Singapore Small Caps and Mid Caps

DBS Group Research on 29 March 2012

Singapore small caps and mid caps have had a good run since hitting a low in December. Since the start of the year, the FTSE ST Small Cap Index and the FTSE ST Mid Cap Index have outperformed the Straits Times Index (STI), up 18.1 per cent and 19.0 per cent, respectively, versus a gain of 14.1 per cent for the benchmark STI.

Despite this rally, small and mid caps continue to trade at a 20 per cent discount to large caps, probably due to the sector's mediocre profit growth of just 9 per cent. At current levels, small and mid cap valuations are now back to their historical mean.

Looking ahead, we believe that only companies with stronger fundamentals, that is, above-par earnings or enjoying better than market growth, will continue to head higher.

Sustained high oil prices will encourage oil companies to increase their exploration and production budgets, spurring more offshore activity and, in turn, demand for offshore and marine (O&M) services and vessels. We therefore see significant scope for earnings upgrades within O&M on the back of rising utilisation and day rates. Stock picks include Ezion Holdings ('buy', target price S$1.25) for high earnings visibility and solid execution. CH Offshore ('buy', TP S$0.50) and ASL Marine ('buy', TP S$0.78) are turnarounds, expected to benefit from the improving charter market and a rebound in orders for offshore support vessels.

Maintain focus on earnings turnaround, profit upside, company specific re-rating catalysts. As we are no longer in a 'rising tide market', the only stocks to see a further uplift will be those expecting a turnaround in fortunes, sustained profit growth or upside to current forecasts.

Our turnaround picks are Venture Corp ('buy', TP S$9.60) for a continuation of the tech rebound, China Minzhong ('buy', TP S$1.45) for better harvest in the near term, and Tiger Airways ('buy', TP S$1.01) for its stronger operational efficiencies.

We also see potential earnings upside for Sound Global ('buy', TP S$0.86), Luye Pharma Group (not rated, TP S$1.21), ARA Asset Management ('buy', TP S$1.74) and Biosensors International ('buy', TP S$1.68).