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Thursday, June 6, 2013

CIMB underweighs REITs and highly-geared companies on prospects of interest rate rise

Source: http://www.nextinsight.net/index.php/story-archive-mainmenu-60/919-2013/6940-cimb-underweights-reits-sias-ups-king-wans-target-to-42-cents

Analyst: Kenneth Ng, CFA

cash_cimb6.13OEL = Overseas Education; VMS = Venture Manufacturing Services; BS = Bukit Sembawang;  PRA = Parkson Retail Asia; SSG = Sheng Siong; BIG = Biosensors Group; HIP = Hi-P; MINZ = China Minzhong


Should interest rates rise, winners in Singapore would be banks and companies with cash piles. Losers would be companies with high net gearing and REITs. 

The fact that REITs have already reacted to rising bond yields does not mean that they will automatically recover to pre-selldown highs.

In our end-12 Singapore outlook, we took the view that the market did not expect interest rates to rise as yet but the risk remained. If interest rates were to rise, the REIT sector would be most at risk because of its high ownership. 

We have been underweight on REIT and telco since end-12 but upgraded them to Neutral in May when Japan started QE. 

Our recent strategy aims to find value in banks (DBS), NAV plays (UOL, CAPL, GLP), consumer companies (THBEV, SATS) and stable business models (STE, EZI, VARD) with yields, rather than pure REITs.
 
What You Should Do. The common question posed is whether investors should get back into some of the REITs. 

We reiterate our preference for banks, consumer names and high-yielding, net cash operating companies over REITs and highly-geared companies. 

The latter sees a higher concentration among commodity, shipping and second-tier offshore and marine companies. 

Potential losers are REITs and highly-geared companies. The most highly-geared companies under our coverage include Olam, NOL, UEM, Swiber, Ezion, Ezra, Wilmar and Noble. 

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