With growing interest, Sheng Siong shares have gained over 60% year to date, valuing the company at around 28 times historical earnings, nearly double the market’s average. This, from Yon’s perspective, suggests that valuations in Singapore remain “very cheap” compared to the US, even with the government’s market-boosting measures under the Equity Market Development Programme (EQDP).
The measures, aimed mainly at the small- and mid-caps (SMID), could help lift this space, as Yon feels many of them are still undervalued relative to US stocks, as seen in metrics such as book value, price-to-earnings, and so on. “[The] EQDP will definitely garner more interest,” says Yon, who has been with the brokerage for more than seven years.
However, he has some reservations about the programme’s sustainability. While Yon is not writing off the review group’s efforts, he notes that the beginning of the EQDP has brought a flurry of news and activities. Nonetheless, given that the funds will be deployed in a few stages over the next few years, only time will tell whether it is truly effective, he says.
Sector-agnostic approach
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The analysts at Lim & Tan are sector-agnostic, focusing on the Singapore market as a whole. They adopt a bottom-up and top-down approach, analysing individual stocks based on their fundamentals while also considering the broader market context. They also examine individual sector cycles to determine whether a particular counter is worth considering.
For instance, until two years ago, offshore & marine (O&M) stocks traded at lows due to the prolonged slump in energy prices, leading to severe underinvestment in the sector. With a gradual stabilisation of energy prices and subsequent gains, the risk-to-reward ratio for investors would have been attractive for the remaining stocks, especially where the field dwindled as weaker companies went under.
“The worst is over, and selling seems to have stopped despite continued negative news. Share prices and valuations across the sector also looked to be at a low. That was one of the sectors we identified,” says Yon, listing stocks such as then-listed Dyna-Mac Holdings and Marco Polo Marine, that he started covering.
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Construction sector’ flavour of the year’
With buoyant construction demand expected to last for the coming few years, Yon is upbeat about this sector too. Besides the brighter outlook ahead, contractors are gradually clearing their previous, lower-margin contracts signed during the pandemic, when supply chain woes and labour market disruptions hampered them. Heavyweights BRC Asia and Pan-United Corp, as well as smaller contractors like OKP, are seeing a “huge uplift” in profits, says Yon.
Tiong Woon Corp is another counter to focus on, given its leading position in supplying cranes used to build public housing, where an active programme is underway as the government keeps a close eye on rising resale prices. “People don’t appreciate how powerful Tiong Woon is,” says Yon. “They were the first guys to invest in tower cranes during the build-to-order (BTO) boom, so there’s a first-mover advantage, which shows great foresight by the management.”
In addition, the cranes are deployed in other heavyweight projects. According to Yon, the contracts from petrochemical projects provide the “alpha” for Tiong Woon, as it is the only local company with the cranes to perform “super heavy” lifting of up to 2,200 tonnes.
Tiong Woon also wins contracts across the region, including India, Thailand, Brunei, Singapore, Malaysia, and the UAE. “Compared to Mammoet and Sarens, the world’s top two players, which are privately-held by Europeans, Tiong Woon remains competitive and can secure project wins against them and is going so far as to acquire some of Mammoet’s assets in Thailand,” says Yon.
However, he is careful to point out that industry cycles do not last forever and there is always a new “flavour of the year” that will emerge. During the pandemic, healthcare was in play, and now, construction. Nonetheless, Yon expects this sector to continue its bull run for the next one to two years.
Assessing stocks and market sentiment
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When asked how he views stocks, Yon points out that prices are driven not only by fundamentals but also by short-term factors such as sentiment, emotions, and the market climate. “A good stock doesn’t mean investors will make money and [conversely], a bad stock doesn’t mean investors won’t,” he says.
Investors should have an investment checklist and look at factors that will attract other investors to buy it at a higher price at a later date. And once the stock’s value has been determined, they should assess the risk-to-reward ratio to maximise the potential upside.
However, evaluating stocks can sometimes be an art rather than a science with a checklist.
Before Yon initiates a call on any stock, he prefers to meet the company’s management. He will also look out for factors such as background, outlook and the team’s view on their business.
“Companies that are more focused on their share price may underperform in the long run as it may shift attention away from sustainable value creation,” he says.
“The focus will shift from managing the company to caring more about its share price. For instance, companies looking to increase their share price can do so in many ways, such as acquiring unsynergetic targets to meet key performance indicators or even adopting overly aggressive revenue recognition policies or an overly lenient depreciation policy,” he adds.
In contrast, management teams focused on growing the business will usually have the CEO talking about what the company can do instead. When CEOs talk too much about their “cheap” share prices and focus on raising them, Yon inevitably ends up feeling “less confident” in the company.
In addition to Tiong Woon, other stocks favoured by Yon include Grand Banks Yachts, OKP and Oiltek International, of which the latter two are his best calls this year.
Fast-growing Oiltek may not be the cheapest now, but investors are still paying a premium because it’s a leading player in biodiesel, Yon says. “The company will also benefit from the Indonesian and Malaysian governments looking to increase the percentage of biodiesel in their oil, which means Oiltek will continue to benefit.”
OKP, which has been steadily clinching new contracts and growing its order book, will benefit from the construction boom, Yon adds. Most recently, on Nov 27, OKP, which had enjoyed a 250% year-to-date gain in its share price, announced a three-for-four bonus share issue, further driving the share price up by 6.6% on Nov 28.
On the other hand, Yon’s worst call, remembered “very clearly”, was Starburst Holdings, which specialises in building shooting ranges. Yon figured that, given how the customers are almost all public sector organisations, they were supposedly insulated from things like the pandemic, which hurts the wider economy. “I thought it was quite strong and defensive with recurring business,” says Yon.
“Unfortunately, three weeks later, its management team got hauled up by the Corrupt Practices Investigation Bureau (CPIB) for fraud and corruption as they forged some contracts,” he recalls. “I remember it was a Friday late afternoon and I noticed that the stock was dumping very hard. I then found out over the weekend, and by Monday, Starburst had fallen by about 50%.”
StarBurst was eventually acquired by Nordic Group in early 2022. “That is unfortunate and remains a risk with small caps,” he adds.
On the positive side, there is still room for construction stocks to grow. REITs, too, especially those with higher exposure to interest rates, will benefit from the falling interest rates.
Do your research
When evaluating stocks, investors should spend time on research. “If you’re only spending a few hours looking at the stock, you won’t be able to understand its intricacies. You won’t be fully immersed and look into the eyes of the owner to say, ‘What is my stock worth today?’,” he says.
“A lot of people want to take the easy way out,” he notes, adding that if investors can assess the information given by financial influencers, they should be able to read up on the stock they’re interested in and determine whether these financial influencers are actually accurate or not. “In this bull market, everyone suddenly becomes an expert stock picker.”
For Singaporean investors, Yon adds that they should form their own opinions based on what they’ve seen so far, rather than mindlessly following sentiment.
Another piece of advice: “Don’t chase the stock and always think about the margin of safety. You should ask what it would take for this stock to move down to the next level,” he says. “Know that you’re investing and not gambling. When you invest, buy into a good business with long-term prospects.”
