Small/Mid Cap Strategy and Stock Picks - the DBS Vickers ...

Regional Small/Mid Cap Strategy Q2 2008
Country Assessment
GROWTH AND VALUATION
Small caps valuations look relatively more attractive
than big caps after having underperformed large caps
in the last three quarters. In fact, the valuations of
some good quality small caps have dropped by almost
50% in the absence of company specific news.
Small caps earnings growth in 2008-09 should remain
healthy (double digit growth), with ROE improving to
13.5% in 2009 from 12.6% in 2008. Valuation should
drop to 10.8x PER in 2009 from 13.4x in 2008; this is
cheaper than large caps and the broad market.
However, the above reasons are not compelling
enough to regain investors’ interest in small caps. This
is premised on anticipated prolonged market volatility
this quarter due to growing uncertainties/ risks in the
US market.
Big and Small Caps Valuation
Large Cap
Small Cap
FY08 FY09 FY08 FY09
EPS Gth (%) 15.3 16.9 31.1 17.7
PER (x) 14.5 11.9 13.4 10.8
EV/EBITDA (x) 4.8 4.2 6.3 5.5
ROE (%) 23.1 23.4 12.6 13.5
Source: DBSVI
STRATEGY AND STOCK PICKS
Review:
Two of our three stock picks outperformed the market
in 1Q08, although none gave positive returns. UNSP did
surge 41% in the quarter and surpassed our target
price, but it tumbled before the quarter ended as CPO
price corrected and due to the major market sell down.
TOTL fell 38% in the quarter (third worst performing
small cap in 1Q08) after falling 39% in 4Q07 despite
encouraging growth prospects that is supported by
strong back-log orders and ample projects in the
pipeline. Interestingly, its close competitor, ADHI, also
fell 45% (worst small cap performer). However, we
remain positive on the Construction sector as well as
TOTL, but the counter is lacking a positive catalyst.
Review 1Q08 Small Cap Picks
17-Dec-07 25-Mar-08 Chg
UNSP.jk Bakrie Sumatra P 2,000 1,810 -9.5%
TOTL.jk Total Bangun P 580 360 -37.9%
RALS.jk Ramayana Lestari 840 820 -2.4%
Source: DBSVI
RECOMMENDATION:
For 2Q08, our stock picks focus on the plantation
sector as we are still optimistic of CPO prices and view
that the huge sell off for all plantation stocks, which
was triggered by CPO price trend reversal, were
overdone. Note that although CPO price tumbled by
more than 25% from its peak, current price is still
34% higher than last year average and more
importantly, still 7% higher than our assumed average
prcice for the year.
In our stock selection, we select companies that can
offer significant volume growth as a hedge against
price decline although the latter is not our house view.
In total we feature three small caps for 2Q08, two
from plantation sector and a sorbitol producer from
the consumer goods sector.
2Q08 Small Caps Top Picks
Mkt
Cap Price (Rp) PE
EV/EBITD
A P/BV Div Yld ROE Vol/day 6m
US$m Rp Target Upside 08F 08F 08F 08F 08F (m shrs)
TBLA IJ Tunas Baru Lampung 202 445 780 75% 12.1 5.8 1.8 2.5 15.5 48.2
UNSP IJ Bakrie Sumatra P 748 1,810 3,050 69% 14.1 9.7 2.9 1.3 18.4 60.0
SOBI IJ Sorini Corporation 138 1,410 2,750 95% 11.7 7.7 2.4 2.2 22.3 7.8
Source: DBSVI
We feature UNSP and TBLA as we expect both
companies to deliver robust production growth going
forward. UNSP’s production growth driver is
acquisitions, which will effectively more than double
its oil palm planted area. TBLA would be driven
primarily by its young trees -- it expects FFB production
to nearly double in 2009. Last but not least, we also
recently upgraded our CPO price assumption and
consequently, target price for UNSP to Rp3,050 and
for TBLA to Rp.780.
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