Making sense of conflicting data

DBS Vickers analysts made ‘buy’ calls to a sceptical audience.

EMILYN YAP
22 March 2010

One was a novice as a stock analyst, the other a veteran. But when the financial crisis hit last year, both were confronted with a pretty similar set of challenges.

DBS Vickers analyst Derek Tan had been in the job for just over a year when the stock market tanked. Most investors were in no mood to bet on any counter going up – but he was recommending CDL Hospitality Trust (CDLHT) as a buy.

The numbers told a good story then, he says. CDLHT was trading at a discount compared with its peers in the real estate investment trust sector, even though it was less exposed to refinancing risks due to its conservative balance sheet.

But with few investors keen to enter the market, Mr. Tan found it hard to sell the story. ‘The sentiment was very bearish, and investors were all cautious,’ he recalls. ‘There was an audience out there, just that it was smaller.’

Mr. Tan’s colleague Ben Santoso started covering the plantation sector in 1997 – when the Asian financial crisis was brewing. He, too, saw buying opportunity last year, but had to work to convince sceptics.

He upped his call on First Resources to a ‘buy’ in March, expecting severe weather conditions in South America to shave commodity supplies. Also, ‘we saw that this was an overlooked and undervalued stock’, he says.

StarMine highlighted Mr. Tan’s and Mr. Santoso’s calls as noteworthy in the small and mid-cap field last year. Both CDLHT and First Resources gained and outperformed the benchmark that StarMine used for its broker rankings.

The good calls would not have come easy. Making sense of all the information that was coming through during the crisis was a huge challenge.

‘There were so many data points in the market pointing to all directions,’ says Mr. Tan. ‘The same data point could be read differently by two analysts.’

The cohesiveness of the property team at DBS Vickers was an advantage, he says. Analysts made their recommendations independently, but it helped that they could often bounce ideas off one another. Team leader Lock Mun Yee was also on hand to give guidance and test assumptions.

Imagine the difficulty of covering the plantation or commodities sector, where analysts have to weigh the impact of the El Nino weather phenomenon, bio-fuel and many other factors to come up with one forecast for crude palm oil prices. ‘There are so many moving parts,’ says Mr. Santoso.

And the complexity of the work looks set to continue even though the financial crisis appears to be largely over – commodity prices could still be volatile this year, he reckons. For instance, there could be near-term weakness in soybean prices as supply from South America rises.

According to Mr. Tan: ‘It’s hard to say if this will be an easier year. You need the same thought processes and rigorous modelling, be it in a recessionary or in a growth year.’

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