Thursday, April 22, 2010

Tremendous opportunities in a crisis

I always like to read the pieces she writes. I think it is because BT has given her the time to more of these contemplative stuff as well as managing Pulses.

Also, I have some reports on the local F&B sector. Email me at sgxstockpicker if you fancy a read.

April 17 2010
Even in the darkest hours, step up your research and you are most likely to be rewarded


IT TURNS out to be almost the proverbial 'V'-shaped market recovery after all. From a peak of 3,875.77 points on Oct 11, 2007, the Straits Times Index plunged to a low of 1,456.95 on March 9, 2009. Since then, prices have rebounded strongly, picking up steam in the last few weeks. Yesterday, the STI ended at 3,007.19.

Still, at yesterday's close, the blue chip index is 22.4 per cent below its 2007 peak. It is, however, 106 per cent higher than its 2009 trough.

The STI, of course, represents only 30 stocks. How has the rest of the market fared? Well, it seems that there is still a bit of catching up to do for the average stock on the Singapore Exchange (SGX).

I downloaded the entire market's prices and compared them with the peak in 2007 and the trough in 2009. On average, the 700-plus stocks are still 36 per cent below their October 2007 levels. The median is a bigger 42 per cent.

The median climb out of the trough - at 97.8 per cent - also lags that of the STI. However, a few super out-performers managed to pull the market's average rebound from the trough to 127 per cent.

How about market valuation through the severe price swings of the past two-plus years? Chart 2 plots the median dividend yield and price-to-book ratio for all Singapore listed stocks on Oct 11, 2007, March 9, 2009 and April 15, 2010.

The median dividend yield back in 2007 was 1.24 per cent with the price-to-book ratio at 1.76 times. The crash following the Lehman collapse severely depressed stock prices. On March 9, 2009, the median dividend yield for a Singapore-listed stock was 2.9 per cent - that's an increase of 131 per cent. The median price-to-book, meanwhile, had fallen 72 per cent to a staggeringly low 0.5 time. From that measure, March last year was indisputably the Great Stock Sale of the decade.

Where do we stand today? Well, the anticipation of difficult conditions following the market collapse had led many companies to reduce, or entirely do away with, dividend payments in the past 12 months to conserve cash. As a result, the median dividend yield plunged to just 0.72 per cent. That's even lower than the yield in 2007, when prices were much higher. In terms of price-to-book ratio, with the median at 0.98 times, that's an appreciation of 100 per cent from March last year. However, compared with 2007, prices are still 44 per cent below. In other words, there is still value to be found in the stock market.

Now, let's go micro and look at how individual stocks have done. Well, it is true that one can make money in all types of market conditions. Some 90 stocks, or about 12 per cent of the market, are now trading above their 2007 levels.

The best performer on SGX in the two-and-a-half years since October 2007 is Malaysian-based condensed milk manufacturer Etika International. The company continued to expand despite market uncertainties. In the past two years or so, it set up a joint venture in New Zealand and sealed an agreement to buy a company in Vietnam. For the year ended Sept 30, 2009, it posted a 52 per cent jump in net earnings to RM61.5 million (S$26.4 million). Its stock price has risen from 12 cents on Oct 11, 2007 to 66.5 cents on Thursday. That's a gain of 454 per cent - despite the so-called Great Recession. This proves the point that a fundamentally good company trading at a cheap price can navigate any kind of storm and emerge stronger.

Even at its current price, the stock is only trading at 6.8 times its trailing 12 months' earnings.

The second-best performer is RH Petrogas which put on 422 per cent. The company was formerly known as Tri-M but has since transformed itself into an oil and gas play. It bought a $203 million oilfield in China's Songliao Basin in mid-2008. It is also awaiting approval for its purchase of Temasek's exploration and production arm Orchard Energy, a deal signed five months ago.

Waste-to-energy group Think Environmental is a slightly distant third-best performer, having advanced 182 per cent in the past two-and-a-half years. The stock, which used to be known as Asia Tiger Group, changed its name after taking a controlling interest in UK-based waste-to-energy specialist Think Greenergy.

Meanwhile, one of the earliest S-chips in Singapore, Tianjin Zhongxin Pharmaceutical has had a superb run in the past two-and-a-half years, closing its valuation gap with its A-shares listed on the Shanghai Stock Exchange. On Thursday, it ended at US$1.36, up 180 per cent from its Oct 11, 2007 price of US$0.485.

Other outstanding performers include GMG Global and Ramba Energy. Each has put on about 170 per cent. Meanwhile, Hsu Fu Chi International, Hoe Leong, PSL Holdings, Fragrance Group and Indofood Agri Resources have added 80-90 per cent.

All these are spectacular returns. However, the big money was to be made by buying in at the market bottom, when many good companies were trading at less than 10 cents.

Osim plunged from 58.6 cents on Oct 11, 2007 to a mere five cents by March 9, 2009. In the 13 months since then, the stock has rocketed 20 times. It last traded at 97 cents. $5,000 invested in Osim last year would be worth $97,000 today.

The next best performer is Z-Obee. The China-based designer and maker of mobile phone handsets has surged from three cents to 57.5 cents. Its performance was also boosted by its dual listing on the Hong Kong Stock Exchange.

Another turnaround story is HTL, which plunged 91 per cent from 84.5 cents in October 2007 to 7.5 cents in March last year. Since then, it has risen 10 times to 87 cents.

The leather sofa manufacturer's business was affected by its acquisition of German furniture retailer Domicil and then the sub-prime crisis. It has since restructured its business and swung back firmly into the black with a full-year net profit of $48.3 million for FY 2009.

Another 10-bagger is Hong Leong Asia. The company has stakes in Xinfei Group, China's No. 3 refrigerator manufacturer, and diesel engine manufacturer Yuchai. Both were beneficiaries of China's stimulus package.

The above examples illustrate the tremendous opportunities that present themselves during a crisis. So the takeaway is: never give up hope, even in the darkest hours of the market. In fact, step up your research. Because that's when you are most likely to be rewarded.

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