Whatever the case, STI’s valuation based on its price-earnings ratio (PER) is back at 15 times. Citi expects support at a PER 14.2 times, which is the equivalent of 3,000 on the index. The Euro crisis low was at a PER 13 times, or 2,700.
But the problem is that earnings growth in Singapore is likely to be modest. “Within our coverage universe, flat aggregate EPS trends are expected for 2013, growing into a modest 8% in aggregate EPS growth for 2014E,” Citi states. “Our Earnings Revisions Count ratio (ERC or the upgrade versus downgrade count) is in mildly negative zone at –10% versus –16% at end-Feb post 2012 results.”
Citi has a handful of stock picks for when the market settles and investors return to hunting mode. They are Keppel Corp for capital goods, Hongkong Land on valuation basis, ST Engineering and Venture Corp to play the stronger US$, and United Overseas Bank as the most defensive of the local banks.
Keppel Corp is still the world’s largest rig builder despite the rise of Chinese yards. “Our view remains that the rig cycle remains intact despite volatility in oil prices and we believe orderbook momentum can continue in 2H13, with margin resilience,” Citi reckons. The broker has a $13.45 target price based on a marginal discount to its RNAV estimate of $13.58, applying a 20% discount to the value of Keppel's investments in M1, K1 Ventures, Dyna-Mac and K-Green Trust, its 55% stake in Keppel Land at market price. An average PER of 17 times FY13-15 earnings is applied for the offshore and marine business.
UOB has retraced by around 10%. Citi likes UOB for its Asean footprint and growing fee income. Its target for UOB is $20.30 using a dividend discount model assuming EPS of $1.67, dividend per share of 63 cents and 7.1% long-term growth rate.
Hongkong Land is trading at a discount to RNAV of 40% compared to an average of 20% elsewhere.“While there is risk of rising interest rates impacting cap rate valuations, we are already using a cap rate of 5.0% versus the firm’s 4.25%,” Citi says.
Venture Corp too benefits from a stronger US$, and Citi believes it can sustain its dividend yield of 7%. Moreover, its 12-month target of $8.12 is based on modest valuations, of 13.7 times PER for this year’s earnings.
To read other undervalued SG stocks and investing strategy highlighted in previous blog entries, click the following:
SG stock investing strategy
Undervalued stock: Goodpack