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Why it's (finally) time to buy

KEPPEL CORP

STI COMPONENTS PRICE VS 52WK LOW

OCT 2008     BASIC FEAR VS CONFIDENCE

The recent headwinds followed by turmoil and the plunge of the financial, forex and equity markets has in total and in tandem led to the interplay of fear versus confidence.

The balance of fear and confidence is the key to successful investing. Many investors enter the market when stocks prices are high (lacking confidence to enter when prices were GOING low). Once the stocks market crash, they tend to sell out their shares  CUTTING LOSS out of fear and pessimism. Hence, contrarian investors buying on fear and attendent inherent risks, may however be compounded by inaccurate  "insiders' information or rumours", more bad news and fear  creating information resulting in herd instincts  and a flight to safety. Fundamental investors selling on good news may be a way to lead the market.

When the momentum of fear enters the market, fundamental analysis and sound analysis of earnings outlook  and the best logic will not be the decision markers. Stockmarkets becomes a house of gamble. There must be a good balance of objectivity of the mathematics versus the subjectivity of our emotions.

Many factors affect share price movements  in the short term movements and long term trends. Significant investor unloading/ unwinding to raise cash could drive prices down - always lookout for it.  We need to recognise them and lead them in order to set proper target price and direction- buying into uptrend and selling before market turns.

Broad economic factors, industry outlook, currency fluctuations,  company specifics and activities, execution, capabilities, capacities and timing all affect the company's future performance.

Long term investor may focus on earnings potential and value of the shares by choosing a comfortable entry point and not subject to the volatilty. In the downturn, it is wise to pick the blue chips with strong revenue and profit gowth- which will be the first to enjoy substantial rebound when the market turn.

Wall Street
Why it's (finally) time to buy
Singapore maket falls behind America's; one serious view is that US equities, after being overpriced for 10 years, are now at sensible - but not bargain - prices.
Oct 4, 2008

By Shawn Tully,
editor at large, Fortune Magazine
New York - You didn't hear this uttered very often, but over the past decade and a half, through bull and bear market alike, the value proposition for stocks could be stated succinctly: There's nothing to buy.

The fact is that equities were over-valued for years, making them vulnerable to the kind of brutal, sudden sell-off we've just witnessed. But now that the S&P has declined 40% in 12 months, the question is whether equities are at long last a bargain.

The answer is a qualified yes: Stocks aren't exactly cheap, but for the first time in years you can expect decent returns, provided you're patient.

"If you buy now and wake up in 10 years, you'll probably get a return around the historic average," said Yale economist Robert Shiller.

In the near term, however, Shiller - who correctly predicted the implosion of the stock-market and real-estate bubbles - is more cautious.

"There is a substantial risk that with all this economic turmoil, stocks will fall far lower," he warned.

But make no mistake, stocks are now at levels where buying makes sense.

The best measure of stock valuation is Shiller's own index of price-earnings multiples. Shiller uses a 10-year average of inflation-adjusted earnings to calculate an adjusted P/E. The advantage to the Shiller method is that it smoothes out the peaks and valleys in profits.

Example: In the 2003 to 2006 period, earnings soared to historic heights, jumping from a normal 9% of gross domestic product to an extraordinary 12%.

The profit bubble made P/Es look artificially low, handing the stock jockeys a logical-sounding reason to claim that equities were a buy, when in fact they were overpriced.

Both the "P" and the "E" were in a bubble - the "P" even more than the "E." When the "E" collapsed in the face of the current downturn, the outrageous valuations were rudely exposed.

To see how out of whack P/Es had gotten, let's take a look back. From 1890 to the early 90s, the average Shiller P/E stood at 14.6.

It dropped as low at 6 in the early 80s, and never went over 24. Then, in the late 90s, P/Es regularly stood at over 30, and at their peak in 2000 hit 44.

In the bear market that followed, P/Es dropped - but only into the low-20s. Then they took off again, averaging 25 to 28 from 2003 to the beginning of this year.

Now they're at 15.7, not far from their pre-bubble average. That decline is tonic for investors.

Research by economist and hedge fund manager Cliff Asness shows that buying in at a high Shiller P/E usually leads to poor returns, while grabbing stocks at a low Shiller P/E is a reliable route to riches.

From today's levels, what can we expect? Stocks' future return is closely related to the inverse of the P/E, also known as the earnings yield.

So at a P/E of less than 16, investors should obtain real, or inflation-adjusted, gains of around 6.5%, which is about what Asness found in his research.

Add 2.5 points for inflation, and the nominal return comes to a respectable 9%. That's about a point below stocks' long-run return, but it's far better than anything investors could expect for a decade and a half.

The rub is that getting even that 9% return won't be easy. Assuming no escalation of P/Es, stock returns come from a combination of earnings growth and dividend income.

Earnings per share grow only at about 2% a year after inflation. (Total earnings grow faster than that, but new issues of stock dilute that growth.)

So add in our 2.5% inflation rate to 2% real growth, and you still need a dividend yield of 4.5% to get to that 9% goal.

The yield on the S&P 500 is now around 3.3%, versus around 2% earlier this decade. That's better, but not enough.

So simply buying "the market" at today's decent valuations isn't enough. You also need to choose stocks that pay higher-than-average dividends to reach the 9% threshold.

Fortunately, that's not too difficult to do now. Lots of stocks with predictable, reliable earnings streams now offer yields between 4% and 6%, including Consolidated Edison (ED, Fortune 500), Kraft Foods (KFT, Fortune 500), Duke Energy (DUK, Fortune 500), and Merck (MRK, Fortune 500).

You'll also want to avoid most tech issues. Companies such as Oracle, Google (GOOG, Fortune 500), Symantec, and Research in Motion (RIMM) pay no dividends at all, and sell at pricey multiples between 16 and 23.

Finally, remember this: Shiller points out that stocks were cheap in the early 1930s, and investors who bought then eventually made good money. But it took them many years to get there.

So if you buy now, stick with strong dividend-paying stocks, and fasten your

 seatbelts. It will be a bumpy ride.

 

YC Chan Newsletter 110

 

STI on 28 October dropped to the lowest point at 1,473. On that day, STI was at 95%

pessimistic line of the linear regression chart, suggesting that the pessimistic sentiment had

reached its lowest level.

For the past 10 years, whenever STI fell to 95% pessimistic line of the linear regression

chart, market began to turn around, as happened in 1998 and 2000. Similarly, when the

trend line was at 95% optimistic line, market also turned around, as in 1997, 2000, and 2003.

Up to now however, I find out that they are coincidental occurrences which I do not have

any theoretical explanation to prove the certainty of the accuracy of the chart. Nevertheless, I

believe the chart is definitely worthwhile for reference purposes.

STI in a short span of 3 days rebounded approximately 25%. The rebound velocity was

too traumatic. We could expect volatile fluctuations in the near term.

The financial tsunami is terrifying. I have never seen it before in my life. Cautious

navigation gives you safe voyages for many years to come. I would not suggest you put your

stake with what you have, but keep at least 50% cash with you until mid year next and to

observe how the market trend develops. The post financial tsunami effects will be traumatic.

Rebuilding devastated properties after tsunami takes a long time.

Many people puzzle over how the United States, the country that causes the financial

tsunami, the government that prints currency notes to save the market could lead to US$

appreciates so much. This has upset the financial system worldwide. Beside US$, Japanese

yen also appreciates.

The appreciation of US$ and Japanese yen induce many people to dispose of stocks

and convert other currencies to US$, and deposit monies into American banks. The

American banks however, dare not lend out monies, and US remains short of funds.

3 months ago everybody thought US would wantonly print paper money, and US$

would devalue; everybody sold US$. When US$ strengthens, the scenario turns around;

people rush to buy up US$, upsetting the worldwide market to such an extent that no

traditional analytical explanation is feasible. The only explanation is: the market has become

a big gambling den.

Governments worldwide have come out to rescue the market. I am thus basically

optimistic. The only worry is the collapse of market confidence which would take a long time

to recover. On top of it, there are many gamblers playing the market everyday, making it so

much irrationale.

For now you must try to curb your greed and fear sentiment. Fear on account of stock

holdings that see the market’s dip; greed on account of chasing stocks on market’s rise.

Share prices have dropped to relatively cheap level. The appropriate stock holding and

cash ratio should be 70% to 50% cash, or 30% to 50% stock holding. It all depends on your

own risk tolerance. Never borrow money to buy shares.

 

10 月28 日，海峡时报指数最低跌至1473 点，那一天，海峡时报的对数直线回归图已经刚刚好跌至95%的悲观点。这说明市场悲观情绪已达到极点。

过去10 年，每逢海峡时报指数对数直线回归图跌到95%的悲观点之后，股市就转势了。这包括1998 年及2003 年。同样的，当这条线升至95%的乐观点之后，股市也转势了，那是1997

年、2000 年及2003 年。

很可惜，我发现的这个图至今为止，仍然只能以巧合来解释。我无法以任何理论来证明这个图一定准确，但相信有一定的参考价值。

不过，也在短短的三天内，海峡指数由低位反弹5%左右，反弹的速度也太快了，短期内应该波动还很大。

金融海啸非同小可，这是我这辈子至今仍未见过的，因此小心驶得万年船，我也不建议大

家孤注一掷，豪赌一场。也许，仍然应该保留至少50%现金至明年中，观察市场如何发展。这一次的金融海啸，后遗症非常多。海啸过后，到处是烂房子，如何重整家园是要用不少时间,因此复苏时间会很长。

至今许多人摸不到头脑的是，美国做为金融海啸的发源地，美国政府已准备大印钞票来救市，但美元汇价却大幅上涨。这一下子打乱了全球的金融秩序，除了美元涨之外，日元也狂

涨。

美元日元涨，人人抛售其他国家的货币与股票，把钱存在美国的银行里，但美国的银行依然不敢乱动，不敢把钱借出去，美国的企业依然缺乏资金。

才三个月前，人人以为美国会狂印钞票而导致美元贬值，于是人人沽空美元。一下子美元由弱转强，投机盘又转过来，抢购美元。这使到全球市场已经混乱到极点，混乱到传统的分析

方法无法分析了。唯一能解释的就是，这已经是一个大赌场。

现在，全球政府都出来救市，因此，我基本上还是乐观的，唯一的担心是信心的崩溃不是短时间能恢复，再加上市场上的赌徒依然很多，每天炒上炒下，令人难以适从。

现在，你最需要的是克服贪婪与恐惧心。买了股票之后见到股价下跌不好恐惧，见了股价抢高未入市也不好因贪婪而抢着买。

股价跌到这个水平已是相当便宜，但仍然不适合搏身家式的全面投入。比假适合的现金股票比率是7 成至5 成现金，及3 成至5 成股票之间的比例。这视乎你自己的风险承受能力而定。

千万千万不好借钱炒股。

 

NOV 2008    

The performance of our STI stocks from the lowest point to 10 Nov 2008.

KEPPEL CORP  BY ML

Stock Data

Price S$5.19   Price Objective S$7.25 to S$6.15

Date Established 5-Nov-2008

Investment Opinion B-1-7

Volatility Risk MEDIUM

52-Week Range S$3.35-S$14.40

Mrkt Val / Shares Out (mn) US$5,559 / 1,580.8

Average Daily Volume 14,241,400

ML Symbol / Exchange KPELF / SES

Bloomberg / Reuters KEP SP / KPLM.SI

ROE (2008E) 19.9%

Net Dbt to Eqty (Dec-2007A) 9.0%

Est. 5-Yr EPS / DPS Growth 3.4% / 3.7%

F ree Float 77.6%

Lowering PO to S$6.15/share

We are reducing our valuation of Keppel Corp in light of recent changes in price

objectives of subsidiaries including SPC and K-REIT covered by ML analysts. As

a result, we reduce our sum of the parts valuation and PO from S$7.25/share to

S$6.15/share. We have also lowered our FY08-10E earnings estimate for Keppel

by an average of 4%. SPC and K-REIT currently accounts for 10% and 3% of

Keppel’s FY08E PATMI respectively.

SPC – downgrade to Underperform

We reduce our PO on SPC to S$2 from S$10 to reflect our new cautious view on

the Asian refining sector and SG Complex margin revisions in 2009/10.

Additionally, we cite the company’s accounting complexity and rapidly rising

working capital as major risks. Thus, we change our PO basis from DCF to trough

cycle valuation applying 2.5x 2009E EV/EBITDA, which is a 50% discount to the

sector’s benchmark valuation and implies 2009E P/B of 0.5x.

K-REIT – PO cut on downgrade of office sector

We continue to see office as the asset class with the greatest downside risk to

capital values and rentals. Due to a reduction in our demand assumptions we now

expect rents and capital values to stabilize in 2011 at S$5psf (from S$8psf) and

S$800psf (from S$1400psf). In line with the changes to our occupancy and rental

assumptions, we have cut our FY09-11 DPU estimates for K-REIT by an average

of 7% and reduce our PO to S$0.55 from S$1.00/share.

Maintain Buy rating

Despite the cut in our PO, we maintain our Buy rating on Keppel. We believe the

group has secure cash flows for the next two years generated from the O&M

division and is in a strong balance sheet position (0.1x gearing, 15x interest

cover). Keppel is now trading on a 7.0x FY09E P/E and P/B of 1.4x.- ML

DEC2008  TBA    

JAN 2009    TBA

FEB 2009    TBA