O&M concerns return with a vengeance

MONDAY'S short-covering bounce having been completed paved the way for the selling to resume on Tuesday, with the Straits Times Index (STI) plunging 35.85 points or 1.2 per cent to 2,856.67 as concerns over the health of the offshore and marine (O&M) sector took grip.

Banks were among the top index losers, though the largest fall was reserved for Singtel, which traded ex-dividend and whose S$0.13 drop to S$4.05 cut 13 points off the STI.

Turnover amounted to a moderate 1.3 billion units worth S$1.03 billion but this would have likely been higher had Hong Kong not been closed because of Typhoon Nida. Excluding warrants, the market recorded 128 rises versus 308 falls.

O&M stocks and those operating in the periphery to the sector have been battered in the past few sessions following the shock collapse of one of its members, Swiber, when it first applied to be liquidated last week, then changed this to an application to be placed under judicial management.

Shares of DBS, which is said to have the greatest exposure among banks to Swiber, dropped S$0.21 or 1.4 per cent to S$15.15 on volume of 6.5 million.

In downgrading DBS to "neutral", Macquarie Equities Research (MQ) was quoted by Macquarie Warrants (MW) in its Aug 1 newsletter as saying that although DBS will book "only" S$150 million in specific provisions because of Swiber, this is not the important message.

"The key questions after the Swiber episode is how much more concentration risks are on the balance sheet of DBS, and that it raises questions about risk management and risk tolerance. Swiber has been known in the market to be of higher risk and proactive risk management would suggest early de-risking, early restructuring and early loss recognition," said MQ.

"MQ cut DBS' 2016 estimated earnings by 3 per cent to reflect the higher provisions. Due to cut in earnings and higher cost of equity, MQ has cut their target price on DBS to S$15 from S$17 previously," said MW.

Commodities firm Noble Group's shares have featured prominently in the top volume list over the past year and Tuesday was no different. The stock plunged S$0.029 or 18 per centto S$0.133 on volume of 336 million, drawing an afternoon query from the Singapore Exchange. Noble replied a short while later that it did not know of reasons for the selling. Brokers said that the pressure could have come ahead of the crediting of the new shares into trading accounts on Aug 4 from a recent rights issue.

"If you are knowledgeable like fund managers, you can actually sell ahead of the listing date . . . meaning even if I sell the rights shares today, I am not shorting," said a dealer, adding that as long as the sold shares are available for delivery on the due date, the sale is valid.

Also queried was medical firm Singapore O&G which replied that although it did not know of reasons why its shares rose to an intraday high of S$1.235 before settling at S$1.22, a net gain of S$0.01 on volume of 865,500. However it also noted that three local brokers have in recent weeks initiated coverage of the firm with "buy" recommendations.

Bank of Singapore's chief investment officer Johan Jooste in a Aug 1 report The Post-Brexit Rally: Does it Have Legs? said that he thinks that much of the recent surge in risk asset prices may be down to near-universal expectations for easing from major central banks not located in the US, mainly in England, Europe and Japan.

"The first set of numbers after Brexit suggests that the UK will experience a recession this year. The only issue is how deep it will be and how long it will last . . . while the data remains sketchy, we caution that contagion risk is still out there for the European economy," said Mr Jooste.

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