Time to ‘bottom fish’ commodity stocks?
Views mixed; some see firms doing better, others cite China uncertainty
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Views mixed; some see firms doing better, others cite China uncertainty
Kenneth Lim
06 July 2012
Commodity stocks are wallowing near all-time lows after being spurned by a fickle market, but analysts are split on whether the time is right to swoop in and snag the rebound.
“Generally, the sector has been sold down quite severely,” said CIMB analyst Lee Wen Ching.
“Several stocks are trading at close to two standard deviations below historical means, which suggests value is quite cheap for some stocks.”
Disappointing first-quarter earnings and a murky outlook for the global economy have conspired to drag down the valuations of commodity stocks.
Noble Group, Asia’s biggest commodities trader, is currently trading at a historical price-earnings ratio of about 13 times, compared with a peak multiple of about 18 times in February, according to data from Bloomberg.
Olam International, a smaller trader, has seen its PE shrink to about 9 times from 14 times in February.
Sakari Resources, a coal mining company, is languishing at 6.9 times earnings, from 12.6 times in February.
“This sector hasn’t performed well in the past few quarters,” Ms. Lee said. “Earnings have disappointed, and it has shaken confidence a little bit.”
But the winds could change soon.
“I’m pretty confident that earnings will start to show some strength in the second half,” Ms. Lee said.
“The second quarter, I expect, will be better than the first quarter for various reasons,” she said. “Noble’s second quarter should be better than the first quarter for seasonal reasons - the first quarter was a lull for sugar. Sakari as well - the first quarter was spent opening new mines and opening new pits.”
DMG & Partners yesterday also put out a positive call for the commodities sector, highlighting Noble, Olam and Sakari as top picks.
“We also like selective cyclical stocks whose share prices have been overly punished due to negative news flow,” wrote analyst Leng Seng Choon in a note.
But other analysts were not so ready to send out the buy signals.
Maybank Kim Eng’s James Koh said it was probably too early to “bottom fish” amid uncertainty about China’s economic outlook.
“Data coming out from China still looks pretty bearish, and it really depends on whether there’s more action by the government,” said Mr. Koh, who expects the coming set of company results to disappoint.
State Street Global Advisors Asia equity portfolio strategist Ken Wong said his firm was also underweight on the sector in the region for now.
“I think the third quarter for China is going to be tough,” he said. “Valuations are very cheap for China, but the problem now is we can’t only look at valuations. First six months earnings haven’t been as strong as at the start of last year, and now companies will start to report semi-annual numbers. So I think we will see some revisions, and we expect the revisions to be downwards.”
But once expectations have been adjusted, Mr. Wong sees potential for re- ratings in 2013 as China speeds up some projects to maintain growth, and inflation picks up in the region.
“We expect both oil and commodity prices to go up in the second half of 2012. And when prices go back up, you would subsequently expect some of these companies to do better,” Mr. Wong said.