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Saturday, September 7, 2013

CIMB Highlights Its 8 Small-Cap Picks For An Uncertain 2H2013


Analyst: William Tng, CFA

Fear of rising interest rates, weak currencies, economic uncertainties and the return of “risk-off” sentiments in the equity markets will limit small-cap performance in 2H13.

But the small caps under our coverage have the balance sheet strength to ride out this storm.

Top pick -- Overseas Education Ltd. Given the uncertainty surrounding 2H13, our top small-cap pick is OEL. Against this backdrop, we think that the education business offers the most earnings resilience.

While other companies will grapple with earnings uncertainty caused by factors beyond their control, it would be hard for OEL not to deliver on earnings unless it loses cost discipline or foreigners flee Singapore.

OEL is our top pick as we see 1) earnings visibility, 2) a net cash balance, and 3) attractive dividend yields of 3.8-4.2%.

The risks to our Outperform call are: a) Inflationary pressure on wages.
b) oversupply of foreign system schools.
c) Placement

Apple play – Hi-P.

September is typically the month where Apple launches new products or refreshes its product line. In the US, Apple has started to let iPhone owners trade in their smartphones for credit toward the purchase of new models.

Apple has scheduled an event on 10 September at which the company could unveil new iPhones. Rumours range from a gold handset to a low-price version aimed at emerging markets.

As expectations for Apple’s new product launch build up, we look at Hi-P in Singapore which is a proxy for Apple. The company supplies parts for Apple products including iPhone and iPad.

Dividend yields – UMS, Venture.

Of the small caps under our coverage, UMS Holdings and Venture Corp stand out as generating strong sustainable cash flow and paying good dividends.

For UMS, although 3Q13 could be a weak quarter as customers take a breather, recovery seems to be leaning toward 4Q13 rather than 1Q14. With just around 50% of its capacity utilised, there is no need for capex and UMS can comfortably pay out 4 cts in DPS.

We have assumed a 5 cts DPS for FY13 or 9.6% dividend yield. The bull-case scenario is a DPS of 6 cts or 11.5% yield.

Venture typically sees a stronger 2H which will support its share price. Unless there are investment opportunities, Venture should be able to pay a DPS of S$0.50 in FY13-15, translating into a dividend yields of 6.6%.

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