Concerns about global growth and the debt crisis in Europe late last year have all but melted away in the last couple of months. The Straits Times Index has jumped 356.4 points, or 13.5%, since the beginning of this year. The rise has been fuelled by improving economic data out of the US as well as the European Central Bank’s Long-Term Refinancing Operation (LTRO) first announced in December.

Yet, analysts are ambivalent about the sustainability of the rally, with some recommending that investors maintain a flexible stance. Kenneth Ng, head of research at CIMB Research, sees the STI hitting 3,340 by mid-year, about 11.2% higher than its current level. That would reflect an average stock valuation of 14 times earnings. Ng says, “But I think by 2H2013, the concerns will be about Europe, how it handles a real economic slowdown, when things start to go bad. Those things will lead to [another round of] fear, about a slowdown and its effects.”

That could see the STI retreating to the low end of its trading range of 2,900, Ng says, adding, “[This] was also the lows that it met at the end of last year.” If that happens, investors are looking at a downside of 3.4% from current levels.

Much depends on the earnings performance of the companies on the STI. The good news is that after three consecutive quarters of downgrades last year, corporate earnings seemed to turn the corner in 4Q2011, say analysts. “The earnings cycle appears to be bottoming,” says Gregory Lui, a strategist at Deutsche Bank. In fact, nearly two-thirds of companies covered by UOB KayHian came in within expectations, the highest percentage in the last two years, according to Andrew Chow, an analyst at the firm.

CONFIDENCE IN OFFSHORE SECTOR

The segment of the local market that analysts seem most confident about is offshore and marine (O& M) stocks. CIMB’s Ng notes that the sector suffered earnings forecast downgrades last year on fears that a tightening global credit market and sinking oil prices would affect demand for offshore rigs and vessels. In fact, the flow of orders has escalated recently, driven by Brazil’s Petrobras. In addition, both Sembcorp Marine and Keppel Corp are seeing their order books swell. Now, Ng says SembMarine might surprise with larger-than-expected margins as activity at its yards picks up.

In 4Q2011, SembMarine reported a reduced net profit of $752 million and operating margins of 18.6%. Keppel reported a 14% y-o-y increase in net profit to $1.49 billion, and higher margins at its O& M and energy segments. CIMB upgraded the O& M sector in a report last month to “overweight” from “underweight” previously.

Deutsche Bank’s Lui is also positive on the sector, noting that ultra-deepwater rigs are operating at almost full utilisation and day rates for such vessels are rising. In addition, a growing focus on safety and productivity is driving a replacement cycle for these vessels. Keppel is among Lui’s picks in the sector.

CIMB says another way to ride the returning boom in the O& M sector is to buy shares in Sembcorp Industries, the parent company of SembMarine. Besides benefiting from SembMarine’s earnings, Sembcorp Industries also has a burgeoning portfolio of utilities assets. Moreover, shares in Sembcorp Industries trade at 12 times forward earnings, lower than both SembMarine and Keppel.

Beyond the O& M sector, there seems to be little consensus on which sectors will lead the STI higher. Ng says the pockets of earnings strength in 4Q2011 were “more stock-specific, rather than sector-specific”. UOB KayHian’s Chow echoes that view. “Typically, when the market bottoms out, earnings visibility tends to be pretty low at the inflection point,” he says. “That’s why the market may not show many trends at this stage until things clear up in the horizon.” (See table for How the blue chips fared in 4Q2011)

BANK AND PROPERTY STOCKS

The banks generally did better than expected in 4Q2011, according to Deutsche Bank’s Lui in a report dated March 2, thanks to strong loan growth and good credit quality. Among the three local banks, analysts seem to prefer DBS Group Holdings at this point.

DBS reported net profit of $731 million, fuelled by its operations in Singapore, Greater China, and South and Southeast Asia. Its business loans, which include manufacturing, construction and general commerce, grew faster than consumer loans. “The management has been able to dismantle the volatility of earnings that used to be a characteristic of DBS’s past, to more sustainable cross-sell initiatives now,” says Ng.

Indeed, analysts note that DBS has shown six to seven straight quarters of improvement already. Yet, its shares are still trading at lower valuations than its peers. Chow says shares in DBS ought to trade at 1.3 to 1.4 times book value, versus 1.1 times currently.

Some analysts are also positive on property stocks. Despite ongoing uncertainty in the residential and commercial property markets, the major players in this sector have continued generating good financial numbers.

For instance, CapitaLand reported net profit of $1.06 billion. Its core markets of Singapore, Australia and China contributed $2.03 billion, or 97.1%, of the group’s total earnings before income tax. Of its business units, CapitaMalls Asia and CapitaLand China Holdings were the best performers. “China is roughly close to 40% of their RNAV [revised net asset value], and that seems to be turning the corner,” says Chow. “CapitaLand has landbank on the cheap.”

TELCO TROUBLE

On the other hand, analysts seemed to turn less optimistic about the telecoms sector after the 4Q2011 earnings season. CIMB’s Ng figures that a selldown could be looming for the sector because of expensive valuations and lack of growth potential. “Leading to the end of the year, a lot of people were hiding in telcos because telco revenue tends to be steady over bad times and offer some yield,” he says. CIMB has cut its rating for the sector from “overweight” to “underweight”.

One problem that local telcos face is the possibility of slower population growth in Singapore, as immigration rules are tightened. Meanwhile, hefty subsidies given to the telcos for smartphones have not really resulted in significantly higher average revenue per user (ARPU), says Ng.

Singapore Telecommunications’ significant overseas exposure is not really helping either at the moment. “Fixed broadband competition in Australia might intensify and we are probably most concerned because Bharti [Airtel]’s contribution, its biggest earnings base, even bigger than Singapore, would decline from a weakening rupee,” says Ng. Bharti’s India operations continued to see 3G losses, and the associates’ ordinary pre-tax contributions fell 8.3%.

For its 3QFY2012 ended December 2011, Sing-Tel reported net profit of $902.9 million. Revenues from its broadband, pay-TV and wireless businesses were all up y-o-y. The group also reported that it had secured 55,000 subscribers to the National Broadband Network.

Earlier this month, SingTel also announced a major organisational restructuring that will see it reorganise itself into three units: group consumer, group digital life, and group information and communication technologies (ICT). At the same time, it announced the acquisition of US-based Amobee for US$321 million ($405.1 million). “We are not too excited about their restructuring,” says Chow. “There are just too many moving parts, and we feel that the associates may not have bottomed out.” UOB KayHian has a fair value of $3.08 for SingTel, and recommends a “buy” at $2.70.

BET ON GAMING?

Among segment of the STI that has been closely followed recently is the gaming sector, specifically Genting Singapore, which opened its Resorts World at Sentosa integrated resort on 2010. The company quickly surprised the market with a rapid scaling-up of its business.

Momentum seems to be slowing, though. In 4Q2011, Singapore’s casinos saw their firstever decline, of 16% q-o-q, in gross gaming revenues. VIP volumes fell 33%, with Marina Bay Sands recording a 36% decline and Resorts World at Sentosa showing a 26% decline, according to a JPMorgan report dated March 3. Genting Singapore’s mass-market volumes also slipped 7%, and it was saddled with baddebt provisions. For 4Q2011, the company reported a net profit of $265.7 million.

“There were some doubts as to whether the gaming market could still keep going, but all this is probably reflective of a burnout. Over the events that happened in 4Q, people just pulled back on all this discretionary gaming,” says Ng. CIMB still recommends a switch from Genting Hong Kong to Genting Singapore, however, because of the latter’s relatively undemanding valuations.

COMMODITIES AND SHIPPING SLIDES

The STI component that disappointed the most during the 4Q2011 reporting season was Neptune Orient Lines, as it suffered from a combination of weak demand, vessel oversupply and high fuel costs. The company suffered a net loss of US$320.4 million in 4Q2011, compared with the net loss of US$91.1 million in 3Q2011 and the net profit of US$177.5 million in 4Q2010.

Chow expects NOL to rack up another year of losses in 2012 and doubts the stock will perform well anytime soon. “We continue to have a ‘sell’ because things will probably get worse before they get better,” he says. Ng is slightly more optimistic, though. “People expected a difficult time, but it came in a lot more difficult. That said, the freight industry just had a big increase in freight rates, so we’ve probably passed the peak of losses,” he says.

Analysts are also cautious about operating trends in the commodities sector. Among the largest STI components in the sector is Wilmar International, which saw lower processing margins in 4Q2011 for the palm and laurics, and oilseeds and grains divisions. The company was also anticipating reduced consumer demand from Europe and further competition in the processing margins from China. CIMB has downgraded the stock to a “neutral”.

Some analysts are more optimistic than others. “I’m getting a bit interested because the share price has come down very sharply,” says Chow. “Given the size and the liquidity, it could be something very interesting at these levels.” The group reported a net profit of US$500 million (or $265 million, excluding non-operating items and gains on biological assets).

“In the past, they used to command very significant valuation premiums, but now it’s down to about 12x PER [price-to-earnings ratio] 2013 earnings. And, no matter what the q-o-q earnings fluctuations may be, this is still a very strong franchise. It’s a global business. They have a market share of more than 50% of consumer packed oils in China, which is a strong growth market. Judge this company on a longer-term basis rather than on the last few quarters.” (See Chart 1 and Chart 2)

Jurong Shipyard

Sembawang Shipyard

SMOE

PPL Shipyard

Jurong SML

[Trading Central] Sembcorp Marine: bullish bias above 5.1.

Update on supports and resistances.

Helix Signs Contract for New Well Intervention Semi from Jurong Shipyard

Helix ESG's Q4000 Well Intervention Semi-submersible

SINGAPORE (Dow Jones)–Sembcorp Marine Ltd. (S51.SG) on Tuesday said it has secured a US$385.5 million order to build a semisubmersible well intervention rig from Helix Energy Solutions Group (HLX).

The vessel is scheduled for delivery in January 2015 and will be able to perform top hole drilling, subsea construction, and decommissioning well intervention.

The contract isn’t expected to have any material impact on Sembcorp Marine’s earnings for the year ending Dec. 31.

-By Sam Holmes, Dow Jones Newswires