US$1.7 billion last year. Half of its order book (US$1.35 billion as of February) will be recognised in FY13. With more potential works coming its way, analysts are forecasting a record-breaking streak.

Leverage Concerns It is no mystery that Swiber's high gearing ratio leaves a big question mark among investors. Though the ratio went down to 0.95 times for the financial year ended 2012 compared to 1 time in the first nine months of 2012, it is 8 percent higher on a year-on-year basis. Whether the company can support its future cash needs would depend on its order wins and execution.


The share price of AusGroup have held up. For the period, AusGroup's share price has reflected an increase of some 5.8 percent. Within this period under review, we have seen a peak of $0.68, and AusGroup is now trading at 1.19 times price-to-book value, and a considerably low price-earnings ratio of 8.5 times.

In its most recent 1H13 results, net profit reflected a 9.8 percent increase, while revenue rose 11.8 percent, largely due to increased activity levels within its Major Projects and Fabrication divisions. On a quarter-on-quarter comparison however, profits slipped 46.3 percent as a result of lower gross margins, which were negatively affected by costs incurred in the close-out of two contracts.

As of 14 February 2013, AusGroup has work on hand with a value of some A$308 million. This figure is also exclusive of further works awarded, such as the latest Allseas contract for Chevron operated Wheatstone project.

Growth In Work On Hand Value The A$308 million in work on hand is effectively a 9.23 percent increase compared to that of A$282 million a year ago. With the company bidding for the Allseas contract, it seems like there is more upside run potential for this eventual value of work on hand. We believe that its latest Allseas contract win, is a testament to AusGroup's ability and is well poised to bid for large Liquefied Natural Gas (NYSEMKT:LNG) projects moving forward. In addition to that, continued growth in demand for scaffolding and associated services across the region is expected to benefit AusGroup in terms of more work for tender, and award.

Target Run Potential And Margin Concerns The estimate polled by FactSet, which shows OSK-DMG's target price of $0.73 effectively represents a 37.7 percent upside potential based on its closing price of $0.53 on 29 April. OSK-DMG felt that with a consistent performance of above 15 percent seen in AusGroup's return on equity, strong net cash position of $0.054 per share, it has given a "Buy" call on AusGroup's stock.

Although winning more LNG projects is a good thing, lower margins at completion stages for large LNG projects, which will have an impact on its books have to be taken into consideration. This effect is even more so amplified if a string of large LNG projects are nearing completion at the same time, creating possible downward pressure on its margins.

Perennial China Retail Trust

The period has treated unitholders of Perennial China Retail Trust (PCRT) well with a total return of 7.3 percent. This is inclusive of the distribution per unit of $0.0196 declared for the financial year ended 31 December 2012. The share price appreciation alone was in-line with the STI return of 4.5 percent but lagged the FTSE ST Real Estate Investment Trust return of 5.1 percent.

Results for the financial year ended 31 December 2012 were within projections. Earn-out deed support of $21.9 million and revaluation gain of $91.2 million supported the rise in earnings from $6 million in FY11 to $84.6 million. With majority of its initial portfolio assets becoming income-producing end-FY12 as well as two other development properties turning operational (one of which has a targeted occupancy of 90 percent) in the current fiscal year, earnings visibility has been enhanced. Its net asset value will also see growth as its development projects are progressively completed.

Committed Distribution Covered; Monetisation Plans PCRT's annual committed distribution of Rmb227 million target for the current and next fiscal years is fully covered by its earn-out deeds. This works out to be 6.2 percent in yield based on CIMB's estimates which incorporate a 10 to 15 percent net asset value per share growth from FY12's $0.70.

In the longer term, the company plans to monetise completed assets to unlock value and recycle capital. Divestments, which would see substantial gains, act as a catalyst should more details be furnished.

Slower Growth And Bird Flu Fears In China - Not A Good Combination Though any growth above 7 percent is not exactly slow, recent gross domestic product figure of 7.7 percent for the first quarter of 2013 reported by China's National Bureau of Statistics had folks worry that the second largest economy in the world might be losing steam. This news could lead to investors undermining the potential growth at PCRT. On the other hand, one real concern, considering that all of its assets are situated in China, is the outbreak of the H7N9 avian flu in that country. In the near-term, the bird flu fears may curb shopper traffic.

A word of caution, outperformance in a quarter does not make a trend. As the saying goes, the only thing that is constant is change. Thus, while you are busy sieving through the slew of financial reports filed with the Singapore Exchange, do keep track of major economic events that can potentially act as market drivers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.