Master Rider Blog

SMB United

August 27th, 2007 NW Teong

I took a quick look at the market this morning and found that major indices have rebounded quite dramatically since the lows registered for the week ended 17 of Aug 2007. The market proxy for Singapore, The Straits Times Index has risen about 9% since its recent low of 3130 registered on 17 Aug to current level of about 3413 now. This is in a space of 6 business days! While markets will continue to be volatile, I would feel that the next few days would be interesting to watch. At this juncture, caution is needed in view of where we are right now, i.e. in a typically very volatile quarter with anniversary of 911 and Black Monday nearing. A quick glance of my macro indicators tell me that nothing is alarming at the moment with the yield of 10-year treasury at around 4.62 at the moment. However, we need to watch very closely during this period.

Yes, today, I am sharing with you this interesting stock, another construction related stock, SMB United. However, it is in a very niche sector of the construction industry. It is in the manufacturing, installing and maintenance of electrical switchgear which is needed in all buildings.

We all know that Singapore is going to have many new buildings in the next few years with so many enbloc sales, influx of foreigners, rich investors. In addition, the mega projects in the likes of two integrated resorts, news breaking high end residential and commercial projects will provide further upside potential to this stock. How about those old buildings that need to replace their old switchgears due to more stringent requirement by the building authority? Readers are encouraged to read up more on this company from research houses.

What I wish to share with you is that using my valuation model, I find that its 2007 PER is slightly less than 10 times (of course base on analyst earnings forecast). In short, its valuation is not demanding and the added bonus is that it will give you a dividend yield of about 4.11% even based on today’s price at about $0.365! Please note that this yield is likely to increase with the increase in earnings in the next few years.

This is another stock which I have selected to ride on the momentum of the construction industry. At this juncture, I need to caution all readers that we have to be very careful in investing in construction sector. We need to be the first ones to get out of this sector if we feel that this industry is likely to go into recession. We invest in this sector only if we are very sure that the prospect is good in the next few years. As you know the margin in this sector is razor thin or even negative during bad times and the main problem is that the bad time can be very long. Construction sector is like the out source process, after the developers get the deal (land or enbloc, or others), they then engage construction companies to build and handle the project. In short, they have very little bargaining power (this is true most of the time, and this is true especially in bad times!).

Cheers!

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Entry Filed under: Stocks, Singapore