We expect Asia’s emerging markets to outperform for the rest of the year; to take advantage of this, we prefer cyclical industries that should continue to close the valuation gap with defensive group, suggests Yiannis Mostrous who looks at two such stocks in Capitalist Times.
Keppel Corp. (KPELY)
One of the world’s best-run companies, Singapore-based Keppel Corp. remains a longtime favorite for investors looking to diversify their portfolios internationally.
Its offshore and marine business, which generates the bulk of the firm’s revenue, continues to enjoy robust demand for drilling rigs, a trend that we expect to continue as the industry demobilizes older equipment and replaces them with higher-specification units.
Keppel also signed a contract to convert an existing Moss LNG (liquefied natural gas) carrier into a floating liquefaction factory—the world’s first such conversion.
Demand for these units should continue to grow, as ship owners seek to address the supply overhang in the LNG tanker market and producers opt for the lower costs and flexibility afforded by floating liquefaction.
Meanwhile, half the world’s jack-up fleet will be more than 35 years old by 2020, suggesting that the rig replacement trend will continue in coming years. Trading at 10.7 times earnings and 1.9 times book value, Keppel ’s ADR rates a buy up to US$18.00.
Cheung Kong Holdings (1:HK)
Residential developer Cheung Kong Holdings owns a portfolio of commercial properties on which it collects rent and a 52% interest in Hutchison Whampoa (13:HK), a conglomerate whose diverse assets range from ports and retailers to property development and infrastructure.
Analysts have been negative on Hong Kong real estate this year, but the market has proved more resilient than expected. And, a proposal to relax last year’s doubling of the stamp duty on property sales could lead to an uptick in activity—a potential boon for Cheung Kong Holdings.
The property developer plans to offer 3,000 housing units in 2014 and had targeted HK$30 billion in sales contracts. Trinity Towers, a 402-unit project, launched in March and sold out completely in April.
Like other conglomerates, Cheung Kong Holdings’ stock trades at a discount to the firm’s net asset value because of its complexity and diverse business interests. But it looks cheap at 9 times earnings.
With a strong balance sheet, net debt to equity of about 14% and access to inexpensive financing, Cheung Kong Holdings stands out among its peers and rates a buy up to HK$150.
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