Investors pleasantly surprised by special dividends

We have compiled a quarterly earnings scorecard for the recently concluded results period ended March 2011. Served up in an easy‐to‐read format, it provides a quick snapshot of the key issues that have affected individual companies during the period, as well as industry themes uncovered by the results. The following are some highlights.

Short‐term confusion
With property developers adopting the new accounting practice of recognising development profits overseas only upon completion of the projects rather than on a percentage‐of‐completion basis, reported earnings are now even less representative of their current business operations.

Sudden generosity
Many investors must have been pleasantly surprised by the willingness of cash‐rich companies to return excess cash via special dividends. Singapore Airlines, SIA Engineering and SingTel, whose year‐ends were in the quarter just concluded, all paid out cash which surpassed even the most bullish expectations. However, the theme of higher dividends may not be applicable across the board, as StarHub is already constrained by a 100% dividend payout policy. We welcome such generosity as it is always good to have a more efficient capital structure.

The big gets bigger and better while the small languishes
In the marine sector, there has been an apparent differentiation between the big shipyards and the smaller ones. Heavyweights Sembcorp Marine and Keppel Corp continue to thrive on the revitalised rig‐building cycle, while the smaller yards struggle to fill their capacity and fight off shrinking margins. Marine services, too, have seen day‐rate erosion due to a glut.

Banking on hopes?
Banks’ earnings have shown admirable resilience amid a difficult interest rate environment. With loan growth of 18‐21% in the quarter just ended, the expectation now is that last year’s breakneck pace will likely continue although interest income will remain subdued due to the depressed
margins. Notably, DBS Group reported better‐than‐expected traction in its regional growth initiatives

Turning crisis to opportunity
In a quarter characterised by disruptions to global commodity supply and fluctuations in prices, commodity traders Noble and Olam emerged unscathed and with good profit growth to boot. Olam, in particular,
managed to maintain its impressive growth momentum from the first half, which gave the market reason to cheer. Strong S$ a bane for small/mid cap with overseas exposure The S$ has strengthened significantly against most major currencies, including the US$ and RMB over the past 12 months. In the quarter just
concluded, there was a visible trail of negative impact on companies with overseas exposure, particularly small‐ and mid‐cap firms which have less experience in managing this. ComfortDelgro, Goodpack and Armstrong, for example, performed below our expectations, mostly due to unrealised forex translation losses. This is an important theme which we will continue to monitor, given the current stance by the Monetary Authority of Singapore to strengthen the S$. BUY list shrank after 1Q, pin hopes on growth stocks.

The 1Q results have triggered several downgrades in recommendations and target prices. Thus, after the reporting season, our BUY list has shrunk by four stocks to 31 BUY calls. There was absolutely no upgrade to any recommendation in our coverage list. Winners in 2Q are likely to be growth companies underpinned by rising orderbooks, pricing power or operating leverage. Keppel Corp, Sembcorp Marine, CWT, Goodpack,
Noble and Olam fit the bill nicely.