SGX Market Commentary

Published August 6, 2005 in BT,

In broker jargon, a 'mild correction'

IF this week were looked at in isolation, the Straits Times Index's movements would read: two days of gains followed by three days of losses culminating in yesterday's alarming 23.52-point drop to 2,338.97. Extend the frame of reference a bit further back, and the picture isn't so dramatic - in the two weeks leading up to the start of this week, the index had risen almost exactly 100 points or 4.3 per cent. This, by any standard, is a sizeable advance - fuelled in no small part by the government's property measures - so it stands to reason that a sizeable correction can reasonably be expected. As it turns out, the loss for this week was only 14 points or less than one per cent which in broking parlance would be considered a 'mild correction'. Wall Street's Thursday drop in response to oil crossing US$61 per barrel was probably the main reason for the selling yesterday, since all regional markets were similarly depressed.

Oil and gas, rig builders and shipping continued to play central roles throughout the week, with the likes of SPC, KS Energy, Ezra, SembCorp Maritime, STX PanOcean, NOL and Cosco all seeing active trading while posting big price rises.

What was noticeable was the loss of momentum in the previous week's big plays, namely, banks and property. CapitaLand and DBS, for instance, started off the week with a bang, shooting up 19 cents and 50 cents to $3.02 and $16.60 respectively, but by mid-week showed signs of strain. CapitaLand finished at $2.99 yesterday, down five cents while DBS was unchanged at $16.50.

Also noticeable was the significant impact that broker reports had on the stocks concerned - STX's Thursday rejuvenation, for example, came courtesy of a CSFB 'outperform'; Fu Yu's collapse came after 'hold' calls from Kim Eng and Phillip Securities.

Meanwhile, compact disc firm Anwell Technologies' shares plunged mid-week after the company issued a profit warning, while the seemingly unstoppable Hyflux Ltd encountered selling yesterday after it released its first-half results. Phillip Securities was among the houses to call a 'sell' on Hyflux's shares, saying it has adjusted its earnings forecasts downwards for FY05 from $54.1 million to $50.2 million to take into account lower margins and lower core earnings. 'By using 19x P/E and FY06 core EPS of 12 cents, we arrive at the fair value of $2.28. We think the stock is overvalued now. Downgrade from HOLD to SELL on valuations,' it said. Similarly, CIMB-GK Goh downgraded Hyflux from 'outperform' to 'neutral' stating that 'Hyflux's share price has soared nearly four-fold within a year, but its FY05-06 PE multiples have only moved from the 20-25x range to 30-35x due to earnings upgrades . . . current valuations appear rich, given the risk of unproven execution. Should there be any delay in the award of contracts, disappointment in 3Q core earnings could lead to share price weakness.' Hyflux yesterday lost 12 cents to $3.56.